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EX-31.1 - EXHIBIT 31.1 - VEREIT, Inc.vereit3312017-ex311.htm
EX-32.4 - EXHIBIT 32.4 - VEREIT, Inc.vereit3312017-ex324.htm
EX-31.3 - EXHIBIT 31.3 - VEREIT, Inc.vereit3312017-ex313.htm
EX-31.4 - EXHIBIT 31.4 - VEREIT, Inc.vereit3312017-ex314.htm
EX-10.2 - EXHIBIT 10.2 - VEREIT, Inc.vereit3312017-ex102.htm
EX-32.3 - EXHIBIT 32.3 - VEREIT, Inc.vereit3312017-ex323.htm
EX-31.2 - EXHIBIT 31.2 - VEREIT, Inc.vereit3312017-ex312.htm
EX-32.1 - EXHIBIT 32.1 - VEREIT, Inc.vereit3312017-ex321.htm
EX-32.2 - EXHIBIT 32.2 - VEREIT, Inc.vereit3312017-ex322.htm
EX-10.1 - EXHIBIT 10.1 - VEREIT, Inc.vereit3312017-ex101.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________

Commission file numbers: 001-35263 and 333-197780

VEREIT, Inc.
VEREIT Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
Maryland (VEREIT, Inc.)
 
45-2482685
Delaware (VEREIT Operating Partnership, L.P.)
 
45-1255683
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2325 E. Camelback Road, Suite 1100, Phoenix, AZ
 
85016
(Address of principal executive offices)
 
(Zip Code)
(800) 606-3610
(Registrant’s telephone number, including area code)

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. VEREIT, Inc. Yes x No o VEREIT Operating Partnership, L.P. Yes x No o
Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). VEREIT, Inc. Yes x No o VEREIT Operating Partnership, L.P. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
VEREIT, Inc.
Large accelerated filer
x
 
Accelerated filer
o
 
Non-accelerated filer
(Do not check if a smaller reporting company)
o
 
 
 
 
 
 
 
 
 
Smaller reporting company
o
 
Emerging growth company
o
 
 
VEREIT Operating Partnership, L.P.
Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
(Do not check if a smaller reporting company)
x
 
 
 
 
 
 
 
 
 
Smaller reporting company
o
 
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
VEREIT, Inc. Yes o No x VEREIT Operating Partnership, L.P. Yes o No x
There were 974,311,931 shares of common stock of VEREIT, Inc. outstanding as of May 2, 2017.




EXPLANATORY NOTE

This report combines the Quarterly Reports on Form 10-Q for the three months ended March 31, 2017 of VEREIT, Inc., a Maryland corporation, and VEREIT Operating Partnership, L.P., a Delaware limited partnership, of which VEREIT, Inc. is the sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “VEREIT,” the “Company” or the “General Partner” mean VEREIT, Inc. together with its consolidated subsidiaries, including VEREIT Operating Partnership, L.P., and all references to the “Operating Partnership” or “OP” mean VEREIT Operating Partnership, L.P. together with its consolidated subsidiaries.
As the sole general partner of VEREIT Operating Partnership, L.P., VEREIT, Inc. has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control.
We believe combining the Quarterly Reports on Form 10-Q of VEREIT, Inc. and VEREIT Operating Partnership, L.P. into this single report results in the following benefits:
enhancing investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminating duplicative disclosure and providing a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.
There are a few differences between the Company and the Operating Partnership, which are reflected in the disclosure in this report. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how we operate as an interrelated consolidated company. VEREIT, Inc. is a real estate investment trust whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, VEREIT, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity or debt from time to time and guaranteeing certain unsecured debt of the Operating Partnership and certain of its subsidiaries. The Operating Partnership holds substantially all of the assets of the Company and holds the ownership interests in the Company’s joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from public equity issuances by VEREIT, Inc., which are generally contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units. To help investors understand the significant differences between VEREIT, Inc. and the Operating Partnership, there are separate sections in this report that separately discuss VEREIT, Inc. and the Operating Partnership, including the consolidated financial statements and certain notes to the consolidated financial statements as well as separate Exhibit 31 and Exhibit 32 certifications. As general partner with control of the Operating Partnership, VEREIT, Inc. consolidates the Operating Partnership for financial reporting purposes. Therefore, the assets and liabilities of VEREIT, Inc. and VEREIT Operating Partnership, L.P. are the same on their respective consolidated financial statements. The separate discussions of VEREIT, Inc. and VEREIT Operating Partnership, L.P. in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.



VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
For the quarterly period ended March 31, 2017

 
Page

1

VEREIT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data) (Unaudited)

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
 
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
2,868,447

 
$
2,895,625

Buildings, fixtures and improvements
 
10,630,598

 
10,644,296

Intangible lease assets
 
2,017,739

 
2,044,521

Total real estate investments, at cost
 
15,516,784

 
15,584,442

Less: accumulated depreciation and amortization
 
2,494,811

 
2,331,643

Total real estate investments, net
 
13,021,973

 
13,252,799

Investment in unconsolidated entities
 
45,145

 
46,077

Investment in direct financing leases, net
 
34,909

 
39,455

Investment securities, at fair value
 
42,630

 
47,215

Mortgage notes receivable, net
 
22,545

 
22,764

Cash and cash equivalents
 
285,586

 
256,452

Restricted cash
 
46,712

 
45,018

Intangible assets, net
 
20,464

 
24,609

Rent and tenant receivables and other assets, net
 
346,898

 
330,705

Goodwill
 
1,462,585

 
1,462,203

Due from affiliates
 
15,007

 
21,349

Real estate assets held for sale, net
 
12,081

 
38,928

Total assets
 
$
15,356,535


$
15,587,574

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Mortgage notes payable and other debt, net
 
