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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
Form 10-Q 
_____________________________________

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-51962
_____________________________________
COLE CREDIT PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
_____________________________________
Maryland
 
20-0939158
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
2325 East Camelback Road, Suite 1100
Phoenix, Arizona 85016
 
(602) 778-8700
(Address of principal executive offices; zip code)
 
(Registrant’s telephone number, including area code)
Not Applicable
(former name, former address and former fiscal year, if changed since last report)
_____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of May 14, 2014, there were 10,090,951 shares of common stock, par value of $0.01, of Cole Credit Property Trust, Inc. outstanding.



COLE CREDIT PROPERTY TRUST, INC.
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements

COLE CREDIT PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(in thousands, except share and per share amounts)

 
March 31, 2014
 
December 31, 2013
ASSETS
Investment in real estate assets:
 
 
 
Land
$
43,175

 
$
43,175

Buildings and improvements, less accumulated depreciation of $26,545 and $25,782, respectively
78,540

 
78,885

Intangible lease assets, less accumulated amortization of $13,161 and $12,821, respectively
7,825

 
8,165

Total investment in real estate assets, net
129,540

 
130,225

Cash and cash equivalents
432

 
652

Restricted cash
2,301

 
2,327

Rents and tenant receivables, prepaid expenses and other assets
1,187

 
1,273

Deferred financing costs, less accumulated amortization of $2,355 and $2,217, respectively
674

 
812

Total assets
$
134,134

 
$
135,289

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Notes payable
$
85,409

 
$
85,606

Lines of credit with affiliate
300

 
300

Accounts payable and accrued expenses
1,189

 
662

Due to affiliates
71

 
39

Acquired below market lease intangibles, less accumulated amortization of $1,847 and $1,802, respectively
350

 
395

Distributions payable
429

 
429

Deferred rent
254

 
517

Total liabilities
88,002

 
87,948

Commitments and contingencies

 

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

 

Common stock, $0.01 par value; 90,000,000 shares authorized, 10,090,951 shares issued and outstanding
101

 
101

Capital in excess of par value
90,424

 
90,424

Accumulated distributions in excess of earnings
(44,393
)
 
(43,184
)
Total stockholders’ equity
46,132

 
47,341

Total liabilities and stockholders’ equity
$
134,134

 
$
135,289

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

3


COLE CREDIT PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)

 
Three Months Ended March 31,
 
2014
 
2013
Revenues:
 
 
 
Rental and other property income
$
3,268

 
$
3,187

Tenant reimbursement income
136

 
120

Total revenue
3,404

 
3,307

 
 
 
 
Expenses:
 
 
 
General and administrative expenses
180

 
208

Property operating expenses
164

 
154

Property management expenses
104

 
97

Merger and acquisition related expenses
330

 
94

Depreciation
763

 
769

Amortization
336

 
372

Total operating expenses
1,877

 
1,694

Operating income
1,527

 
1,613

 
 
 
 
Other expense:
 
 
 
Interest expense, net
(1,491
)
 
(1,493
)
Total other expense
(1,491
)
 
(1,493
)
Net income
$
36

 
$
120

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
Basic and diluted
10,090,951

 
10,090,951

 
 
 
 
Net income per common share:
 
 
 
Basic and diluted
$
0.00

 
$
0.01

 
 
 
 
Distributions declared per common share
$
0.12

 
$
0.12

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

4


COLE CREDIT PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
 
 
Common Stock
 
Capital in
Excess
of Par Value
 
Accumulated
Distributions
in Excess of Earnings
 
Total
Stockholders’
Equity
 
Number of
Shares
 
Par Value
 
 
 
Balance, January 1, 2014
10,090,951

 
$
101

 
$
90,424

 
$
(43,184
)
 
$
47,341

Distributions

 

 

 
(1,245
)
 
(1,245
)
Net income

 

 

 
36

 
36

Balance, March 31, 2014
10,090,951

 
$
101

 
$
90,424

 
$
(44,393
)
 
$
46,132

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

5


COLE CREDIT PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
36

 
$
120

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
763

 
769

Amortization of intangible lease assets and below market lease intangibles, net
295

 
324

Amortization of deferred financing costs
138

 
139

Changes in assets and liabilities:
 
 
 
Rents and tenant receivables, prepaid expenses and other assets
86

 
119

Accounts payable and accrued expenses
118

 
(178
)
Deferred rent
(263
)
 
(312
)
Due to affiliates
32

 
(2
)
Net cash provided by operating activities
1,205

 
979

Cash flows from investing activities:
 
 
 
Investment in capital expenditures and real estate assets
(9
)
 
(1,771
)
Change in restricted cash
26

 
32

Net cash provided by (used in) investing activities
17

 
(1,739
)
Cash flows from financing activities:
 
 
 
Distributions to investors
(1,245
)
 
(1,243
)
Repayment of notes payable
(197
)
 
(188
)
Net cash used in financing activities
(1,442
)
 
(1,431
)
Net decrease in cash and cash equivalents
(220
)
 
(2,191
)
Cash and cash equivalents, beginning of period
652

 
7,788

Cash and cash equivalents, end of period
$
432

 
$
5,597

 
 
 
 
Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Distributions declared and unpaid
$
429

 
$
429

Accrued capital expenditures
$
409

 
$

Supplemental cash flow disclosures:
 
 
 
