VEREIT, Inc. - FORM 8-K/A - EX-99.1 - COLE'S UNAUDITED FINANCIAL STATEMENTS - November 18, 2013

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8-K/A - AMENDMENT TO FORM 8-K - VEREIT, Inc.v360869_8ka.htm
EX-99.2 - EXHIBIT 99.2 - VEREIT, Inc.v360869_ex99-2.htm
EX-99.3 - EXHIBIT 99.3 - VEREIT, Inc.v358793_ex99-3.htm

Exhibit 99.1
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
INDEX
 
 
 
 
 
Condensed Consolidated Unaudited Balance Sheets as of September 30, 2013 and December 31, 2012
2
 
 
Condensed Consolidated Unaudited Statements of Operations for the three and nine months ended September 30, 2013 and 2012
3
 
 
Condensed Consolidated Unaudited Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012
4
 
 
Condensed Consolidated Unaudited Statements of Equity for the nine months ended September 30, 2013 and 2012
5
 
 
Condensed Consolidated Unaudited Statements of Cash Flows for the nine months ended September 30, 2013 and 2012
6
 
 
Notes to Condensed Consolidated Unaudited Financial Statements
7
 
 

 
 


COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
September 30, 2013
 
December 31, 2012
ASSETS
 
 
 
Investment in real estate assets:
 
 
 
Land
$
1,531,115

 
$
1,490,843

Buildings and improvements, less accumulated depreciation of $277,770 and $187,870, respectively
4,386,349

 
4,222,363

Acquired intangible lease assets, less accumulated amortization of $174,831 and $122,258, respectively
828,801

 
860,963

Total investment in real estate assets, net
6,746,265

 
6,574,169

Investment in notes receivable, net
90,497

 
90,358

Investment in marketable securities
11,154

 
51,103

Investment in marketable securities pledged as collateral
260,790

 
266,098

Investment in unconsolidated entities
92,035

 
96,785

Total investment in real estate assets and related assets, net
7,200,741

 
7,078,513

Assets related to real estate held for sale, net
60,739

 
15,485

Cash and cash equivalents
185,786

 
192,504

Restricted cash
31,170

 
18,444

Rents and tenant receivables, less allowance for doubtful accounts of $496 and $337, respectively
105,867

 
79,760

Intangible and other assets, net
110,591

 
11,790

Deferred financing costs, less accumulated amortization of $18,372 and $23,105, respectively
59,275

 
57,229

Goodwill
258,876

 
—

Leasehold improvements and property and equipment, net
21,005

 
—

Due from affiliates
13,445

 
—

Total assets
$
8,047,495

 
$
7,453,725

LIABILITIES AND EQUITY
 
 
 
Notes payable and other borrowings
$
3,836,596

 
$
3,292,048

Accounts payable and accrued expenses
75,338

 
42,756

Due to affiliates
—

 
4,525

Acquired below market lease intangibles, less accumulated amortization of $23,430 and $16,389, respectively
113,878

 
113,607

Dividends payable
28,720

 
26,399

Contingent consideration
260,227

 
5,341

Deferred rent, derivative and other liabilities
49,298

 
51,317

Liabilities related to real estate held for sale, net
35,370

 
322

Total liabilities
4,399,427

 
3,536,315

Commitments and contingencies

 

Redeemable common stock
—

 
234,578

EQUITY:
 
 
 
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding
—

 
—

Common stock, $0.01 par value; 990,000,000 shares authorized, 469,364,805 and 479,547,099 shares outstanding, respectively
4,693

 
4,795

Capital in excess of par value
4,181,120

 
4,068,015

Accumulated dividends in excess of earnings
(572,310
)
 
(416,886
)
Accumulated other comprehensive income
18,020

 
23,101

Total stockholders’ equity
3,631,523

 
3,679,025

Noncontrolling interests
16,545

 
3,807

Total equity
3,648,068

 
3,682,832

Total liabilities and equity
$
8,047,495

 
$
7,453,725

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
2
 


COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Real estate investment revenue
$
159,803

 
$
131,913

 
$
467,223

 
$
361,475

Interest income on real estate-related investments
6,917

 
8,247

 
22,702

 
18,488

Private capital management revenue
199,831

 
—

 
282,474

 
—

Total revenue
366,551

 
140,160

 
772,399

 
379,963

Expenses:
 
 
 
 
 
 
 
Reallowed fees and commissions
130,398

 
—

 
169,360

 
—

General and administrative expenses
55,252

 
3,291

 
100,719

 
12,001

Merger related stock-based compensation
13,329

 
—

 
23,607

 
—

Property operating expenses
17,685

 
12,701

 
49,853

 
33,037

Property and asset management expenses
263

 
11,717

 
15,316

 
32,384

Merger and acquisition related expenses
25,237

 
13,612

 
52,660

 
46,431

Depreciation and amortization
53,797

 
40,760

 
156,698

 
110,939

Total operating expenses
295,961

 
82,081

 
568,213

 
234,792

Operating income
70,590

 
58,079

 
204,186

 
145,171

Other income (expense):
 
 
 
 
 
 
 
Other income
285

 
483

 
1,715

 
5,362

Interest expense
(40,520
)
 
(43,902
)
 
(127,464
)
 
(100,152
)
Total other expense
(40,235
)
 
(43,419
)
 
(125,749
)
 
(94,790
)
Income from continuing operations before income taxes
30,355

 
14,660

 
78,437

 
50,381

Provision for income taxes
(9,426
)
 
—

 
(9,191
)
 
—

Income from continuing operations
20,929

 
14,660

 
69,246

 
50,381

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations
556

 
3,910

 
2,581

 
12,448

Gain on sale of real estate assets
3,078

 
—

 
22,085

 
14,781

Income from discontinued operations
3,634

 
3,910

 
24,666

 
27,229

Net income
24,563

 
18,570

 
93,912

 
77,610

Net income (loss) allocated to noncontrolling interests
374

 
3

 
589

 
(117
)
Net income attributable to the Company
$
24,189

 
$
18,567

 
$
93,323

 
$
77,727

 
 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.04

 
$
0.03

 
$
0.14

 
$
0.11

Income from discontinued operations
$
0.01

 
$
0.01

 
$
0.05

 
$
0.06

Net income attributable to the Company
$
0.05

 
$
0.04

 
$
0.19

 
$
0.17

Diluted earnings per common share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.04

 
$
0.03

 
$
0.14

 
$
0.11

Income from discontinued operations
$
0.01

 
$
0.01

 
$
0.05

 
$
0.06

Net income attributable to the Company
$
0.05

 
$
0.04

 
$
0.19

 
$
0.17

Weighted average number of common shares outstanding:
 
 
 
 
 
 
Basic
479,370,020

 
476,353,149

 
482,720,629

 
457,996,321

Diluted
495,479,956

 
476,353,149

 
489,288,861

 
457,996,321

Dividends declared per common share issued
$
0.18

 
$
0.16

 
$
0.51

 
$
0.49

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

3
 

COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
24,563

 
$
18,570

 
$
93,912

 
$
77,610

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
2,890

 
44,349

 
(10,091
)
 
43,038

Reclassification of previous unrealized gain on marketable securities into net income
—

 
—

 
(612
)
 
—

Unrealized (loss) gain on interest rate swaps
(3,726
)
 
(2,153
)
 
3,058

 
(7,830
)
Reclassification of previous unrealized loss on interest rate swaps into net income
—

 
9,263

 
2,564

 
9,263

Total other comprehensive (loss) income
(836
)
 
51,459

 
(5,081
)
 
44,471

 
 
 
 
 
 
 
 
Total comprehensive income
23,727

 
70,029

 
88,831

 
122,081

Comprehensive income (loss) attributable to noncontrolling interests
374

 
3

 
589

 
(117
)
Total comprehensive income attributable to the Company
$
23,353

 
$
70,026

 
$
88,242

 
$
122,198

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.


4
 

COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF EQUITY
(in thousands, except share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital in
 
Accumulated
 
Accumulated
 
 
 
 
 
 
 
Common Stock
 
Excess
 
Dividends
 
Other
 
Total
 
Non-
 
 
 
Number of
 
Par
 
of Par
 
in Excess of
 
Comprehensive
 
Stockholders’
 
controlling
 
Total
 
Shares
 
Value
 
Value
 
Earnings
 
Income
 
Equity
 
Interests
 
Equity
Balance, January 1, 2013
479,547,099

 
$
4,795

 
$
4,068,015

 
$
(416,886
)
 
$
23,101

 
$
3,679,025

 
$
3,807

 
$
3,682,832

Issuance of common stock
7,830,909

 
78

 
74,317

 
—

 
—

 
74,395

 
—

 
74,395

Issuance of common stock related to the merger
8,568,980

 
86

 
90,574

 
—

 
—

 
90,660

 
—

 
90,660

Merger related stock-based compensation
—

 
—

 
23,607

 
—

 
—

 
23,607

 
—

 
23,607

Equity plans stock-based compensation
—

 
—

 
1,831

 
—

 
—

 
1,831

 
 
 
1,831

Contributions from noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
13,206

 
13,206

Dividends to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(1,057
)
 
(1,057
)
Dividends to investors
—

 
—

 
—

 
(248,747
)
 
—

 
(248,747
)
 
—

 
(248,747
)
Redemptions and cancellations of common stock
(6,174,020
)
 
(62
)
 
(62,006
)
 
—

 
—

 
(62,068
)
 
—

 
(62,068
)
Tender repurchase of common stock
(20,408,163
)
 
(204
)
 
(249,796
)
 
—

 
—

 
(250,000
)
 
—

 
(250,000
)
Changes in redeemable common stock
—

 
—

 
234,578

 
—

 
—

 
234,578

 
—

 
234,578

Comprehensive income (loss)
—

 
—

 
—

 
93,323

 
(5,081
)
 
88,242

 
589

 
88,831

Balance,
September 30, 2013
469,364,805

 
$
4,693

 
$
4,181,120

 
$
(572,310
)
 
$
18,020

 
$
3,631,523

 
$
16,545

 
$
3,648,068

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital in
 
Accumulated
 
Accumulated
 
 
 
 
 
 
 
Common Stock
 
Excess
 
Dividends
 
Other
 
Total
 
Non-
 
 
 
Number of
 
Par
 
of Par
 
in Excess of
 
Comprehensive
 
Stockholders’
 
controlling
 
Total
 
Shares
 
Value
 
Value
 
Earnings
 
Income
 
Equity
 
Interests
 
Equity
Balance, January 1, 2012
385,236,590

 
$
3,852

 
$
3,322,924

 
$
(319,031
)
 
$
(24,757
)
 
$
2,982,988

 
$
1,275

 
$
2,984,263

Issuance of common stock
96,667,486

 
967

 
956,882

 
—

 
—

 
957,849

 
—

 
957,849

Contributions from noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
2,938

 
2,938

Dividends to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(312
)
 
(312
)
Dividends to investors
—

 
—

 
—

 
(222,966
)
 
—

 
(222,966
)
 
—

 
(222,966
)
Commissions on stock sales and related dealer manager fees
—

 
—

 
(72,926
)
 
—

 
—

 
(72,926
)
 
—

 
(72,926
)
Other offering costs
—

 
—

 
(13,188
)
 
—

 
—

 
(13,188
)
 
—

 
(13,188
)
Redemptions of common stock
(4,713,238
)
 
(47
)
 
(46,071
)
 
—

 
—

 
(46,118
)
 
—

 
(46,118
)
Changes in redeemable common stock
—

 
—

 
(78,846
)
 
—

 
—

 
(78,846
)
 
—

 
(78,846
)
Purchase of investment from noncontrolling interest
—

 
—

 
(730
)
 
—

 
—

 
(730
)
 
—

 
(730
)
Comprehensive income(loss)
—

 
—

 
—

 
77,727

 
44,471

 
122,198

 
(117
)
 
122,081

Balance,
September 30, 2012
477,190,838

 
$
4,772

 
$
4,068,045

 
$
(464,270
)
 
$
19,714

 
$
3,628,261

 
$
3,784

 
$
3,632,045

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

5
 

COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
93,912

 
$
77,610

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
99,054

 
80,828

Amortization of intangibles and deferred financing costs, net
72,245

 
54,043

Accretion of marketable securities and notes receivable, net
(4,065
)
 
(2,799
)
Equity in income of unconsolidated entities
(2,365
)
 
(1,331
)
Return on investment from unconsolidated entities
2,365

 
1,331

Gain on sale of real estate assets
(22,085
)
 
(14,781
)
Loss on sale of marketable securities
1,331

 
—

Loss on derivatives and extinguishment of debt
4,268

 
9,263

Merger related stock-based compensation
23,607

 
—

Equity plans stock-based compensation
1,831

 
—

Loss on change in fair value of contingent consideration, net
19,278

 
288

Other operating activities
573

 
(413
)
Changes in assets and liabilities:
 
 
 
Rents and tenant receivables
(28,229
)
 
(27,147
)
Intangible and other assets
(4,348
)
 
(6,131
)
Due from affiliates
(9,138
)
 
—

Accounts payable and accrued expenses
19,587

 
9,807

Deferred rent and other liabilities
(11,699
)
 
(1,997
)
Due to affiliates
(4,525
)
 
5

Net cash provided by operating activities
251,597

 
178,576

Cash flows from investing activities:
 
 
 
Investment in real estate and related assets
(442,515
)
 
(1,743,469
)
Cash paid in connection with the merger, net of cash acquired
(7,251
)
 
—

Return of investment and repayment of advance from unconsolidated entities
5,318

 
22,375

Proceeds from sale and condemnation of real estate assets
98,194

 
69,222

Proceeds from the sale of marketable securities
36,533

 
—

Payment of property escrow deposits
(64,894
)
 
(33,532
)
Refund of property escrow deposits
49,594

 
30,571

Change in restricted cash
(12,726
)
 
694

Other investing activities, net
(143
)
 
648

Net cash used in investing activities
(337,890
)
 
(1,653,491
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
—

 
832,885

Offering costs on issuance of common stock
—

 
(87,195
)
Redemptions of common stock
(62,068
)
 
(46,118
)
Tender repurchase of common stock
(250,000
)
 
—

Dividends to investors
(172,031
)
 
(93,442
)
Proceeds from notes payable and other borrowings
871,310

 
1,482,508

Repayment of notes payable and other borrowings
(302,708
)
 
(726,953
)
Deferred financing costs paid
(12,592
)
 
(14,275
)
Contributions from noncontrolling interests
13,206

 
2,938

Other financing activities, net
(5,542
)
 
(7,989
)
Net cash provided by financing activities
79,575

 
1,342,359

Net decrease in cash and cash equivalents
(6,718
)
 
(132,556
)
Cash and cash equivalents, beginning of period
192,504

 
216,353

Cash and cash equivalents, end of period
$
185,786

 
$
83,797

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

6
 

COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 30, 2013

NOTE 1 — ORGANIZATION AND BUSINESS
Cole Real Estate Investments, Inc. (formerly known as Cole Credit Property Trust III, Inc. (“CCPT III”)) (the “Company”) is a Maryland corporation that was formed on January 22, 2008, which has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes. The Company operates through two business segments, Real Estate Investment (“REI”) and Private Capital Management (“PCM”), as further discussed in Note 4. Substantially all of the Company’s REI segment is conducted through Cole REIT III Operating Partnership, LP (“CCPT III OP”), a Delaware limited partnership. Substantially all of the Company’s PCM segment is conducted through Cole Capital Advisors, Inc. (“CCA”), an Arizona corporation. CCA is treated as a taxable REIT subsidiary (“TRS”) under Section 856 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).
In the Offerings (as defined in Note 15), the Company issued approximately 499.9 million shares of its common stock for aggregate gross proceeds of $5.0 billion, before share redemptions pursuant to the Company’s share redemption program of $174.7 million and offering costs, selling commissions and dealer management fees of $463.2 million. On June 20, 2013, the Company listed its common stock on the New York Stock Exchange (the “NYSE”) under the ticker symbol “COLE” (the “Listing”). Subsequent to the Listing, the Company purchased $250.0 million of shares of its common stock pursuant to the Tender Offer (as defined in Note 15) and, in connection with the Listing, redeemed an aggregate of $394,000 of fractional shares.
On October 22, 2013, the Company entered into an Agreement and Plan of Merger (the “ARCP Merger Agreement”) with American Realty Capital Properties, Inc., a Maryland corporation (“ARCP”) and Clark Acquisition Company, LLC, a Delaware limited liability company and direct wholly owned subsidiary of ARCP (“ARCP Merger Sub”). The ARCP Merger Agreement provides for the merger of the Company with and into ARCP Merger Sub (the “ARCP Merger”), with ARCP Merger Sub surviving as a direct wholly owned subsidiary of ARCP. The board of directors of the Company has, by unanimous vote of the members of the board of directors, approved the ARCP Merger Agreement, the ARCP Merger and the other transactions contemplated by the ARCP Merger Agreement. Refer to Note 19 for further discussion regarding the ARCP Merger.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The condensed consolidated unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, the statements for the interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of full year results. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with CCPT III’s audited consolidated financial statements for the year ended December 31, 2012, and related notes thereto set forth in CCPT III’s Annual Report on Form 10-K for the year ended December 31, 2012. The condensed consolidated unaudited financial statements should also be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.
The condensed consolidated unaudited financial statements include the accounts of the Company, its wholly-owned subsidiaries, consolidated joint venture arrangements in which the Company has controlling financial interests and REITs of which the Company is the sole stockholder. The portions of the consolidated joint venture arrangements not owned by the Company are presented as noncontrolling interests as of and during the period consolidated. All intercompany balances and transactions have been eliminated in consolidation. Certain prior year balances have been reclassified in the condensed consolidated unaudited statements of operations to conform with the current year presentation of real estate assets held for sale and discontinued operations. In addition, prior year revenue amounts were reclassified in the condensed consolidated unaudited statements of operations to conform to the current year presentation for the reportable segments. Also, certain balances have been combined in the condensed consolidated unaudited balance sheets, statements of operations and statements of cash flows.

