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Section 1: 10-K (10-K)

VEREIT 12.31.2016 10-K Combined Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
 
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)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class:
Name of each exchange on which registered:
Common Stock, $0.01 par value per share (VEREIT, Inc.)
New York Stock Exchange
6.70% Series F Cumulative Redeemable Preferred Stock, $0.01 par value per share (VEREIT, Inc.)
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
 
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
VEREIT, Inc. Yes x No o VEREIT Operating Partnership, L.P. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
VEREIT, Inc. Yes o No x VEREIT Operating Partnership, L.P. Yes o No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
VEREIT, Inc.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
VEREIT Operating Partnership, L.P.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
(Do not check if a smaller reporting company)
Smaller reporting company o
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



The aggregate market value of voting and non-voting common stock held by non-affiliates of VEREIT, Inc. as of June 30, 2016 was approximately $9.2 billion based on the closing sale price for VEREIT, Inc.’s common stock on that day as reported by the New York Stock Exchange. Such value excludes common stock held by executive officers and directors.
There were 974,109,378 shares of common stock of VEREIT, Inc. outstanding as of February 22, 2017.
There is no public trading market for the common units of VEREIT Operating Partnership, L.P. As a result, the aggregate market value of the common units held by non-affiliates of VEREIT Operating Partnership, L.P. cannot be determined.

DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of VEREIT, Inc.’s Definitive Proxy Statement for its 2017 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed pursuant to Rule 14a-6 of the Securities Exchange Act of 1934, as amended, are incorporated by reference into this Annual Report on Form 10-K. Other than those portions of the Proxy Statement specifically incorporated by reference pursuant to Items 10 through 14 of Part III hereof, no other portions of the Proxy Statement shall be deemed so incorporated.




EXPLANATORY NOTE

This report combines the Annual Reports on Form 10-K for the year ended December 31, 2016 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,” or the “Company” mean VEREIT, Inc., which we sometimes refer to as the “General Partner”, 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 Annual Reports on Form 10-K 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 fiscal year ended December 31, 2016

 
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Forward-Looking Statements
This Annual Report on Form 10-K includes “forward-looking statements” (within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act) that reflect our expectations and projections about our future results, performance, prospects and opportunities. We have attempted to identify these forward-looking statements by the use of words such as “may,” “will,” “seek,” “expects,” “anticipates,” “believes,” “targets,” “intends,” “should,” “estimates,” “could,” “continue,” “assume,” “projects,” “plans” or similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, those discussed below. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. We do not undertake publicly to update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or new information, future events or otherwise, except as may be required to satisfy our obligations under federal securities law.
The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements:
We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties.
Our properties, goodwill and intangible assets and other assets may be subject to impairment charges.
We could be subject to unexpected costs or unexpected liabilities that may arise from potential dispositions.
We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties and we may be unable to acquire, dispose of, or lease properties on advantageous terms.
We could be subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally.
We may be affected by risks associated with pending government investigations relating to the findings of the previously-announced investigation conducted by the audit committee (the “Audit Committee”) of the General Partner’s board of directors (the “Audit Committee Investigation”) and related litigation.
We have substantial indebtedness, which may affect our ability to pay dividends, and expose us to interest rate fluctuation risk and the risk of default under our debt obligations.
Our overall borrowing and operating flexibility may be adversely affected by the terms and restrictions within the indenture governing the Senior Notes (as defined in Note 11 – Debt), and the terms of the Credit Facility (as defined in Note 11 – Debt).
Our access to capital and terms of future financings may be affected by adverse changes to our credit rating.
We may be affected by the incurrence of additional secured or unsecured debt.
We may not be able to achieve and maintain profitability.
We may not generate cash flows sufficient to pay our dividends to stockholders or meet our debt service obligations.
We may be affected by risks resulting from losses in excess of insured limits.
We may fail to remain qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.
Compliance with the REIT annual distribution requirements may limit our operating flexibility.
We may be unable to fully reestablish the financial network which previously supported Cole Capital® and its Cole REITs (defined below) and/or regain the prior level of transaction and capital raising volume of Cole Capital.
Our Cole Capital operations are subject to extensive governmental regulation.
We are subject to conflicts of interest relating to Cole Capital’s investment management business.
We may be unable to retain or hire key personnel.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A. Risk Factors within this Annual Report on Form 10-K.
We use certain defined terms throughout this Annual Report on Form 10-K that have the following meanings:
When we refer to “annualized rental income,” we mean the rental revenue under our leases on operating properties owned at the respective reporting date on a straight-line basis, which includes the effect of rent escalations and any tenant concessions, such as free rent, and excludes any bad debt allowances and any contingent rent, such as percentage rent. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance.

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When we refer to a “creditworthy tenant,” we mean a tenant that has entered into a lease that we determine is creditworthy and may include tenants with an investment grade or below investment grade credit rating, as determined by major credit rating agencies, or unrated tenants. To the extent we determine that a tenant is a “creditworthy tenant” even though it does not have an investment grade credit rating, we do so based on our management’s determination that a tenant should have the financial wherewithal to honor its obligations under its lease with us. As explained further below, this determination is based on our management’s substantial experience performing credit analysis and is made after evaluating all of a tenant’s due diligence materials that are made available to us, including financial statements and operating data.
When we refer to a “direct financing lease,” we mean a lease that requires specific treatment due to the significance of the lease payments from the inception of the lease compared to the fair value of the property, term of the lease, a transfer of ownership, or a bargain purchase option. These leases are recorded as a net asset on the balance sheet. The amount recorded is calculated as the fair value of the remaining lease payments on the leases and the estimated fair value of any expected residual property value at the end of the lease term.
When we refer to properties that are net leased on a “long term basis,” we mean properties with remaining primary lease terms of generally seven to 10 years or longer on average, depending on property type.
Under a “net lease,” the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. There are various forms of net leases, most typically classified as triple net or double net. Triple net leases typically require the tenant pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs). Double net leases typically require that the tenant pay all operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance), but excludes some or all major repairs (e.g., roof, structure and parking lot). Accordingly, the owner receives the rent “net” of these expenses, rendering the cash flow associated with the lease predictable for the term of the lease. Under a net lease, the tenant generally agrees to lease the property for a significant term and agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease.

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PART I
Item 1. Business.
Overview
We are a full-service real estate operating company that operates through two business segments, our real estate investment (“REI”) segment and our investment management segment, Cole Capital, as further discussed in “Note 3 – Segment Reporting” to our consolidated financial statements. Through our REI segment, we own and actively manage a diversified portfolio of 4,142 retail, restaurant, office and industrial real estate properties with an aggregate of 93.3 million square feet, of which 98.3% was leased as of December 31, 2016, with a weighted-average remaining lease term of 9.9 years. Through our Cole Capital segment, we are responsible for raising capital for and managing the affairs of certain non-listed real estate investment trusts (the “Cole REITs”) on a day-to-day basis, identifying and making acquisitions and investments on behalf of the Cole REITs, 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.
Substantially all of the REI segment’s operations are conducted through the Operating Partnership. VEREIT, Inc. is the sole general partner and holder of 97.6% of the common partnership interests in the Operating Partnership (the “OP Units”) as of December 31, 2016 with the remaining 2.4% of the OP Units owned by certain non-affiliated investors and certain former directors, officers and employees of the Former Manager (defined below). 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 Operating Partnership. 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”). Prior to January 8, 2014, we were externally managed by ARC Properties Advisors, LLC (the “Former Manager”) on a day-to-day basis, with the exception of certain acquisition, accounting and portfolio management activities which were performed by our employees. In August 2013, our board of directors (the “Board of Directors” or the “Board”) determined that it was in our best interests to become self-managed, and we completed our transition to self-management on January 8, 2014. Through strategic mergers and acquisitions discussed in “Note 6 – Mergers with Real Estate Businesses” to our consolidated financial statements, the Company has grown significantly since incorporation.
VEREIT, Inc. was incorporated in the State of Maryland on December 2, 2010 and has elected to be treated as a REIT for U.S. federal income tax purposes. The Operating Partnership was incorporated in the State of Delaware on January 13, 2011. We operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”). VEREIT, Inc.’s shares of common stock and 6.70% Series F Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”) trade on the New York Stock Exchange (the “NYSE”) under the trading symbols “VER” and “VER PRF,” respectively.
2016 Developments
Real Estate Acquisitions
During the year ended December 31, 2016, the Company acquired controlling financial interests in eight commercial properties for an aggregate purchase price of $100.2 million.
Real Estate Dispositions
During the year ended December 31, 2016, the Company disposed of 301 properties and one property owned by an unconsolidated joint venture for an aggregate sales price of $1.20 billion, of which the Company’s share was $1.14 billion, resulting in consolidated proceeds of $1.00 billion after closing costs, $55.0 million of debt assumptions and $57.0 million of debt repayments by the unconsolidated joint venture.
Balance Sheet and Liquidity
2016 Bond Offering and $300.0 million 2016 Term Loan
On June 2, 2016, the Operating Partnership closed its senior note offering (the “2016 Bond Offering”), consisting of (i) $0.4 billion aggregate principal amount of 4.125% Senior Notes due June 1, 2021 and (ii) $0.6 billion aggregate principal amount of 4.875% Senior Notes due June 1, 2026 and entered into the $300.0 million 2016 Term Loan, as defined in Note 11 – Debt. On July 5, 2016, the Company redeemed all of the $1.3 billion aggregate principal amount of our outstanding 2.000% Senior Notes due February 2017, plus accrued and unpaid interest thereon and the required make-whole premium.
Common Stock Offering
On August 10, 2016, VEREIT, Inc. issued 69.0 million shares of common stock in a public offering for net proceeds, after underwriting discounts and offering costs, of $702.5 million, which were used to repay the entire $300.0 million 2016 Term Loan and in part to repay amounts under the Credit Facility.