Interest paid
$
1,355

 
$
1,359

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

6


COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
March 31, 2014
NOTE 1 — ORGANIZATION AND BUSINESS
Cole Credit Property Trust, Inc. (the “Company”) is a Maryland corporation that was formed on March 29, 2004, which has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes. The Company is the sole general partner of, and owns, directly or indirectly, 100% of the partnership interest in, Cole Operating Partnership I, LP, a Delaware limited partnership (“Cole OP I”). The Company is externally managed by Cole REIT Advisors, LLC (“Cole Advisors”), an affiliate of the Company’s sponsor, Cole Capital™, which is a trade name used to refer to a group of affiliated entities directly or indirectly controlled by American Realty Capital Properties, Inc. (“ARCP”), a self-managed publicly traded Maryland corporation listed on The NASDAQ Global Select Market. On February 7, 2014, ARCP acquired Cole Real Estate Investments, Inc. (“Cole”), which, prior to its acquisition, indirectly owned and/or controlled Cole Advisors, the Company’s dealer manager, Cole Capital Corporation (“CCC”), the Company’s property manager, Cole Realty Advisors, LLC (“Cole Realty”), and Cole Capital. As a result of ARCP’s acquisition of Cole, ARCP indirectly owns and/or controls Cole Advisors, CCC, Cole Realty and Cole Capital.
On March 17, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), among the Company, ARCP and Desert Acquisition, Inc., a Delaware corporation and direct wholly-owned subsidiary of ARCP (“Merger Sub”), pursuant to which, among other things, Merger Sub commenced a cash tender offer (the “Offer”) to purchase all of the outstanding shares of the Company’s common stock. See Note 2 for a further explanation of the Offer.
As of March 31, 2014, the Company owned 39 properties comprising 956,000 square feet of single-tenant retail and commercial space located in 19 states. As of March 31, 2014, these properties were 100% leased.
The Company’s stock is not currently listed on a national securities exchange. In the event the Company does not complete the CCPT Merger and does not list its stock for trading on a national securities exchange prior to February 1, 2016, its charter requires that it either: (1) seek stockholder approval of an extension or amendment of this listing deadline; or (2) seek stockholder approval to adopt a plan of liquidation.
NOTE 2 — MERGER AGREEMENT
On March 17, 2014, the Company entered into the Merger Agreement among the Company, ARCP, and Merger Sub pursuant to which, among other things, Merger Sub commenced the Offer to purchase all of the outstanding shares of the Company’s common stock at a price of $7.25 per share in cash, without interest, subject to applicable tax withholding. If that number of shares of Company common stock which, together with any shares of Company common stock beneficially owned by ARCP or Merger Sub, represents at least a majority of the shares of Company common stock outstanding as of immediately prior to the expiration of the Offer (as it may be extended pursuant to its terms) are validly tendered in the Offer and not validly withdrawn (the “Minimum Condition”), subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement and, if necessary, the exercise of the Top-Up Option described below, the Company will merge with and into Merger Sub, with Merger Sub surviving as a direct wholly-owned subsidiary of ARCP (the “CCPT Merger”). In the CCPT Merger, each share of Company common stock not purchased in the Offer (other than shares held by ARCP, any of its subsidiaries or any wholly-owned subsidiaries of the Company, which will automatically be canceled and retired and will cease to exist) will be converted into the right to receive the same cash consideration paid in the Offer.
Pursuant to the terms of the Merger Agreement, beginning on the date of the Merger Agreement and ending at 11:59 p.m., New York City time, on April 16, 2014 (the “Go-Shop Period”), the Company and its representatives had the right (acting under the direction of the Company’s board of directors or any committee thereof) to initiate, solicit and encourage any alternative acquisition proposals from third parties, and to provide non-public information to and engage in discussions with third parties with respect to acquisition proposals.  Prior to the expiration of the Go-Shop Period, the Company had not received, in writing or orally, any such alternative acquisition proposals.
Completion of the Offer is subject to various conditions, including the satisfaction of the Minimum Condition, the accuracy of the Company’s representations and warranties (subject to customary qualifications), the Company’s material compliance with its covenants and agreements contained in the Merger Agreement, receipt of certain third party consents and the absence of any Company Material Adverse Effect (as defined in the Merger Agreement) with respect to the Company’s business. The Offer is not subject to a financing condition. The closing of the CCPT Merger is subject to various additional conditions. The Merger Agreement includes certain termination rights for both the Company and ARCP and provides that, in connection with the termination of the Merger Agreement, under specified circumstances, the Company may be required to pay ARCP a termination fee in the amount of $1.463 million and reimburse ARCP’s transaction expenses in an amount up to $500,000.

7

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
March 31, 2014

If, after completion of the Offer, ARCP, Merger Sub and their respective subsidiaries own at least 90% of the outstanding shares of Company common stock, the CCPT Merger will be consummated in accordance with the “short-form” merger provisions under Maryland law without the approval of the CCPT Merger by the Company’s stockholders. If, after completion of the Offer, ARCP, Merger Sub and their respective subsidiaries own less than 90% of the outstanding shares of Company Common Stock, Merger Sub will have the right to exercise an irrevocable option (the “Top-Up Option”) granted to it by the Company under the Merger Agreement to purchase from the Company that number of additional shares of Company common stock that will result in ARCP, Merger Sub and their respective subsidiaries owning one share more than 90% of the outstanding shares of Company common stock (after giving effect to the issuance of shares pursuant to the Top-Up Option). Following the issuance of shares of Company common stock to Merger Sub pursuant to the Top-Up Option, the CCPT Merger will be consummated in accordance with the short-form merger provisions under Maryland law without the approval of the CCPT Merger by the Company’s stockholders.
As of March 31, 2014, the Company had incurred $330,000 for legal, consulting and other expenses related to the CCPT Merger, which is included in merger and acquisition related expenses in the condensed consolidated unaudited statements of operations.
NOTE 3 — 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 U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting, including the instructions to Form 10-Q and Article 8 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 the Company’s audited consolidated financial statements as of and for the year ended December 31, 2013 and related notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. 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 and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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 consolidated 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, including acquisition related expenses incurred prior to January 1, 2009, construction and any tenant improvements, major improvements and betterments that extend the useful life of the real estate assets. All repairs and maintenance costs 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:

8

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
March 31, 2014

Buildings
40 years
Tenant improvements
Lesser of useful life or lease term
Intangible lease assets
Lease term
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. No impairment losses were recorded during the three months ended March 31, 2014 or 2013.
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.
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 of the asset, net of selling costs, 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. There were no assets identified as held for sale as of March 31, 2014 or December 31, 2013.
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.

9

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
March 31, 2014

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 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.
Restricted Cash
As of March 31, 2014, $2.2 million was included in restricted cash, which was held by lenders in escrow accounts primarily for tenant and capital improvements, leasing commissions and repairs and maintenance for certain properties, in accordance with the respective lender’s loan agreement. In addition, as of March 31, 2014, the Company had $147,000 in restricted cash held by lenders in a lockbox account. As part of certain debt agreements, rents from the encumbered properties are deposited directly into a lockbox account, from which the monthly debt service payment is disbursed to the lender and the excess funds are disbursed to the Company.
Revenue Recognition
Certain 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.
Income Taxes
The Company currently qualifies as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company will generally not be subject to federal corporate income tax to the extent it distributes its taxable income to its stockholders, and so long as it, among other things, 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 or its subsidiaries may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.
Redemptions of Common Stock
The Company’s share redemption program provides that the Company’s board of directors must determine at the beginning of each fiscal year the maximum amount of shares that the Company may redeem during that year. The Company’s board of directors determined that no amounts are to be made available for redemption during the year ending December 31, 2014.
Recent Accounting Pronouncements
In April 2014, the U.S. Financial Accounting Standards Board issued Accounting Standards Update, 2014-08 Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which amends the reporting requirements for discontinued operations by updating the definition of a discontinued operation to be a component of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, resulting in fewer disposals that qualify for discontinued operations reporting; yet, the pronouncement also requires expanded disclosures for discontinued operations. The adoption of ASU 2014-08 did not have a material impact on the Company’s condensed consolidated unaudited financial statements because the Company did not have any discontinued operations.

10

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
March 31, 2014

NOTE 4 — 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 payable and lines of credit – 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 Company’s debt was $87.9 million and $88.6 million as of March 31, 2014 and December 31, 2013, respectively, compared to the carrying value of $85.7 million and $85.9 million as of March 31, 2014 and December 31, 2013, respectively. The fair value of the Company’s debt is estimated using Level 2 inputs.
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 March 31, 2014, there have been no transfers of financial assets or liabilities between fair value hierarchy levels.
NOTE 5 — REAL ESTATE ACQUISITIONS
No properties were acquired during the three months ended March 31, 2014. During the three months ended March 31, 2013, the Company acquired a 100% interest in one commercial property for a purchase price of $1.8 million (the “2013 Acquisition”). The Company purchased the 2013 Acquisition with net cash proceeds from the sale of five properties during the year ended December 31, 2012. The Company allocated the purchase price of the 2013 Acquisition to the fair value of the assets acquired. The following table summarizes the purchase price allocation (in thousands):
 
 
March 31, 2013
Land
 
$
296

Building and improvements
 
1,303

Acquired in-place leases
 
172

Total purchase price
 
$
1,771

The Company recorded revenue of $33,000 and a net loss of $55,000 for the three months ended March 31, 2013 related to the 2013 Acquisition. In addition, the Company recorded $94,000 of acquisition related expenses for the three months ended March 31, 2013.

11

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
March 31, 2014

The following table summarizes selected financial information of the Company as if the 2013 Acquisition was completed on January 1, 2012 for each period presented below. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the three months ended March 31, 2013 and 2012 (in thousands):
 
Three Months Ended March 31,
Pro forma basis:
2013
 
2012
Revenue
$
3,308

 
$
3,696

Net income
$
198

 
$
35

The pro forma information for the three months ended March 31, 2013 was adjusted to exclude acquisition related expenses recorded during such period relating to the 2013 Acquisition. These expenses were recognized in the pro forma information for the three months ended March 31, 2012. The pro forma revenue presented for the three months ended March 31, 2012 includes revenue related to properties sold in 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.
NOTE 6 — NOTES PAYABLE AND LINES OF CREDIT
As of March 31, 2014, the Company had $85.7 million of debt outstanding, consisting of $79.4 million of fixed rate mortgage loans (the “Fixed Rate Notes”), a $6.0 million variable rate mortgage loan (the “Variable Rate Note”) and $300,000 of borrowings on one of the Company’s two revolving Lines of Credit with an affiliate of Cole Advisors (the “Lines of Credit”). The Fixed Rate Notes have interest rates ranging from 5.27% to 6.96%, with a weighted average interest rate of 6.53%, and mature on various dates from March 2015 through September 2017, with a weighted average remaining term of 1.3 years. The Variable Rate Note had an interest rate of 2.54% at March 31, 2014 and matures in December 2015. The Lines of Credit provide for total borrowings of up to $2.9 million and both mature on March 31, 2015. The Lines of Credit bear interest at 5.75%. During the three months ended March 31, 2014, the Company repaid $197,000 of monthly principal payments on the Fixed Rate Notes. The aggregate balance of gross real estate and related assets, net of gross intangible lease liabilities, securing the debt outstanding was $156.8 million as of March 31, 2014.
Each of the mortgage notes payable and Lines of Credit are secured by the respective properties and their related leases on which the debt was placed. The mortgage notes and Lines of Credit are generally non-recourse to the Company and Cole OP I, but both are liable for customary non-recourse carve-outs. The mortgage notes payable and Lines of Credit contain customary default provisions. Generally, upon the occurrence of an event of default, interest on the mortgage notes will accrue at an annual default interest rate equal to the lesser of (1) the maximum rate permitted by applicable law or (2) the then-current interest rate plus a percentage specified in the respective loan agreement. Certain mortgage notes payable contain customary affirmative, negative and financial covenants, such as requirements for minimum net worth, debt service coverage ratios, limitations on leverage ratios and variable rate debt. Based on the Company’s analysis and review of its results and related requirements, the Company believes it was in compliance with the covenants of such mortgage notes payable as of March 31, 2014.
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. The Company is not aware of any pending legal proceedings of which the outcome is reasonably possible to have a material effect on its results of operations, financial condition or liquidity.
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 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. The Company is not aware of any environmental condition that it believes will have a material effect on its results of operations, financial condition or liquidity.