7
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



The Company evaluates its relationships and investments to determine if it has variable interests.  A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns.  If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity (“VIE”).  A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.  The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE’s operations.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, its form of ownership interest, its representation on the entity’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and to replace the manager of and/or liquidate the entity.
The Company continually evaluates the need to consolidate joint ventures and the managed investment programs based on standards set forth in GAAP. In determining whether the Company has a controlling interest in a joint venture or managed investment programs and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, power to make decisions and contractual and substantive participating rights of the partners/members as well as whether the entity is a VIE for which the Company is the primary beneficiary. As of September 30, 2013, the Company consolidated the accounts of four joint ventures (the “Consolidated Joint Ventures”), which held real estate assets with an aggregate book value of $277.7 million, and, as further discussed in Note 14, the accounts of two managed investment programs with aggregate cash of $400,000.
In addition, the Company evaluates its investments in marketable securities to determine if they represent variable interests in VIEs. As of September 30, 2013, the Company determined that investments in marketable securities are variable interests in VIEs, of which the Company is not the primary beneficiary because it does not have the ability to direct the activities of the VIEs that most significantly impact each entity’s economic performance. The Company’s maximum exposure to loss from these investments does not exceed their aggregate amortized cost basis.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 
Investment in and Valuation of Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. Amounts capitalized to real estate assets consist of the cost of acquisition, excluding acquisition related expenses, construction and any tenant improvements, major improvements and betterments that extend the useful life of the real estate assets and leasing costs. All repairs and maintenance are expensed as incurred.
The Company is required to make subjective assessments as to the useful lives of its depreciable assets. The Company considers the period of future benefit of each respective asset to determine the appropriate useful life of the assets. Real estate assets, other than land, are depreciated or amortized on a straight-line basis. The estimated useful lives of the Company’s real estate assets by class are generally as follows:
Buildings
40 years
Tenant improvements
Lesser of useful life or lease term
Intangible lease assets
Lease term

8
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



When a real estate asset is identified by the Company as held for sale, the Company ceases depreciation and amortization of the assets related to the property and estimates the fair value, net of selling costs. If, in management’s opinion, the fair value, net of selling costs, of the asset is less than the carrying amount of the asset, an adjustment to the carrying amount would be recorded to reflect the estimated fair value of the property, net of selling costs.
Allocation of Purchase Price of Real Estate Assets
Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings and improvements, and identified intangible assets and liabilities, consisting of the value of above market and below market leases and the value of in-place leases, based in each case on their respective fair values. Acquisition related expenses are expensed as incurred. The Company utilizes independent appraisals to assist in the determination of the fair values of the tangible assets of an acquired property (which includes land and building). The Company obtains an independent appraisal for each real property acquisition. The information in the appraisal, along with any additional information available to the Company’s management, is used in estimating the amount of the purchase price that is allocated to land. Other information in the appraisal, such as building value and market rents, may be used by the Company’s management in estimating the allocation of purchase price to the building and to intangible lease assets and liabilities. The appraisal firm has no involvement in management’s allocation decisions other than providing this market information. 
The fair values of above market and below market lease intangibles are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) an estimate of fair market lease rates for the corresponding in-place leases, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease including any bargain renewal periods, with respect to a below market lease. The above market and below market lease intangibles are capitalized as intangible lease assets or liabilities, respectively. Above market leases are amortized as a reduction to rental income over the remaining terms of the respective leases. Below market leases are amortized as an increase to rental income over the remaining terms of the respective leases, including any bargain renewal periods. In considering whether or not the Company expects a tenant to execute a bargain renewal option, the Company evaluates economic factors and certain qualitative factors at the time of acquisition, such as the financial strength of the tenant, remaining lease term, the tenant mix of the leased property, the Company’s relationship with the tenant and the availability of competing tenant space. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market or below market lease intangibles relating to that lease would be recorded as an adjustment to rental income.
The fair values of in-place leases include estimates of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rental and other property income which are avoided by acquiring a property with an in-place lease. Direct costs associated with obtaining a new tenant include commissions and other direct costs and are estimated in part by utilizing information obtained from independent appraisals and management’s consideration of current market costs to execute a similar lease. The intangible values of opportunity costs, which are calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease, are capitalized as intangible lease assets and are amortized to expense over the remaining term of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
The Company has acquired, and may continue to acquire, certain properties subject to contingent consideration arrangements that may obligate the Company to pay additional consideration to the seller based on the outcome of future events. Additionally, the Company may acquire certain properties for which it funds certain contingent consideration amounts into an escrow account pending the outcome of certain future events. The outcome may result in the release of all or a portion of the escrow funds to the Company or the seller or a combination thereof. Contingent consideration arrangements are based on a predetermined formula and have set time periods regarding the obligation to make future payments, including funds released to the seller from escrow accounts, or the right to receive escrowed funds as set forth in the respective purchase and sale agreement. Contingent consideration arrangements, including amounts funded through an escrow account, are recorded upon acquisition of the respective property at their estimated fair value, and any changes to the estimated fair value, subsequent to acquisition, are reflected in the accompanying condensed consolidated unaudited statements of operations. The determination of the amount of contingent consideration arrangements is based on the probability of several possible outcomes as identified by management. The respective amounts recorded are carried at fair value, with any changes in fair value included in net income.

9
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



The Company estimates the fair value of assumed mortgage notes payable based upon indications of current market pricing for similar types of debt financing with similar maturities. Assumed mortgage notes payable are initially recorded at their estimated fair value as of the assumption date, and any difference between such estimated fair value and the mortgage note’s outstanding principal balance is amortized to interest expense over the term of the respective mortgage note payable.
The determination of the fair values of the real estate assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables. The use of alternative estimates may result in a different allocation of the Company’s purchase price, which could impact the Company’s results of operations.
Discontinued Operations
Upon the disposal of a real estate asset or the determination of a real estate asset as being held for sale, the Company determines if the asset disposed of is considered a component of the Company. A component is comprised of operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes, from the rest of the Company. If the asset is considered a component of the Company, the results of operations and gains or losses on the sale of the component are required to be presented in discontinued operations if both of the following criteria are met: (1) the operations and cash flows of the asset have been (or will be) eliminated from the ongoing operations of the Company as a result of the disposal transaction and (2) the Company will not have any significant continuing involvement in the operations of the asset after the disposal transaction. Also, the prior period results of operations for the asset are reclassified and presented in discontinued operations in the prior condensed consolidated unaudited statements of operations.
Sale of Real Estate Assets
Gains on the sale of real estate assets are generally recognized by the full accrual method when the following criteria are met: (1) the gain is determinable, that is, the collectability of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (2) the earnings process is virtually complete, that is, the Company is not obligated to perform significant activities after the sale to earn the gain. 
Investment in Marketable Securities
Investments in marketable securities consist of investments in commercial mortgage-backed securities (“CMBS”), including those pledged as collateral. The Company classifies its investments as available-for-sale because although the Company does not actively trade these securities, the Company may sell them prior to their maturity. These investments are carried at estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. The Company uses estimated non-binding quoted market prices from the trading desks of financial institutions that are dealers in such securities, where available, for similar CMBS tranches that actively participate in the CMBS market and industry benchmarks, such as Trepp’s CMBS Analytics, where applicable. Market conditions, such as interest rates, liquidity, trading activity and credit spreads may cause significant variability to the received quotes. If the Company is unable to obtain quotes or if the Company believes the quotes received are inaccurate, the Company would estimate fair value using internal models that primarily consider Trepp’s CMBS Analytics, expected cash flows, known and expected defaults and rating agency reports. Changes in market conditions could result in a significant increase or decrease in the recorded amount of the securities. Significant judgment is involved in valuations and different judgments and assumptions used in management’s valuation could result in alternative valuations. If there are significant disruptions to the financial markets, the Company’s estimates of fair value may have significant volatility. Upon the sale of a security, the realized net gain or loss is computed on a specific identification basis.
Accretion of discounts on the CMBS is recognized based on the effective yield method and is recorded in the accompanying condensed consolidated unaudited statements of operations in interest income on real estate-related investments. The effective yield on these CMBS is based on the projected cash flows from each security, which are estimated based on the Company’s observation of current information and events and include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses. The Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual maturities of the securities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, and prepayments of principal. Therefore actual maturities of the securities may be shorter than stated contractual maturities.

10
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Investment in Unconsolidated Entities
Investment in Unconsolidated Joint Ventures
Investment in unconsolidated joint ventures as of September 30, 2013 consisted of the Company’s interest in seven joint ventures that owned 12 properties (the “Unconsolidated Joint Ventures”). As of September 30, 2013, the Company owned aggregate equity investments of $91.6 million in the Unconsolidated Joint Ventures. The Company accounts for the Unconsolidated Joint Ventures using the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over operating and financial policies of these investments. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the joint ventures’ earnings and distributions.
Investment in Unconsolidated Managed REITs
As of September 30, 2013, the Company owned aggregate equity investments of $427,000 in the following publicly registered, non-traded REITs: Cole Credit Property Trust, Inc. (“CCPT”), Cole Credit Property Trust IV, Inc. (“CCPT IV”), Cole Corporate Income Trust, Inc. (“CCIT”) and Cole Real Estate Income Strategy (Daily NAV), Inc. (“INAV”, and collectively with CCPT, CCPT IV and CCIT, the “Unconsolidated Managed REITs”). The Company accounts for these investments using the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over the Unconsolidated Managed REITs’ operating and financial policies through its advisory and property management agreements with the respective Unconsolidated Managed REITs. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the respective Unconsolidated Managed REIT’s earnings and distributions.
Leasehold Improvements and Property and Equipment
The Company leases its office facilities under operating leases. Leasehold improvements related to these are recorded at cost less accumulated amortization. Leasehold improvements are amortized over the lesser of the estimated useful life or remaining lease term. The Company recorded $320,000 and $587,000 of amortization expense for the three months ended September 30, 2013 and the period from the Cole Holdings Merger Date (as defined in Note 3) to September 30, 2013, respectively. Accumulated amortization was $587,000 as of September 30, 2013.
Property and equipment, which primarily include office furniture, fixtures and equipment and computer hardware and software, are stated at cost less accumulated depreciation. Property and equipment are depreciated on a straight-line method over the estimated useful lives of the assets, which range from five to seven years. Depreciation expense for property and equipment totaled $369,000 and $662,000 for the three months ended September 30, 2013 and the period from the Cole Holdings Merger Date to September 30, 2013, respectively. Accumulated depreciation was $662,000 as of September 30, 2013. The Company reassesses the useful lives of its property and equipment and adjusts the future monthly depreciation expense based on the new useful life, as applicable. If the Company disposes of an asset, the asset and related accumulated depreciation are written off upon disposal.
Goodwill
In the case of a business combination, after identifying all tangible and intangible assets and liabilities, the excess consideration paid over the fair value of the assets and liabilities acquired and assumed represents goodwill. The Company allocates goodwill to the respective reporting unit in which such goodwill arose. In connection with the Cole Holdings Merger (as defined in Note 3), the Company recorded goodwill in its PCM segment. Prior to the Cole Holdings Merger, there was no goodwill recorded.

11
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Impairments
Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to, bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value is determined using a discounted cash flow analysis and recent comparable sales transactions. When developing estimates of expected future cash flows, the Company makes certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in estimating expected future cash flows could result in a different determination of the property’s expected future cash flows and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the fair value of the real estate assets. No impairment indicators were identified and no impairment losses were recorded related to the Company’s real estate assets during the nine months ended September 30, 2013 or 2012.
Investment in Marketable Securities
The Company monitors its available-for-sale securities for impairments. A loss is recognized when the Company determines that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost, the amount of the unrealized loss, the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. The analysis of determining whether the impairment of a security is deemed to be other-than-temporary requires significant judgments and assumptions. The use of alternative judgments and assumptions could result in a different conclusion. No impairment indicators were identified and no impairment losses were recorded related to the Company’s marketable securities during the nine months ended September 30, 2013 or 2012.
Investment in Unconsolidated Entities
The Company is required to determine whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of any of its investment in the unconsolidated entities. If an event or change in circumstance has occurred, the Company is required to evaluate its investment in the unconsolidated entity for potential impairment and determine if the carrying amount of its investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an unconsolidated entity for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions.  The use of different judgments and assumptions could result in different conclusions. No impairment indicators were identified and no impairment losses were recorded related to the Company’s unconsolidated entities for the nine months ended September 30, 2013 or 2012.
Leasehold Improvements and Property and Equipment
Leasehold improvements and property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If this review indicates that the carrying amount of the asset is not recoverable, the Company records an impairment loss, measured at fair value by estimated discounted cash flows or market appraisals. No impairments of leasehold improvements or property or equipment were identified during the period from the Cole Holdings Merger Date to September 30, 2013.

12
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Goodwill
The Company will evaluate goodwill for possible impairment at least annually or upon the occurrence of a triggering event using a two-step process. To identify any impairment, the Company will first compare the estimated fair value of the business segment with its respective carrying amount, including goodwill. The Company will calculate the estimated fair value of the PCM segment by applying a multiple, based on comparable companies, to earnings. The selection of the comparable companies and transactions to be used in the Company’s evaluation process could have a significant impact on the fair value of the Company’s reporting unit and possible impairments. If the fair value of the reporting unit exceeds its carrying amount, the Company will not consider goodwill to be impaired and no further analysis will be required. If the carrying amount of the business segment exceeds its estimated fair value, the Company will then perform the second step to determine and measure the amount of the potential impairment charge.
For the second step, the Company will compare the implied fair value of the goodwill for the business segment with its respective carrying amount and record an impairment charge equal to the excess of the carrying amount over the implied fair value. The Company will determine the implied fair value of the goodwill by allocating the estimated fair value of the business segment to its assets and liabilities. The excess of the estimated fair value of the business segment over the amounts assigned to its assets and liabilities will be the implied fair value of the goodwill. The evaluation of goodwill for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions.  The use of different judgments and assumptions could result in different conclusions.
Program Development Costs
The Company pays for organization, registration and offering expenses associated with the sale of common stock of the Unconsolidated Managed REITs’, Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”, and collectively with the Unconsolidated Managed REITs, the “Managed REITs”) and Cole Credit Property Trusty V, Inc. (“CCPT V”), which is currently in the registration process.  The reimbursement of these expenses by the Managed REITs is limited to a certain percentage of the proceeds raised from their offerings, in accordance with their respective advisory agreement and charter. Expenses paid by the Company on behalf of the Managed REITs in excess of these limits that are expected to be collected are recorded as program development costs. The Company assesses the collectability of the program development costs, considering the offering period and historical and forecasted sales of shares under the Managed REITs’ respective offering and reserves for any balances considered not collectible. No reserves were recorded as of September 30, 2013, as the Company expects to be reimbursed for all of the program development costs by the Managed REITs as they raise additional proceeds from their respective offerings.
Due from Affiliates
The Company receives or may be entitled to receive compensation and reimbursement for services primarily relating to the Managed REITs’ offerings and the investment, management, financing and disposition of their respective assets. Refer to Note 14 for further explanation.
Deferred Lease Liabilities and Rent Expense
The Company leases its office facilities under operating leases. Certain lease agreements contain rent escalation clauses that require scheduled rent increases during the lease term. The Company records rental expense for the non-cancelable lease term of each lease on a straight-line basis. As of September 30, 2013, the Company had deferred rent obligations related to the recognition of rental expense on a straight-line basis of $148,000, which are included in the accompanying condensed consolidated unaudited balance sheets in deferred rent, derivative and other liabilities.
Reportable Segments
The Company has concluded that it has two reportable segments as it has organized its operations into two segments for management and internal financial reporting purposes, Real Estate Investment and Private Capital Management. The identification and aggregation of reportable segments may require the Company’s management to exercise certain judgments. Refer to Note 4 for further information.