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Common Stock Continuous Offering Program
On September 19, 2016, the Company registered a continuous equity offering program (the “Program”) pursuant to which the Company can offer and sell, from time to time through September 19, 2019 in “at-the-market” offerings or certain other transactions, shares of common stock with an aggregate gross sales price of up to $750.0 million, through its sales agents. There were no shares of common stock issued under the Program during the year ended December 31, 2016.
Debt Repayments
As a result of the reduction in mortgage debt due to property dispositions and other measures taken by management, the Company decreased total debt by $1.7 billion, from $8.1 billion to $6.4 billion, comprised of unsecured bonds of $0.3 billion, unsecured Credit Facility of $1.0 billion, and secured debt of $0.4 billion.
Primary Investment Focus
We own and actively manage a diversified portfolio of retail, restaurant, office and industrial real estate assets subject to long-term net leases with creditworthy tenants. Our focus is on single-tenant, net-leased properties that are strategically located and essential to the business operations of the tenant, as well as retail properties that offer necessity and value-oriented products or services. We actively manage the portfolio by considering several metrics including property type, tenant concentration, geography, credit and key economic factors for appropriate balance and diversity. We believe that actively managing our portfolio allows us to attain the best operating results for each asset and the overall portfolio through strategic planning, implementation of these plans and responding proactively to changes and challenges in the marketplace.
Additionally, we employ a shared services model for Cole Capital’s portfolios by providing transactional and operational real estate functions. The shared services model allows our strong and experienced real estate team to be active in the markets at all times and manage complimentary portfolios.
Investment Policies
When evaluating prospective investments in or dispositions of real property, our management considers relevant real estate and financial factors, including the location of the property, the leases and other agreements affecting the property and business operations of the tenant, the creditworthiness of major tenants, its income-producing capacity, its physical condition, its prospects for appreciation, its prospects for liquidity, tax considerations and other factors. In this regard, our management will have substantial discretion with respect to the selection of specific investments, subject in certain instances to the approval of the Board of Directors.
As part of our overall portfolio strategy, we seek to lease space and/or acquire properties leased to creditworthy tenants that meet our underwriting and operating guidelines. Prior to entering into any transaction, our corporate credit analysis and underwriting professionals conduct a review of a tenant’s credit quality. In addition, we consistently monitor the credit quality of our portfolio by actively reviewing the creditworthiness of certain tenants, focusing primarily on those tenants representing the greatest concentration of our portfolio. This review primarily includes an analysis of the tenant’s financial statements either quarterly, or as frequently as the lease permits. We also consider tenant credit quality when assessing our portfolio for strategic dispositions. When we assess tenant credit quality, we, among other factors that we may deem relevant: (i) review relevant financial information, including financial ratios, net worth, revenue, cash flows, leverage and liquidity; (ii) evaluate the depth and experience of the tenant’s management team; and (iii) assess the strength/growth of the tenant’s industry. On an on-going basis, we evaluate the need for an allowance for doubtful accounts arising from estimated losses that could result from the tenant’s inability to make required current rent payments and an allowance against accrued rental income for future potential losses that we deem to be unrecoverable over the term of the lease. The factors considered in determining the credit risk of our tenants include, but are not limited to: payment history; credit status and change in status (credit ratings for public companies are used as a primary metric); change in tenant space needs (i.e., expansion/downsize); tenant financial performance; economic conditions in a specific geographic region; and industry specific credit considerations. We are of the opinion that the credit risk of our portfolio is reduced by the high quality of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants.

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Real Estate Investments
As of December 31, 2016, the Company owned 4,142 properties comprising 93.3 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 98.3% leased with a weighted-average remaining lease term of 9.9 years. There were no tenants exceeding 10% of our consolidated annualized rental income as of December 31, 2016 or 2015. As of December 31, 2014, leases with Red Lobster® restaurants represented 11.6% of our consolidated annualized rental income. As of December 31, 2016, 2015 and 2014, properties located in Texas represented 13.5%, 13.1% and 12.7%, respectively, of our consolidated annualized rental income. As of December 31, 2016, tenants in the casual dining restaurant and manufacturing industries accounted for 15.6% and 10.1%, respectively, of our consolidated annualized rental income. As of December 31, 2015, tenants in the casual dining restaurant and manufacturing industries accounted for 16.6% and 10.1%, respectively, of our consolidated annualized rental income. As of December 31, 2014, tenants in the casual dining restaurant industry accounted for 18.4% of our consolidated annualized rental income. 
Cole Capital®  
Cole Capital sponsors and manages direct investment real estate programs, which primarily include five publicly registered, non-listed REITs, as discussed in “Note 2 – Summary of Significant Accounting Policies” to our consolidated financial statements. Cole Capital is responsible for raising capital for and managing the day-to-day affairs of the Cole REITs, identifying and making acquisitions and investments on behalf of the Cole REITs, and recommending to each of the Cole REIT’s respective board of directors an approach for providing investors with liquidity. Cole Capital serves as the dealer manager and distributes shares of common stock for certain Cole REITs and advises them regarding offerings, manages relationships with participating broker-dealers and financial advisors, and provides assistance in connection with compliance matters relating to the offerings. 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, including obtaining regulatory approvals from the U.S. Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority, Inc. (“FINRA”) and various blue sky jurisdictions for such offerings.
Financing Policies
We rely on leverage to allow us to invest in a greater number of assets and enhance our asset returns. We expect our leverage metrics to improve over time.
We intend to finance future acquisitions with the most advantageous source of capital available to us at the time of the transaction, which may include a combination of public and private offerings of our equity and debt securities, secured and unsecured corporate-level debt, property-level debt and mortgage financing and other public, private or bank debt. In addition, we may acquire properties in exchange for the issuance of common stock or OP Units and in many cases we may acquire properties subject to existing mortgage indebtedness.
We also may obtain secured or unsecured debt to acquire properties, and we expect that our financing sources will include the public debt market, banks and institutional investment firms, including asset managers and life insurance companies. Although we intend to maintain a conservative capital structure, our charter does not contain a specific limitation on the amount of debt we may incur and the Board of Directors may implement or change target debt levels at any time without the approval of our stockholders.
We intend to continue to emphasize unsecured corporate-level or OP-level debt in our financing and to seek to reduce the percentage of our assets which are secured by mortgage loans. For information relating to our Credit Facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Competition
In our REI segment, we are subject to competition in the acquisition and disposition of properties and in the leasing of our properties. We compete with a number of developers, owners and operators of retail, restaurant, office and industrial real estate, many of which own properties similar to ours in the same markets in which our properties are located. We also may face new competitors and, due to our focus on single-tenant properties located throughout the United States, and because many of our competitors are locally or regionally focused, we do not expect to encounter the same competitors in each region of the United States. Many of our competitors have greater financial and other resources than us and may have other advantages over us. Our competitors may be willing to accept lower returns on their investments and may succeed in buying the properties that we have targeted for acquisition. We may also incur costs in connection with unsuccessful acquisitions that we will not be able to recover. Foreign investors may view the U.S. real estate market as being more stable than other international markets and may increase investments in high-quality single-tenant properties, especially in gateway cities.

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In our Cole Capital segment, we also face competition in raising funds for the Cole REITs from other entities with similar investment objectives such as other non-listed REITs, publicly traded REITs and private funds, including hedge funds.
Regulations
Our investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, health, safety and zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all material permits and approvals necessary under current law to operate our investments.
Our properties are also subject to laws such as the Americans with Disabilities Act of 1990 (“ADA”), which require that all public accommodations must meet federal requirements related to access and use by disabled persons. Some of our properties may currently not be in compliance with the ADA. If one or more of the properties in our portfolio is not in compliance with the ADA or any other regulatory requirements, we may be required to incur additional costs to bring the property into compliance.
Environmental Matters
Under various federal, state and local environmental laws, a current owner of real estate may be required to investigate and clean up contaminated property. Under these laws, courts and government agencies have the authority to impose cleanup responsibility and liability even if the owner did not know of and was not responsible for the contamination. For example, liability can be imposed upon us based on the activities of our tenants or a prior owner. In addition to the cost of the cleanup, environmental contamination on a property may adversely affect the value of the property and our ability to sell, rent or finance the property, and may adversely impact our investment in that property.
Prior to acquisition of a property, we will obtain Phase I environmental reports, or will rely on recent Phase I environmental reports. These reports will be prepared in accordance with an appropriate level of due diligence based on our standards and generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs and other information on past uses of the property and nearby or adjoining properties. We may also obtain a Phase II investigation which may include limited subsurface investigations and tests for substances of concern where the results of the Phase I environmental reports or other information indicates possible contamination or where our consultants recommend such procedures.
Employees
As of December 31, 2016, we had approximately 350 employees.
Available Information
We electronically file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, and proxy statements, with the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may access them through the EDGAR database at the SEC’s website at http://www.sec.gov. In addition, copies of our filings with the SEC may be obtained from the website maintained for us at www.ir.vereit.com. We are providing our website address solely for the information of investors. We do not intend for the information contained on our website to be incorporated into this Annual Report on Form 10-K or other filings with the SEC.
Item 1A. Risk Factors.
Investors should carefully consider the following factors, together with all the other information included in this Annual Report on Form 10-K, in evaluating the Company and our business.  If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, the trading price of the General Partner's securities could decline and its stockholders and/or the Operating Partnership's unitholders may lose all or part of their investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.  This “Risk Factors” section contains references to our “capital stock” and to our “stockholders” and “unitholders.” Unless expressly stated otherwise, references to our “capital stock” represent the General Partner’s common stock and any class or series of its preferred stock, references to our “stockholders” represent holders of the General Partner’s common stock and any class or series of its preferred stock and references to our “unitholders” represent holders of the OP units and any class of series of the Operating Partnership’s preferred units.