$
2,586,917

 
$
2,671,106

Corporate bonds, net
 
2,227,307

 
2,226,224

Convertible debt, net
 
976,031

 
973,340

Credit facility, net
 
497,148

 
496,578

Below-market lease liabilities, net
 
217,721

 
224,023

Accounts payable and accrued expenses
 
135,817

 
146,137

Deferred rent, derivative and other liabilities
 
68,196

 
68,039

Distributions payable
 
165,765

 
162,578

Due to affiliates
 
7

 
16

Total liabilities
 
6,874,909

 
6,968,041

Commitments and contingencies (Note 14)
 

 


Preferred stock, $0.01 par value, 100,000,000 shares authorized and 42,834,138 issued and outstanding as of each of March 31, 2017 and December 31, 2016
 
428

 
428

Common stock, $0.01 par value, 1,500,000,000 shares authorized and 974,238,458 and 974,146,650 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
 
9,742

 
9,741

Additional paid-in-capital
 
12,642,099

 
12,640,171

Accumulated other comprehensive loss
 
(1,795
)
 
(2,556
)
Accumulated deficit
 
(4,338,029
)
 
(4,200,423
)
Total stockholders’ equity
 
8,312,445

 
8,447,361

Non-controlling interests
 
169,181

 
172,172

Total equity
 
8,481,626

 
8,619,533

Total liabilities and equity
 
$
15,356,535


$
15,587,574


The accompanying notes are an integral part of these statements.

2

VEREIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2017
 
2016
Revenues:
 
 
 
 
Rental income
 
$
293,739

 
$
313,971

Direct financing lease income
 
433

 
569

Operating expense reimbursements
 
26,726

 
23,247

Cole Capital revenue
 
27,131

 
31,233

Total revenues
 
348,029


369,020

Operating expenses:
 
 
 
 
Cole Capital reallowed fees and commissions
 
2,660

 
8,068

Acquisition-related 
 
617

 
242

Litigation and other non-routine costs, net of insurance recoveries
 
12,875

 
(5,175
)
Property operating
 
34,016

 
34,813

General and administrative
 
29,148

 
29,400

Depreciation and amortization
 
183,152

 
204,308

Impairments
 
6,725

 
160,517

Total operating expenses
 
269,193


432,173

Operating income (loss)
 
78,836


(63,153
)
Other (expense) income:
 
 
 
 
Interest expense
 
(73,743
)
 
(80,426
)
Loss on extinguishment and forgiveness of debt, net
 
(70
)
 

Other income, net
 
798

 
1,062

Equity in (loss) income and gain on disposition of unconsolidated entities
 
(82
)
 
10,404

Gain (loss) on derivative instruments, net
 
824

 
(1,086
)
Total other expenses, net
 
(72,273
)

(70,046
)
Income (loss) before taxes and real estate dispositions
 
6,563

 
(133,199
)
Gain on disposition of real estate and held for sale assets, net
 
12,481

 
17,175

Income (loss) before taxes

19,044


(116,024
)
Provision for income taxes
 
(4,254
)
 
(56
)
Net income (loss)
 
14,790


(116,080
)
Net (income) loss attributable to non-controlling interests (1)
 
(352
)
 
2,994

Net income (loss) attributable to the General Partner
 
$
14,438


$
(113,086
)
 
 
 
 
 
Basic and diluted net loss per share attributable to common stockholders
 
$
(0.00
)
 
$
(0.15
)
Distributions declared per common share
 
$
0.14

 
$
0.14

_______________________________________________
(1)
Represents (income) loss attributable to limited partners and consolidated joint venture partners.

The accompanying notes are an integral part of these statements.

3

VEREIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2017
 
2016
Net income (loss)
 
$
14,790

 
$
(116,080
)
Other comprehensive income (loss):
 
 
 
 
Unrealized gain (loss) on interest rate derivatives
 
504

 
(9,702
)
Reclassification of previous unrealized loss on interest rate derivatives into net income (loss)
 
470

 
2,099

Unrealized loss on investment securities, net
 
(194
)
 
(1,961
)
Total other comprehensive income (loss)
 
780


(9,564
)
 
 
 
 
 
Total comprehensive income (loss)
 
15,570

 
(125,644
)
Comprehensive (income) loss attributable to non-controlling interests (1)
 
(371
)
 
3,238

Total comprehensive income (loss) attributable to the General Partner

$
15,199


$
(122,406
)
_______________________________________________
(1)
Represents (income) loss attributable to limited partners and consolidated joint venture partners.

The accompanying notes are an integral part of these statements.



4

VEREIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except for share data) (Unaudited)

 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of Shares
 
Par
Value
 
Number
of Shares
 
Par
Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total Stock-holders’ Equity
 
Non-Controlling Interests
 
Total Equity
Balance, January 1, 2017
 
42,834,138

 
$
428

 
974,146,650

 
$
9,741

 
$
12,640,171

 
$
(2,556
)
 
$
(4,200,423
)
 
$
8,447,361

 
$
172,172

 
$
8,619,533

Repurchases of common stock to settle tax obligation
 

 

 
(140,832
)
 
(1
)
 
(1,183
)
 

 

 
(1,184
)
 

 
(1,184
)
Equity-based compensation, net
 

 

 
232,640

 
2

 
3,111

 

 

 
3,113

 

 
3,113

Distributions declared on common stock
 

 

 

 

 

 

 
(133,929
)
 
(133,929
)
 

 
(133,929
)
Distributions to non-controlling interest holders
 

 