12

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
March 31, 2014

Lease Commitments
During the year ended December 31, 2013, the Company executed two lease amendments extending the non-cancelable lease terms by five and ten years, respectively. In accordance with the lease amendments, the Company is obligated to fund up to $1.1 million of capital improvements, of which the Company funded $333,000 as of March 31, 2014. In addition, during the three months ended March 31, 2014, the Company incurred an additional $409,000 related to the capital improvements that will be funded in the three months ending June 30, 2014.
NOTE 8 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
Certain affiliates of the Company’s advisor received fees and compensation in connection with the Company’s private placement of shares of its common stock. Certain affiliates of the Company’s advisor have received, and may continue to receive, fees and compensation in connection with the acquisition, financing, management and disposition of the assets of the Company. Other transactions may result in the receipt of commissions, fees and other compensation by Cole Advisors and its affiliates, including subordinated participation in net sale proceeds and subordinated performance fees.
If Cole Advisors provides substantial services, as determined by the Company, in connection with the origination or refinancing of any debt financing obtained by the Company 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 will pay Cole Advisors a financing coordination fee equal to 1% of the amount available under such financing; provided, however, that Cole Advisors shall not be entitled to a financing coordination fee in connection with the refinancing of any loan secured by any particular property that was previously subject to a refinancing in which Cole Advisors received such a fee. Financing coordination fees payable on loan proceeds from permanent financing will be paid to Cole Advisors as the Company acquires such permanent financing. However, no fees will be paid on loan proceeds from any lines of credit until such time as all net offering proceeds have been invested by the Company. No such fees were incurred by the Company during the three months ended March 31, 2014 or 2013.
The Company paid, and expects to continue to pay, Cole Realty, its property manager and an affiliate of the Company’s advisor, fees for the management and leasing of the Company’s properties. Property management fees are equal to 3% of gross revenues, and leasing fees are at prevailing market rates, not to exceed the greater of $4.50 per square foot or 7.5% of the total lease obligation. During the three months ended March 31, 2014 and 2013, the Company incurred $104,000 and $97,000, respectively, for property management fees. As of March 31, 2014 and December 31, 2013, $71,000 and $39,000, respectively, of such costs had been incurred but not paid by the Company, and are included in due to affiliates on the condensed consolidated unaudited balance sheets. Pursuant to a waiver of the leasing fee by Cole Realty, no leasing fees were incurred by the Company during the three months ended March 31, 2014 or 2013. The Company is not obligated to pay any amounts for such period. However, Cole Realty may elect to charge leasing fees in future periods at prevailing market rates. 
Cole Realty, or its affiliates, also receives acquisition and advisory fees of up to 3% of the contract purchase price of each property. No such fees were incurred by the Company during the three months ended March 31, 2014. During the three months ended March 31, 2013, the Company incurred $53,000 for acquisition fees.
The Company is obligated to pay Cole Advisors an annualized asset management fee of up to 0.25% of the aggregate asset value of the Company’s assets. Pursuant to a waiver of the fee by Cole Advisors, no asset management fees were incurred by the Company during the three months ended March 31, 2014 or 2013. The Company is not obligated to pay any amounts for such periods. However, Cole Advisors may elect to charge asset management fees in future periods up to the 0.25% fee.
If Cole Advisors, or its affiliates, provides a substantial amount of services, as determined by the Company, in connection with the sale of one or more properties, the Company will pay Cole Advisors an amount up to 3% of the contract price of each asset sold. In no event will the combined disposition fee paid to Cole Advisors, its affiliates and unaffiliated third parties exceed the reasonable, customary and competitive amount for such services. In addition, after investors have received a return of their net capital contributions and a 7.5% annual cumulative, non-compounded return, then Cole Advisors is entitled to receive 20% of the remaining net sale proceeds. No such fees were incurred by the Company during the three months ended March 31, 2014 or 2013 relating to the sale of properties. In addition, no fees are expected to be incurred by the Company relating to the CCPT Merger.