13
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Revenue Recognition
Real Estate Investment Segment
Certain acquired properties have leases where minimum rental payments increase during the term of the lease. The Company records rental income for the full term of each lease on a straight-line basis. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purpose of this calculation. The Company defers the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Expected reimbursements from tenants for recoverable real estate taxes and operating expenses are included in tenant reimbursement income in the period when such costs are incurred.
Private Capital Management Segment
Revenue consists of securities sales commissions and dealer manager fees, real estate acquisition fees, asset management fees, property management fees, advisory fees and performance fees for services relating to the Managed REITs’ offerings and the investment and management of their respective assets, in accordance with the respective advisory and dealer manager agreements. The Company records revenue related to acquisition fees, securities sales commissions and dealer manager fees upon completion of a transaction and asset and property management fees as services are performed. The Company is also reimbursed for certain costs incurred in providing these services. Securities sales commission and dealer manager reimbursements are recorded as revenue as the expenses are incurred. Other reimbursements are recorded as revenue when reimbursements are reasonably assured.
Stock-Based Compensation
The Company has granted restricted share units and performance share units to certain employees and independent directors of the Company under the Equity Plans (as defined in Note 16). Stock-based compensation expense is based on the grant date fair value, calculated in accordance with GAAP, and is recognized on a straight-line basis over the respective vesting period, net of estimated forfeitures.
Earnings Per Share
Basic earnings per common share is calculated by dividing net income attributable to the Company, as adjusted for dividends attributable to participating securities, by the weighted average number of shares outstanding during each period. Diluted earnings per common share reflects the potential dilution, calculated in accordance with GAAP, of securities that could share in earnings, such as potentially dilutive common shares that may be issuable under the Equity Plans and certain contingent consideration arrangements, and is calculated by dividing net income by the weighted average number of shares, including dilutive securities outstanding during the period.
Income Taxes
The Company currently qualifies and has elected to be taxed as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code. As a REIT, except as discussed below, the Company generally is not subject to federal income tax on taxable income that it distributes to its stockholders so long as it distributes at least 90% of its annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the Company maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.
The Company conducts substantially all of its PCM segment operations through a TRS. A TRS is a subsidiary of a REIT that is subject to corporate federal, state and local income taxes, as applicable. The Company’s use of a TRS enables it to engage in certain businesses while complying with the REIT qualification requirements and to retain any income generated by these businesses for reinvestment without the requirement to distribute those earnings. The Company conducts all of its business in the United States, and as a result, the Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. Certain of the Company’s inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation.

14
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



The Company provides for income taxes in accordance with current authoritative accounting and tax guidance. The tax expense or benefit related to significant, unusual or extraordinary items is recognized in the quarter in which those items occur. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the quarter in which the change occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.
Employee Benefit Plans

The Company maintains a 401(k) defined contribution plan (the “401(k) Plan”), which covers substantially all employees. The 401(k) Plan permits participants to contribute to the 401(k) Plan on the first of the month following their date of hire subject to Internal Revenue Code restrictions. Employer matching contributions are discretionary and determined to be a percent of the respective employee’s contribution, subject to maximum limits. The Company’s matching contributions were $179,000 and $380,000 for the three months ended September 30, 2013 and the period from the Cole Holdings Merger Date to September 30, 2013, respectively, and are included in general and administrative expenses in the accompanying condensed consolidated unaudited statements of operations.
Concentration of Credit Risk
As of September 30, 2013, the Company had cash on deposit, including restricted cash accounts held by the Company, in 11 financial institutions, nine of which had deposits in excess of federally insured levels, totaling $196.8 million; however, the Company has not experienced any losses in such accounts. The Company limits significant cash investments to accounts held by financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits.
No single tenant or industry accounted for greater than 10% of the Company’s 2013 gross annualized rental revenues as of September 30, 2013. The Company has certain geographic concentrations in its property holdings. In particular, as of September 30, 2013, 187 of the Company’s properties were located in Texas, which accounted for 16% of its 2013 gross annualized rental revenues.
Repurchase Agreements
In certain circumstances the Company may obtain financing through a repurchase agreement. The Company evaluates the initial transfer of a financial instrument and the related repurchase agreement for sale accounting treatment. In instances where the Company maintains effective control over the transferred securities, the Company accounts for the transaction as a secured borrowing, and accordingly, both the securities and related repurchase agreement payable are recorded separately in the condensed consolidated unaudited balance sheets. In instances where the Company does not maintain effective control over the transferred securities, the Company accounts for the transaction as a sale of securities for proceeds consisting of cash and a forward purchase contract.
Recent Accounting Pronouncements
In February 2013, the U.S. Financial Accounting Standards Board issued Accounting Standards Update, 2013-02 Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), which amends the reporting requirements for comprehensive income pertaining to the reclassification of items out of accumulated other comprehensive income. ASU 2013-02 was effective for the Company beginning January 1, 2013 and the Company has presented the required information within the condensed consolidated unaudited statements of comprehensive income and notes to the financial statements. 

15
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



NOTE 3 — COLE HOLDINGS MERGER
Overview
On March 5, 2013, CCPT III, Cole Holdings Corporation (“Holdings”), an Arizona corporation that was originally wholly owned by Christopher H. Cole, the current executive chairman of the Company’s board of directors, and the former chairman, chief executive officer and president of the Company (the “Holdings Stockholder”), CREInvestments, LLC, a Maryland limited liability company and a wholly-owned subsidiary of the Company (“Merger Sub”), and the Holdings Stockholder entered into an Agreement and Plan of Merger (the “Cole Holdings Merger Agreement”). The Cole Holdings Merger Agreement provided for the merger of Holdings with and into Merger Sub (the “Cole Holdings Merger”), with Merger Sub surviving and continuing its existence under the laws of the state of Maryland as a wholly owned subsidiary of the Company. The Cole Holdings Merger Agreement, and the transactions contemplated thereby, were approved by the Company’s board of directors at the recommendation of a special committee of the board of directors comprised solely of independent directors. Effective April 5, 2013 (the “Cole Holdings Merger Date”), the Company closed the Cole Holdings Merger and entered into a registration rights agreement and an escrow agreement in connection with the completion of the Cole Holdings Merger.
Consideration
As a result of the Cole Holdings Merger, certain of Holdings’ executive officers became entitled to a portion of the consideration that otherwise would have been paid to the Holdings Stockholder in the Cole Holdings Merger. In the Cole Holdings Merger, the Holdings Stockholder and such executive officers (collectively, the “Holdings Executives”) received a total of $21.9 million in cash, which included $1.9 million paid related to an excess working capital adjustment, and approximately 10.7 million newly-issued shares of common stock of the Company (including approximately 661,000 shares withheld to satisfy applicable tax withholdings) (the “Upfront Stock Consideration”). In addition, as a result of the listing of the Company’s common stock on the NYSE, an aggregate of approximately 2.1 million shares of common stock (including approximately 135,000 shares withheld to satisfy applicable tax withholdings) (the “Listing Consideration”) were issued to the Holdings Executives. In accordance with the Cole Holdings Merger Agreement and as further discussed below, approximately 4.3 million shares of the Upfront Stock Consideration and the Listing Consideration were placed into escrow (the “Escrow Shares”) and will be released on April 5, 2014, subject to meeting certain requirements. The Upfront Stock Consideration and the Listing Consideration are subject to a three-year lock-up with approximately one-third of the shares released each year following the Cole Holdings Merger Date.
Pursuant to the Cole Holdings Merger Agreement and certain preexisting transaction bonus entitlements, additional shares of the Company’s common stock are potentially payable in 2017 by the Company to the Holding Executives as an “earn-out” contingent upon the acquired business’ demonstrated financial success based on two criteria: (a) the acquired business generating Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) above a minimum threshold during the years ending December 31, 2015 and 2016 and (b) the Company’s stock performance relative to its peer group during the same period (collectively, the “Earnout Consideration”). The Earnout Consideration is subject to a lock-up until December 31, 2017. Additionally, the Holdings Executives may be entitled to additional shares of the Company’s common stock (the “Incentive Consideration,” and collectively with the Earnout Consideration, the “Merger Contingent Consideration”) based on the terms of the Company’s advisory agreement with a subsidiary of Holdings in effect prior to the Cole Holdings Merger. However, the Holdings Stockholder agreed as part of the Cole Holdings Merger to reduce the amount that would have been payable by 25%. The Incentive Consideration is based on 11.25% (reduced from 15% in the advisory agreement) of the amount by which the market value of the Company’s common stock raised in the Offerings (the “Capital Raised”) exceeds the amount necessary to generate an 8% cumulative, non-compounded annual return, including all dividends paid on Capital Raised, to investors. The market value of the Capital Raised is based on the average closing price over a period of 30 consecutive trading days (the “Incentive Consideration Test Period”) beginning 180 days after June 20, 2013, the date the Company’s shares of common stock were listed on the NYSE.

16
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Other Agreements
Under the Cole Holdings Merger Agreement, the Holdings Stockholder has agreed, subject to certain limitations, to indemnify the Company with respect to certain representations and warranties regarding Holdings and other matters.
The Company and the Holdings Executives entered into an escrow agreement with U.S. Bank National Association related to the Escrow Shares, in part to satisfy the Holdings Stockholder’s indemnity obligations. Under the terms of the escrow agreement, the Company pays non-refundable dividends to the Holdings Executives and no forfeitures are expected.
At the closing of the Cole Holdings Merger, the Company and the Holdings Executives entered into a registration rights agreement pursuant to which the Company agreed to customary demand and piggyback registration rights with respect to the shares of the Company’s common stock issued pursuant to the Cole Holdings Merger or otherwise held by any of the Holdings Executives. The registration rights agreement also contains the lock-up provisions that are set forth in the Cole Holdings Merger Agreement.
Fair Value of Consideration Transferred
The Company accounted for the Cole Holdings Merger as a business combination under the acquisition method of accounting. During the three and nine months ended September 30, 2013, the Company incurred $2.0 million and $29.7 million, respectively, for legal, consulting and other expenses related to the Cole Holdings Merger, which are included in merger and acquisition related expenses in the accompanying condensed consolidated unaudited statements of operations. As the release of the Escrow Shares from escrow is dependent upon continued employment by the Holdings Executives, among other factors, the fair value of the Escrow Shares of $50.3 million at the respective grant date is considered compensation that will be amortized over the period that the shares are required to be held in escrow. During the three and nine months ended September 30, 2013, the Company recorded $13.3 million and $23.6 million, respectively, of amortization, which is recorded as merger related stock-based compensation in the accompanying condensed consolidated unaudited statements of operations. As of September 30, 2013, the remaining unamortized merger related stock-based compensation expense totaled $26.7 million.
The Company is in the process of gathering certain additional information in order to finalize its assessment of the fair value of the consideration transferred; thus, the fair values are subject to change. The estimated fair value of the consideration transferred at the Cole Holdings Merger Date, excluding the Escrow Shares value noted above, totaled $350.0 million and consisted of the following (in thousands):
 
Initially Reported as of June 30, 2013
 
Measurement Period Adjustments
 
As Revised as of September 30, 2013
Estimated Fair Value of Consideration Transferred:
 
 
 
 
 
Cash
$
21,886

 
$
—

 
$
21,886

Common stock - Upfront Stock Consideration
75,550

 
—

 
75,550

Common stock - Listing Consideration
15,110

 
—

 
15,110

Merger Contingent Consideration
209,553

 
27,928

 
237,481

Total consideration transferred
$
322,099

 
$
27,928

 
$
350,027

The estimated fair value of the Company’s shares of common stock issued in the Cole Holdings Merger as part of the Upfront Stock Consideration and the Listing Consideration was determined using a market approach that considered share prices as compared to performance measures of comparative public companies and management’s estimates of the Company’s pro forma results for the year ending December 31, 2013, adjusted for illiquidity discounts. The estimated fair value of the Incentive Consideration was calculated using the Monte Carlo method, a probabilistic valuation approach. The Company estimated the fair value of the Earnout Consideration based on probability-weighted discounted estimates of the acquired business’ EBITDA. These fair value measurements are based on significant inputs not observable in the market and thus represents a Level 3 measurement as discussed in Note 5. The key assumptions used in estimating the fair value of the Upfront Stock Consideration, the Listing Consideration and the Merger Contingent Consideration, as applicable, included (i) a discount rate of 9%, (ii) undiscounted price per share, on the Cole Holdings Merger Date, ranging from $12.25 to $13.22, (iii) aggregate illiquidity discounts ranging from 10% to 20%, (iv) average implied volatility of 17%, (v) average dividend yield of 6.0% and (vi) probability adjusted annual EBITDA ranging from $42.6 million to $147.0 million.

17
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Allocation of Consideration
The consideration transferred pursuant to the Cole Holdings Merger Agreement was allocated to the assets acquired and liabilities assumed, based upon their preliminary estimated fair values as of the Cole Holdings Merger Date. The Company is in the process of gathering certain additional information in order to finalize its assessment of the fair value of certain intangible assets; thus, the provisional measurements of intangible assets and goodwill are subject to change. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Cole Holdings Merger Date initially recorded in the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2013, as well as measurement period adjustments recorded during the three months ended September 30, 2013 and the revised estimated fair values of the assets acquired and liabilities assumed at the Cole Holdings Merger Date (in thousands). The measurement period adjustments did not have a significant impact on the Company’s condensed consolidated statements of operations in any period; therefore, the Company has not retrospectively adjusted its financial statements.
Initially Reported as of June 30, 2013
 
Measurement Period Adjustments
 
As Revised as of September 30, 2013
Identifiable Assets Acquired at Fair Value:
 
 
 
 
 
Cash and cash equivalents
$
14,635

 
$
—

 
$
14,635

Leasehold improvements and property and equipment
21,495

 
—

 
21,495

Due from affiliates
4,304

 
—

 
4,304

Investment in unconsolidated entities
570

 
—

 
570

Intangible assets
70,092

 
1,852

 
71,944

Program development costs and other assets
24,126

 
(9,393
)
 
14,733

Total identifiable assets acquired
135,222

 
(7,541
)
 
127,681

 
 
 
 
 
 
Identifiable Liabilities Assumed at Fair Value:
 
 
 
 
 
Accounts payable and accrued expenses
23,619

 
—

 
23,619

Above market lease liabilities
5,183

 
—

 
5,183

Deferred tax liabilities, net
13,424

 
(5,696
)
 
7,728

Total liabilities assumed
42,226

 
(5,696
)
 
36,530

 
 
 
 
 
 
Net identifiable assets acquired
92,996

 
(1,845
)
 
91,151

Goodwill
229,103

 
29,773

 
258,876

Net assets acquired
$
322,099

 
$
27,928

 
$
350,027

The intangible assets acquired primarily consist of management and advisory contracts that the Company has with the Unconsolidated Managed REITs and are subject to an estimated useful life of approximately four years. The Company recorded $3.3 million and $8.8 million of amortization expense for the three months ended September 30, 2013 and the period from the Cole Holdings Merger Date to September 30, 2013, respectively. The estimated amortization expense for the remainder of the year ending December 31, 2013 is $4.5 million. The estimated amortization expense for each of the years ending December 31, 2014, 2015 and 2016 is $18.0 million and the estimated amortization expense for the period ending December 17, 2017 is $4.7 million.
The goodwill recognized is primarily supported by the fact that the PCM segment brings an established management platform with numerous strategic benefits including growth from new income streams and the ability to offer new products. None of the goodwill is expected to be deductible for income tax purposes.
The fair value of the above market lease liabilities related to certain office leases assumed was recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) an estimate of fair market lease rates for the corresponding in-place leases, which was obtained from independent market reports, measured over a period equal to the remaining non-cancelable term of the lease including any bargain renewal periods. The above market lease liabilities are

18
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



amortized as a decrease to rental expense over the remaining terms of the respective leases. Above market lease liabilities are included in deferred rent, derivative and other liabilities in the accompanying condensed consolidated unaudited balance sheet as of September 30, 2013.
Pro Forma Financial Information
The following table summarizes selected pro forma financial information of the Company, as if the Cole Holdings Merger had occurred on January 1, 2012 for each period presented below. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of what the Company’s actual results of operations would have been had it completed the Cole Holdings Merger on January 1, 2012, nor does it purport to represent the results of future operations. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the three and nine months ended September 30, 2013 and 2012, respectively (in thousands).
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Pro forma basis:
 