 

 

 

 

 

 

 
(3,326
)
 
(3,326
)
Distributions to participating securities
 

 

 

 

 

 

 
(178
)
 
(178
)
 

 
(178
)
Distributions to preferred shareholders and unitholders
 

 

 

 

 

 

 
(17,937
)
 
(17,937
)
 
(36
)
 
(17,973
)
Net income
 

 

 

 

 

 

 
14,438

 
14,438

 
352

 
14,790

Other comprehensive income
 

 

 

 

 

 
761

 

 
761

 
19

 
780

Balance, March 31, 2017
 
42,834,138

 
$
428

 
974,238,458

 
$
9,742

 
$
12,642,099

 
$
(1,795
)
 
$
(4,338,029
)
 
$
8,312,445

 
$
169,181

 
$
8,481,626

 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of Shares
 
Par
Value
 
Number
of Shares
 
Par
Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total Stock-holders’ Equity
 
Non-Controlling Interests
 
Total Equity
Balance, January 1, 2016

42,834,138

 
$
428

 
904,884,394

 
$
9,049

 
$
11,931,768

 
$
(2,025
)
 
$
(3,415,233
)

$
8,523,987


$
189,972


$
8,713,959

Repurchases of common stock to settle tax obligation
 

 

 
(127,741
)
 
(1
)
 
(1,023
)
 

 

 
(1,024
)
 

 
(1,024
)
Equity-based compensation, net
 

 

 
712

 

 
1,730

 

 

 
1,730

 

 
1,730

Contributions from non-controlling interest holders
 

 

 

 

 

 

 

 

 
675

 
675

Distributions declared on common stock
 

 

 

 

 

 

 
(124,285
)
 
(124,285
)
 

 
(124,285
)
Distributions to non-controlling interest holders
 

 

 

 

 

 

 

 

 
(3,299
)
 
(3,299
)
Distributions to participating securities
 

 

 

 

 

 

 
(125
)
 
(125
)
 

 
(125
)
Distributions to preferred shareholders
 

 

 

 

 

 

 
(17,937
)
 
(17,937
)
 
(36
)
 
(17,973
)
Cumulative effect adjustment for equity-based compensation forfeitures
 

 

 

 

 
384

 

 
(384
)
 

 

 

Net loss
 

 

 

 

 

 

 
(113,086
)
 
(113,086
)
 
(2,994
)
 
(116,080
)
Other comprehensive loss
 

 

 

 

 

 
(9,320
)
 

 
(9,320
)
 
(244
)
 
(9,564
)
Balance, March 31, 2016
 
42,834,138


$
428


904,757,365


$
9,048


$
11,932,859


$
(11,345
)

$
(3,671,050
)

$
8,259,940


$
184,074


$
8,444,014


The accompanying notes are an integral part of these statements.

5

VEREIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net income (loss)
 
$
14,790

 
$
(116,080
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
189,880

 
208,362

Gain on real estate assets and joint venture, net
 
(12,481
)
 
(27,373
)
Impairments
 
6,725

 
160,517

Equity-based compensation
 
3,111

 
1,730

Equity in loss (income) of unconsolidated entities
 
82

 
(206
)
Distributions from unconsolidated entities
 
851

 
1,491

(Gain) loss on derivative instruments, net
 
(824
)
 
1,086

Loss on extinguishment and forgiveness of debt, net
 
70

 

Changes in assets and liabilities:
 
 
 
 
Investment in direct financing leases
 
621

 
701

Rent and tenant receivables and other assets, net
 
(20,939
)
 
(13,024
)
Due from affiliates
 
3,792

 
(984
)
Accounts payable and accrued expenses
 
(3,269
)
 
(32,556
)
Deferred rent, derivative and other liabilities
 
1,935

 
(4,822
)
Due to affiliates
 
(9
)
 
(230
)
Net cash provided by operating activities
 
184,335

 
178,612

Cash flows from investing activities:
 
 
 
 
Investments in real estate assets
 
(101,914
)
 
(19,952
)
Capital expenditures and leasing costs
 
(6,960
)
 
(5,388
)
Real estate developments
 
(5,615
)
 
(554
)
Principal repayments received from borrowers
 
3,672

 
3,863

Proceeds from disposition of real estate and joint venture
 
195,730

 
176,137

Investment in leasehold improvements and other assets
 
(99
)
 
(574
)
Deposits for real estate assets
 
(13,532
)
 
(3,818
)
Uses and refunds of deposits for real estate assets
 
7,717

 
2,019

Line of credit repayments from affiliates
 
2,550

 
50,000

Change in restricted cash
 
(1,694
)
 
(365
)
Net cash provided by investing activities
 
79,855

 
201,368

Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
2,403

 
206

Payments on mortgage notes payable and other debt, including extinguishment costs
 
(84,261
)
 
(21,948
)
Proceeds from credit facility
 

 
203,000

Payments on credit facility
 

 
(383,000
)
Payments of deferred financing costs
 
(3
)
 
(240
)
Repurchases of common stock to settle tax obligations
 
(976
)
 
(801
)
Contributions from non-controlling interest holders
 

 
675

Distributions paid
 
(152,219
)
 
(142,525
)
Net cash used in financing activities
 
(235,056
)
 
(344,633
)
Net change in cash and cash equivalents
 
29,134

 
35,347

Cash and cash equivalents, beginning of period
 
256,452

 
69,103

Cash and cash equivalents, end of period
 
$
285,586

 
$
104,450


The accompanying notes are an integral part of these statements.