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Risks Related to Our Business
We are primarily dependent on single-tenant leases for our revenue and, accordingly, if we are unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire on favorable terms or at all, our financial condition could be adversely affected.
We focus our investment activities on ownership of freestanding, single-tenant commercial properties that are net leased to a single tenant. Therefore, the financial failure of, or other default by, a significant tenant or multiple tenants could cause a material reduction in our revenues and operating cash flows. In addition, to the extent that we enter into a master lease with a particular tenant, the termination of such master lease could affect each property subject to the master lease, resulting in the loss of revenue from all such properties.
We cannot assure you that our leases will be renewed or that we will be able to lease or re-lease the properties on favorable terms, or at all, or that lease terminations will not cause us to sell the properties at a loss. Any of our properties that become vacant could be difficult to re-lease or sell. We have and may continue to experience vacancies either by the continued default of a tenant under its lease or the expiration of one of our leases. We typically must incur all of the costs of ownership for a property that is vacant. Upon or pending the expiration of leases at our properties, we may be required to make rent or other concessions to tenants, or accommodate requests for renovations, remodeling and other improvements, in order to retain and attract tenants. Certain of our properties may be specifically suited to the particular needs of a tenant (e.g., a retail bank branch or distribution warehouse) and major renovations and expenditures may be required in order for us to re-lease the space for other uses. If the vacancies continue for a long period of time, we may suffer reduced revenues, resulting in less cash available for distribution to our stockholders and unitholders. If we are unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire on favorable terms or at all, our financial condition could be adversely affected.
We are subject to tenant, geographic and industry concentrations that make us more susceptible to adverse events with respect to certain tenants, geographic areas or industries.
As of December 31, 2016, we had derived approximately:
$96.7 million, or 8.2%, of our annualized rental income from Red Lobster®, a wholly owned subsidiary of Golden Gate Capital;
$297.7 million, or 25.3%, of our annualized rental income from properties located in the following three states: Texas (13.5%), Illinois (6.2%), and Florida (5.6%); and
$642.0 million, or 54.6%, of our annualized rental income from tenants in the following six industries: the casual dining restaurant industry (15.6%), the manufacturing industry (10.1%), the quick service restaurant industry (8.5%), the discount retail industry (7.8%), the pharmacy retail industry (7.2%) and the finance industry (5.4%).
Any adverse change in the financial condition of a tenant with whom we may have a significant credit concentration now or in the future, or any downturn of the economy in any state or industry in which we may have a significant credit concentration now or in the future, could result in a material reduction of our cash flows or material losses to us.
Our net leases may require us to pay property-related expenses that are not the obligations of our tenants.
Under the terms of the majority of our net leases, in addition to satisfying their rent obligations, our tenants are responsible for the payment or reimbursement of property expenses such as real estate taxes, insurance and ordinary maintenance and repairs. However, under the provisions of certain existing leases and leases that we may enter into in the future with our tenants, we may be required to pay some or all of the expenses of the property, such as the costs of environmental liabilities, roof and structural repairs, real estate taxes, insurance, certain non-structural repairs and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations may be adversely affected and the amount of cash available to meet expenses and to make distributions to our stockholders and unitholders may be reduced.
Our properties may be subject to impairment charges.
We routinely evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions and tenant performance. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. Since our investment focus is on properties net leased to a single tenant, the financial failure of, or other default by, a single tenant under its lease may result in a significant impairment loss. If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded. Management has recorded impairment charges related to certain properties in the year ended December 31, 2016, and may record future impairments based on actual results and changes in circumstances. Negative developments in the real estate market may cause management to reevaluate the business and macro-economic assumptions used in its impairment

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analysis. Changes in management’s assumptions based on actual results may have a material impact on the Company’s financial statements. See “Note 10 Fair Value Measures” to our consolidated financial statements for a discussion of real estate impairment charges.
Our ownership of certain properties and other facilities are subject to ground leases or other similar agreements which limit our uses of these properties and may restrict our ability to sell or otherwise transfer such properties.
As of December 31, 2016, we held interests in properties and other facilities through leasehold interests in the land on which the buildings are located and we may acquire additional properties in the future that are subject to ground leases or other similar agreements. As of December 31, 2016, the costs associated with these ground leases represented 2.0% of annualized rental revenue. Many of our ground leases and other similar agreements limit our uses of these properties and may restrict our ability to sell or otherwise transfer such properties without the ground landlord’s consent, which may impair their value.
Real estate investments are relatively illiquid and therefore we may not be able to dispose of properties when appropriate or on favorable terms.
Real estate investments are, in general, relatively illiquid and may become even more illiquid during periods of economic downturn. As a result, we may not be able to sell our properties quickly or on favorable terms in response to changes in the economy or other conditions when it otherwise may be prudent to do so. In addition, certain significant expenditures generally do not change in response to economic or other conditions, including debt service obligations, real estate taxes, and operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced earnings. Further, as a result of the 100% prohibited transactions tax applicable to REITs, we intend to hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be favorable. Therefore, we may be unable to adjust our portfolio promptly in response to economic, market or other conditions, which could adversely affect our business, financial condition, liquidity and results of operations.
Our investments in properties where the underlying tenant has a below investment grade credit rating, as determined by major credit rating agencies, or has an unrated tenant may have a greater risk of default.
As of December 31, 2016, approximately 58.8% of our tenants were not rated or did not have an investment grade credit rating from a major ratings agency or were not affiliates of companies having an investment grade credit rating. Our investments in properties leased to such tenants may have a greater risk of default and bankruptcy than investments in properties leased exclusively to investment grade tenants. When we invest in properties where the tenant does not have a publicly available credit rating, we will use certain credit assessment tools as well as rely on our own estimates of the tenant’s credit rating which includes reviewing the tenant’s financial information (e.g., financial ratios, net worth, revenue, cash flows, leverage and liquidity, if applicable). If our ratings estimates are inaccurate, the default or bankruptcy risk for the subject tenant may be greater than anticipated. If our lender or a credit rating agency disagrees with our ratings estimates, we may not be able to obtain our desired level of leverage or our financing costs may exceed those that we projected. This outcome could have an adverse impact on our returns on that asset and hence our operating results.
We may be unable to sell a property if or when we decide to do so, including as a result of uncertain market conditions, which could adversely impact our ability to make cash distributions to our stockholders and unitholders.
We expect to hold the various real properties in which we invest until such time as we decide that a sale or other disposition is appropriate given our investment business objectives. We generally intend to hold properties for an extended time, but our management or Board of Directors may exercise their discretion as to whether and when to sell a property to achieve investment objectives. Our ability to dispose of properties on advantageous terms or at all depends on certain factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. We cannot predict the various market conditions affecting real estate investments which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the disposition of our properties, we cannot assure you that we will be able to sell such properties at a profit or at all in the future. Accordingly, the extent to which our stockholders and unitholders will receive cash distributions and realize potential appreciation on our real estate investments will depend upon fluctuating market conditions. Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold.
Dividends paid from sources other than our cash flow from operations could affect our profitability, restrict our ability to generate sufficient cash flow from operations, and dilute stockholders’ and unitholders’ interests in us.
We may not generate sufficient cash flow from operations to pay dividends and we may in the future pay dividends from sources other than from our cash flow from operations, such as borrowings and/or the sale of assets or the proceeds from offerings of securities. We have not established any limit on the amount of borrowings and/or the sale of assets or the proceeds from an

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offering of securities that may be used to fund dividends, except that, in accordance with our organizational documents and Maryland law, we may not make dividend distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences; or (3) jeopardize our ability to qualify as a REIT.
Funding dividends from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding dividends with the sale of assets or the proceeds of offerings of securities may affect our ability to generate cash flows. In addition, funding dividends from the sale of additional securities could dilute your interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third party investors. As a result, the return you realize on your investment may be reduced. Payment of dividends from these sources could affect our profitability, restrict our ability to generate sufficient cash flow from operations, and dilute stockholders’ and unitholders’ interests in us, any or all of which may adversely affect your overall return.
We could face potential adverse effects from the bankruptcies or insolvencies of tenants or from tenant defaults generally.
The bankruptcy or insolvency of our tenants may adversely affect the income produced by our properties. Under bankruptcy law, a tenant cannot be evicted solely because of its bankruptcy and has the option to assume or reject any unexpired lease. If the tenant rejects the lease, any resulting claim we have for breach of the lease (excluding collateral securing the claim) will be treated as a general unsecured claim. Our claim against the bankrupt tenant for unpaid and future rent will be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant that rejects its lease would pay in full amounts it owes us under the lease. Even if a lease is assumed and brought current, we still run the risk that a tenant could condition lease assumption on a restructuring of certain terms, including rent, that would have an adverse impact on us. Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our cash flows and results of operations and could cause us to reduce the amount of distributions to our stockholders and unitholders.
In addition, the financial failure of, or other default by, one or more of the tenants to whom we have exposure could have an adverse effect on the results of our operations. While we evaluate the creditworthiness of our tenants by reviewing available financial and other pertinent information, there can be no assurance that any tenant will be able to make timely rental payments or avoid defaulting under its lease. If any of our tenants’ businesses experience significant adverse changes, they may fail to make rental payments when due, close a number of stores, exercise early termination rights (to the extent such rights are available to the tenant) or declare bankruptcy. A default by a significant tenant or multiple tenants could cause a material reduction in our revenues and operating cash flows. In addition, if a tenant defaults, we may incur substantial costs in protecting our investment.
If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
We have entered and may continue to enter into sale-leaseback transactions. In a sale-leaseback transaction, we purchase a property and then lease it back to the third party from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback might possibly be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our financial condition, cash flows and the amount available for distributions to our stockholders and unitholders.
If the sale-leaseback were re-characterized as a financing, we would not be considered the owner of the property and, as a result, would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property.
We have a history of operating losses and cannot assure you that we will achieve profitability.
Since our inception in 2010, we have experienced net losses (calculated in accordance with U.S. GAAP) each fiscal year and, as of December 31, 2016, had an accumulated deficit of $4.2 billion. The extent of our future operating losses and the timing of when we will achieve profitability are uncertain, and together depend on the demand for, and value of, our portfolio of properties. We may never achieve or sustain profitability.

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We may be unable to enter into and consummate property acquisitions on advantageous terms or our property acquisitions may not perform as we expect due to competitive conditions and other factors.
We may acquire properties in the future. The acquisition of properties entails various risks, including the risks that our investments may not perform as we expect and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate. Further, we expect to finance any future acquisitions through a combination of borrowings under our unsecured credit facility (the “Credit Facility”), proceeds from equity or debt offerings by the General Partner, the Operating Partnership or their subsidiaries, funds from operations and proceeds from property contributions and dispositions which, if unavailable, could adversely affect our cash flows.
In addition, our ability to acquire properties in the future on satisfactory terms and successfully integrate and operate such properties is subject to the following significant risks:
we may be unable to acquire desired properties or the purchase price of a desired property may increase significantly because of competition from other real estate investors, including other real estate operating companies, REITs and investment funds, including the Cole REITs;
we may acquire properties that are not accretive to our results upon acquisition;
we may be unable to obtain the necessary debt or equity financing to consummate an acquisition or, if obtainable, financing may not be on satisfactory terms;
we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
agreements for the acquisition of properties are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations, and we may spend significant time and money on potential acquisitions that we do not consummate;
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations; and
we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as cleanup of environmental contamination, remediation of latent defects, claims by tenants, vendors or other persons against the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.
Any of the above risks could adversely affect our business, financial condition, liquidity and results of operations.
We have assumed, and may in the future assume, liabilities in connection with our property acquisitions, including unknown liabilities.
We have assumed existing liabilities, some of which may have been unknown or unquantifiable at the time of the transaction. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of tenants or other persons dealing with prior owners of the properties, tax liabilities, employment-related issues, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. If the magnitude of such unknown liabilities is high, either singly or in the aggregate, it could adversely affect our business, financial condition, liquidity and results of operations.
We face intense competition, which may decrease or prevent increases in the occupancy and rental rates of our properties.
We are subject to competition in the leasing of our properties. We compete with numerous developers, owners and operators of retail, restaurant, industrial and office real estate, many of which have greater financial and other resources than us. Many of our competitors own properties similar to ours in the same markets in which our properties are located. If one of our properties is nearing the end of the lease term or becomes vacant and our competitors (which could include funds sponsored by us) offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer substantial rent concessions in order to retain tenants when such tenants’ lease expire or attract new tenants. In addition, if our competitors sell assets similar to assets we intend to divest in the same markets and/or at valuations below our valuations for comparable assets, we may be unable to divest our assets at all or at favorable pricing or on favorable terms. As a result of these actions by our competitors, our business, financial condition, liquidity and results of operations may be adversely affected.
The value of our real estate investments is subject to risks associated with our real estate assets and with the real estate industry.
Our real estate investments are subject to various risks, fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease our cash available for distribution to our stockholders and unitholders, as well as the value of our properties. These events include, but are not limited to:
adverse changes in international, national or local economic and demographic conditions;