 
 
 
 
 
 
Revenue
$
372,470

 
$
178,878

 
$
828,751

 
$
485,416

Net income
$
36,567

 
$
8,760

 
$
150,002

 
$
20,756

The pro forma financial information for the three and nine months ended September 30, 2013 was adjusted to exclude $2.0 million and $29.7 million, respectively, for legal, consulting and other expenses related to the Cole Holdings Merger recorded during the three and nine months ended September 30, 2013. These costs were recognized in the pro forma financial information for the nine months ended September 30, 2012. The pro forma financial information was also adjusted for the three and nine months ended September 30, 2013 to exclude $13.3 million and $23.6 million, respectively, for merger related stock-based compensation expense recorded during the three and nine months ended September 30, 2013. These costs were recognized in the pro forma financial information for the three and nine months ended September 30, 2012. In addition, the pro forma financial information was adjusted to exclude fees paid by CCPT III to a subsidiary of Holdings during the three and nine months ended September 30, 2012 and from January 1, 2013 through the Cole Holdings Merger Date because these fees would not have been incurred if the Cole Holdings Merger had occurred on January 1, 2012.
NOTE 4 — SEGMENT REPORTING
The Company operates under two segments, Real Estate Investment and Private Capital Management.
Real Estate Investment - Through its REI segment, the Company acquires and operates a diverse portfolio of core commercial real estate investments primarily consisting of necessity retail properties located throughout the U.S., including U.S. protectorates. The REI segment’s operating results and cash flows are primarily influenced by rental income from its commercial properties, interest expense on the Company’s property acquisition indebtedness and acquisition and operating expenses. As of September 30, 2013, the Company owned 1,026 properties, comprising 44.8 million rentable square feet of single and multi-tenant retail and commercial space located in 48 states, which include properties owned through the Consolidated Joint Ventures. As of September 30, 2013, the rentable space at these properties was 99% leased. As of September 30, 2013, the Company also owned 21 CMBS, three notes receivable and, through the Unconsolidated Joint Ventures, had interests in 12 properties comprising 2.3 million rentable square feet of commercial and retail space.
Private Capital Management - The Company’s PCM segment is contractually responsible for managing the Managed REITs’ affairs on a day-to-day basis, identifying and making acquisitions and investments on the Managed REITs’ behalf, and recommending to each of the Managed REIT’s respective board of directors an approach for providing investors with liquidity. The PCM segment distributes the shares of common stock for certain Managed REITs and advises them regarding offerings, manages relationships with participating broker-dealers and financial advisors and provides assistance in connection with compliance matters relating to the offerings. The PCM segment receives compensation and reimbursement for services relating to the Managed REITs’ offerings and the investment, management, financing and disposition of their respective assets, as applicable. The PCM segment also develops new REIT offerings, including obtaining regulatory approvals from the SEC, the Financial Industry Regulatory Authority and various jurisdictions for such offerings.

19
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



The Company allocates certain operating expenses, such as audit and legal fees, board of director fees, employee related costs and benefits and general overhead expenses between its two segments. The following tables present a summary of the comparative financial results and total assets for each business segment (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Real Estate Investment
 
 
 
 
 
 
 
Rental and other property income
$
144,560

 
$
121,105

 
$
424,254

 
$
331,937

Tenant reimbursement income
15,243

 
10,808

 
42,969

 
29,538

Interest income on notes receivable
1,959

 
1,769

 
5,818

 
4,617

Interest income on marketable securities
4,958

 
6,478

 
16,884

 
13,871

Total real estate investment revenue
166,720

 
140,160

 
489,925

 
379,963

General and administrative expenses
12,462

 
3,291

 
29,250

 
12,001

Merger related stock-based compensation
13,329

 
—

 
23,607

 
—

Property operating expenses
17,685

 
12,701

 
49,853

 
33,037

Property and asset management expenses
263

 
11,717

 
15,316

 
32,384

Merger and acquisition related expenses
25,237

 
13,612

 
52,660

 
46,431

Depreciation and amortization
49,834

 
40,760

 
146,677

 
110,939

Total operating expenses
118,810

 
82,081

 
317,363

 
234,792

Total interest and other expense, net
(40,242
)
 
(43,419
)
 
(125,763
)
 
(94,790
)
Income from continuing operations
7,668

 
14,660

 
46,799

 
50,381

Income from discontinued operations
3,634

 
3,910

 
24,666

 
27,229

Net income
$
11,302

 
$
18,570

 
$
71,465

 
$
77,610

 
 
 
 
 
 
 
 
Private Capital Management
 
 
 
 
 
 
 
Dealer manager fees, selling commissions and offering reimbursements
$
172,864

 
$
—

 
$
224,682

 
$
—

Transaction service fees
16,883

 
—

 
38,392

 
—

Management fees and reimbursements
10,084

 
—

 
19,400

 
—

Total private capital management revenue
199,831

 
—

 
282,474

 
—

Reallowed fees and commissions
130,398

 
—

 
169,360

 
—

General and administrative expenses
42,790

 
—

 
71,469

 
—

Depreciation and amortization
3,963

 
—

 
10,021

 
—

Total operating expenses
177,151

 
—

 
250,850

 
—

Total other income
7

 
—

 
14

 
—

Income before income taxes
22,687

 
—

 
31,638

 
—

Provision for income taxes
(9,426
)
 
—

 
(9,191
)
 
—

Net income
$
13,261

 
$
—

 
$
22,447

 
$
—

 
 
 
 
 
 
 
 
Total Company
 
 
 
 
 
 
 
Total revenue
$
366,551

 
$
140,160

 
$
772,399

 
$
379,963

Total operating expenses
295,961

 
82,081

 
568,213

 
234,792

Total interest and other expense, net
(40,235
)
 
(43,419
)
 
(125,749
)
 
(94,790
)
Provision for income taxes
(9,426
)
 
—

 
(9,191
)
 
—

Income from continuing operations
20,929

 
14,660

 
69,246

 
50,381

Income from discontinued operations
3,634

 
3,910

 
24,666

 
27,229

Net income
$
24,563

 
$
18,570

 
$
93,912

 
$
77,610


20
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



 
Total Assets as of
 
September 30, 2013
 
December 31, 2012
Real estate investment
$
7,621,240

 
$
7,453,725

Private capital management
426,255

 
—

Total company
$
8,047,495

 
$
7,453,725

NOTE 5 — FAIR VALUE MEASUREMENTS
GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 – Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:
Cash and cash equivalents and restricted cash – The Company considers the carrying values of these financial assets to approximate fair value because of the short period of time between their origination and their expected realization.
Notes receivable – The fair value is estimated by discounting the expected cash flows on the notes at rates at which management believes similar loans would be made as of the measurement date. The estimated fair value of these notes was $96.7 million and $97.3 million as of September 30, 2013 and December 31, 2012, respectively, compared to the carrying value of $90.5 million and $90.4 million as of September 30, 2013 and December 31, 2012, respectively. The fair value of the Company’s notes receivable is estimated using Level 2 inputs.
Marketable securities – The Company’s marketable securities are carried at fair value and are valued using Level 3 inputs. The Company used estimated non-binding quoted market prices from the trading desks of financial institutions that are dealers in such securities for similar CMBS tranches that actively participate in the CMBS market and industry benchmarks, such as Trepp’s CMBS Analytics. As of September 30, 2013 and December 31, 2012, no marketable securities were valued using internal models.
Notes payable and other borrowings – The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of the measurement date. The estimated fair value of the notes payable and other borrowings, including a loan obligation to be assumed by the buyer related to the 2013 Held for Sale Property (as defined in Note 9), was $3.9 billion as of September 30, 2013, which approximated the carrying value on such date. As of December 31, 2012, the estimated fair value of the notes payable and other borrowings was $3.4 billion, compared to the carrying value of $3.3 billion. The fair value of the Company’s notes payable and other borrowings is estimated using Level 2 inputs.

21
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Derivative instruments – The Company’s derivative instruments represent interest rate swaps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. The Company includes the impact of credit valuation adjustments on derivative instruments measured at fair value.
Contingent consideration arrangements – The contingent consideration arrangements are carried at fair value and are valued using Level 3 inputs. The Holdings Executives may be entitled to the Merger Contingent Consideration to be paid by the Company. Refer to Note 3 for further details regarding the Cole Holdings Merger and the valuation of the Merger Contingent Consideration. The estimated fair value of the Merger Contingent Consideration totaled $258.1 million and $237.5 million as of September 30, 2013 and the Cole Holdings Merger Date, respectively. The change in fair value of $22.9 million and $20.6 million for the three and nine months ended September 30, 2013, respectively, is included in the accompanying condensed consolidated statements of operations in merger and acquisition related expenses.
The fair value of the contingent payments related to property acquisitions is determined based on the estimated timing and probability of the seller leasing vacant space subsequent to the Company’s acquisition of certain properties. The estimated fair value of the property-related contingent consideration arrangements totaled $2.1 million and $5.3 million as of September 30, 2013 and December 31, 2012, respectively.
Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, on disposition of the financial assets and liabilities. As of September 30, 2013, there have been no transfers of financial assets or liabilities between levels.
In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):
 
Balance as of
September 30, 2013
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Interest rate swaps
$
1,248

 
$
—

 
$
1,248

 
$
—

Marketable securities
271,944

 
—

 
—

 
271,944

Total assets
$
273,192

 
$
—

 
$
1,248

 
$
271,944

Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
(20,317
)
 
$
—

 
$
(20,317
)
 
$
—

Contingent consideration
(260,227
)
 
—

 
—

 
(260,227
)
Total liabilities
$
(280,544
)
 
$
—

 
$
(20,317
)
 
$
(260,227
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Balance as of
December 31, 2012
 
Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable  Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Marketable securities
$
317,201

 
$
—

 
$
—

 
$
317,201

Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
(23,046
)
 
$
—

 
$
(23,046
)
 
$
—

Contingent consideration
(5,341
)
 
—

 
—

 
(5,341
)
Total liabilities
$
(28,387
)
 
$
—

 
$
(23,046
)
 
$
(5,341
)

22
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



The following tables show a reconciliation of the change in fair value of the Company’s marketable securities and contingent consideration arrangements valued using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2013 and 2012 (in thousands):
 
Marketable Securities
 
Contingent Consideration
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2013
 
September 30, 2013
 
September 30, 2013
 
September 30, 2013
Balance at beginning of period
$
268,017

 
$
317,201

 
$
211,145

 
$
5,341

Total gains and losses
 
 
 
 
 
 
 
Reclassification of previous unrealized gain on marketable securities into net income
—

 
(612
)
 
—

 
—

Unrealized gain (loss) included in other comprehensive income, net
2,890

 
(10,091
)
 
—

 
—

Changes in fair value included in net income, net
—

 
—

 
22,623

 
19,278

Purchases, measurement period adjustments, settlements, sales and accretion
 
 
 
 
 
 
 
Purchases
—

 
—

 
—

 
209,553

Measurement period adjustments
—

 
—

 
27,928

 
27,928

Settlements
—

 
—

 
(1,469
)
 
(1,873
)
Sales
—

 
(37,864
)
 
—

 
—

Accretion included in net income, net
1,037

 
3,310

 
—

 
—

Balance at end of period
$
271,944

 
$
271,944

 
$
260,227

 
$
260,227

 
Marketable Securities
 
Contingent Consideration
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2012
 
September 30, 2012
 
September 30, 2012
Balance at beginning of period
$
274,761

 
$
114,129

 
$
7,991

 
$
5,519

Total gains and losses
 
 
 
 
 
 
 
Unrealized gain included in other comprehensive income, net
44,349

 
43,038

 
—

 
—

Changes in fair value included in net income, net
—

 
—

 
(42
)
 
288

Purchases, settlements and accretion
 
 
 
 
 
 
 
Purchases
22,362

 
183,427

 
4,352

 
6,494

Settlements
—

 
—

 
(5,999
)
 
(5,999
)
Accretion included in net income, net
1,124

 
2,002

 
—

 
—

Balance at end of period
$
342,596

 
$
342,596

 
$
6,302

 
$
6,302


23
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



NOTE 6 — REAL ESTATE ACQUISITIONS
2013 Property Acquisitions
During the nine months ended September 30, 2013, the Company acquired interests in 32 commercial properties, including a property held in one of the Consolidated Joint Ventures, for an aggregate purchase price of $410.7 million (the “2013 Acquisitions”). The Company purchased the 2013 Acquisitions with net proceeds from the DRIP Offering (as defined in Note 15), borrowings and the sale of properties. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation (in thousands):
 
September 30, 2013
Land
$
61,572

Building and improvements
324,806

Acquired in-place leases
34,727

Acquired above market leases
1,136

Acquired below market leases
(11,153
)
Fair value adjustment of assumed note payable
(362
)
Total purchase price
$
410,726

The Company recorded revenue for the three and nine months ended September 30, 2013 of $6.6 million and $11.3 million, respectively, and net income for the three months ended September 30, 2013 of $1.8 million and a net loss for the nine months ended September 30, 2013 of $624,000 related to the 2013 Acquisitions.
The table below presents the Company’s estimated revenue and net income, on a pro forma basis, as if all of the 2013 Acquisitions were completed on January 1, 2012 for each period presented below (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Pro forma basis:
 
 
 
 
 
 
 
Revenue
$
371,188

 
$
161,636

 
$
796,324

 
$
445,241

Net income
$
50,110

 
$
22,756

 
$
121,473

 
$
90,719

The pro forma information for the three and nine months ended September 30, 2013 was adjusted to exclude $300,000 and $2.3 million, respectively, of property related acquisition costs recorded during the three and nine months ended September 30, 2013. These costs were recognized in the pro forma information for the nine months ended September 30, 2012. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2012, nor does it purport to represent the results of future operations.
2013 Investment in Development Projects
During the nine months ended September 30, 2013, the Company completed the construction of an office building. Total costs for the construction of the building were $43.3 million. The development of the project was initiated in 2011, and therefore, the property is not included in the 2013 Acquisitions.


24
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



2012 Property Acquisitions
During the nine months ended September 30, 2012, the Company acquired interests in 287 commercial properties, including a property held in one of the Consolidated Joint Ventures, for an aggregate purchase price of $1.5 billion (the “2012 Acquisitions”). The Company purchased the 2012 Acquisitions with net proceeds from the Follow-on Offering (as defined in Note 15) and the DRIP Offering and through the issuance or assumption of mortgage notes. The Company allocated the purchase price of the 2012 Acquisitions to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation (in thousands):
 
September 30, 2012
Land
$
328,363

Building and improvements
950,557

Acquired in-place leases
173,737

Acquired above market leases
28,174

Acquired below market leases
(27,744
)
Total purchase price
$
1,453,087

The Company recorded revenue for the three and nine months ended September 30, 2012 of $26.8 million and $46.7 million, respectively, and a net loss for the three and nine months ended September 30, 2012 of $1.2 million and $20.7 million, respectively, related to the 2012 Acquisitions.
The table below presents the Company’s estimated revenue and net income, on a pro forma basis, as if all of the 2012 Acquisitions were completed on January 1, 2011 for each period presented below (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Pro forma basis:
 
 
 
 
 
 
 
Revenue
$
157,462

 
$
128,863

 
$
465,594

 
$
343,060

Net income
$
32,175

 
$
12,603

 
$
142,990

 
$
25,651

The pro forma information for the three and nine months ended September 30, 2012 was adjusted to exclude $9.9 million and $37.4 million, respectively, of acquisition costs recorded during the three and nine months ended September 30, 2012. These costs were recognized in the pro forma information for the nine months ended September 30, 2011. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2011, nor does it purport to represent the results of future operations.
2012 Investment in Development Projects
During the nine months ended September 30, 2012, the Company acquired a completed development project for an aggregate purchase price of $7.7 million through the repayment of a construction loan facility and the purchase of the joint venture partner’s noncontrolling interest. The Company also completed the construction of a single tenant office building. Total costs for the construction of the building were $12.2 million. The development of these projects was initiated in 2011, and therefore, these properties are not included in the 2012 Acquisitions.
2012 Investments in Unconsolidated Joint Ventures
During the nine months ended September 30, 2012, the Company acquired a $36.1 million interest in an unconsolidated joint venture arrangement. In addition, the Company acquired a $27.7 million financial interest in one of the Consolidated Joint Ventures, whose only assets are interests in three of the Unconsolidated Joint Ventures. The acquired interests are included in the accompanying condensed consolidated unaudited balance sheets in investment in unconsolidated entities.