6

VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for unit data) (Unaudited)

 
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
2,868,447

 
$
2,895,625

Buildings, fixtures and improvements
 
10,630,598

 
10,644,296

Intangible lease assets
 
2,017,739

 
2,044,521

Total real estate investments, at cost
 
15,516,784


15,584,442

Less: accumulated depreciation and amortization
 
2,494,811

 
2,331,643

Total real estate investments, net
 
13,021,973


13,252,799

Investment in unconsolidated entities
 
45,145

 
46,077

Investment in direct financing leases, net
 
34,909

 
39,455

Investment securities, at fair value
 
42,630

 
47,215

Mortgage notes receivable, net
 
22,545

 
22,764

Cash and cash equivalents
 
285,586

 
256,452

Restricted cash
 
46,712

 
45,018

Intangible assets, net
 
20,464

 
24,609

Rent and tenant receivables and other assets, net
 
346,898

 
330,705

Goodwill
 
1,462,585

 
1,462,203

Due from affiliates
 
15,007

 
21,349

Real estate assets held for sale, net
 
12,081

 
38,928

Total assets
 
$
15,356,535


$
15,587,574

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 

Mortgage notes payable and other debt, net
 
$
2,586,917

 
$
2,671,106

Corporate bonds, net
 
2,227,307

 
2,226,224

Convertible debt, net
 
976,031

 
973,340

Credit facility, net
 
497,148

 
496,578

Below-market lease liabilities, net
 
217,721

 
224,023

Accounts payable and accrued expenses
 
135,817

 
146,137

Deferred rent, derivative and other liabilities
 
68,196

 
68,039

Distributions payable
 
165,765

 
162,578

Due to affiliates
 
7

 
16

Total liabilities
 
6,874,909


6,968,041

Commitments and contingencies (Note 14)
 


 


General Partner's preferred equity, 42,834,138 General Partner Preferred Units issued and outstanding as of each of March 31, 2017 and December 31, 2016
 
835,884

 
853,821

General Partner's common equity, 974,238,458 and 974,146,650 General Partner OP Units issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
 
7,476,561

 
7,593,540

Limited Partner's preferred equity, 86,874 Limited Partner Preferred Units issued and outstanding as of each of March 31, 2017 and December 31, 2016
 
3,135

 
3,171

Limited Partner's common equity, 23,748,347 Limited Partner OP Units issued and outstanding as of each of March 31, 2017 and December 31, 2016, respectively
 
163,710

 
166,598

Total partners’ equity
 
8,479,290


8,617,130

Non-controlling interests
 
2,336

 
2,403

Total equity
 
8,481,626


8,619,533

Total liabilities and equity
 
$
15,356,535


$
15,587,574


The accompanying notes are an integral part of these statements.


7

VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per unit data) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2017
 
2016
Revenues:
 
 
 
 
Rental income
 
$
293,739

 
$
313,971

Direct financing lease income
 
433

 
569

Operating expense reimbursements
 
26,726

 
23,247

Cole Capital revenue
 
27,131

 
31,233

Total revenues

348,029


369,020

Operating expenses:
 
 
 
 
Cole Capital reallowed fees and commissions
 
2,660

 
8,068

Acquisition-related
 
617

 
242

Litigation and other non-routine costs, net of insurance recoveries
 
12,875

 
(5,175
)
Property operating
 
34,016

 
34,813

General and administrative
 
29,148

 
29,400

Depreciation and amortization
 
183,152

 
204,308

Impairments
 
6,725

 
160,517

Total operating expenses

269,193


432,173

Operating income (loss)

78,836


(63,153
)
Other (expense) income:
 
 
 
 
Interest expense
 
(73,743
)
 
(80,426
)
Loss on extinguishment and forgiveness of debt, net
 
(70
)
 

Other income, net
 
798

 
1,062

Equity in (loss) income and gain on disposition of unconsolidated entities
 
(82
)
 
10,404

Gain (loss) on derivative instruments, net
 
824

 
(1,086
)
Total other expenses, net

(72,273
)

(70,046
)
Income (loss) before taxes and real estate dispositions

6,563


(133,199
)
Gain on disposition of real estate and held for sale assets, net
 
12,481

 
17,175

Income (loss) before taxes

19,044

 
(116,024
)
Provision for income taxes
 
(4,254
)
 
(56
)
Net income (loss)

14,790


(116,080
)
Net loss attributable to non-controlling interests (1)
 
7

 
39

Net income (loss) attributable to the OP

$
14,797


$
(116,041
)
 
 
 
 
 
Basic and diluted net loss per unit attributable to common unitholders
 
$
(0.00
)
 
$
(0.15
)
Distributions declared per common unit
 
$
0.14

 
$
0.14

_______________________________________________
(1)
Represents loss attributable to consolidated joint venture partners.

The accompanying notes are an integral part of these statements.

8

VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2017
 
2016
Net income (loss)
 
$
14,790

 
$
(116,080
)
Other comprehensive income (loss):
 
 
 
 
Unrealized gain (loss) on interest rate derivatives
 
504

 
(9,702
)
Reclassification of previous unrealized loss on interest rate derivatives into net income (loss)
 
470

 
2,099

Unrealized loss on investment securities, net
 
(194
)
 
(1,961
)
Total other comprehensive income (loss)

780


(9,564
)
 
 
 
 
 
Total comprehensive income (loss)

15,570


(125,644
)
Comprehensive loss attributable to non-controlling interests (1)
 
7

 
39

Total comprehensive income (loss) attributable to the OP

$
15,577


$
(125,605
)
_______________________________________________
(1)
Represents loss attributable to consolidated joint venture partners.

The accompanying notes are an integral part of these statements.