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vacancies or our inability to lease space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early termination rights or tenant-favorable renewal options;
adverse changes in financial conditions of buyers, sellers and tenants of properties;
inability to collect rent from tenants, or other failures by tenants to perform the obligations under their leases;
competition from other real estate investors, including other real estate operating companies, REITs and institutional investment funds;
reductions in the level of demand for commercial space generally, and freestanding net leased properties specifically, and changes in the relative popularity of our properties;
increases in the supply of freestanding single-tenant properties;
fluctuations in interest rates, which could adversely affect our ability, or the ability of buyers and tenants of our properties, to obtain financing on favorable terms or at all;
increases in expenses, including, but not limited to, insurance costs, labor costs, energy prices, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies, all of which have an adverse impact on the rent a tenant may be willing to pay us in order to lease one or more of our properties;
civil unrest, acts of God, including earthquakes, floods, hurricanes and other natural disasters, including extreme weather events from possible future climate change, which may result in uninsured losses, and acts of war or terrorism; and
changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the ADA.
Any or all of these factors could materially adversely affect our results of operations through decreased revenues or increased costs.
Uninsured losses or losses in excess of our insurance coverage could materially adversely affect our financial condition and cash flows, and there can be no assurance as to future costs and the scope of coverage that may be available under insurance policies.
We carry comprehensive liability, fire, extended coverage, and rental loss insurance covering all of the properties in our portfolio under one or more blanket insurance policies with policy specifications, limits and deductibles customarily carried for similar properties. In addition, we carry professional liability and directors’ and officers’ insurance, and cyber liability insurance. We select policy specifications and insured limits that we believe are appropriate and adequate given the relative risk of loss, insurance coverages provided by tenants, the cost of the coverage and industry practice. There can be no assurance, however, that the insured limits on any particular policy will adequately cover an insured loss if one occurs. If any such loss is insured, we may be required to pay a significant deductible on any claim for recovery of such a loss prior to our insurer being obligated to reimburse us for the loss, or the amount of the loss may exceed our coverage for the loss. In addition, we may reduce or discontinue terrorism, earthquake, flood or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. Our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases.
Further, we do not carry insurance for certain losses, including, but not limited to, losses caused by riots or war. Certain types of losses may be either uninsurable or not economically insurable, such as losses due to earthquakes, riots or acts of war. If we experience a loss that is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. In addition, we carry several different lines of insurance, placed with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. As a result of any of the situations described above, our financial condition and cash flows may be materially and adversely affected.
Our participation in joint ventures creates additional risks as compared to direct real estate investments, and the actions of our joint venture partners could adversely affect our operations or performance.
We have in the past participated, and may in the future participate, in transactions structured to purchase assets jointly with unaffiliated third parties or the Cole REITs (a “joint venture”). There are additional risks involved in joint venture transactions. As a co-investor in a joint venture, we may not be in a position to exercise sole decision-making authority relating to the property, joint venture, or other entity. In addition, there is the potential of the third-party participant in the joint venture becoming bankrupt and the possibility of diverging or inconsistent economic or business interests of us and that participant. These diverging interests

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could result in, among other things, exposure to liabilities of the joint venture in excess of our proportionate share of these liabilities. The competing rights of each owner in a jointly-owned property could effect a reduction in the value of each owner’s interest in the subject property.
If we are unable to maintain effective disclosure controls and procedures and effective internal control over financial reporting, investor confidence and our stock price could be adversely affected.
Our management is responsible for establishing and maintaining effective disclosure controls and procedures and internal control over financial reporting. There were no changes to our internal control over financial reporting that occurred during the year ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, however, there can be no guarantee as to the effectiveness of our disclosure controls and procedures and we cannot assure you that our internal control over financial reporting will not be subject to material weaknesses in the future. If we fail to maintain the adequacy of our internal controls over financial reporting and our operating internal controls, including any failure to implement required new or improved controls as a result of changes to our business or otherwise, or if we experience difficulties in their implementation, our business, results of operations and financial condition could be adversely affected and we could fail to meet our reporting obligations.
Government investigations relating to the findings of the Audit Committee Investigation may require time and attention from certain members of management, result in significant legal expenses, fines, and/or penalties, including indemnification obligations, and cause our business, financial condition, liquidity and results of operations to suffer.
On November 13, 2014, we received the first of two subpoenas relating to the findings of the Audit Committee Investigation from the staff of the SEC, each of which called for the production of certain documents. On December 19, 2014, we received a subpoena from the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts. The U.S. Attorney’s Office for the Southern District of New York also contacted counsel for the Company and counsel for the Audit Committee. We and the Audit Committee are cooperating with these regulators in their investigations. The amount of time needed to resolve these investigations is uncertain, and we cannot predict the outcome of these investigations or whether we will face additional government investigations, inquiries or other actions related to these matters. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees, among others in connection with the ongoing government investigations and potential future government inquiries, investigations or actions. These matters could require us to expend management time and could result in civil and criminal actions seeking, among other things, injunctions against us and the payment of significant fines and/or penalties, as well as requiring payment of substantial legal fees and indemnification obligations, and cause our business, financial condition, liquidity and results of operations to suffer. We can provide no assurance as to the outcome of any government investigation.
The Company and certain of our former officers and former and current directors, among others, have been named as defendants in various lawsuits related to the findings of the Audit Committee Investigation and those lawsuits may require time and attention from certain members of management, result in significant legal expenses and/or damages, including indemnification obligations, and may materially impact our business, financial condition, liquidity and results of operations.
Since the October 29, 2014 announcement of the findings of the Audit Committee Investigation and the subsequent restatement of the Company’s financial statements in March 2015, the Company and its former officers and current and former directors (along with others) have been named as defendants in multiple putative securities class action complaints in the United States District Court for the Southern District of New York, which were subsequently consolidated under the caption In re American Realty Capital Properties, Inc. Litigation, 1:15-mc-00040-AKH, multiple individual securities lawsuits and multiple derivative lawsuits. See “Note 15 Commitments and Contingencies” to our consolidated financial statements for additional details regarding pending litigation matters related to the Audit Committee Investigation.
As a result of the various pending litigations, and subject to certain limitations, we are obligated to advance certain legal expenses to and indemnify our current and former directors, officers and employees, as well as certain outside individuals and entities. In addition, any of these lawsuits may require management time and attention, result in significant legal expenses, indemnification obligations and/or damages, which may not be covered by insurance, and may materially impact the Company’s business, financial condition, liquidity and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations, and they require management to make estimates, judgments, and assumptions about matters that are inherently uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations. We have identified several accounting policies as being critical to the presentation of our financial position and results of operations because they require management to make particularly subjective or complex judgments about matters that are

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inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions. Because of the inherent uncertainty of the estimates, judgments, and assumptions associated with these critical accounting policies, we cannot provide any assurance that we will not make subsequent significant adjustments to our consolidated financial statements. If our judgments, assumptions, and allocations prove to be incorrect, or if circumstances change, our business, financial condition, liquidity and results of operations could be adversely affected.
Changes in U.S. accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants, which could reduce overall demand for our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. Under capital lease accounting for a tenant, both the leased asset and liability are reflected on its balance sheet. If the lease does not meet the criteria for a capital lease, the lease is to be considered an operating lease by the tenant, and the obligation does not appear on the tenant’s balance sheet; rather, the contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus, entering into an operating lease can appear to enhance a tenant’s balance sheet in comparison to direct ownership. The Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board (the “IASB”) conducted a joint project to re-evaluate lease accounting. In February 2016, the FASB issued Accounting Standards Update, (“ASU”) 2016-02, Leases (“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. These and other potential changes to the accounting guidance could affect both our accounting for leases as well as that of our current and potential tenants. These changes may affect how our real estate leasing business is conducted. For example, with the ASU 2016-02 revision, companies may be less willing to enter into leases in general or desire to enter into leases with shorter terms because the apparent benefits to their balance sheets under current practice could be reduced or eliminated. This impact in turn could make it more difficult for us to enter into leases on terms we find favorable. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements.
We may not be able to maintain our competitive advantages if we are not able to attract and retain key personnel.
Our success depends to a significant extent on our ability to attract and retain key members of our executive team and staff. Our future success depends in part on the continued service of our senior management team. If there are changes in senior leadership, such changes could be disruptive and could compromise our ability to execute our strategic plan. While we have entered into employment agreements with certain key personnel, there can be no assurance that we will be able to retain the services of individuals whose knowledge and skills are important to our businesses. Our success also depends on our ability to prospectively attract, integrate, train and retain qualified management personnel. Because the competition for qualified personnel is intense, costs related to compensation and retention could increase significantly in the future. If we were to lose a sufficient number of our key employees and were unable to replace them in a reasonable period of time, these losses could damage our business and adversely affect our results of operations.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and investor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations, business relationships or confidential information will not be negatively impacted by such an incident.
We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in the dilution of our stockholders and unitholders, and limit our ability to sell or refinance such assets.
We have in the past and may in the future acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for OP Units. Under the limited partnership agreement of the OP, as amended (the “LPA”), after holding the OP Units for a period of one year, unless otherwise consented to by the General Partner, holders of OP Units have a right to redeem the OP Units for the cash value of a corresponding number of shares of the General Partner’s common stock or, at the