25
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



In connection with the acquired interests in the unconsolidated joint venture arrangements discussed above, one of the Unconsolidated Joint Ventures borrowed $17.6 million (the “Advance Note”) from one of the Consolidated Joint Ventures and fully repaid the Advance Note during the nine months ended September 30, 2012. The Advance Note had a variable interest rate equal to the one-month LIBOR plus 225 basis points. During the nine months ended September 30, 2012, the Company recorded $107,000 of interest income on the Advance Note. No financing coordination fees were incurred in connection with the Advance Note.
NOTE 7 — INVESTMENT IN NOTES RECEIVABLE
As of September 30, 2013, the Company owned a junior mezzanine loan (the “Mezzanine Note”), secured by equity interests in a joint venture which owns 15 shopping centers. The Mezzanine Note has an interest rate of LIBOR plus 9.0% with a LIBOR floor of 0.50% and matures in July 2015 with two one-year extension options. As of both September 30, 2013 and December 31, 2012, the Mezzanine Note had an interest rate of 9.5%. As of September 30, 2013 and December 31, 2012, investment in notes receivable included $25.3 million and $25.4 million, respectively, related to the Mezzanine Note. As of September 30, 2013, the Mezzanine Note balance consisted of the outstanding face amount of the note of $25.0 million, $500,000 of acquisition costs and net accumulated amortization of acquisition costs of $181,000. As of December 31, 2012, the Mezzanine Note balance consisted of the outstanding face amount of the note of $25.0 million, $500,000 of acquisition costs and net accumulated amortization of acquisition costs of $65,000. The acquisition costs are amortized over the term of the loan using the effective interest rate method. Interest only payments are due each month. There were no amounts past due as of September 30, 2013. Subsequent to September 30, 2013, the Company received proceeds of $5.2 million related to the Mezzanine Note, consisting of a $5.0 million loan prepayment and a $160,000 consent fee.
In addition, as of September 30, 2013, the Company owned two mortgage notes receivable, each of which is secured by an office building (collectively the “Mortgage Notes”). As of September 30, 2013 and December 31, 2012, investment in notes receivable included $65.2 million and $64.9 million, respectively, related to the Mortgage Notes. As of September 30, 2013, the Mortgage Notes balance consisted of the outstanding face amount of the notes of $72.2 million, a $12.0 million discount, $1.3 million of acquisition costs and net accumulated accretion of discounts and amortization of acquisition costs of $3.7 million. As of December 31, 2012, the Mortgage Notes balance consisted of the outstanding face amount of the notes of $72.9 million, a $12.0 million discount, $1.3 million of acquisition costs and net accumulated accretion of discounts and amortization of acquisition costs of $2.8 million. The discount is accreted and acquisition costs are amortized over the terms of each respective Mortgage Note using the effective interest rate method. The Mortgage Notes have a fixed interest rate of 5.93% per annum and mature on October 1, 2018. Interest and principal payments are due each month until October 1, 2018. There were no amounts past due as of September 30, 2013.
The Company evaluates the collectability of both interest and principal on each note receivable to determine whether it is collectible, primarily through the evaluation of credit quality indicators, such as underlying collateral and payment history. No impairment losses were recorded related to notes receivable for the nine months ended September 30, 2013 or 2012. In addition, no allowances for uncollectability were recorded related to notes receivable as of September 30, 2013 or December 31, 2012.
NOTE 8 — INVESTMENT IN MARKETABLE SECURITIES
During the nine months ended September 30, 2013, the Company sold eight CMBS for aggregate proceeds of $36.5 million, net of closing fees, and realized a loss on the sale of $1.3 million. As of September 30, 2013, the Company owned 21 CMBS, with an estimated aggregate fair value of $271.9 million. As of December 31, 2012, the Company owned 29 CMBS, with an estimated aggregate fair value of $317.2 million.

26
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



As of September 30, 2013, certain of these securities were pledged as collateral under repurchase agreements (the “Repurchase Agreements”), as discussed in Note 11. The following table provides the activity for the CMBS during the nine months ended September 30, 2013 (in thousands). No CMBS were in an unrealized loss position at September 30, 2013.
 
Amortized Cost Basis
 
Unrealized Gain
 
Fair Value
Marketable securities as of December 31, 2012
$
271,054

 
$
46,147

 
$
317,201

Net accretion on marketable securities
3,310

 
—

 
3,310

Decrease in fair value of marketable securities
—

 
(10,091
)
 
(10,091
)
Decrease due to sale of marketable securities
(37,864
)
 
(612
)
 
(38,476
)
Marketable securities as of September 30, 2013
$
236,500

 
$
35,444

 
$
271,944

 
 
 
 
 
 
 
 
 
 
 
 
The scheduled maturity of the Company’s CMBS as of September 30, 2013 is as follows (in thousands):
 
Amortized Cost
 
Estimated Fair Value
Due within one year
$
—

 
$
—

Due after one year through five years
—

 
—

Due after five years through ten years
236,500

 
271,944

Due after ten years
—

 
—

 
$
236,500

 
$
271,944

Actual maturities of marketable securities can differ from contractual maturities because borrowers may have the right to prepay their respective loan balances at any time. In addition, factors such as prepayments and interest rates may affect the yields on the marketable securities.
NOTE 9 — DISCONTINUED OPERATIONS
During the nine months ended September 30, 2013, the Company disposed of 20 single-tenant properties for an aggregate gross sales price of $100.1 million (the “2013 Property Dispositions”). During the year ended December 31, 2012, the Company disposed of 26 single-tenant properties and two multi-tenant properties for an aggregate gross sales price of $573.8 million (the “2012 Property Dispositions”). No disposition fees were paid in connection with the sale of the 2013 Property Dispositions or the 2012 Property Dispositions. The Company has no continuing involvement with the 2013 Property Dispositions or the 2012 Property Dispositions. The following table presents the major classes of assets and liabilities of the 2013 Property Dispositions and 2012 Property Dispositions as of the respective closing dates (in thousands):
 
September 30, 2013
 
December 31, 2012
 
Assets:
 
 
 
 
Investment in real estate assets, net
$
76,846

 
$
450,214

 
Straight-line rent receivables
$
976

 
$
12,698

 
Liabilities:


 


 
Notes payable
$
—

 
$
180,250

(1) 
Below market lease liabilities, net
$
1,974

 
$
8,966

 
________________
(1) Includes $24.3 million assumed by a buyer of one of the properties.

27
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



As of September 30, 2013, the Company classified one property as held for sale (the “2013 Held for Sale Property”). As of December 31, 2012, the Company classified two properties as held for sale (the “2012 Held for Sale Properties”). The results of operations for the 2013 Property Dispositions, the 2012 Property Dispositions, the 2013 Held for Sale Property and the 2012 Held for Sale Properties (collectively, the “Discontinued Operations Properties”) have been presented as discontinued operations on the Company’s condensed consolidated unaudited statements of operations for all periods presented.
The following table summarizes the operating income from discontinued operations of the Discontinued Operations Properties for the three and nine months ended September 30, 2013 and 2012 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Total revenue
$
2,153

 
$
12,878

 
$
8,124

 
$
39,962

Total expenses
1,597

 
8,968

 
5,543

 
27,514

Income from discontinued operations
556

 
3,910

 
2,581

 
12,448

Gain on sale of real estate assets
3,078

 
—

 
22,085

 
14,781

Total income from discontinued operations
$
3,634

 
$
3,910

 
$
24,666

 
$
27,229

The following table presents the major classes of assets and liabilities of the 2013 Held for Sale Property as of September 30, 2013 and the 2012 Held for Sale Properties as of December 31, 2012 (in thousands):
 
September 30, 2013
 
December 31, 2012
Investment in real estate assets, net
$
59,571

 
$
15,376

Other assets
1,168

 
109

Assets related to real estate held for sale, net
$
60,739

 
$
15,485

 
 
 
 
Notes payable
$
34,300

 
$
—

Other liabilities
1,070

 
$
322

Liabilities related to real estate assets held for sale
$
35,370

 
$
322

NOTE 10 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risks. The following table summarizes the terms of the Company’s executed swap agreements designated as hedging instruments (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Fair Value of (Liabilities)
 
 
 
 Outstanding Notional
 
 
 
 
 
 
 
 and Assets
 
Balance Sheet
 
Amount as of
 
Interest
 
Effective
 
Maturity
 
September 30,
 
December 31,
 
Location
 
September 30, 2013
 
Rates (1)
 
Dates
 
Dates
 
2013
 
2012
Interest Rate Swaps
Deferred rent, derivative and other liabilities
 
$
1,186,572

 
3.15% to 6.83%
 
12/18/2009 to 7/17/2013
 
6/27/2014 to 4/1/2021
 
$
(20,317
)
 
$
(22,601
)
Interest Rate Swaps
Intangible and other assets (2)
 
$
65,000

 
3.27% to 4.49%
 
11/20/2012 to 12/14/2012
 
1/8/2018 to 11/20/2019
 
$
1,248

 
$
(445
)
_______________
(1)
The interest rates consist of the underlying index swapped to a fixed rate and the applicable interest rate spread.
(2)
As of December 31, 2012, these interest rate swaps were in a liability position and are included in deferred rent, derivative and other liabilities in the accompanying condensed consolidated unaudited balance sheet as of December 31, 2012.


28
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Additional disclosures related to the fair value of the Company’s derivative instruments are included in Note 5. The notional amount under the interest rate swap agreements is an indication of the extent of the Company’s involvement in each instrument, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges, to hedge the variability of the anticipated cash flows on its variable rate notes payable. The change in fair value of the effective portion of the derivative instruments that are designated as hedges is recorded in other comprehensive income. Any ineffective portion of the change in fair value of the derivative instruments is recorded in interest expense.
The following table summarizes the unrealized gains and losses on the Company’s derivative instruments and hedging activities for the three and nine months ended September 30, 2013 and 2012 (in thousands):
 
Amount of (Loss) Gain Recognized in Other
Comprehensive Income
 
Amount of Loss Reclassified from Accumulated Other Comprehensive Income to Net Income (1)
Derivatives in Cash Flow Hedging Relationships
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Interest Rate Swaps 
$
(3,726
)
 
$
(2,153
)
 
$
3,058

 
$
(7,830
)
 
$
—

 
$
(9,263
)
 
$
(2,564
)
 
$
(9,263
)
_______________
(1)
In connection with the amendment of the Company’s senior unsecured credit facility discussed in Note 11, two interest rate swap agreements, with an aggregate notional amount of $278.8 million and maturity dates of June 27, 2014, were deemed to be ineffective and the Company reclassified $2.6 million of unrealized losses previously recorded in accumulated other comprehensive income into interest expense during the nine months ended September 30, 2013. The Company recorded a $420,000 and $920,000 increase in the fair value related to these swaps in interest expense during the three and nine months ended September 30, 2013, respectively. The remaining interest rate swaps were considered effective during the nine months ended September 30, 2013. As of September 30, 2012, an interest rate swap was designated as ineffective and the unrealized loss was reclassified from accumulated comprehensive income into interest expense as it related to one of the 2012 Held for Sale Properties and the Company terminated the swap when the property was sold.
The Company has agreements with each of its derivative counterparties providing that if the Company defaults on certain of its unsecured indebtedness, then the Company could also be declared in default on its derivative obligations resulting in an acceleration of payment. In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the respective credit quality of the Company and the counterparty. During the nine months ended September 30, 2013 and 2012, there were no termination events or events of default related to the interest rate swaps.
NOTE 11 — NOTES PAYABLE AND OTHER BORROWINGS
As of September 30, 2013, the Company and the Consolidated Joint Ventures had $3.9 billion of debt outstanding, including a loan obligation of $34.3 million to be assumed by the buyer related to the 2013 Held for Sale Property, with a weighted average years to maturity of 5.5 years and weighted average interest rate of 4.04%. The following table summarizes the debt activity during the nine months ended and balances as of September 30, 2013 (in thousands): 
 
 
 
During the Nine Months Ended September 30, 2013
 
 
 
Balance as of
December 31, 2012
 
Debt Issuance
and Assumptions
 
Repayments
 
Other (1)
 
Balance as of
September 30, 2013
Fixed rate debt (2)
$
2,311,541

 
$
275,088

 
$
(9,824
)
 
$
385

 
$
2,577,190

Variable rate debt
84,942

 
11,901

 
—

 
—

 
96,843

Construction facilities
27,758

 
6,932

 
(7,884
)
 
—

 
26,806

Credit facility
767,750

 
587,250

 
(285,000
)
 
—

 
1,070,000

Repurchase agreements
100,057

 
—

 
—

 
—

 
100,057

Total (3)
$
3,292,048

 
$
881,171

 
$
(302,708
)
 
$
385

 
$
3,870,896


29
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



________________
(1)
Represents fair value adjustment of assumed mortgage note payable, net of amortization.
(2)
Fixed rate debt included a loan obligation of $34.3 million to be assumed by the buyer related to the 2013 Held for Sale Property, which is included in liabilities related to real estate held for sale, net in the accompanying condensed consolidated unaudited balance sheets.
(3)
The table above does not include loan amounts associated with the Unconsolidated Joint Ventures of $195.8 million, of which $10.2 million is recourse to CCPT III OP. These loans mature on various dates ranging from July 2015 to July 2021.
As of September 30, 2013, the fixed rate debt included $472.8 million of variable rate debt subject to interest rate swap agreements which had the effect of fixing the variable interest rates per annum through the maturity date of the loan. In addition, the fixed rate debt included mortgage notes assumed with an aggregate face amount of $45.0 million and an aggregate fair value of $43.9 million at the date of assumption. The fixed rate debt has interest rates ranging from 2.75% to 6.83% per annum. The variable rate debt has variable interest rates ranging from LIBOR plus 225 basis points to 325 basis points per annum. In addition, the construction facility has an interest rate of LIBOR plus 235 basis points. The debt outstanding matures on various dates from December 2013 through June 2023. The aggregate balance of gross real estate and related assets, net of gross intangible lease liabilities, securing the fixed and variable rate debt outstanding was $4.9 billion as of September 30, 2013. Each of the mortgage notes payable is secured by the respective properties on which the debt was placed. Certain notes payable contain covenants, representations, warranties and borrowing conditions customary for similar credit arrangements. These notes also include usual and customary events of default and remedies for agreements of this nature. Based on the Company’s analysis and review of its results of operations and financial condition, the Company believes it was in compliance with the covenants of such notes payable as of September 30, 2013.
As of September 30, 2013, the Company had $194.3 million available for borrowing under a senior unsecured credit facility (the “Credit Facility”) based on the underlying collateral pool of $2.0 billion. During the nine months ended September 30, 2013, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”), which increased the available borrowings, extended the term and decreased the interest rates associated with the original Credit Facility. The Company expensed $2.6 million of unamortized deferred financing costs incurred in connection with the original Credit Facility and $2.6 million of new loan costs in connection with the Amended and Restated Credit Agreement, which are included in interest expense in the accompanying condensed consolidated unaudited statements of operations. The Credit Facility provides for borrowings of up to $1.4 billion, which includes a $500.0 million term loan (the “Term Loan”) and up to $900.0 million in revolving loans (the “Revolving Loans”). The Credit Facility may be increased to a maximum of $1.75 billion. The maturity dates of the Term Loan and the Revolving Loans are June 3, 2018 and June 3, 2017, respectively; however, the Company may elect to extend the maturity date on the Revolving Loans to June 3, 2018 subject to satisfying certain conditions set forth in the Amended and Restated Credit Agreement. Depending upon the type of loan specified and overall leverage ratio, the Revolving Loans bear interest at either LIBOR plus an interest rate spread ranging from 1.65% to 2.25% or a base rate, ranging from 0.65% to 1.25%, plus the greatest of (1) LIBOR plus an interest rate spread ranging from 2.65% to 3.25%, (2) Bank of America N.A.’s Prime Rate or (3) the Federal Funds Rate plus 0.50%. The Company executed a swap agreement associated with the Term Loan, which had the effect of fixing the variable interest rates per annum on July 17, 2013 through the maturity date of the loan at 3.30%. The Revolving Loans and Term Loan had a combined weighted average interest rate of 2.72% as of September 30, 2013. The Amended and Restated Credit Agreement contains provisions with respect to covenants, events of default and remedies customary for facilities of this nature and borrowing conditions. In particular, the Amended and Restated Credit Agreement requires the REI segment to maintain a minimum consolidated net worth of at least $3.4 billion as of September 30, 2013, a leverage ratio greater than 60%, a fixed charge coverage ratio equal to or less than 1.50, an unsecured debt to unencumbered asset value ratio greater than 60%, an unsecured debt service coverage ratio equal to or less than 1.75 and a secured debt ratio greater than 40%. The Company believes it was in compliance with the covenants under the Amended and Restated Credit Agreement as of September 30, 2013.
The Repurchase Agreements have interest rates ranging from LIBOR plus 135 basis points to 175 basis points and mature on various dates from October 2013 through December 2013. Upon maturity, the Company may elect to renew the Repurchase Agreements for a period of 90 days until the CMBS mature. The CMBS have a weighted average remaining term of 8.4 years. Under the Repurchase Agreements, the lender retains the right to mark the underlying collateral to fair value. A reduction in the value of the pledged assets would require the Company to provide additional collateral to fund margin calls. As of September 30, 2013, the securities held as collateral had a fair value of $260.8 million and an amortized cost of $227.9 million. There was no cash collateral held by the counterparty as of September 30, 2013. The Repurchase Agreements are being accounted for as secured borrowings because the Company maintains effective control of the financed assets. The Repurchase Agreements are non-recourse to the Company and CCPT III OP.