9

VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except for unit data) (Unaudited)

 
 
Preferred Units
 
Common Units
 
 
 
 
 
 
 
 
General Partner
 
Limited Partner
 
General Partner
 
Limited Partner
 
 
 
 
 
 
 
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Total Partners' Capital
 
Non-Controlling Interests
 
Total Capital
Balance, January 1, 2017
 
42,834,138

 
$
853,821

 
86,874

 
$
3,171

 
974,146,650

 
$
7,593,540

 
23,748,347

 
$
166,598

 
$
8,617,130

 
$
2,403

 
$
8,619,533

 Repurchases of common OP Units to settle tax obligation
 

 

 

 

 
(140,832
)
 
(1,184
)
 

 

 
(1,184
)
 

 
(1,184
)
 Equity-based compensation, net
 

 

 

 

 
232,640

 
3,113

 

 

 
3,113

 

 
3,113

 Distributions to Common OP Units and non-controlling interest holders
 

 

 

 

 

 
(134,107
)
 

 
(3,266
)
 
(137,373
)
 
(60
)
 
(137,433
)
 Distributions to Preferred OP Units
 

 
(17,937
)
 

 
(36
)
 

 

 

 

 
(17,973
)
 

 
(17,973
)
 Net income
 

 

 

 

 

 
14,438

 

 
359

 
14,797

 
(7
)
 
14,790

 Other comprehensive income
 

 

 

 

 

 
761

 

 
19

 
780

 

 
780

Balance, March 31, 2017
 
42,834,138


$
835,884


86,874


$
3,135


974,238,458


$
7,476,561


23,748,347


$
163,710


$
8,479,290


$
2,336


$
8,481,626


 
 
Preferred Units
 
Common Units
 
 
 
 
 
 
 
 
General Partner
 
Limited Partner
 
General Partner
 
Limited Partner
 
 
 
 
 
 
 
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Total Partners' Capital
 
Non-Controlling Interests
 
Total Capital
Balance, January 1, 2016

42,834,138

 
$
925,569

 
86,874

 
$
3,315

 
904,884,394

 
$
7,598,418

 
23,763,797

 
$
184,800

 
$
8,712,102

 
$
1,857

 
$
8,713,959

 Repurchases of common OP Units to settle tax obligation
 

 

 

 

 
(127,741
)
 
(1,024
)
 

 

 
(1,024
)
 

 
(1,024
)
 Equity-based compensation, net
 

 

 

 

 
712

 
1,730

 

 

 
1,730

 

 
1,730

 Contributions from non-controlling interest holders
 

 

 

 

 

 

 

 

 

 
675

 
675

 Distributions to Common OP Units and non-controlling interest holders
 

 

 

 

 

 
(124,410
)
 

 
(3,269
)
 
(127,679
)
 
(30
)
 
(127,709
)
 Distributions to Preferred OP Units
 

 
(17,937
)
 

 
(36
)
 

 

 

 

 
(17,973
)
 

 
(17,973
)
 Net loss
 

 

 

 

 

 
(113,086
)
 

 
(2,955
)
 
(116,041
)
 
(39
)
 
(116,080
)
 Other comprehensive loss
 

 

 

 

 

 
(9,320
)
 

 
(244
)
 
(9,564
)
 

 
(9,564
)
Balance, March 31, 2016
 
42,834,138


$
907,632


86,874


$
3,279


904,757,365


$
7,352,308


23,763,797


$
178,332


$
8,441,551


$
2,463


$
8,444,014



The accompanying notes are an integral part of these statements.


10

VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
14,790

 
$
(116,080
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
189,880

 
208,362

Gain on real estate assets and joint venture, net
 
(12,481
)
 
(27,373
)
Impairments
 
6,725

 
160,517

Equity-based compensation
 
3,111

 
1,730

Equity in loss (income) of unconsolidated entities
 
82

 
(206
)
Distributions from unconsolidated entities
 
851

 
1,491

(Gain) loss on derivative instruments, net
 
(824
)
 
1,086

Loss on extinguishment and forgiveness of debt, net
 
70

 

Changes in assets and liabilities:
 
 
 
 
Investment in direct financing leases
 
621

 
701

Rent and tenant receivables and other assets, net
 
(20,939
)
 
(13,024
)
Due from affiliates
 
3,792

 
(984
)
Accounts payable and accrued expenses
 
(3,269
)
 
(32,556
)
Deferred rent, derivative and other liabilities
 
1,935

 
(4,822
)
Due to affiliates
 
(9
)
 
(230
)
Net cash provided by operating activities
 
184,335


178,612

Cash flows from investing activities:
 
 
 
 
Investments in real estate assets
 
(101,914
)
 
(19,952
)
Capital expenditures and leasing costs
 
(6,960
)
 
(5,388
)
Real estate developments
 
(5,615
)
 
(554
)
Principal repayments received from borrowers
 
3,672

 
3,863

Proceeds from disposition of real estate and joint venture
 
195,730

 
176,137

Investment in leasehold improvements and other assets
 
(99
)
 
(574
)
Deposits for real estate assets
 
(13,532
)
 
(3,818
)
Uses and refunds of deposits for real estate assets
 
7,717

 
2,019

Line of credit repayments from affiliates
 
2,550

 
50,000

Change in restricted cash
 
(1,694
)
 
(365
)
Net cash provided by investing activities
 
79,855

 
201,368

Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
2,403

 
206

Payments on mortgage notes payable and other debt, including extinguishment costs
 
(84,261
)
 
(21,948
)
Proceeds from credit facility
 

 
203,000

Payments on credit facility
 

 
(383,000
)
Payments of deferred financing costs
 
(3
)
 
(240
)
Repurchases of common units to settle tax obligations
 
(976
)
 
(801
)
Contributions from non-controlling interest holders
 

 
675

Distributions paid
 
(152,219
)
 
(142,525
)
Net cash used in financing activities
 
(235,056
)

(344,633
)
Net change in cash and cash equivalents
 
29,134

 
35,347

Cash and cash equivalents, beginning of period
 
256,452

 
69,103

Cash and cash equivalents, end of period
 
$
285,586


$
104,450


The accompanying notes are an integral part of these statements.