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option of the General Partner, a corresponding number of shares of the General Partner’s common stock. This could result in the dilution of our stockholders and unitholders through the issuance of OP Units that may be exchanged for shares of our common stock.  This acquisition structure may also have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to restrictions on our ability to dispose of, or refinance the debt on, the acquired properties in order to protect the contributors’ ability to defer recognition of taxable gain.  Similarly, we may be required to incur or maintain debt we would otherwise not incur so we can allocate the debt to the contributors to maintain their tax bases.  These restrictions could limit our ability to sell or refinance an asset at a time, or on terms, that would be favorable absent such restrictions.
Risks Related to Financing
We intend to rely on external sources of capital to fund future capital needs, and if we encounter difficulty in obtaining such capital, we may not be able to meet maturing obligations or make any additional investments.
In order to qualify as a REIT under the Internal Revenue Code, we are required, among other things, to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with U.S. GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. Because of this dividend requirement, we may not be able to fund from cash retained from operations all of our future capital needs, including capital needed to refinance maturing obligations or make investments.
Market volatility and disruption could hinder our ability to obtain new debt financing or refinance our maturing debt on favorable terms or at all or to raise debt and equity capital. Our access to capital will depend upon a number of factors, including:
general market conditions;
the market’s perception of our future growth potential;
the extent of investor interest;
analyst reports about us and the REIT industry;
the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;
our financial performance and that of our tenants;
our current debt levels;
our current and expected future earnings;
our cash flow and cash dividends, including our ability to satisfy the dividend requirements applicable to REITs; and
the market price per share of our common stock.
If we are unable to obtain needed capital on satisfactory terms or at all, we may not be able to meet our obligations and commitments as they mature or make any additional investments.
We have substantial amounts of indebtedness outstanding, which may affect our ability to pay dividends, and may expose us to interest rate fluctuation risk and to the risk of default under our debt obligations.
As of December 31, 2016, our aggregate indebtedness was $6.4 billion. We may incur significant additional debt in the future, including borrowings under our Credit Facility, for various purposes including, without limitation, the funding of future acquisitions, if any, capital improvements and leasing commissions in connection with the repositioning of a property and litigation expenses. At December 31, 2016, we had $2.3 billion of undrawn commitments under our Credit Facility. Our substantial outstanding indebtedness, and the limitations imposed on us by our debt agreements, could have significant adverse consequences, including as follows:
our cash flow may be insufficient to meet our required principal and interest payments;
we may be unable to borrow additional funds as needed or on satisfactory terms to fund future working capital, capital expenditures and other general corporate requirements, which could, among other things, adversely affect our ability to capitalize upon any acquisition opportunities or fund capital improvements and leasing commissions;
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;
payments of principal and interest on borrowings may leave us with insufficient cash resources to make the dividend payments necessary to maintain our REIT qualification or may otherwise impose restrictions on our ability to make distributions;
we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

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we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations;
certain of the property subsidiaries’ loan documents may include restrictions on such subsidiary’s ability to make dividends to us;
we may be unable to hedge floating-rate debt, counterparties may fail to honor their obligations under our hedge agreements, these agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge agreements, we would be exposed to then-existing market rates of interest and future interest rate volatility;
we may default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and exercise their rights under any assignment of rents and leases;
we may be vulnerable to general adverse economic and industry conditions; and
we may be at a disadvantage compared to our competitors with less indebtedness.
If we default under a loan or indenture (including any default in respect of the financial maintenance and negative covenants contained in the Credit Agreement, or the indenture governing the Senior Notes, we may automatically be in default under any other loan or indenture that has cross-default provisions (including the credit agreement (the “Credit Agreement”)), dated June 30, 2014, as amended, with Wells Fargo Bank National Association, as administrative agent, and other lender parties thereto, governing the Credit Facility), and (x) further borrowings under the Credit Facility will be prohibited, and outstanding indebtedness under the Credit Facility, and our indenture (including the indenture governing the Senior Notes) or such other loans may be accelerated and (y) to the extent any such debt is secured, directly or indirectly, by any properties or assets, the lenders may foreclose on the properties or assets securing such indebtedness.
In addition, increases in interest rates may impede our operating performance and payments of required debt service obligations or amounts due at maturity, or creation of additional reserves under loan agreements or indentures, could adversely affect our financial condition and operating results.
Further, any foreclosure on our properties could create taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the REIT dividend requirements imposed by the Internal Revenue Code.
The indenture governing our Senior Notes and the Credit Agreement contain restrictive covenants that limit our operating flexibility.
The indenture governing our Senior Notes and the Credit Agreement require us to meet customary negative covenants and other financial and operating covenants. The indenture governing our Senior Notes requires us to maintain financial ratios for total leverage, secured debt, debt service coverage and total unencumbered assets. In addition, the Credit Agreement requires us, among other things, to maintain a minimum tangible net worth, a maximum leverage ratio, a minimum fixed charge coverage ratio, a secured leverage ratio, a total unencumbered asset value ratio, a minimum encumbered interest coverage ratio and a minimum encumbered asset value. These covenants restrict our ability to incur secured or unsecured indebtedness and may also restrict our ability to engage in certain business activities.
Our ability to comply with these and other provisions of the indenture governing our Senior Notes and the Credit Agreement may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments or other events adversely impacting us. Any failure to comply with these covenants would constitute a default under the indenture governing our Senior Notes and/or the Credit Agreement, as applicable, and would prevent further borrowings under the Credit Agreement and could cause those and other obligations to become due and payable. If any of our indebtedness is accelerated, we may not be able to repay it.
Our organizational documents have no limitation on the amount of indebtedness that we may incur. As a result, we may become more highly leveraged in the future, which could adversely affect our financial condition.
Our business strategy contemplates the use of both secured and unsecured debt to finance long-term growth. While we intend to limit our indebtedness to maintain an overall net debt to gross real estate investment ratio of approximately 45% to 55% (provided that we may exceed this amount for individual properties in select cases where attractive financing is available), our organizational documents contain no limitations on the amount of debt that we may incur. Further, our financing decisions and related decisions regarding levels of debt may be determined by our Board of Directors in its discretion without stockholder approval. As a result, we may be able to incur substantial additional debt, including secured debt, in the future, subject to us meeting the financial and operating covenants described above, which could result in us becoming more highly leveraged and adversely affecting our financial condition.

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Increases in interest rates would increase our debt service obligations and may adversely affect the refinancing of our existing debt and our ability to incur additional debt, which could adversely affect our financial condition.
Certain of our borrowings bear interest at variable rates, and we may incur additional variable-rate debt in the future. Increases in interest rates would result in higher interest expenses on our existing unhedged variable rate debt, and increase the costs of refinancing existing debt or incurring new debt. Additionally, increases in interest rates may result in a decrease in the value of our real estate and decrease the market price of our capital stock and could accordingly adversely affect our financial condition.
We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness, and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash. To a certain extent, our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors, many of which are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.
Additionally, if we incur additional indebtedness in connection with any future acquisitions or development projects or for any other purpose, our debt service obligations could increase. We may need to refinance all or a portion of our indebtedness before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
our financial condition and market conditions at the time;
restrictions in the agreements governing our indebtedness;
general economic and capital market conditions;
the availability of credit from banks or other lenders;
investor confidence in us; and
our results of operations.
As a result, we may not be able to refinance our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity, or delaying any strategic acquisitions and alliances or capital expenditures, any of which could have a material adverse effect on our operations.
Adverse changes in our credit ratings could affect our borrowing capacity and borrowing terms.
Our Senior Notes are periodically rated by nationally recognized credit rating agencies. Our current corporate credit rating is “BB+” and our issue-level rating for our Senior Notes is “BBB-” with a “positive” outlook from Standard & Poor’s Rating Services. Our corporate credit and issue-level ratings for our Senior Notes are “Ba1” with a “positive” outlook assigned by Moody’s Investor Service, Inc. Both agencies have upgraded our ratings in comparison to the prior year, however, there can be no assurance that our ratings will not fluctuate. Fitch Ratings, Inc. has also assigned to us a first time investment grade rating of “BBB-” with a “stable” outlook. The credit ratings are based on our operating performance, liquidity and leverage ratios, overall financial position, and other factors viewed by the credit rating agencies as relevant to our industry and the economic outlook in general. Our credit ratings can adversely affect the cost and availability of capital, as well as the terms of any financing we obtain. Since we depend in part on debt financing to fund our business, an adverse change in our credit ratings could have a material adverse effect on our financial condition, liquidity, results of operations and the trading price of our Senior Notes.
Risks Related to Equity
The Board of Directors may create and issue a class or series of common or preferred stock without stockholder approval.
Subject to applicable legal and regulatory requirements, the Board of Directors is empowered under our charter to amend our charter from time to time to increase or decrease the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue, to designate and issue from time to time one or more classes or series of stock and to classify or reclassify any unissued shares of our common stock or preferred stock without stockholder approval. The Board of Directors may determine the relative preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any class or series of stock issued. As a result, we may issue series or classes of stock with voting rights, rights to dividends or other rights, senior to the rights of holders of our outstanding capital stock. The issuance of any such stock could also have the effect of delaying or preventing a change of control transaction that might otherwise be in the best interests of our stockholders. In addition, future sales of shares of our common stock or preferred stock may be dilutive to existing stockholders.