13

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
March 31, 2014

In the event the Company does not complete the CCPT Merger and the Company’s common stock is listed in the future on a national securities exchange, a subordinated incentive listing fee equal to 20% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate a 7.5% annual cumulative, non-compounded return to investors, will be paid to Cole Advisors.
The Company may reimburse Cole Advisors for expenses it incurs in connection with its provision of administrative services, including related personnel costs. The Company does not reimburse for personnel costs in connection with services for which Cole Advisors receives acquisition or disposition fees. Pursuant to a waiver by Cole Advisors, no such costs were incurred by the Company during the three months ended March 31, 2014 or 2013.
As of March 31, 2014, the Company had $300,000 outstanding on one of its Lines of Credit with an affiliate of Cole Advisors and available borrowings of $2.6 million. Both of the Lines of Credit mature on March 31, 2015 and bear fixed interest rates of 5.75%. No financing coordination fee was paid, or will be paid, to Cole Advisors or its affiliates in connection with the Lines of Credit. During the three months ended March 31, 2014, the Company incurred $4,000 of interest expense related to the Lines of Credit. During the three months ended March 31, 2013, no interest expense related to the Lines of Credit was incurred.
NOTE 9 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged or will engage Cole Advisors and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issuance, as well as other administrative responsibilities for the Company including accounting services and investor relations. As a result of these relationships, the Company is dependent upon Cole Advisors and its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.
NOTE 10 — SUBSEQUENT EVENTS
CCPT Merger
Subsequent to March 31, 2014, ARCP, Merger Sub and the Company disclosed that the Offer was extended and is scheduled to expire at 5:00 p.m., New York City time, on May 16, 2014 unless further extended or terminated. Merger Sub extended the Offer because the condition to the Offer that certain lender consents under mortgage loans secured by certain of the Company’s properties was not satisfied by the previously scheduled expiration date of the Offer. As of April 25, 2014, preliminary results indicated that approximately 63% of the Company’s outstanding shares had been tendered and not withdrawn in the Offer.
Lines of Credit
Subsequent to March 31, 2014, the Company borrowed $500,000 on one of the Lines of Credit. As of May 9, 2014, the Company had $800,000 outstanding under the Lines of Credit and $2.1 million available for borrowing.



14


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto, and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013. The terms “we,” “us,” “our” and the “Company” refer to Cole Credit Property Trust, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated unaudited financial statements and the notes thereto.
Forward-Looking Statements
Except for historical information, this section contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including discussion and analysis of our financial condition and our subsidiaries, our anticipated capital expenditures, amounts of anticipated cash distributions to our stockholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry. Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” or comparable words, variations and similar expressions are intended to identify forward-looking statements. All statements not based on historical fact are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Investors are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q. We make no representation or warranty (expressed or implied) about the accuracy of any such forward looking statements contained in this Quarterly Report on Form 10-Q. Additionally, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Quarterly Report on Form 10-Q include, among others, changes in general economic conditions, changes in real estate conditions, construction costs that may exceed estimates, construction delays, increases in interest rates, lease-up risks, rent relief, inability to obtain new tenants upon the expiration or termination of existing leases, inability to obtain financing or refinance existing debt and the potential need to fund tenant improvements or other capital expenditures out of operating cash flows.
Management’s discussion and analysis of financial condition and results of operations are based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed on March 29, 2004 to acquire and operate commercial real estate primarily consisting of net leased, freestanding, single tenant, income-generating retail and commercial properties located throughout the United States. We have no paid employees and are externally advised and managed by our advisor. We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes.
On February 7, 2014, ARCP acquired Cole, which, prior to its acquisition, indirectly owned and/or controlled our external advisor, Cole Advisors, our dealer manager, CCC, our property manager, Cole Realty, and our sponsor, Cole Capital. As a result of ARCP’s acquisition of Cole, ARCP indirectly owns and/or controls Cole Advisors, CCC, Cole Realty and Cole Capital.
On March 17, 2014, we entered into the Merger Agreement among us, ARCP and Merger Sub, pursuant to which, among other things, Merger Sub commenced the Offer to purchase all of our outstanding shares of common stock. Following the expiration of the Offer, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement and, if necessary, exercise of the Top-Up Option, we will merge with and into Merger Sub, with Merger Sub surviving as a direct wholly-owned subsidiary of ARCP. See Note 2 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for further explanation of the Offer and the CCPT Merger.