11

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017 (Unaudited)


Note 1 – Organization
VEREIT® is a Maryland corporation, incorporated on December 2, 2010, that qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning in the taxable year ended December 31, 2011. The OP is a Delaware limited partnership of which the General Partner is the sole general partner. VEREIT’s common stock, par value $0.01 per share (“Common Stock”), and its 6.70% Series F Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series F Preferred Stock”) trade on the New York Stock Exchange (“NYSE”) under the trading symbols, “VER” and “VER PRF,” respectively. As used herein, the terms the “Company,” “we,” “our” and “us” refer to VEREIT, together with its consolidated subsidiaries, including the OP.
The Company is a full-service real estate operating company with investment management capabilities that operates through two reportable segments, its real estate investment (“REI”) segment and its investment management segment, Cole Capital® (“Cole Capital”), as further discussed in Note 3 – Segment Reporting. Through the REI segment, the Company owns and actively manages a diversified portfolio of retail, restaurant, office and industrial real estate properties subject to long-term net leases with creditworthy tenants. The Company actively manages its portfolio considering a number of metrics including property type, concentration and key economic factors for appropriate balance and diversity. Through the Cole Capital segment, the Company is responsible for raising capital for and managing the affairs of the Cole REITs® (as defined in Note 3 – Segment Reporting) on a day-to-day basis, identifying and making acquisitions and investments on the Cole REITs’ behalf, and recommending to the respective board of directors of each of the Cole REITs an approach for providing investors with liquidity. Cole Capital receives compensation and reimbursement for performing these services. To support both reportable segments, the Company employs a shared services model pursuant to which its personnel are integral in providing, among other things, transactional and operational functions to the Company’s owned portfolio and the Cole REITs.
Substantially all of the REI segment’s operations are conducted through the OP. VEREIT is the sole general partner and holder of 97.6% of the common equity interests in the OP as of March 31, 2017 with the remaining 2.4% of the common equity interests owned by unaffiliated investors and certain former directors, officers and employees of ARC Properties Advisors, LLC (the “Former Manager”). Under the limited partnership agreement of the OP, as amended (the “LPA”), after holding units of limited partner interests in the OP (“OP Units”) for a period of one year, unless an earlier redemption is otherwise consented to by VEREIT, holders of OP Units have the right to redeem the OP Units for the cash value of a corresponding number of shares of VEREIT’s Common Stock or, at the option of VEREIT, a corresponding number of shares of VEREIT’s Common Stock. The remaining rights of the holders of OP Units are limited, however, and do not include the ability to replace the General Partner or to approve the sale, purchase or refinancing of the OP’s assets.
Substantially all of the Cole Capital segment’s operations are conducted through Cole Capital Advisors, Inc. (“CCA”), an Arizona corporation and a wholly owned subsidiary of the OP. 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”).
The actions of the OP and its relationship with the General Partner are governed by the LPA. The General Partner does not have any significant assets other than its investment in the OP. Therefore, the assets and liabilities of the General Partner and the OP are substantially the same. Additionally, pursuant to the LPA, all administrative expenses and expenses associated with the formation, continuity, existence and operation of the General Partner incurred by the General Partner on the OP’s behalf shall be treated as expenses of the OP. Further, when the General Partner issues any equity instrument that has been approved by the General Partner’s board of directors, the LPA requires the OP to issue to the General Partner equity instruments with substantially similar terms, to protect the integrity of the Company’s umbrella partnership REIT structure, pursuant to which each holder of interests in the OP has a proportionate economic interest in the OP reflecting its capital contributions thereto. OP Units issued to the General Partner are referred to as General Partner OP Units. OP Units issued to parties other than the General Partner are referred to as Limited Partner OP Units. The LPA also provides that the OP issue debt with terms and provisions consistent with debt issued by the General Partner. The LPA will be amended to provide for the issuance of any additional class of equivalent equity instruments to the extent the General Partner’s board of directors authorizes the issuance of any new class of equity securities.

12

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017 (Unaudited) (Continued)

Note 2 – Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements of the Company presented herein include the accounts of the General Partner and its consolidated subsidiaries, including the OP. All intercompany transactions have been eliminated upon consolidation. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2016 of the Company, which are included in the Company’s Annual Report on Form 10-K filed on February 23, 2017. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2017, except the Company adopted Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), as disclosed within the “Acquisition-Related Expenses and Litigation and Other Non-routine Costs” and “Recent Accounting Pronouncements” sections herein. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and U.S. GAAP.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries and consolidated joint venture arrangements. The portions of the consolidated joint venture arrangements not owned by the Company are presented as non-controlling interests in VEREIT’s and the OP’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. In addition, as described in Note 1 – Organization, certain third parties have been issued OP Units. Holders of OP Units are considered to be non-controlling interest holders in the OP and their ownership interest in the limited partner’s share is presented as non-controlling interests in VEREIT’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Upon conversion of OP Units to Common Stock, any difference between the fair value of shares of Common Stock issued and the carrying value of the OP Units converted is recorded as a component of equity. As of both March 31, 2017 and December 31, 2016, there were approximately 23.75 million Limited Partner OP Units outstanding.