30
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



NOTE 12 — SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the nine months ended September 30, 2013 and 2012 are as follows (in thousands):
 
Nine Months Ended September 30,
 
2013
 
2012
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
 
 
Dividends declared and unpaid
$
28,720

 
$
25,418

Fair value of mortgage notes assumed in real estate acquisitions at date of assumption
$
10,223

 
$
24,000

Common stock issued through distribution reinvestment plan
$
74,395

 
$
124,964

Net unrealized gain on interest rate swaps
$
3,058

 
$
1,433

Unrealized (loss) gain on marketable securities
$
(10,091
)
 
$
43,038

Contingent consideration
$
237,481

 
$
6,494

Common stock issued as consideration related to the merger
$
90,660

 
$
—

Accrued deferred financing costs, construction and capital expenditures
$
741

 
$
3,397

Supplemental Cash Flow Disclosures:
 
 
 
Interest paid, net of capitalized interest of $43 and $237, respectively
$
105,713

 
$
85,437

 
NOTE 13 — COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company may become subject to litigation, claims or commitments. The Company is not aware of any material pending legal proceedings, other than as stated below and ordinary routine litigation incidental to the Company’s business, to which the Company is a party or to which the Company’s properties are the subject.
Litigation in Connection with the Cole Holdings Merger
In connection with the Cole Holdings Merger, between March 20 and April 30, 2013, three putative class action lawsuits were filed in the Circuit Court for Baltimore City, Maryland making various claims alleging that the Cole Holdings Merger injured the Company and its shareholders. On April 30, 2013, the actions were consolidated by order of the Court as one action called In Re Cole Credit Property Trust, III, Inc. Derivative And Class Litigation, Case No. 24-C-13-001563. On May 8, 2013, plaintiffs filed a consolidated amended class action and derivative complaint naming as defendants Holdings; Cole REIT Advisors III, LLC (“CR III Advisors”); Merger Sub; CCA; Cole Capital Corporation; Equity Fund Advisors, Inc.; Cole Realty Advisors, Inc.; each of the Company’s directors; and the Company as a nominal defendant. The consolidated amended complaint alleges a variety of claims against some or all of the defendants including claims for breaches of fiduciary duties and aiding abetting those breaches; unjust enrichment; corporate waste; breaches of the Company’s charter and the advisory agreement with CR III Advisors; and disclosure violations in connection with disclosures for the Company’s 2013 annual meeting. The plaintiffs seek, among other relief, class certification; various forms of injunctive relief; compensatory damages; and restitution. On June 7, 2013, defendants in the consolidated action moved to dismiss the amended complaint for, among other reasons, lack of standing and failure to state a claim upon which relief can be granted. On July 15, 2013, plaintiffs opposed defendants’ motion. A hearing was held on August 27, 2013 before a Maryland state judge. On October 23, 2013, the Maryland court issued a ruling granting defendants’ motion to dismiss plaintiffs’ consolidated amended complaint, with prejudice.
On March 27, 2013, a putative derivative action was filed in the U.S. District Court, Arizona District, captioned Carter v. Cole Holdings, et al., No. CV-13-00629-PHX-ROS (“Carter”) making various claims alleging that the Cole Holdings Merger injured the Company and its shareholders. On May 13, 2013, Carter amended the complaint naming as defendants Holdings; CR III Advisors; Merger Sub; each of the Company’s directors, and the Company as nominal defendant. The amended complaint alleges a variety of claims against some or all of the defendants including claims for breaches of fiduciary duty and aiding and abetting those breaches; breaches of the Company’s charter and the advisory agreement with CR III Advisors; breach of the implied covenant of good faith; abuse of control; corporate waste; unjust enrichment; and, in connection with disclosures for the Company’s 2013 annual meeting, violations of Sections 14 and 20 of the Securities Exchange Act of 1934. Carter seeks, among other relief, a declaratory judgment; various forms of injunctive relief; compensatory damages; and restitution.

31
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



On April 8, 2013, a putative class action and derivative action was filed in the U.S. District Court, Arizona District, captioned Schindler v. Cole Holdings Corporation, et al., No. CV-13-00712-PHX-ROS (“Schindler”) making various claims alleging that the Cole Holdings Merger injured the Company and its shareholders. On June 7, 2013, Schindler amended the complaint naming as defendants Holdings; CR III Advisors; Merger Sub; the Company’s directors; and the Company as nominal defendant. The amended complaint alleges a variety of claims against some or all of the defendants including claims for breaches of fiduciary duty and aiding and abetting those breaches; unjust enrichment; corporate waste; and, in connection with disclosures for the Company’s 2013 annual meeting, violations of Sections 14 and 20 of the Securities Exchange Act of 1934. Schindler seeks, among other relief, class certification; various forms of injunctive relief; compensatory damages; and restitution.
On October 23, 2013, the U.S. District Court for the District of Arizona issued an order granting defendants’ motion to consolidate the Carter and Schindler actions, granting Schindler’s motion for appointment as lead plaintiff and of his selection for lead plaintiffs’ counsel, and denying Carter’s motion for appointment of lead plaintiff and lead liaison counsel. On November 1, 2013, the court ordered plaintiffs to file an amended, consolidated complaint, but has since stayed the deadline of that filing pending further order of the court.
Litigation in Connection with the ARCP Merger
To date, four lawsuits have been filed in connection with the announced ARCP Merger Agreement. The first, Wunsch v. Cole Real Estate Investments, Inc., et al (“Wunsch”), No. 13-CV-2186, is a putative class action that was filed on October 25, 2013 in the U.S. District Court for the District of Arizona. The Company, ARCP, ARCP Merger Sub, and the Company’s directors — Christopher Cole, Thomas Andruskevich, Marc Nemer, Scott Sealy and Leonard Wood — are named as defendants. The named plaintiff claims to be a stockholder of the Company and purports to represent “all owners of the Company’s common stock as of October 23, 2013.” The complaint asserts two claims: first, that the individual defendants breached fiduciary duties owed to plaintiff and the other public stockholders of the Company; and second, that the entity defendants aided and abetted those breaches. The plaintiff seeks, among other relief: class certification; to enjoin the ARCP Merger or, if it is consummated, to rescind it; an accounting of all damages caused; and attorneys’ fees.
On October 30, 2013 and October 31, 2013, three other putative stockholder class action lawsuits were filed in the Circuit Court for Baltimore City, Maryland, captioned as: Operman v. Cole Real Estate Investments, Inc., et al (“Operman”); Branham v. Cole Real Estate Investments, Inc., et al (“Branham”); and Wilfong v. Cole Real Estate Investments, Inc., et al (“Wilfong”). All of these lawsuits name the Company, ARCP, and the Company’s directors as defendants; Branham and Wilfong also name ARCP Merger Sub as a defendant. All of the named plaintiffs claim to be stockholders of the Company and purport to represent all holders of the Company’s stock. Each complaint includes the same claims asserted in the Wunsch lawsuit described above: first, that the individual defendants breached fiduciary duties owed to the plaintiffs and to other public stockholders of the Company; and second, that the entity defendants aided and abetted those breaches. In addition, the Operman lawsuit claims that the individual defendants breached their duty of candor to stockholders; the Branham lawsuit also asserts a claim derivatively, on behalf of the Company, against the individual defendants for their alleged breach of fiduciary duties owed to the Company. Among other remedies, the complaints seek injunctive relief prohibiting the defendants from completing the proposed ARCP Merger or, in the event that an injunction is not awarded, unspecified money damages, costs and attorneys’ fees.
The Company believes that the lawsuits in connection with the Cole Holdings Merger and the ARCP Merger are without merit, but the ultimate outcome of these matters cannot be predicted.  While losses and legal expenses may be incurred, an estimate of the range of reasonably possible potential losses cannot be made, and no provisions for losses have been recorded in the accompanying condensed consolidated unaudited financial statements.
Purchase Commitments
Under its PCM segment, the Company enters into purchase and sale agreements, and deposits funds into escrow towards the purchase of such acquisitions, most of which are expected to be assigned to one of the Managed REITs at or prior to the closing of the respective acquisition. As of September 30, 2013, the Company was a party in 54 purchase and sale agreements with unaffiliated third-party sellers to purchase a 100% interest in 163 properties, subject to meeting certain criteria, for an aggregate purchase price of $690.2 million, exclusive of closing costs.  As of September 30, 2013, the Company had $17.3 million of property escrow deposits held by escrow agents in connection with these future property acquisitions, which may be forfeited if the transactions are not completed under certain circumstances. The Company will be reimbursed by the assigned Managed REIT for amounts escrowed when it acquires a property. As of October 31, 2013, the Company had assigned 58 of

32
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



these properties, with an aggregate purchase price of $322.2 million, to certain of the Managed REITs. As of October 31, 2013, two agreements were terminated and no escrow deposits were forfeited.
Contingent Consideration Arrangements
In addition, the Holdings Executives may be entitled to the Merger Contingent Consideration to be paid by the Company. The Company also had properties subject to earnout provisions obligating it to pay additional consideration to the respective seller contingent on the future leasing and occupancy of vacant space at the properties. Refer to Note 5 for further discussion.
Environmental Matters
In connection with the ownership and operation of real estate, the Company potentially may be liable for costs and damages related to environmental matters. The Company owns certain properties that are subject to environmental remediation. In each case, the seller of the property, the tenant of the property and/or another third party has been identified as the responsible party for environmental remediation costs related to the respective property. Additionally, in connection with the purchase of certain of the properties, the respective sellers and/or tenants have indemnified the Company against future remediation costs. In addition, the Company carries environmental liability insurance on its properties that provides limited coverage for remediation liability and pollution liability for third-party bodily injury and property damage claims. Accordingly, the Company does not believe that it is reasonably possible that the environmental matters identified at such properties will have a material effect on its results of operations, financial condition or liquidity, nor is it aware of any environmental matters at other properties which it believes are reasonably possible to have a material effect on its results of operations, financial condition or liquidity.
NOTE 14 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company’s PCM segment is contractually responsible for managing the Managed REITs’ affairs on a day-to-day basis, identifying and making acquisitions and investments on the Managed REITs’ behalf, and recommending to each of the Managed REIT’s respective board of directors an approach for providing investors with liquidity. In addition, the Company distributes the shares of common stock for certain Managed REITs and advises them regarding offerings, manages relationships with participating broker-dealers and financial advisors and provides assistance in connection with compliance matters relating to the offerings. The Company receives compensation and reimbursement for services relating to the Managed REITs’ offerings and the investment, management and disposition of their respective assets, as applicable.
Offerings
The Company generally receives a selling commission of up to 7.0% of gross offering proceeds related to the sale of shares of CCPT IV, CCIT and CCIT II common stock in their primary offerings, before reallowance of commissions earned by participating broker-dealers. The Company has and intends to continue to reallow 100% of selling commissions earned to participating broker-dealers. In addition, the Company generally receives 2.0% of gross offering proceeds in the primary offerings, before reallowance to participating broker-dealers, as a dealer manager fee in connection with the sale of CCPT IV, CCIT and CCIT II shares of common stock. The Company, in its sole discretion, may reallow all or a portion of its dealer manager fee to such participating broker-dealers as a marketing and due diligence expense reimbursement, based on factors such as the volume of shares sold by such participating broker-dealers and the amount of marketing support provided by such participating broker-dealers. No selling commissions or dealer manager fees are paid to the Company or other broker-dealers with respect to shares sold under the respective Managed REIT’s distribution reinvestment plans, under which the stockholders may elect to have distributions reinvested in additional shares.
In connection with the sale of INAV shares of common stock, the Company receives an asset-based dealer manager fee that is payable in arrears on a monthly basis and accrues daily in an amount equal to (1) 1/365th of 0.55% of the net asset value (“NAV”) for Wrap Class shares of common stock (“W Shares”) for such day, (2) 1/365th of 0.55% of the NAV for Advisor Class shares of common stock (“A Shares”) for such day and (3) 1/365th of 0.25% of the NAV for Institutional Class shares of common stock (“I Shares”) for such day. The Company, in its sole discretion, may reallow a portion of its dealer manager fee received on W Shares, A Shares and I Shares to participating broker-dealers. In addition, the Company receives a selling commission on A Shares sold in the primary offering of up to 3.75% of the offering price per share for A Shares, before reallowance of commissions earned by participating broker-dealers. The Company has and intends to continue to reallow 100% of selling commissions earned to participating broker-dealers. The Company also receives an asset-based distribution fee for A Shares that is payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 0.50% of the NAV for

33
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



A Shares for such day. The Company, in its sole discretion, may reallow a portion of the distribution fee to participating broker-dealers. No selling commissions are paid to the Company or other broker-dealers with respect to W Shares or I Shares or on shares of any class of INAV common stock sold pursuant to INAV’s distribution reinvestment plan, under which the stockholders may elect to have distributions reinvested in additional shares, and no distribution fees are paid to the Company or other broker-dealers with respect to W Shares or I Shares.
All other organization and offering expenses associated with the sale of the Managed REITs’ common stock (excluding selling commissions, if applicable, and the dealer manager fee) are paid for in advance by the Company and subject to reimbursement by the Managed REITs, up to certain limits per the respective advisory agreement. As these costs are incurred, they are recorded as reimbursement revenue, up to the respective limit, and are included in dealer manager fees, selling commissions and offering reimbursements in the financial results for the PCM segment in Note 4. Expenses paid on behalf of the Managed REITs in excess of these limits that are expected to be collected are recorded as program development costs. As of September 30, 2013, the Company had $8.3 million of organization and offering costs paid on behalf of the Managed REITs in excess of the limits that have not been reimbursed, which are expected to be reimbursed by the Managed REITs as they raise additional proceeds from the respective offering. The program development costs are included in intangible and other assets, net in the accompanying condensed consolidated unaudited balance sheets. Subsequent to September 30, 2013, the Company had incurred $590,000 of additional organization and offering costs and the Managed REITs reimbursed the Company $438,000.
The Company recorded commissions, fees and expense reimbursements as shown in the table below for services provided to the Managed REITs related to the services described above during the three months ended September 30, 2013 and the period from the Cole Holdings Merger Date to September 30, 2013 (in thousands). As the Company did not commence operations for the PCM segment until the Cole Holdings Merger Date, comparative financial data is not presented for the three and nine months ended September 30, 2012.
 