15


Our operating results and cash flows are primarily influenced by rental income from our commercial properties and interest expense on our property indebtedness. Rental and other property income accounted for 96% of our total revenue during each of the three months ended March 31, 2014 and 2013. As 100% of our rentable square feet is under lease, with a weighted average remaining lease term of 7.1 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors. Our advisor regularly monitors the creditworthiness of our tenants by reviewing the tenant’s financial results, credit rating agency reports, when available, on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment, and other information for changes and possible trends. If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property, or identifying a possible replacement tenant should the current tenant fail to perform on the lease. In addition, as of March 31, 2014, the debt leverage ratio of our portfolio, which is the ratio of debt to total gross real estate assets, net of gross intangible lease liabilities, was 51%, with 7% of the debt, or $6.0 million, subject to a variable interest rate.
If we acquire additional commercial real estate or refinance our debt upon maturity, we will be subject to changes in interest rates. We manage our interest rate risk by monitoring the interest rate environment in connection with our future property acquisitions, when applicable, or upcoming debt maturities to determine the appropriate financing or refinancing terms, which may include fixed rate loans, variable rate loans or interest rate hedges. See our contractual obligations table in the section captioned “Liquidity and Capital Resources — Long-term Liquidity and Capital Resources.”
Recent Market Conditions
Beginning in late 2007, domestic and international financial markets experienced significant disruptions that severely impacted the availability of credit and contributed to rising costs associated with obtaining credit. Financial conditions affecting commercial real estate have improved and continue to improve, as low treasury rates and increased lending from banks, insurance companies and commercial mortgage backed securities (“CMBS”) conduits have increased lending activity. Nevertheless, the debt market remains sensitive to the macro environment, such as Federal Reserve policy, market sentiment, or regulatory factors affecting the banking and CMBS industries. While we expect that financial conditions will remain favorable, if they were to deteriorate we may experience more stringent lending criteria, which may affect our ability to finance certain property acquisitions or refinance any debt at maturity. Additionally, for properties for which we are able to obtain financing, the interest rates and other terms on such loans may be unacceptable. We expect to manage the current mortgage lending environment by considering multiple lending sources, including securitized debt, fixed rate loans, borrowings on the Lines of Credit, short-term variable rate loans, assumed mortgage loans in connection with property acquisitions, interest rate lock or swap agreements, or any combination of the foregoing.
Commercial real estate fundamentals continue to strengthen, as a moderate pace of job creation has supported gains in office absorption, retail sales and warehouse distribution. Although construction activity has increased, it remains near historic lows; as a result, incremental demand growth has helped to reduce vacancy rates and support modest rental growth. Improving fundamentals have resulted in gains in property values; however, in many markets property values, occupancy and rental rates continue to be below those previously experienced before the economic downturn. As of March 31, 2014, 100% of our rentable square feet was under lease and we expect that occupancy will remain high as the real estate recovery continues. However, if recent improvements in the economy reverse course, we may experience vacancies or be required to reduce rental rates on occupied space. If we do experience vacancies, Cole Realty will actively seek to lease our vacant space; nevertheless, such space may be leased at lower rental rates and for shorter lease terms than our current leases provide.
Results of Operations
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Revenue Revenue increased $97,000, or 3%, to $3.4 million for the three months ended March 31, 2014, compared to $3.3 million for the three months ended March 31, 2013. The increase was primarily due to the acquisition of two rental income producing properties subsequent to March 31, 2013. Our revenue primarily consists of rental income from net leased commercial properties, which accounted for 96% of total revenue during each of the three months ended March 31, 2014 and 2013.
General and Administrative Expenses General and administrative expenses decreased $28,000, or 13%, to $180,000 for the three months ended March 31, 2014, compared to $208,000 for the three months ended March 31, 2013. The decrease was primarily due to a decrease in director and officer insurance premiums and computer software license fees for the three months ended March 31, 2014. Our primary general and administrative expense items are legal and accounting fees, state franchise and income taxes, board of director fees, insurance, transfer agent fees and license and other fees.

16


Property Operating Expenses Property operating expenses increased $10,000, or 6%, to $164,000 for the three months ended March 31, 2014, compared to $154,000 for the three months ended March 31, 2013. The increase was primarily due to an increase in property repairs and maintenance for the three months ended March 31, 2014. The primary property operating expense items are property taxes, property insurance and property repairs and maintenance.
Property Management Expenses Property management expenses increased $7,000, or 7%, to $104,000 for the three months ended March 31, 2014, compared to $97,000 for the three months ended March 31, 2013. Pursuant to the property management agreement with our property manager, we are required to pay our property manager a property management fee in an amount of 3% of gross revenues. The increase in our property management fees was primarily due to an increase in our rental and tenant reimbursement income related to the two properties acquired subsequent to March 31, 2013.
Merger and Acquisition Related Expenses Merger related expenses of $330,000 for the three months ended March 31, 2014 consisted of costs recorded for legal, consulting and other expenses related to the CCPT Merger during the period. There were no merger related expenses during the three months ended March 31, 2013. During the three months ended March 31, 2013, acquisition related expenses were $94,000 resulting from the acquisition of one property during the period. There were no acquisition related expenses during the three months ended March 31, 2014.
Depreciation and Amortization Expenses Depreciation and amortization expenses remained relatively constant at $1.1 million for each of the three months ended March 31, 2014 and 2013.
Interest Expense, Net Net interest expense remained relatively constant at $1.5 million for each of the three months ended March 31, 2014 and 2013.
Funds From Operations and Modified Funds From Operations
Funds From Operations (“FFO”) is a non-GAAP financial performance measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and widely recognized by investors and analysts as one measure of operating performance of a real estate company. The FFO calculation excludes items such as real estate depreciation and amortization, gains and losses on the sale of depreciable real estate and impairment of depreciable real estate. Depreciation and amortization as applied in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, it is management’s view, and we believe the view of many industry investors and analysts, that the presentation of operating results for real estate companies by using the cost accounting method alone is insufficient. In addition, FFO excludes gains and losses from the sale of depreciable real estate and impairment charges on depreciable real estate, which we believe provides management and investors with a helpful additional measure of the performance of our real estate portfolio, as it allows for comparisons, year to year, that reflect the impact on operations from trends in items such as occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs. We compute FFO in accordance with NAREIT’s definition.
In addition to FFO, we use Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental financial performance measure to evaluate the operating performance of our real estate portfolio. MFFO, as we define it, excludes from FFO acquisition and merger related costs, which are required to be expensed in accordance with GAAP. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses. Management believes that excluding acquisition and merger related costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analyses used by management, and provides investors a view of the performance of our portfolio over time, including after we cease to acquire properties on a frequent and regular basis. MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions and mergers, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.
For all of these reasons, we believe FFO and MFFO, in addition to net income and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of our real estate portfolio over time. However, not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. FFO and MFFO should not be considered alternatives to net income or to cash flows from operating activities, and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs.