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The trading price of our common stock has been and may continue to be subject to wide fluctuations.
The sales price of our common stock on the NYSE has fluctuated in recent quarters. Our stock price may fluctuate in response to a number of events and factors, including as a result of future offerings of our securities, as a result of the events described in this “Risk Factors” section or in our future filings with the SEC, and as a result of changes to our dividend yield relative to yields on other financial instruments (e.g., increases in interest rates resulting in higher yields on other financial instruments may adversely affect the sales price of our common stock). In addition, the trading volume and price of our common stock may fluctuate and be adversely impacted in response to a number of factors, including:
actual or anticipated variations in our operating results, earnings, or liquidity, or those of our competitors;
changes in our dividend policy;
publication of research reports about us, our competitors, our tenants, or the REIT industry;
changes in market valuations of companies similar to us;
speculation in the press or investment community;
our failure to meet, or changes to, our earnings estimates, or those of any securities analysts;
increases in market interest rates;
adverse market reaction to the amount of or the maturity of our debt and our ability to refinance such debt and the terms thereof;
adverse market reaction to any additional indebtedness we incur or equity or securities we may issue;
changes in our credit ratings;
actual or perceived conflicts of interest;
changes in our key management;
the financial condition, liquidity, results of operations, and prospects of our tenants;
resolution of pending litigation and government investigations;
failure to maintain our REIT qualification; and
general market and economic conditions, including the current state of the credit and capital markets.
The issuance of additional equity securities may dilute existing equity holders.
Giving effect to the issuance of common stock in future potential offerings, the receipt of future potential net proceeds and the use of those proceeds, additional equity offerings may have a dilutive effect on our expected earnings per share. Additionally, we are not restricted from issuing additional shares of our common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities in the future. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that such sales could occur.
Future offerings of debt, which would be senior to our common stock upon liquidation, or preferred equity securities that may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our common stock.
In the future, we may issue debt or preferred equity securities. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. Additional equity offerings, including offerings of convertible preferred stock, may dilute the holdings of our existing stockholders or otherwise reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Preferred stock, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our ability to make distributions to holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.
The change of control conversion feature of the Series F Preferred Stock may make it more difficult for a party to take over the Company or discourage a party from taking over the Company.
Upon the occurrence of a change of control (as defined in the Articles Supplementary for the Series F Preferred Stock) the result of which is that our common stock or the common securities of the acquiring or surviving entity are not listed on a national stock exchange, holders of the Series F Preferred Stock will have the right (unless, prior to the change of control conversion date, we have provided or provide notice of our election to redeem the Series F Preferred Stock) to convert some or all of their Series

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F Preferred Stock into shares of our common stock (or equivalent value of alternative consideration). The change of control conversion feature of the Series F Preferred Stock may have the effect of discouraging a third party from making an acquisition proposal for the Company or of delaying, deferring or preventing certain change of control transactions of the Company under circumstances that stockholders may otherwise believe are in their best interests.
Risks Relating to our REI Segment
Because we own real property, we are subject to extensive environmental regulation, which creates uncertainty regarding future environmental expenditures and liabilities.
Environmental laws regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under various provisions of these laws, an owner or operator of real estate, such as us, is or may be liable for costs related to soil or groundwater contamination on, in, or migrating to or from its property. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site. Such laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these substances, or the failure to properly remediate them, may adversely affect our ability to sell or lease our property or to borrow using such property as collateral. In addition, persons exposed to hazardous or toxic substances may sue us for personal injury damages. As a result, in connection with our current or former ownership, operation, management and development of real properties, we may be potentially liable for investigation and cleanup costs, penalties, and damages under environmental laws.
Although our properties are generally subjected to preliminary environmental assessments, known as Phase I assessments, by independent environmental consultants that identify certain liabilities, Phase I assessments are limited in scope, and may not include or identify all potential environmental liabilities or risks associated with the property. Further, any environmental liabilities that arose since the date the studies were done would not be identified in the assessments. Unless required by applicable laws or regulations, we may not further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments.
We cannot assure you that these or other environmental studies identified all potential environmental liabilities, or that we will not incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to finance or sell any affected properties.
We are subject to risks relating to mortgage, bridge or mezzanine loans.
Investing in mortgage, bridge or mezzanine loans involves risk of defaults on those loans caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. If there are defaults under these loans, we may not be able to repossess and sell quickly any properties securing such loans. An action to foreclose on a property securing a loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of any lawsuit brought in connection with the foreclosure if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the loan, which could reduce the value of our investment in the defaulted loan.
We are subject to risks relating to real estate-related securities, including commercial mortgage backed securities (“CMBS”).
Real estate-related securities are often unsecured and also may be subordinated to other obligations of the issuer. As a result, investments in real estate-related securities may be subject to risks of (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities, (2) substantial market price volatility resulting from changes in prevailing interest rates in the case of traded equity securities, (3) subordination to the prior claims of banks and other senior lenders to the issuer, (4) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets, (5) the possibility that earnings of the issuer or that income from collateral may be insufficient to meet debt service and distribution obligations and (6) the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic slowdown or downturn. These risks may adversely affect the value of outstanding real estate-related securities and the ability of the obliged parties to repay principal and interest or make distribution payments.
CMBS are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, these securities are subject to the risks listed above and all of the risks of the underlying mortgage loans. CMBS are issued by investment banks and non-regulated financial institutions, and are not insured or guaranteed by the U.S. government. The value of CMBS may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities market as a whole and may be negatively impacted by any dislocation in the mortgage-backed securities market in general.

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CMBS are also subject to several risks created through the securitization process. Subordinate CMBS are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes delinquent loans, there is a risk that interest payments on subordinate CMBS will not be fully paid. Subordinate CMBS are also subject to greater credit risk than those CMBS that are more highly rated. In certain instances, third-party guarantees or other forms of credit support can reduce the credit risk.
Our build-to-suit program is subject to additional risks related to properties under development.
We engage in build-to-suit programs and the acquisition of properties under development. In connection with these businesses, we enter into purchase and sale arrangements with sellers or developers of suitable properties under development or construction. In such cases, we are generally obligated to purchase the property at the completion of construction, provided that the construction conforms to definitive plans, specifications, and costs approved by us in advance. We may also engage in development and construction activities involving existing properties, including the expansion of existing facilities (typically at the request of a tenant) or the development or build-out of vacant space at retail properties. We may advance significant amounts in connection with certain development projects.
As a result, we are subject to potential development risks and construction delays and the resultant increased costs and risks, as well as the risk of loss of certain amounts that we have advanced should a development project not be completed. To the extent that we engage in development or construction projects, we may be subject to uncertainties associated with obtaining permits or re-zoning for development, environmental and land use concerns of governmental entities and/or community groups, and the builder’s ability to build in conformity with plans, specifications, budgeted costs and timetables. If a developer or builder fails to perform, we may terminate the purchase, modify the construction contract or resort to legal action to compel performance (or in certain cases, we may elect to take over the project and pursue completion of the project ourselves). A developer’s or builder’s performance may also be affected or delayed by conditions beyond that party’s control. Delays in obtaining permits or completion of construction could also give tenants the right to terminate preconstruction leases.
We may incur additional risks if we make periodic progress payments or other advances to builders before they complete construction. These and other such factors can result in increased project costs or the loss of our investment. Although we rarely engage in construction activities relating to space that is not already leased to one or more tenants, to the extent that we do so, we may be subject to normal lease-up risks relating to newly constructed projects. We also will rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If these projections are inaccurate, we may pay too much for a property and our return on our investment could suffer. If we contract with a development company for a newly developed property, there is a risk that money advanced to that development company for the project may not be fully recoverable if the developer fails to successfully complete the project.
Risks Relating to our Cole Capital Segment
We may be unable to fully restore the distribution network which previously supported Cole Capital and the Cole REITs and/or regain the prior capital raising level of Cole Capital, which may adversely affect the financial success of Cole Capital and the Company.
Three of the five Cole REITs currently sponsored and managed by Cole Capital have ongoing public offerings. Following the announcement made by the Company on October 29, 2014 that certain of its financial statements could no longer be relied upon, various broker-dealers and clearing firms participating in offerings of the Cole REITs suspended sales activity with Cole Capital, resulting in a significant decrease in capital raising activity and, consequently, a decline in the overall revenue generated by Cole Capital.
In addition, non-listed REIT sales have decreased industry wide since December 31, 2015. As discussed below, financial service firms are subject to and may be adversely affected by extensive regulations and requirements by agencies, which not only impact our business, but the industry as a whole.
Cole Capital generates revenue from capital raising activity and asset management and advisory activity, the latter of which is also contingent upon successful capital raising activity as each of the Cole REITs is a blind pool whose portfolio is largely built through the deployment of proceeds raised in the respective Cole REIT’s public offering. Revenue generated from Cole Capital’s capital raising activity is received in the form of dealer manager fees, which are earned at the point of sale of the Cole REITs’ common stock and, therefore, a reduction in capital raising activity directly results in a reduction in such dealer manager fees. Cole Capital receives additional compensation, including one-time acquisition fees and ongoing advisory fees from its asset management and advisory activity. Acquisition fees are earned, in large part, when Cole Capital deploys capital raised from a Cole REIT’s public offering into real estate acquisitions on behalf of such Cole REIT. Cole Capital also receives advisory fees that are calculated based, in whole or in part, upon the value of each Cole REIT’s total invested assets. An increase in assets under

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management, which generally occurs as the Cole REITs raise more capital, typically results in increased advisory fees. Therefore, a slowdown in capital raising activity could delay or reduce Cole Capital’s receipt of those additional fees. Additional fees may be earned by Cole Capital following the completion of a Cole REIT’s public offering and deployment of capital therefrom. A description of Cole Capital’s fees is contained in “Note 18 Related Party Transactions and Arrangements” to our consolidated financial statements. While certain of the broker-dealers and the clearing firms have reengaged with Cole Capital following their suspensions, there can be no assurance that the remaining broker-dealers will reengage with Cole Capital on a timely basis or at all. If these circumstances continue for a prolonged period of time, capital raising activity at Cole Capital may continue to be negatively affected, reducing overall fee generation at Cole Capital and, therefore, the overall financial success of Cole Capital and the Company could be adversely affected. In addition, there is no guarantee as to the Cole Capital segment’s actual results. The fair value of goodwill and intangible assets allocated to the Cole Capital segment are dependent upon projected results, including, but not limited to, the timing and aggregate amount of capital raised and deployed on behalf of the Cole REITs, which is influenced by the Company’s ability to reinstate certain selling agreements that were suspended as a result of the Audit Committee Investigation. If the Company is unable to reinstate certain selling agreements with broker-dealers and clearing firms on a timely basis, the fair value of goodwill and intangible assets allocated to the Cole Capital segment may be less than the respective carrying value, resulting in an impairment that could have a material adverse effect on the Company’s financial results.
During the quarter ended December 31, 2016, we recorded significant impairment charges in respect of goodwill and intangible assets allocated to the Cole Capital segment. We reassessed the expected collectability of the program development costs, based on assumptions used to calculate these impairments, and recorded additional reserves in the quarter ended December 31, 2016. Additional charges and/or reserves may be recorded in subsequent periods if actual proceeds raised from the offerings and corresponding program development costs incurred differ from management’s assumptions used at December 31, 2016.
Cole Capital is subject to risks that are particular to its role as sponsor and dealer manager for direct investment program offerings.
Cole Capital, including Cole Capital Corporation, which is Cole Capital’s broker-dealer subsidiary and a wholesale broker-dealer registered with the SEC and a member firm of FINRA, is subject to various risks and uncertainties that are common in the securities industry. Such risks and uncertainties include:
the volatility of financial markets;
extensive governmental regulation;
intense competition; and
litigation.
Cole Capital’s business, which involves sponsoring and distributing interests in direct investment programs, depends on a number of factors including our ability to enter into agreements with broker-dealers to participate in the Cole REIT offerings, our success in investing the proceeds of each offering, managing the properties acquired and generating cash flow to make distributions to investors in our direct investment programs and our success in entering into liquidity events for the direct investment programs. We are subject to competition from other sponsors and dealer managers of direct investment programs and other investments, and there can be no assurance that this business will be successful.
Sponsorship of the Cole REITs also involves risks relating to competition from sponsors of other similar programs and risks relating to the possibility that such programs will not receive capital at the levels and at such times that are anticipated or needed to meet up-front or ongoing costs or debt obligations.
FINRA rules applicable to Cole Capital and the Cole REITs’ business, including Rule 2310 (Direct Participation Programs) which, among other things, imposes limits on total compensation to brokers in connection with an offering, and amendments to Rule 2340 (Customer Account Statements) which were effective in April 2016 and changed the manner in which the value of shares in a Cole REIT may be reflected on customer account statements, as well as FINRA investigations into the manner in which shares are sold by some retail brokers, may have a negative impact on the business of Cole Capital. Public authorities may continue to enact new and more stringent standards, or interpret existing laws and regulations in a more restrictive manner, which may adversely affect companies in the industry, including us.
In addition, Cole Capital is subject to risks that are particular to its function as a wholesale broker-dealer and sponsor of the Cole REITs. For example, in its capacity as dealer manager, the broker-dealer provides substantial promotional support to broker-dealers selling a particular offering, including by providing sales literature, forums, webinars, press releases and other mass forms of communication. Due to Cole Capital acting as a sponsor of the Cole REITs and the volume of materials that Cole Capital Corporation may provide throughout the course of an offering, much of Cole Capital’s activities may be scrutinized by regulators. We and Cole Capital may be exposed to significant liability under federal and state securities laws. Additionally, Cole Capital Corporation may be subject to fines and suspension from the SEC and FINRA.