Three Months Ended September 30, 2013
 
CCPT IV
 
CCIT
 
INAV
 
Total
Offering:
 
 
 
 
 
 
 
Selling commission revenue
$
40,557

 
$
71,379

 
$
—

 
$
111,936

Selling commissions reallowance expense
$
40,557

 
$
71,379

 
$
—

 
$
111,936

Dealer manager fee revenue
$
11,723

 
$
21,246

 
$
67

 
$
33,036

Dealer manager fees reallowance expense
$
6,552

 
$
11,909

 
$
1

 
$
18,462

Other expense reimbursement revenue
$
11,827

 
$
15,996

 
$
69

 
$
27,892

 
Period from the Cole Holdings Merger Date to September 30, 2013
 
CCPT IV
 
CCIT
 
INAV
 
Total
Offering:
 
 
 
 
 
 
 
Selling commission revenue
$
54,924

 
$
90,407

 
$
—

 
$
145,331

Selling commissions reallowance expense
$
54,924

 
$
90,407

 
$
—

 
$
145,331

Dealer manager fee revenue
$
15,911

 
$
26,847

 
$
113

 
$
42,871

Dealer manager fees reallowance expense
$
8,849

 
$
15,178

 
$
2

 
$
24,029

Other expense reimbursement revenue
$
16,072

 
$
20,238

 
$
170

 
$
36,480


34
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Operations
The Company earns acquisition fees related to the acquisition, development or construction of properties on behalf of certain of the Managed REITs. In addition, the Company is reimbursed for acquisition expenses incurred in the process of acquiring properties up to certain limits per the respective advisory agreement. The Company is not reimbursed for personnel costs in connection with services for which it receives acquisition fees or real estate commissions. In connection with services provided by the Company related to the origination or refinancing of any debt financing obtained by certain Managed REITs that is used to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company receives a finance coordination fee and reimbursement, subject to certain limitations. In addition, the Company may earn disposition fees related to the sale of one or more properties, including those held indirectly through joint ventures, on behalf of a Managed REIT. Acquisition, finance coordination and disposition fees and reimbursements, as applicable, are included in transaction service fees in the financial results for the PCM segment in Note 4.
The Company earns advisory and asset and property management fees from certain Managed REITs and other affiliates. In addition, the Company may be reimbursed for expenses incurred in providing advisory and asset and property management services, subject to certain limitations. Advisory fees, asset and property management fees and reimbursements of expenses are included in management fees and reimbursements in the financial results for the PCM segment in Note 4.
The Company recorded fees and expense reimbursements as shown in the table below for services provided primarily to the Managed REITs related to the services described above during the three months ended September 30, 2013 and the period from the Cole Holdings Merger Date to September 30, 2013 (in thousands). As the Company did not commence operations for the PCM segment until the Cole Holdings Merger Date, comparative financial data is not presented for the three and nine months ended September 30, 2012.
 
Three Months Ended September 30, 2013
 
CCPT II (1)
 
CCPT IV
 
CCIT
 
Other
 
Total
Operations:
 
 
 
 
 
 
 
 
 
Acquisition fee revenue
$
—

 
$
7,257

 
$
9,626

 
$
—

 
$
16,883

Asset management fee revenue
$
411

 
$
—

 
$
—

 
$
250

 
$
661

Property management and leasing fee revenue
$
248

 
$
—

 
$
—

 
$
168

 
$
416

Operating expense reimbursement revenue
$
80

 
$
1,780

 
$
1,119

 
$
—

 
$
2,979

Advisory and performance fee revenue
$
—

 
$
2,650

 
$
2,154

 
$
324

 
$
5,128

 
Period from the Cole Holdings Merger Date to September 30, 2013
 
CCPT II (1)
 
CCPT IV
 
CCIT
 
Other
 
Total
Operations:
 
 
 
 
 
 
 
 
 
Acquisition fee revenue
$
—

 
$
17,853

 
$
20,390

 
$
149

 
$
38,392

Asset management fee revenue
$
2,559

 
$
—

 
$
—

 
$
486

 
$
3,045

Property management and leasing fee revenue
$
1,698

 
$
—

 
$
—

 
$
346

 
$
2,044

Operating expense reimbursement revenue
$
933

 
$
2,653

 
$
1,641

 
$
—

 
$
5,227

Advisory and performance fee revenue
$
—

 
$
4,447

 
$
3,338

 
$
399

 
$
8,184

________________
(1) Includes fees and reimbursements recorded for services provided to Cole Credit Property Trust II, Inc. (“CCPT II”) through July 17, 2013, the date of its merger with Spirit Realty Capital, Inc. (“Spirit”). In the connection with the merger between CCPT II and Spirit, the Company agreed to provide certain accounting and related services to Spirit for one quarter. During the nine months ended September 30, 2013, the Company recorded revenue of $900,000 related to these services, which is not included in the table above and is included in management fees and reimbursements in the financial results for the PCM segment in Note 4.


35
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Investment in REITs
As of September 30, 2013, the Company owned aggregate equity investments of $427,000 in the Unconsolidated Managed REITs, which is included in investment in unconsolidated entities in the accompanying condensed consolidated unaudited balance sheets. The table below presents certain information related to the Company’s investments in the Unconsolidated Managed REITs as of September 30, 2013 (carrying amount in thousands):
    
 
 
% of Outstanding Shares Owned
 
Carrying Amount of Investment
Unconsolidated Managed REIT
 
as of September 30, 2013
 
as of September 30, 2013
CCPT
 
0.01
%
 
$
5

CCPT IV
 
0.02
%
 
147

CCIT
 
0.01
%
 
103

INAV
 
0.42
%
 
172

 
 
 
 
$
427

In addition, as of September 30, 2013, the Company had an aggregate investment of $400,000 in two REITs: CCPT V, which is currently in the registration process, and CCIT II, which had its registration statement declared effective by the SEC on September 17, 2013. The aggregate investment of $400,000 is included in cash and cash equivalents in the accompanying condensed consolidated unaudited balance sheet as the Company is the sole stockholder of these REITs.
Due from Affiliates
As of September 30, 2013, $13.1 million was expected to be collected from the Managed REITs for services provided by the Company and expenses subject to reimbursement by the Managed REITs in accordance with their respective advisory and property management agreements and was included in due from affiliates on the accompanying condensed consolidated unaudited balance sheet. In connection with the Cole Holdings Merger, the Company acquired two secured revolving line of credit agreements that provide for an aggregate of $2.9 million of available borrowings to CCPT. The line of credit agreements each bear a fixed interest rate of 5.75%, mature in March 2014 and are secured by a single retail property. At the Cole Holdings Merger Date, no amounts were outstanding under the lines of credit. During the three months ended September 30, 2013, CCPT borrowed $300,000 on one of the lines of credit, which is included in due from affiliates in the accompanying condensed consolidated unaudited balance sheet.
Pre-Merger Expenses
Prior to the Cole Holdings Merger, CCPT III was externally advised by a subsidiary of Holdings. CCPT III recorded fees and expense reimbursements for property management and advisory services provided by a subsidiary of Holdings of $16.7 million from January 1, 2013 through the Cole Holdings Merger Date and $22.9 million and $82.8 million, respectively, for the three and nine months ended September 30, 2012.
NOTE 15 — EQUITY
Common Stock
The Company is authorized to issue up to 990.0 million shares of common stock, $0.01 par value per share. As of September 30, 2013, the Company had issued approximately 473.6 million shares, net of share redemptions, of which the approximately 4.3 million Escrow Shares, as discussed in Note 3, were not considered outstanding in accordance with GAAP. As of December 31, 2012, the Company had approximately 479.5 million shares issued and outstanding. On June 20, 2013, the Company listed its common stock on the NYSE under the ticker symbol “COLE.”
Preferred Stock
The Company is authorized to issue up to 10.0 million shares of preferred stock, $0.01 par value per share. As of September 30, 2013 and December 31, 2012, the Company did not have any preferred stock issued or outstanding. The Company’s board of directors has no present plans to issue shares of preferred stock, but it may do so at any time in the future without stockholder approval.

36
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Prior Public Offerings, Distribution Reinvestment Plan and Share Redemption Program
The Company offered shares of common stock in its initial offering (the “Initial Offering”) from January 2009 to October 2010. At the completion of the Initial Offering, a total of approximately 217.5 million shares of common stock had been issued, including approximately 211.6 million shares issued in the primary offering and approximately 5.9 million shares issued pursuant to a distribution reinvestment plan (the “DRIP”). The remaining approximately 32.5 million unsold shares in the Initial Offering were deregistered.
The Company offered shares of its common stock pursuant to a follow-on offering (the “Follow-on Offering”) from October 2010 to April 2012. At the completion of the Follow-on Offering, a total of approximately 262.2 million shares of common stock had been issued, including approximately 242.9 million shares issued in the primary offering and approximately 19.3 million shares issued pursuant to the DRIP. The remaining approximately 12.8 million unsold shares in the Follow-on Offering were deregistered.
In addition, the Company registered 75.0 million shares of common stock under the DRIP pursuant to a registration statement filed on Form S-3 (the “DRIP Offering” and collectively with the Initial Offering and the Follow-on Offering, the “Offerings”), which was filed with the SEC on March 14, 2012 and automatically became effective with the SEC upon filing. On April 12, 2013, the Company announced that the board of directors, including all of the Company’s independent directors, had voted to suspend the DRIP. On June 17, 2013, the board of directors, including all of the Company’s independent directors, voted to terminate the DRIP effective as of the date of the Listing. Prior to the termination date, the Company had issued approximately 20.3 million shares pursuant to the DRIP Offering. During the nine months ended September 30, 2013, the Company deregistered the remaining approximately 54.7 million unsold shares.
In the Offerings, the Company issued approximately 499.9 million shares of its common stock for aggregate gross proceeds of $5.0 billion (including shares sold pursuant to the DRIP), before share redemptions pursuant to the share redemption program of $174.7 million and offering costs, selling commissions and dealer management fees of $463.2 million.
In connection with the Cole Holdings Merger, the Company issued approximately 12.8 million shares of the Company’s common stock during the nine months ended September 30, 2013 in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Company redeemed approximately 796,000 shares to satisfy applicable tax withholdings related to the Upfront Stock Consideration and Listing Consideration.
The Company had a share redemption program whereby stockholders could sell shares of the Company’s common stock to the Company in compliance with the applicable requirements and guidelines of the Company’s share redemption program. On April 12, 2013, the Company’s board of directors, including all of its independent directors, voted to suspend the share redemption program in anticipation of the planned listing of its shares of common stock on the NYSE. On June 17, 2013, the Company’s board of directors, including all of its independent directors, voted to terminate the share redemption program effective as of the date of the Listing, and the share redemption program was terminated as of such date. During the nine months ended September 30, 2013, the Company received valid redemption requests relating to approximately 5.3 million shares, which were redeemed in full for $52.3 million (an average of $9.82 per share).
Tender Offer
On June 20, 2013, the Company commenced a modified “Dutch auction” tender offer to purchase for cash up to $250.0 million in value of shares of its common stock from its stockholders, which expired on August 8, 2013 (the “Tender Offer”). As a result of the Tender Offer, the Company purchased approximately 20.4 million shares of common stock properly tendered and not properly withdrawn prior to the expiration of the Tender Offer at a purchase price of $12.25 per share, for an aggregate purchase price of $250.0 million, excluding fees and expenses relating to the Tender Offer. The Company funded the purchase price for shares of common stock accepted for payment pursuant to the Tender Offer, and related fees and expenses, from available cash and borrowings under the Credit Facility.

37
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



Fractional Share Redemptions
In connection with the Listing, the Company’s board of directors, including all of its independent directors, approved eliminating all outstanding fractional shares of the Company’s common stock no earlier than the 11th business day following the completion or termination of the Tender Offer by paying each holder of a fractional share as of the record date for the payments an amount in cash equal to the fraction of a share being repurchased multiplied by the average closing price of the Company’s common stock on the NYSE for the ten trading days ending on the trading day prior to the record date, rounded to the nearest whole cent. During the three months ended September 30, 2013, the Company redeemed an aggregate of approximately 35,000 fractional shares for $394,000 (an average of $11.18 per share).
Share Repurchase Program
The Company’s board of directors adopted a share repurchase program (the “Share Repurchase Program”), authorizing the repurchase by the Company, from time to time, of the Company’s shares of common stock for an aggregate purchase price (excluding fees, commissions and all other ancillary expenses) of up to $250.0 million commencing no earlier than the 11th business day following the completion or termination of the Tender Offer. The Company may conduct repurchases on the open market, including through the facilities of the NYSE, in privately negotiated transactions, or otherwise, by direct purchases of common stock or purchases pursuant to derivative instruments or securities relating to common stock, or other transactions. The timing and extent of any repurchases will depend upon market conditions, the trading price of the common stock and other factors. The Share Repurchase Program does not require the Company to acquire any specific number of or value of shares (subject to the maximum value stated above) and may be terminated at any time. The Company intends to fund the purchase price for shares of common stock repurchased pursuant to the Share Repurchase Program, and all related fees and expenses, from available cash and/or borrowings under the Credit Facility. No shares were repurchased under the Share Repurchase Program as of September 30, 2013. The ARCP Merger Agreement, which was entered into subsequent to September 30, 2013, provides that the Company generally may not repurchase shares of its common stock, except as may otherwise be provided in the ARCP Merger Agreement.
NOTE 16 — STOCK-BASED COMPENSATION
Equity Incentive Plans
During the nine months ended September 30, 2013, the Company’s board of directors, upon the recommendation of a special committee comprised solely of independent directors, approved and adopted the Cole Credit Property Trust III, Inc. 2013 Omnibus Employee Incentive Plan (the “Employee Plan”) and the Cole Credit Property Trust III, Inc. 2013 Non-Employee Director Plan (the “Non-Employee Director Plan”, and together with the Employee Plan, the “Equity Plans”). The Equity Plans were adopted and became effective on May 8, 2013 and, unless earlier terminated by the board of directors, will terminate on May 8, 2023. The compensation committee of the Company’s board of directors administers the Equity Plans. Pursuant to the Employee Plan, approximately 40.2 million shares of common stock of the Company, subject to adjustment, are reserved for issuance, and pursuant to the Non-Employee Director Plan, a total of 500,000 shares of common stock of the Company, subject to adjustment, are reserved for issuance. The Equity Plans provide for the grant of non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, dividend equivalents and other stock-based awards. The Employee Plan also provides for the grant of stock options intended to be incentive stock options under Section 422 of the Internal Revenue Code and cash-based awards. Awards under the Employee Plan may only be granted to employees and consultants of the Company, while awards under the Non-Employee Director Plan may only be granted to non-employee directors of the Company’s board of directors. Under the Non-Employee Director Plan, the maximum number of awards that may be granted to any non-employee director in a calendar year may not exceed a grant date fair market value of $300,000.
In July 2013 and August 2013, the compensation committee of the Company’s board of directors approved the grant of approximately 2.3 million restricted share units (“RSUs”) to certain Company employees, including the Company’s chief executive officer and its other executive officers, and approximately 592,000 performance share units (“PSUs”) to the Company’s chief executive officer and its other executive officers under the Employee Plan. The RSUs are scheduled to vest and will be settled in shares of the Company’s common stock in installments subject to the employee’s continued employment over a three-year period. The PSUs have a performance vesting condition based on the Company’s achievement of total stockholder return relative to the total stockholder return of a specified peer group and a continued employment condition over a three-year period, and will be settled in shares of the Company’s common stock in installments at the end of the three-year period.

38
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



In addition, in August 2013, the compensation committee of the Company’s board of directors approved the grant of approximately 27,000 RSUs under the Non-Employee Director Plan to non-employee directors of the Company. These RSUs are scheduled to vest on July 1, 2014, subject to the non-employee director’s continued service as a director of the Company through the vesting date.
The following table summarizes the Company’s non-vested share awards activity under the Equity Plans during the nine months ended September 30, 2013:
 
RSU Awards
 
PSU Awards
 
Shares
 
Weighted Average Grant Date Fair Value (1)
 
Shares
 
Weighted Average Grant Date Fair Value (2)
Non-vested at December 31, 2012
—

 
—

 
—

 
—

Granted
2,283,744

 
$
10.56

 
591,929

 
$
7.04

Vested
—

 
—

 
—

 
—

Forfeited
(6,450
)
 
10.56

 
—

 
—

Non-vested at September 30, 2013
2,277,294

 
$
10.56

 
591,929

 
$
7.04

________________
(1)
The grant date fair values of the RSUs were based on the closing price reported for the Company’s common stock on the NYSE on the respective grant date. Certain RSUs are subject to a two-year restriction period, and, therefore, the fair value for such RSUs was adjusted for a lack of marketability discount of 15%.
(2)
The grant date fair values for the PSUs were determined using a Monte Carlo simulation model on a risk-neutral basis. The key assumptions used in the model were primarily based on available Company data and data of companies with similar operations to the Company and included: (1) an expected volatility rate of 32%; (2) a dividend yield of 6%; (3) a risk-free interest rate of 0.64%; and (4) a lack of marketability discount of 15%, as applicable.
During each of the three and nine months ended September 30, 2013, the Company recognized $1.8 million of stock-based compensation expense related to the Equity Plans, which is included in general and administrative expenses in the accompanying condensed consolidated unaudited statement of operations. The Company used historical staff turnover rates to estimate the forfeiture rate for its non-vested RSUs granted to employees of the Company, which is reflected as a reduction to stock-based compensation expense. In accordance with the Equity Plans, the Company will pay cash dividends related to the RSUs and PSUs on each respective vesting date. These dividends are forfeitable if the respective employee or non-employee director is no longer employed by or serving on the board of directors of, as applicable, the Company on the vesting date. As of September 30, 2013, the Company recorded $300,000 of dividends payable for dividends that would have been paid had the RSUs and PSUs been issued on the respective grant date, adjusted for the forfeiture rate discussed above. These dividends payable are included in the accompanying condensed consolidated unaudited balance sheet in deferred rent, derivative and other liabilities.
As of September 30, 2013, the Company had $21.8 million of unrecognized compensation expenses related to the RSUs, which will be recognized over the remaining weighted average vesting period of approximately 1.7 years, and $3.9 million of unrecognized compensation expenses related to the PSUs, which will be recognized over the remaining weighted average vesting period of approximately 2.7 years.
See Note 19 for a discussion of the treatment of the RSUs and PSUs under the ARCP Merger Agreement.
Merger Related Stock-Based Compensation
The Company issued the Escrow Shares in connection with the Cole Holdings Merger and the Listing. The Company recognized $13.3 million and $23.6 million of merger related stock-based compensation expense related to the Escrow Shares during the three and nine months ended September 30, 2013, respectively. See Note 3 for further discussion.