17


MFFO may provide investors with a useful indication of our future performance and of the sustainability of our current distribution policy. However, because MFFO excludes acquisition and merger expenses, which are an important component in an analysis of the historical performance of a property, MFFO should not be construed as a historic performance measure. None of the SEC, NAREIT, or any other regulatory body has evaluated the acceptability of the exclusions contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP financial performance measure.
FFO and MFFO are influenced by the timing of acquisitions and the operating performance of our real estate investments. Our calculations of FFO and MFFO, and reconciliation to net income, which is the most directly comparable GAAP financial measure, are presented in the table below for the three months ended March 31, 2014 and 2013 (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
NET INCOME
$
36

 
$
120

Depreciation of real estate assets
763

 
769

Amortization of lease related costs
336

 
372

Funds From Operations (FFO)
1,135

 
1,261

Merger and acquisition related expenses
330

 
94

Modified Funds From Operations (MFFO)
$
1,465

 
$
1,355


Set forth below is additional information that may be helpful in assessing our operating results:

In order to recognize revenues on a straight-line basis over the terms of the respective leases, we recorded additional rental income of $3,000 for the three months ended March 31, 2014 and a reduction to rental income of $8,000 for the three months ended March 31, 2013.

Amortization of deferred financing costs totaled $138,000 and $139,000 during the three months ended March 31, 2014 and 2013, respectively.
Distributions
Our board of directors authorized a daily distribution, based on 365 days in the calendar year, of $0.001369999 per share (which equates to an annualized rate of 5% based on an assumed share price of $10.00 per share, or 7.6% based on the most recent estimated value of $6.55 per share) for stockholders of record as of the close of business on each day of the period, commencing on January 1, 2014 and ending on May 31, 2014 (subject to earlier completion of the Offer).
During each of the three months ended March 31, 2014 and 2013, we paid distributions of $1.2 million. Our distributions for the three months ended March 31, 2014 were funded with net cash provided by operations of $1.2 million and excess cash provided by operations from previous periods of $40,000. Our distributions for the three months ended March 31, 2013 were funded with net cash provided by operations of $1.0 million and excess cash provided by operations from previous periods of $264,000.
Liquidity and Capital Resources
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for operating expenses, distributions and monthly interest and principal payments on current and any future indebtedness. We expect to meet our short-term liquidity requirements through net cash provided by operations. During the year ended December 31, 2013, we executed two lease amendments extending the non-cancelable lease terms by five and ten years, respectively. In accordance with lease amendments, we are obligated to fund up to $1.1 million of capital improvements, of which $333,000 had been funded as of March 31, 2014. We expect to fund the remaining amount with borrowings from the Lines of Credit and a portion of the $2.2 million of restricted cash that is held by lenders in escrow accounts primarily for reimbursement of tenant and capital improvements, leasing commissions and repairs and maintenance for certain properties. The Lines of Credit had total available borrowings of $2.6 million as of March 31, 2014.

18


Long-term Liquidity and Capital Resources
We expect to meet our long-term liquidity requirements through proceeds from available borrowings under the Lines of Credit, secured or unsecured financing or refinancings from banks and other lenders, the selective and strategic sale of properties and net cash flows provided by operations. We expect that our primary uses of capital will be for the payment of operating expenses, including debt service payments and debt maturities on our outstanding indebtedness, for the payment of tenant improvements, leasing commissions and repairs and maintenance, for the possible reinvestment of proceeds from the strategic sale of properties in replacement properties and for the payment of distributions to our stockholders, including special distributions of the net proceeds from the sale of properties.
We expect that substantially all cash flows from operations will be used to pay distributions to our stockholders after monthly payments of principal and interest on our outstanding indebtedness and certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we may use other sources to fund distributions, as necessary, such as proceeds from available borrowings under the Lines of Credit. To the extent that cash flows from operations are lower than our current expectations due to lower returns on the properties, distributions paid to our stockholders may be lower.
As of March 31, 2014, we had cash and cash equivalents of $432,000, which we expect to be used primarily to pay operating expenses, interest and principal on our indebtedness and stockholder distributions. In addition, we had restricted cash of $2.2 million held by lenders in escrow accounts for tenant and capital improvements, leasing commissions, repairs and maintenance and other lender reserves for certain properties.
As of March 31, 2014, we had $85.7 million of debt outstanding, consisting of $79.4 million of Fixed Rate Notes, a $6.0 million Variable Rate Note and $300,000 of borrowings on the Lines of Credit. The Fixed Rate Notes have interest rates ranging from 5.27% to 6.96%, with a weighted average interest rate of 6.53%, and mature on various dates from March 2015 through September 2017. The Variable Rate Note had an interest rate of 2.54% at March 31, 2014 and matures in December 2015. As of March 31, 2014, our debt leverage ratio, which is the ratio of debt to total gross real estate assets, net of gross intangible lease liabilities, was 51% and our outstanding debt had a weighted average remaining term to maturity of 1.3 years.
Our contractual obligations as of March 31, 2014 were as follows (in thousands): 
 
Payments due by period(1)
 
Total
 
Less Than 1
Year
 
1-3 Years
 
3-5 Years
 
More Than 5
Years
Principal payments - fixed rate notes (2)
$
79,709

 
$
2,799

 
$
75,232

 
$
1,678

 
$

Interest payments - fixed rate notes (2)
6,638

 
5,301

 
1,295

 
42

 

Principal payments - variable rate note
6,000

 

 
6,000

 

 

Interest payments - variable rate note (3)
280

 
156

 
124

 

 

Total
$
92,627

 
$
8,256

 
$
82,651

 
$
1,720

 
$

 
 
 
 
 
 
 
 
 
 