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Failure to comply with the SEC’s net capital requirements could subject us to sanctions imposed by the SEC or FINRA.
Cole Capital Corporation, our broker-dealer subsidiary, is required to maintain certain levels of minimum net capital subject to the SEC’s net capital rule. The net capital rule is designed to measure the general financial integrity and liquidity of a broker-dealer. Compliance with the net capital rule limits those operations of broker-dealers that require the intensive use of their capital, such as underwriting commitments and principal trading activities. The rule also limits the ability of securities firms to pay dividends or make payments on certain indebtedness, such as subordinated debt, as it matures. FINRA may enter the offices of a broker-dealer at any time, without notice, and calculate the firm’s net capital. If the calculation reveals a deficiency in net capital, FINRA may immediately restrict or suspend certain or all the activities of a broker-dealer. If Cole Capital Corporation is not able to maintain adequate net capital, or its net capital falls below requirements established by the SEC, it may be subject to disciplinary action in the form of fines, censure, suspension, expulsion or the termination of business altogether. In addition, if these net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited. A large operating loss or charge against net capital could adversely affect Cole Capital’s ability to expand or even maintain its present levels of business, which could have a material adverse effect on its business of sponsoring and distributing interests in direct investment programs.
Broker-dealers and other financial services firms are subject to extensive regulations and increased scrutiny.
The financial services industry is subject to extensive regulation by U.S. federal, state and international government agencies, as well as various self-regulatory agencies. Turmoil in the financial markets has contributed to significant rule changes, heightened scrutiny of the conduct of financial services firms and increasing penalties for rule violations. Cole Capital Corporation may be adversely affected by new laws or rules (including the pending Department of Labor fiduciary standard), changes to the laws, rules or in the interpretation of existing rules or more rigorous enforcement. Some of these rules, if implemented, could impact Cole Capital Corporation’s business, including through the potential implementation of a more stringent fiduciary standard for brokers for sales of commission products, such as the Cole REITs, and enhanced regulatory oversight over incentive compensation.
The Cole Capital segment also may be adversely affected by other evolving regulatory standards, such as those relating to suitability and supervision. Legal claims or regulatory actions against Cole Capital Corporation or any of the other entities that comprise Cole Capital also could have adverse financial effects on us or harm our reputation, which could harm our business prospects.
Cole Capital Corporation, which is registered as a broker-dealer under the Exchange Act and is a member of FINRA, is subject to regulation, examination and supervision by the SEC, FINRA, other self-regulatory organizations and state securities regulators. Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales practices, use and safekeeping of clients’ funds and securities’ capital adequacy, record-keeping and the conduct and qualification of officers, employees and independent contractors. Failure by Cole Capital Corporation to comply with applicable laws or regulations could result in censures, penalties or fines, the issuance of cease and desist orders, suspension or expulsion from the securities industry, or other similar adverse consequences. Additionally, the adverse publicity arising from the imposition of sanctions could harm our reputation and cause us to lose existing clients or fail to gain new clients.
Financial services firms are also subject to rules and regulations relating to the prevention and detection of money laundering. The USA PATRIOT Act of 2001 mandates that financial institutions, including broker-dealers and investment advisors, establish and implement anti-money laundering (“AML”) programs reasonably designed to achieve compliance with the Bank Secrecy Act of 1970 and the rules thereunder. Financial services firms must maintain AML policies, procedures and controls, designate an AML compliance officer to oversee the firm’s AML program, implement appropriate employee training and provide for annual independent testing of the program. Cole Capital Corporation has established AML programs, which we subject to periodic third-party testing, but there can be no assurance of the effectiveness of these programs. Failure to comply with AML requirements could subject Cole Capital Corporation to disciplinary sanctions and other penalties. Financial services firms must also comply with applicable privacy and data protection laws and regulations, including SEC Regulation S-P and applicable provisions of the 1999 Gramm-Leach-Bliley Act, the Fair Credit Reporting Act of 1970 and the 2003 Fair and Accurate Credit Transactions Act. Any violations of laws and regulations relating to the safeguarding of private information could subject Cole Capital Corporation to fines and penalties, as well as to civil action by affected parties.
We are subject to conflicts of interest relating to Cole Capital’s investment management business.
Cole Capital currently manages five Cole REITs, all of which have investment objectives and investment strategies similar to our own. As a result, we may be seeking to acquire properties and real estate-related investments at the same time as the Cole REITs. In addition, certain of our officers are also officers and/or directors of the Cole REITs and, as such, they will have duties to us as well as to the Cole REITs. We have implemented certain procedures to help manage any perceived or actual conflicts among us and the Cole REITs, including adopting an allocation policy to allocate property acquisitions among us and the Cole REITs based on the following factors:

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the investment objective of each entity;
the anticipated operating cash flows of each entity and the cash requirements of each entity;
the effect of the potential acquisition both on diversification of each entity’s investments by type of property, geographic area and tenant concentration;
the amount of funds available to each entity and the length of time such funds have been available for investment;
the policy of each entity relating to leverage of properties;
the income tax effects of the purchase to each entity; and
the size of the investment.
If we determine that an investment opportunity may be equally appropriate for more than one entity, then the entity that has had the longest period of time elapse since it was allocated an investment opportunity of a similar size and type (e.g., office, industrial, multi-tenant or single tenant retail) will be allocated such investment opportunity. In addition, we have a right of first refusal over three of the Cole REITs with respect to all opportunities to acquire majority single-tenant real estate and real estate-related assets or portfolios with a purchase price greater than $100.0 million. There can be no assurance that these policies will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to us.
Further, under the advisory agreements with the Cole REITs, Cole Capital receives fees for various services, including, but not limited to, the day-to-day management of the Cole REITs and transaction-related services. The terms of these advisory agreements were not the result of arm’s length negotiations between independent parties and as a result, the terms of these agreements may not be as favorable to us as they would have been if we had negotiated these agreements with unaffiliated third parties.
Because the revenue streams from the advisory agreements Cole Capital has with the Cole REITs are subject to limitation or cancellation, any such termination could have an adverse effect on our business, results of operations and financial condition.
The advisory agreements under which Cole Capital provides services to the Cole REITs are subject to renewal on an annual basis and may generally be terminated by each Cole REIT upon 60 days’ notice to us, with or without cause. The advisory agreements with four of the five Cole REITs are scheduled to expire on November 30, 2017 unless otherwise renewed. The advisory agreement with the remaining Cole REIT is scheduled to expire on September 22, 2017 unless otherwise renewed. There can be no assurance that these agreements will not expire or be otherwise terminated and any such termination could have an adverse effect on our business, financial condition and results of operations.
Risks Related to our Organization and Structure
We are a holding company with no direct operations. As a result, we rely on funds received from the Operating Partnership to pay liabilities and dividends, our stockholders’ claims will be structurally subordinated to all liabilities of the Operating Partnership and our stockholders do not have any voting rights with respect to the Operating Partnership’s activities, including the issuance of additional OP Units.
We are a holding company and conduct all of our operations through the Operating Partnership. We do not have, apart from our ownership of the Operating Partnership, any independent operations. As a result, we rely on distributions from the Operating Partnership to pay any dividends we might declare on shares of our common stock. We also rely on distributions from the Operating Partnership to meet our debt service and other obligations, including our obligations to make distributions required to maintain our REIT qualification. The ability of subsidiaries of the Operating Partnership to make distributions to the Operating Partnership, and the ability of the Operating Partnership to make distributions to us in turn, will depend on their operating results and on the terms of any loans that encumber the properties owned by them. Such loans may contain lockbox arrangements, reserve requirements, financial covenants and other provisions that restrict the distribution of funds. In the event of a default under these loans, the defaulting subsidiary would be prohibited from distributing cash. As a result, a default under any of these loans by the borrower subsidiaries could cause us to have insufficient cash to make distributions on our common stock required to maintain our REIT qualification.
In addition, because we are a holding company, stockholders’ claims will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, claims of our stockholders will be satisfied only after all of our and the Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
As of December 31, 2016, we owned approximately 97.6% of the OP Units in the Operating Partnership. However, the Operating Partnership may issue additional OP Units in the future. Such issuances could reduce our ownership percentage in the Operating Partnership. Because our stockholders would not directly own any such OP Units, they would not have any voting rights with respect to any such issuances or other partnership-level activities of the Operating Partnership.