For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. 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. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity.
The Company then qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE, which is generally defined as the party who has a controlling financial interest in the 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 and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE and the difference between consolidating the VIE and accounting for it using the equity method could be material to the Company’s consolidated financial statements. The Company continually evaluates the need to consolidate these VIEs based on standards set forth in U.S. GAAP.

13

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017 (Unaudited) (Continued)

Acquisition-Related Expenses and Litigation and Other Non-routine Costs
As further disclosed in the “Recent Accounting Pronouncements” section herein, in January 2017, the Company elected to early adopt ASU 2017-01 which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. During the three months ended March 31, 2017, all real estate acquisitions qualified as asset acquisitions, and external acquisition costs related to these asset acquisitions were capitalized. Prior to January 1, 2017, external costs related to property acquisitions were expensed as incurred. Internal costs, such as employee salaries, related to activities necessary to complete, or affect, self-originating asset acquisitions or business combinations are classified as acquisition-related expenses in the accompanying consolidated statements of operations. Any costs incurred as a result of a business combination will be classified as acquisition-related expenses or other non-routine transaction related expenses and expensed as incurred.
External acquisition-related costs incurred in relation to mergers and litigation resulting therefrom and other non-routine transactions are included in litigation and other non-routine costs, net of insurance recoveries in the consolidated statements of operations. The Company has also incurred legal fees and other costs associated with the Audit Committee Investigation (defined below) and the litigations and investigations resulting therefrom, which are considered non-routine. The Company has directors’ and officers’ insurance and the insurance carriers have paid certain defense costs subject to standard reservation of rights under the respective policies.
Litigation and other non-routine costs include the following costs (amounts in thousands):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Litigation and other non-routine costs:
 
 
 
 
Audit Committee Investigation and related matters (1)
 
$
12,671

 
$
4,742

Legal fees and expenses (2)
 
204

 
83

Total costs incurred
 
12,875


4,825

Insurance recoveries
 

 
(10,000
)
Total
 
$
12,875

 
$
(5,175
)
___________________________________
(1)
Includes all fees and costs associated with the previously-announced investigation conducted by the audit committee (the “Audit Committee”) of the Company’s board of directors (the “Audit Committee Investigation”) and various litigations and investigations prompted by the results of the Audit Committee Investigation, including fees and costs incurred pursuant to the Company’s advancement obligations.
(2)
Includes legal fees and expenses associated with litigation resulting from prior mergers.

Recent Accounting Pronouncements
In May 2014, the U.S. Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in Revenue Recognition, Accounting Standards Codification (Topic 605) and will require an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, an amendment to ASU 2014-09, was issued to defer the effective date for all entities by one year. For public business entities, the guidance should be applied to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company is currently assessing the adoption methodology. In accordance with the Company’s plan for the adoption of ASU 2014-09, the Company’s implementation team has identified the Company’s revenue streams and is performing an in-depth review of the Company’s revenue contracts to identify the related performance obligations and to evaluate the impact on the Company’s financial statements and internal accounting processes and controls. As the majority of the Company’s revenue is derived from real estate lease contracts, as discussed in relation to ASU 2016-02 Leases (Topic 842) (“ASU 2016-02”), the Company does not expect that the adoption of ASU 2014-09 will have a material impact on its consolidated financial statements.

14

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017 (Unaudited) (Continued)

In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10), which will require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, which will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than 12 months, with the result being the recognition of a right of use asset and a lease liability and the disclosure of key information about the entity’s leasing arrangements. ASU 2016-02 retains a distinction between finance leases (i.e., capital leases under current U.S. GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current U.S. GAAP. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective approach is required for existing leases that have not expired upon adoption. The Company’s implementation team is developing an inventory of all leases, as well as identifying any non-lease components in the lease arrangements, and evaluating the impact to the Company, both as lessor and lessee, and its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring more timely recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology under current U.S. GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to address diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues as well as application of the predominance principle (dependence on predominant source or use of receipt or payment) and are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. ASU 2016-15 requires retrospective adoption unless it is impracticable to apply, in which case it is to be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements. The Company plans to adopt ASU 2016-15 during the fourth quarter of fiscal year 2017.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. In accordance with ASU 2016-18, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of ASU 2016-18 are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted, and is required to be applied prospectively to any transactions occurring within the period of adoption. The Company has elected to early adopt ASU 2017-01 effective January 1, 2017. As the Company expects that a majority of its real estate acquisitions will be considered asset acquisitions, external acquisition costs related to these asset acquisitions will be capitalized. Prior to 2017, all acquisition-related costs were expensed as incurred. The adoption of this pronouncement resulted in capitalization of $0.4 million of external acquisitions-related costs during the three months ended March 31, 2017. Internal

15

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017 (Unaudited) (Continued)