39
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



NOTE 17 — EARNINGS PER SHARE
The Escrow Shares are included in the computation of earnings per share under the two-class method as they contain non-forfeitable rights to dividends and are considered to be participating securities in accordance with GAAP. The two-class method is an earnings allocation formula that determines earnings per share for each class of common shares and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Escrow Shares contain rights to receive non-forfeitable dividend equivalents, and therefore the Company applies the two-class method of computing earnings per share. The calculation of earnings per share below excludes the income attributable to the Escrow Shares from the numerator. The following table summarizes basic and diluted earnings (in thousands, except share and per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to the Company
 
$
24,189

 
$
18,567

 
$
93,323

 
$
77,727

Dividends paid and declared on Escrow Shares
 
(764
)
 
—

 
(1,369
)
 
—

Net income - basic and diluted
 
$
23,425

 
$
18,567

 
$
91,954

 
$
77,727

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic
 
479,370,020

 
476,353,149

 
482,720,629

 
457,996,321

Effect of dilutive securities
 
16,109,936

 
—

 
6,568,232

 
—

Weighted average number of common shares outstanding - diluted
 
495,479,956

 
476,353,149

 
489,288,861

 
457,996,321

 
 
 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
 
 
Net income per common share attributable to the Company
 
$
0.05

 
$
0.04

 
$
0.19

 
$
0.17

Diluted earnings per common share:
 
 
 
 
 
 
 
 
Net income per common share attributable to the Company
 
$
0.05

 
$
0.04

 
$
0.19

 
$
0.17

In accordance with GAAP, shares of common stock included in the Company’s diluted earnings per common share determination consist of the Merger Contingent Consideration pursuant to the Cole Holdings Merger Agreement using the if-converted method and unvested shares from the Escrow Share arrangements using the treasury share method. A total of 1,347,653 and 773,690 shares of common stock for the three and nine months ended September 30, 2013, respectively, were excluded from the earnings per share computations above as their effect would have been antidilutive.
NOTE 18 — INCOME TAXES
As a REIT, the Company generally is not subject to federal income tax, with the exception of its TRS.  However, the Company, including its TRS, is still subject to certain state and local income taxes in the various jurisdictions in which it operates.
Based on the above, the PCM segment, substantially all of which is conducted through a TRS, recognized a provision for federal and state income taxes of $9.4 million and $9.2 million for the three and nine months ended September 30, 2013, respectively. No provision for income taxes was recognized for the three and nine months ended September 30, 2012 as the Company did not commence operations for the PCM segment until the Cole Holdings Merger Date. The difference in the provision for income taxes reflected in the condensed consolidated unaudited statements of operations as compared to the provision calculated at the statutory federal income tax rate is primarily attributable to various permanent differences and state and local income taxes.

40
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



The REI segment recognized state income and franchise taxes of $481,000 and $1.7 million during the three and nine months ended September 30, 2013, respectively, and $348,000 and $1.5 million during the three and nine months ended September 30, 2012, respectively, which are included in general and administrative expenses in the accompanying condensed consolidated unaudited statements of operations.
NOTE 19 — SUBSEQUENT EVENTS
ARCP Merger Agreement
On October 22, 2013, the Company entered into the ARCP Merger Agreement with ARCP and ARCP Merger Sub. The ARCP Merger Agreement provides for the merger of the Company with and into ARCP Merger Sub, with ARCP Merger Sub surviving as a direct wholly owned subsidiary of ARCP. The board of directors of the Company has, by unanimous vote of the members of the board of directors, approved the ARCP Merger Agreement, the ARCP Merger and the other transactions contemplated by the ARCP Merger Agreement. The ARCP Merger is expected to close in the first half of 2014.
Pursuant to the terms and subject to the conditions set forth in the ARCP Merger Agreement, at the effective time of the ARCP Merger (the “Effective Time”), each outstanding share of common stock, par value $0.01, of the Company (“Company Common Stock”) will be converted into the right to receive, pursuant to an election made by each stockholder, (i) $13.82 in cash, but in no event will the aggregate consideration paid in cash be paid on more than 20% of the shares of Company Common Stock issued and outstanding as of immediately prior to the Effective Time or (ii) 1.0929 shares of common stock, par value $0.01, of ARCP (“ARCP Common Stock”).
If the aggregate elections for payment in cash exceed 20% of the number of shares of Company Common Stock issued and outstanding immediately prior to the Effective Time, then the amount of cash consideration paid on cash elections will be reduced on a pro rata basis with the remaining consideration paid in ARCP Common Stock.
At the Effective Time, each of the Company’s outstanding RSUs and PSUs will vest in full and will be converted into the right to receive the merger consideration. Each PSU will be deemed earned based on the average of the target and maximum percentage payout percentages set forth under the terms of the award agreement applicable to such PSU.
Pursuant to the terms of the ARCP Merger Agreement, the board of directors of ARCP will be expanded by two, which vacancies will be filled by two of the Company’s independent directors at the Effective Time, subject to the ARCP board’s determination that such individuals meet the definition of “independent director” set forth in the rules and regulations of the NASDAQ Stock Market and applicable regulations promulgated by the SEC, and satisfy the criteria set forth in ARCP’s Nominating and Corporate Governance Committee charter.
The Company and ARCP have made certain customary representations and warranties to each other in the ARCP Merger Agreement. The Company has agreed, among other things, not to solicit, initiate, knowingly encourage or knowingly facilitate any inquiry, discussion, offer or request from third parties regarding other proposals to acquire the Company, and not to engage in any discussions or negotiations regarding any such proposal, or furnish to any third party non-public information regarding the Company. The Company has also agreed to certain other restrictions on its ability to respond to any such proposals. The ARCP Merger Agreement also includes certain termination rights for both the Company and ARCP and provides that, in connection with the termination of the ARCP Merger Agreement, under specified circumstances, the Company or ARCP, as applicable, may be required to pay to the other party expense reimbursements in an amount equal to $10.0 million. The ARCP Merger Agreement also provides for the payment of a break-up fee by the Company in the amount of $100.0 million if the ARCP Merger Agreement is terminated under specified circumstances, and for the payment of a reverse break-up fee by ARCP in the amount of either $5.0 million or $110.0 million if the ARCP Merger Agreement is terminated under certain other specified circumstances.
The completion of the ARCP Merger is subject to various conditions, including, among other things, the approval by the Company’s stockholders of the ARCP Merger and the approval by ARCP’s stockholders of the issuance of ARCP Common Stock in connection with the ARCP Merger, the absence of any law, order or injunction prohibiting the consummation of the ARCP Merger, the receipt of certain third party consents and the consummation by ARCP of its previously announced mergers with CapLease, Inc. (“CapLease” and the proposed merger with CapLease, the “CapLease Merger”) and American Realty Capital Trust IV, Inc. (“ARCT IV” and the proposed merger with ARCT IV, the “ARCT IV Merger”). Moreover, each party’s obligation to consummate the ARCP Merger is subject to certain other conditions, including the accuracy of the other party’s

41
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



representations and warranties (subject to customary qualifications) and the other party’s material compliance with its covenants and agreements contained in the ARCP Merger Agreement.
Concurrently with the execution of the ARCP Merger Agreement, Mr. Cole and Marc T. Nemer, the Company’s Chief Executive Officer, entered into a voting agreement with ARCP (the “Voting Agreement”), pursuant to which each of them has agreed to vote in favor of the ARCP Merger and the other transactions contemplated by the ARCP Merger Agreement, upon the terms and subject to the conditions set forth in such agreement. The Voting Agreement will terminate upon certain circumstances, including upon termination of the ARCP Merger Agreement.
Indemnification Agreements
On October 22, 2013, the Company entered into indemnification agreements with each of its directors (the “indemnitee”) that obligate the Company to indemnify them to the maximum extent permitted by Maryland law against all judgments, penalties, fines and amounts paid in settlement and all expenses actually and reasonably incurred by the indemnitee or on his or her behalf in connection with a proceeding. The indemnitee is not entitled to indemnification if it is established that one of the exceptions to indemnification under Maryland law, as set forth in the indemnification agreement, exists.
In addition, the indemnification agreement requires the Company to advance reasonable expenses incurred by the indemnitee within ten days of the receipt by the Company of a statement from the indemnitee requesting the advance. The indemnification agreement also provides for procedures for the determination of entitlement to indemnification, including requiring such determination be made by independent counsel after a change of control of the Company.
Letter Agreements
Concurrently with the execution of the ARCP Merger Agreement, Mr. Cole, Mr. Nemer, Jeffrey C. Holland, the Company’s President and Chief Operating Officer, Stephan Keller, the Company’s Executive Vice President, Chief Financial Officer and Treasurer, and D. Kirk McAllaster, Jr., the Company’s Executive Vice President (collectively, the “Executives”) entered into letter agreements with the Company and ARCP (collectively, the “Letter Agreements”), pursuant to which each of them has agreed, among other things, to certain arrangements in connection with closing of the ARCP Merger and the payment of amounts to which they are entitled under their respective employment agreements and/or the Cole Holdings Merger Agreement, under which the Executives may be entitled to the Merger Contingent Consideration payable by the Company.
Under the Letter Agreements, within three business days after the ARCP Merger is consummated, ACRP will pay each Executive a specified amount in respect of the Merger Contingent Consideration (or bonus entitlements in respect thereof) that remain payable pursuant to the Cole Holdings Merger Agreement. That amount is $217,544,614 for Mr. Cole, $38,390,226 for Mr. Nemer, $9,421,000 each for Messrs. Holland and Keller and $5,223,160 for Mr. McAllaster (collectively, the “Holdings Merger Payments”). The Holdings Merger Payments will be paid in shares of ARCP Common Stock, valued based on the volume weighted average closing sale price per share of ARCP Common Stock on the NASDAQ Stock Market over the ten consecutive trading days ending the trading day immediately before the date that the ARCP Merger is consummated. If the ARCP Merger is consummated after the Incentive Consideration (or bonus entitlements in respect thereof) has already been paid to the Executives, for each Executive, the Holdings Merger Payment will be offset dollar-for-dollar by the amount of the Incentive Consideration (or bonus entitlements in respect thereof) paid to such Executive.
The Letter Agreements also provide that the shares of ARCP Common Stock issued to the Executives in connection with the ARCP Merger (including the shares of ARCP Common Stock issued in respect of the Holdings Merger Payments and shares of Company Common Stock held by the Executives as of the consummation of the ARCP Merger) will be deemed to be “Registrable Securities” pursuant to, and subject to the terms of, the Registration Rights Agreement, dated as of April 5, 2013 (the “Registration Rights Agreement”), including the transfer restrictions set forth in the Registration Rights Agreement. Such transfer restrictions generally prohibit the transfer of (a) one-third (1/3) of the Registrable Securities to be issued to the Executives in respect of certain shares of Company Common Stock that the Executives received pursuant to the Cole Holdings Merger Agreement (and bonus entitlements in respect thereof) until April 5, 2014, (b) one-third (1/3) of such Registrable Securities until April 5, 2015 and (c) the remaining one-third (1/3) of such Registrable Securities until April 5, 2016. The shares of ARCP Common Stock issued pursuant to the Holdings Merger Payments that are not attributable to Incentive Consideration under the Cole Holdings Merger Agreement will be released from transfer restrictions under the Registration Rights Agreement (which generally prohibits transfer of such shares until December 31, 2017) on a quarterly basis on the last day of each calendar quarter, beginning with the first full calendar quarter following the consummation of the ARCP Merger through December 31, 2017.

42
 
COLE REAL ESTATE INVESTMENTS, INC.
(F/K/A COLE CREDIT PROPERTY TRUST III, INC.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2013



The Letter Agreements also provide for the conversion of the Escrow Shares for the satisfaction of certain potential retention and indemnification claims under the Cole Holdings Merger Agreement into shares of ARCP Common Stock or cash, depending on the applicable Executive’s election under the terms of the ARCP Merger Agreement which will remain on deposit with the escrow agent in accordance with and subject to the terms of the indemnification escrow agreement.
The Letter Agreements with Messrs. Cole and Nemer included additional terms relating to their separation from the Company (which will be treated as a termination without cause within two years following a change in control under their respective employment agreements) in connection with the consummation of the ARCP Merger and the payment of amounts to which they are entitled under their respective employment agreements and the ARCP Merger Agreement. In consideration of payments and benefits to which they are entitled under their employment agreements and the Letter Agreements, Messrs. Cole and Nemer each agreed to execute and deliver a release of claims in favor of the Company, ARCP and their respective affiliates. Additionally, the Letter Agreements with Messrs. Cole and Nemer include (i) non-disparagement covenants that are effective until the third anniversary of the consummation of the ARCP Merger and (ii) a standstill, effective until the third anniversary of each of their Letter Agreements unless the ARCP Merger Agreement is terminated, on acquiring securities of or soliciting proxies with respect to the Company, ARCP, their respective subsidiaries and affiliates, or certain investment vehicles sponsored or advised by those entities, subject to fiduciary obligations.
In addition, the Letter Agreement with Mr. Cole provides that, subject to the terms of the ARCP Merger Agreement, Mr. Cole, together with his affiliates, will be entitled to elect to receive cash consideration in the ARCP Merger in respect of up to 20% of all of the shares of Company Common Stock held by Mr. Cole and his affiliates. Mr. Cole also agreed that after the ARCP Merger is consummated, he will not register or use names or trademarks that would be confusingly similar to certain marks of the Company and its subsidiaries. The Letter Agreement with Mr. Cole also amended the scope of the non-competition covenant under the Cole Holdings Merger Agreement and modified the non-competition period so that it applies five years after the consummation of the ARCP Merger, rather than five years after the consummation of the Cole Holdings Merger.
Dividends
On November 1, 2013, the Company’s board of directors authorized the declaration and payment of a cash dividend on a monthly basis, in the amount of $0.06 per share of common stock (a monthly rate that is equivalent to an annual rate of $0.72 per share) for stockholders of record as of each of November 29, 2013, December 31, 2013 and January 31, 2014, respectively.  The payment dates for the dividends for the stockholders of record as of November 29, 2013, December 31, 2013 and January 31, 2014 will be December 2, 2013, January 2, 2014 and February 3, 2014, respectively.  However, if the ARCP Merger is consummated in January 2014, but on or before January 31, 2014, the dividend for January 2013 will be pro-rated based on the number of days elapsed during the month through and including the day prior to the day on which the ARCP Merger is consummated, and the payment date for such pro-rated dividend will be the last business day prior to the date the ARCP Merger is consummated for stockholders of record as of the close of business on such day.
Other Transactions
Real Estate Investment Segment
Subsequent to September 30, 2013, the Company acquired 9 commercial real estate properties for an aggregate purchase price of $40.4 million and sold the 2013 Held for Sale Property discussed in Note 9 for a sales price of $80.5 million, which was greater than the carrying amount of the property. Subsequent to September 30, 2013, the Company received proceeds of $5.2 million related to the Mezzanine Note, consisting of a $5.0 million loan prepayment and $160,000 consent fee, as discussed in Note 7. As of October 31, 2013, the Company had $998.0 million outstanding under the Credit Facility.
Private Capital Management Segment
As of October 31, 2013, the Company was a party to 40 purchase and sale agreements with unaffiliated third-party sellers to purchase a 100% interest in 142 retail properties, subject to meeting certain criteria, for an aggregate purchase price of $601.5 million, exclusive of closing costs. 
Subsequent to September 30, 2013 through October 31, 2013, the PCM segment raised $511.0 million of capital on behalf of the Managed REITs, which included approximately $7.8 million pursuant to the distribution reinvestment plans for such programs. In addition, the PCM segment facilitated the acquisition of $214.0 million of real estate investments and $48.8 million of real estate financing on behalf of the Managed REITs subsequent to September 30, 2013 through October 31, 2013.

43
 

VEREIT, Inc. Reports