(1) The table does not include amounts due to our advisor or its affiliates pursuant to our advisory and property management agreements because such amounts are not fixed and determinable. In addition, the table does not include amounts due to tenants for tenant and capital improvements pursuant to the lease amendments discussed above because such amounts are not fixed and determinable.
(2)
Includes the amount outstanding on the Lines of Credit with an affiliate of Cole Advisors. Amortizing principal payments are included in the year the payments will be made.
(3)
The variable rate debt payment obligations in future periods were calculated using a forward curve analysis with an effective rate of 2.54%, which was the rate in effect as of March 31, 2014.
Cash Flow Analysis
Operating Activities. Net cash provided by operating activities increased $226,000, or 23%, to $1.2 million for the three months ended March 31, 2014, compared to $1.0 million for the three months ended March 31, 2013. The increase was primarily due to an increase in accounts payable and accrued expenses of $296,000, partially offset by a decrease in net income before non cash adjustments for depreciation and amortization of $84,000. See “— Results of Operations” above for a more complete discussion of the factors impacting our operating performance.
Investing Activities. During the three months ended March 31, 2014, net cash provided by investing activities was $17,000, compared to $1.7 million of net cash used in investing activities during the three months ended March 31, 2013, resulting in a change of $1.8 million. The change was primarily due to the acquisition of one real estate property for $1.8 million during the three months ended March 31, 2013, whereas no properties were acquired during the three months ended March 31, 2014.

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Financing Activities. Net cash used in financing activities remained relatively constant at $1.4 million during each of the three months ended March 31, 2014 and 2013. Our net cash used in financing activities primarily relates to distributions paid.
Election as a REIT
We are taxed as a REIT for federal income tax purposes under the Internal Revenue Code of 1986, as amended. To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains).
If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated unaudited financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been recorded in general and administrative expenses in our accompanying condensed consolidated unaudited financial statements.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We consider our critical accounting policies to be the following:
Investment in and Valuation of Real Estate Assets;
Allocation of Purchase Price of Real Estate Assets;
Revenue Recognition; and
Income Taxes.
A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year ended December 31, 2013, and our critical accounting policies have not changed during the three months ended March 31, 2014. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2013, and related notes thereto.
Commitments and Contingencies
We may be subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 7 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanations.
Related-Party Transactions and Agreements
We have entered into agreements with Cole Advisors and its affiliates, whereby we have incurred debt, or have paid, and may continue to pay, certain fees to, or reimburse certain expenses of, Cole Advisors or its affiliates for acquisition and advisory fees and expenses, financing coordination fees, asset and property management fees, disposition fees, interest expense on the Lines of Credit and reimbursement of certain operating costs. See Note 8 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for a further explanation of the various related-party transactions, agreements and fees.

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Subsequent Events
Certain events occurred subsequent to March 31, 2014 through the filing date of this Quarterly Report on Form 10-Q. Refer to Note 10 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanation.
Recent Accounting Pronouncements
Refer to Note 3 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for further explanation. There have been no accounting pronouncements issued, but not yet applied by us, that will significantly impact our financial statements.
Off-Balance Sheet Arrangements
As of March 31, 2014 and December 31, 2013, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Not required for a smaller reporting company.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of March 31, 2014, were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act, and is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d -15(f) of the Exchange Act) during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
In the ordinary course of business we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which our properties are the subject.
Item 1A.
Risk Factors
Not required for a smaller reporting company.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any unregistered securities during the three months ended March 31, 2014. No shares were redeemed during the three months ended March 31, 2014.
Item 3.
Defaults Upon Senior Securities
No events occurred during the three months ended March 31, 2014 that would require a response to this item.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
No events occurred during the three months ended March 31, 2014 that would require a response to this item.
Item 6.
Exhibits
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.


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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Cole Credit Property Trust, Inc.
 
(Registrant)
 
 
By:
/s/ D. Kirk McAllaster, Jr.
 
 
Name:
D. Kirk McAllaster, Jr.
 
 
Title:
Executive Vice President, Chief Financial Officer
 
 
 
and Treasurer
 
 
 
Principal Financial Officer
 
Date: May 14, 2014

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EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014 (and are numbered in accordance with Item 601 of Regulation S-K).
 
Exhibit No.
 
Description
 
 
 
2.1
 
Agreement and Plan of Merger, dated as of March 17, 2014, among American Realty Capital Properties, Inc., Desert Acquisition, Inc. and Cole Credit Property Trust, Inc. (Incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K (File No. 000-51962), filed on March 21, 2014).
3.1
 
Articles of Incorporation (Incorporated by reference to Exhibit 2.1 of the Company’s Form 10-SB (File No. 000-51962), filed on May 1, 2006).
3.2
 
Amended and Restated Bylaws (Incorporated by reference to Exhibit 2.2 to the Company’s Form 10-SB (File No. 000-51962), filed on May 1, 2006).
3.3
 
Amendment to Amended and Restated Bylaws of Cole Credit Property Trust, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K (File No. 000-51962), filed on November 13, 2012).
3.4
 
Amendment No. 2 to Amended and Restated Bylaws of Cole Credit Property Trust, Inc. (as amended by Amendment No. 1, dated as of November 9, 2012) effective March 17, 2014 (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K (File No. 000-51962), filed on March 21, 2014).
10.1
 
Form of Indemnification Agreement between Cole Credit Property Trust, Inc. and each director (Incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K (File No. 000-51962), filed on March 13, 2014).
31.1*
 
Certifications of the Principal Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
 
Certifications of the Principal Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
 
Certifications of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
 
XBRL Instance Document.
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
*
Filed herewith.
**
In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.



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