costs, such as employee salaries, related to activities necessary to complete, or affect, self-originating asset acquisitions or business combinations are classified as acquisition-related expenses in the accompanying consolidated statements of operations. Upon adoption of ASU 2017-01, the Company's real estate dispositions qualify as asset dispositions and as such, no portion of the Company’s REI segment’s goodwill was allocated to the cost basis of these assets in determining the gain or loss on disposition of real estate and held for sale assets. Prior to January 1, 2017, when the Company disposed of a property or classified a property as held for sale, it constituted a business per U.S. GAAP and the Company allocated a portion of the REI segment's goodwill to the cost basis of that property in determining the gain or loss on the disposition of real estate and held for sale assets.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Others (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the measurement of goodwill impairment by eliminating Step 2 from the goodwill impairment test (comparing the implied fair value of goodwill with the carrying amount of goodwill). ASU 2017-04 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), which clarifies the following: 1) nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty; 2) an entity should allocate consideration to each distinct asset by applying the guidance in Topic 606 on allocating the transaction price to performance obligations; and 3) requires entities to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it (a) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Subtopic 810 and (b) transfers control of the asset in accordance with Topic 606. ASU 2017-05 is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.
Note 3 – Segment Reporting
The Company has organized its operations into two segments for management and internal financial reporting purposes, REI and Cole Capital, as further discussed below.
REI – Through its REI segment, the Company owns and actively manages a diversified portfolio of retail, restaurant, office and industrial real estate properties subject to long-term net leases with creditworthy tenants. As of March 31, 2017, the Company owned 4,107 properties comprising 93.5 million square feet of retail and commercial space located in 49 states, Puerto Rico and Canada, which includes properties owned through consolidated joint ventures. The rentable space at these properties was 97.8% leased with a weighted-average remaining lease term of 9.6 years. In addition, as of March 31, 2017, the Company owned eight commercial mortgage-backed securities (“CMBS”) and nine mortgage notes receivable.
Cole Capital – Through its Cole Capital segment, the Company is responsible for managing the day-to-day affairs of Cole Credit Property Trust IV, Inc. (“CCPT IV”); Cole Real Estate Income Strategy (Daily NAV), Inc. (“INAV”); Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”); Cole Office & Industrial REIT (CCIT III), Inc. (“CCIT III”); Cole Credit Property Trust V, Inc. (“CCPT V”); and other real estate offerings in registration (collectively with CCPT IV, INAV, CCIT II, CCIT III and CCPT V, the “Cole REITs”), raising capital for those Cole REITs still in offering, identifying and making acquisitions and investments on the Cole REITs’ behalf and recommending to the respective board of directors of each of the Cole REITs an approach for providing investors with liquidity. Cole Capital serves as the dealer manager and distributes shares of common stock for certain Cole REITs, 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. Cole Capital receives compensation and reimbursement for services relating to the Cole REITs’ offerings and the investment, management, financing and disposition of their respective assets, as applicable. Cole Capital also develops new REIT offerings and assists in obtaining regulatory approvals from the SEC, the Financial Industry Regulatory Authority, Inc. and various blue sky jurisdictions for such offerings. See Note 17 – Related Party Transactions and Arrangements for further discussion on the Cole REITs.

16

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017 (Unaudited) (Continued)

The Company allocates certain operating expenses, such as legal fees, employee related costs and benefits and general overhead expenses between its operating segments. The following tables present a summary of the comparative financial results and total assets for each segment (in thousands):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
REI segment:
 
 
 
 
Revenues:
 
 
 
 
Rental income
 
$
293,739

 
$
313,971

Direct financing lease income
 
433

 
569

Operating expense reimbursements
 
26,726

 
23,247

Total real estate investment revenues
 
320,898


337,787

Operating expenses:
 
 
 
 
Acquisition-related
 
617

 
217

Litigation and other non-routine costs, net of insurance recoveries
 
12,875

 
(5,175
)
Property operating
 
34,016

 
34,813

General and administrative
 
12,560

 
12,228

Depreciation and amortization
 
178,297

 
195,991

Impairment of real estate
 
6,725

 
160,517

Total operating expenses
 
245,090


398,591

Operating income (loss)
 
75,808


(60,804
)
Other (expense) income:
 
 
 
 
Interest expense
 
(73,743
)
 
(80,426
)
Loss on extinguishment and forgiveness of debt, net
 
(70
)
 

Other income, net
 
670

 
568

Equity in (loss) income and gain on disposition of unconsolidated entities
 
(82
)
 
10,404

Gain (loss) on derivative instruments, net
 
824

 
(1,086
)
Total other expenses, net
 
(72,401
)

(70,540
)
Income (loss) before taxes and real estate dispositions
 
3,407


(131,344
)
Gain on disposition of real estate and held for sale assets, net
 
12,481

 
17,175

Income (loss) before taxes
 
15,888


(114,169
)
Provision for income taxes
 
(3,108
)
 
(1,365
)
Net income (loss)
 
$
12,780


$
(115,534
)
 
 
 
 
 

17

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017 (Unaudited) (Continued)

 
 
Three Months Ended March 31,
 
 
2017
 
2016
Cole Capital segment:
 
 
 
 
Revenues:
 
 
 
 
Offering-related fees and reimbursements
 
$
4,316

 
$
12,391

Transaction service fees and reimbursements
 
4,097

 
2,384

Management fees and reimbursements
 
18,718

 
16,458

Total Cole Capital revenues
 
27,131


31,233

Operating expenses:
 
 
 
 
Cole Capital reallowed fees and commissions
 
2,660

 
8,068

Acquisition-related
 

 
25

General and administrative
 
16,588

 
17,172

Depreciation and amortization
 
4,855

 
8,317

Total operating expenses
 
24,103


33,582

Operating income (loss)
 
3,028


(2,349
)
Total other income, net
 
128

 
494

Income (loss) before taxes
 
3,156


(1,855
)
(Provision for) benefit from income taxes
 
(1,146
)
 
1,309

Net income (loss)
 
$
2,010


$
(546
)
 
 
 
 
 
Total Company:
 
 
 
 
Total revenues

$
348,029


$
369,020

Total operating expenses

$
(269,193
)

$
(432,173
)
Total other expense, net

$
(72,273
)

$
(70,046
)
Net income (loss)

$
14,790


$
(116,080
)
 
 
Total Assets
 
 
March 31, 2017
 
December 31, 2016
REI segment
 
$
15,110,337