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Our charter and bylaws and Maryland law contain provisions that may delay or prevent a change of control transaction.
Our charter, subject to certain exceptions, limits any person to actual or constructive ownership of no more than 9.8% in value of the aggregate of our outstanding shares of stock and not more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. In addition, our charter provides that we may not consolidate, merge, sell all or substantially all of our assets or engage in a share exchange unless such actions are approved by the affirmative vote of at least two-thirds of the Board of Directors. The ownership limits and the other restrictions on ownership and transfer of our stock and the Board approval requirements contained in our charter may delay or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Certain provisions in the LPA may delay, defer or prevent unsolicited acquisitions of us.
Certain provisions in the LPA may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making such proposals, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:
redemption rights of qualifying parties;
the ability of the General Partner in some cases to amend the LPA without the consent of the limited partners;
the right of the limited partners to consent to transfers of the general partnership interest of the General Partner and mergers or consolidations of the Company under specified limited circumstances; and
restrictions relating to our qualification as a REIT under the Internal Revenue Code.
The LPA also contains other provisions that may have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Tax protection provisions on certain properties could limit our operating flexibility.
We have agreed with ARC Real Estate Partners, LLC, an affiliate of the Former Manager, to indemnify it against any adverse tax consequences if we were to sell, convey, transfer or otherwise dispose of all or any portion of the interests in the properties that were acquired by us in our formation transactions, in a taxable transaction. These tax protection provisions apply until September 6, 2021, which is the 10th anniversary of the closing of our initial public offering (“IPO”). Although it may be in our stockholders’ best interest that we sell one or more of these properties, it may be economically disadvantageous for us to do so because of these obligations. We have also agreed to make debt available for ARC Real Estate Partners, LLC to guarantee. We agreed to these provisions at the time of our IPO in order to assist ARC Real Estate Partners, LLC in preserving its tax position after its contribution of its interests in our initial properties. As a result, we may be required to incur and maintain more debt than we would otherwise.
The Company’s fiduciary duties as sole general partner of the Operating Partnership could create conflicts of interest.
The Company has fiduciary duties to the Operating Partnership and the limited partners in the Operating Partnership, the discharge of which may conflict with the interests of its stockholders. The LPA provides that, in the event of a conflict between the duties owed by the Company’s directors to the Company and the duties that the Company owes in its capacity as the sole general partner of the Operating Partnership to the Operating Partnership’s limited partners, the Company’s directors are under no obligation to give priority to the interests of such limited partners. As a holder of OP Units, the Company will have the right to vote on certain amendments to the LPA (which require approval by a majority in interest of the limited partners, including the Company) and individually to approve certain amendments that would adversely affect the rights of the Operating Partnership’s limited partners, as well as the right to vote on mergers and consolidations of the Company in its capacity as sole general partner of the Operating Partnership in certain limited circumstances. These voting rights may be exercised in a manner that conflicts with the interests of the Company’s stockholders. For example, the Company cannot adversely affect the limited partners’ rights to receive distributions, as set forth in the LPA, without their consent, even though modifying such rights might be in the best interest of the Company’s stockholders generally.
The Board of Directors may change significant corporate policies without stockholder approval.
Our investment, financing, borrowing and dividend policies and our policies with respect to other activities, including growth, debt, capitalization and operations, will be determined by the Board of Directors. These policies may be amended or revised at any time and from time to time at the discretion of the Board of Directors without a vote of our stockholders. In addition, the Board of Directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A change in these policies could have an adverse effect on our business, financial condition, liquidity and results of operations and our ability to satisfy our debt service obligations and to make distributions to our stockholders and unitholders.

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Our rights and the rights of our stockholders to take action against our directors and officers are limited under Maryland law.
Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (1) actual receipt of an improper benefit or profit in money, property or services or (2) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains such a provision and limits the liability of our directors and officers to the maximum extent permitted by Maryland law. Maryland law requires us to indemnify our directors and officers for liability actually incurred in connection with any proceeding to which they may be made, or threatened to be made, a party, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was either committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, our charter obligates us to advance the reasonable defense costs incurred by our directors and officers. Finally, we have entered into agreements with our directors and officers pursuant to which we have agreed to indemnify them to the maximum extent permitted by Maryland law.
U.S. Federal Income and Other Tax Risks
Our failure to remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our capital stock.
We elected to be taxed as a REIT commencing with the taxable year ended December 31, 2011 and believe we have operated, and intend to operate, in a manner that has allowed us to qualify as a REIT and will allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification if the Board of Directors determines that not qualifying as a REIT is in our best interests, or the qualification may be terminated inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. We structured our activities in a manner designed to satisfy the requirements for qualification as a REIT. However, the REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Accordingly, we cannot be certain that we have been or will be successful in qualifying to be taxed as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the annual income and quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the Internal Revenue Service (the “IRS”), such recharacterization would jeopardize our ability to satisfy the requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could result in our disqualification as a REIT for past or future periods.
If we fail to qualify as a REIT for any taxable year and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions and, accordingly, distributions the Operating Partnership makes to its unitholders could be similarly reduced. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.

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Even if we continue to qualify as a REIT, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to our stockholders and unitholders.
Even if we continue to qualify as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are considered held for sale and not for investment (a “prohibited transaction” under the Internal Revenue Code) will be subject to a 100% tax. In addition, we may not make sufficient distributions to avoid income and excise taxes on retained income. We also may decide to retain net capital gain we earn from the sale or other disposition of our property or other assets and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated for federal income tax purposes as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We may, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Internal Revenue Code to maintain our qualification as a REIT.
A REIT may own up to 100% of the stock of one or more TRSs. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS of the REIT. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to advisory agreements with the Cole REITs. We may use TRSs generally to hold properties for sale in the ordinary course of business or to hold assets or conduct activities that we cannot conduct directly as a REIT. Our TRSs will be subject to applicable U.S. federal, state, local and foreign income tax on their taxable income. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to ensure that the TRS is subject to an appropriate level of corporate taxation. These rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.
Not all taxing jurisdictions recognize the favorable tax treatment afforded to REITs under the Internal Revenue Code. As such, we may be subject to regular corporate net income taxes in certain state, local or foreign taxing jurisdictions. In addition, we, the Operating Partnership, our TRSs, and/or other entities through which we conduct our business may also be subject to state, local or foreign income, franchise, sales, transfer, excise or other taxes. Any taxes that we incur directly or indirectly will reduce our cash available for distribution to our stockholders and unitholders. Additionally, changes in state, local or foreign tax law could reduce the cash flow from certain investments made by us and could make such investments less attractive to potential buyers when we seek to liquidate such investments.
To qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce your overall return.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with U.S. GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to U.S. federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which dividends we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these dividends or make taxable stock dividends. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
If the Operating Partnership or certain other subsidiaries fail to qualify as a partnership or are not otherwise disregarded for U.S. federal income tax purposes, then we would cease to qualify as a REIT.
We intend to maintain the status of the Operating Partnership as a partnership for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of the Operating Partnership as a partnership for such purposes, it would be taxable as a corporation. This would result in our failure to qualify as a REIT and would cause us to be subject to a corporate-level tax on our income. This would substantially reduce our cash available to pay distributions and the yield on your investments. In addition, if one or more of the partnerships or limited liability companies through which the Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, then it would be subject to taxation as a corporation, thereby reducing distributions to the Operating Partnership. Such a recharacterization of a subsidiary entity could also threaten our ability to maintain our REIT qualification.

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Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum U.S. federal income tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20% (not including the net investment income tax). Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock. Tax rates could be changed in future legislation.
If we were considered to have actually or constructively paid a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.
For our taxable years that ended on or before December 31, 2014, in order for our distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions could not have been “preferential dividends.” A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. There is uncertainty as to the IRS’s position regarding whether certain arrangements that REITs have with their stockholders could give rise to the inadvertent payment of a preferential dividend. While we believe that our operations have been structured in such a manner that we will not be treated as inadvertently paying preferential dividends, there is no de minimis or reasonable cause exception with respect to preferential dividends under the Internal Revenue Code. Therefore, if the IRS were to take the position that we inadvertently paid a preferential dividend, we may be deemed either to (a) have distributed less than 100% of our REIT taxable income and be subject to tax on the undistributed portion, or (b) have distributed less than 90% of our REIT taxable income and our status as a REIT could be terminated for the year in which such determination is made and for the four taxable years following the year of termination if we were unable to cure such failure.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or to offset certain other positions, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of one or both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities, qualified real estate assets and stock of a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, qualified real estate assets and stock of a TRS) can consist of the securities of any one issuer, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets can be represented by securities of one or more TRSs and no more than 25% of the value of our total assets can be represented by certain debt securities of publicly offered REITs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

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Re-characterization of sale-leaseback transactions may cause us to lose our REIT status.
We may purchase properties and lease them back to the sellers of such properties. The Internal Revenue Service could challenge our characterization of certain leases in any such sale-leaseback transactions as “true leases,” which allows us to be treated as the owner of the property for U.S. federal income tax purposes. In the event that any sale-leaseback transaction is challenged and re-characterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT qualification “asset tests” or the “income tests” and, consequently, lose our REIT status effective with the year of re-characterization. Alternatively, such a recharacterization could cause the amount of our REIT taxable income to be recalculated, which might also cause us to fail to meet the distribution requirement for a taxable year and thus lose our REIT status.
We may incur adverse tax consequences if ARCT III, CapLease, ARCT IV or Cole failed to qualify as a REIT for U.S. federal income tax purposes.
 The tax years subsequent to and including the fiscal year ended December 31, 2012 remain open to examination by the major taxing jurisdictions to which the OP, the General Partner, American Realty Capital Trust III, Inc. (“ARCT III”), CapLease, Inc. (“CapLease”), American Realty Capital Trust IV, Inc., (“ARCT IV”), Cole Real Estate Investments, Inc. (“Cole”) and Cole Credit Property Trust, Inc. (“CCPT”) are subject. If any of ARCT III, CapLease, ARCT IV, Cole or CCPT failed to qualify as a REIT for U.S. federal income tax purposes at any time prior to such entity’s merger with us, we may inherit significant tax liabilities and could fail to qualify as a REIT.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our capital stock.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect our taxation and our ability to qualify as a REIT or the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their tax advisor with respect to the impact of recent legislation on their investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a regular corporation. As a result, our charter provides the Board of Directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. The Board of Directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
In addition, according to publicly released statements, a top legislative priority of the Trump administration and the current Congress may be significant reform of the Internal Revenue Code, including significant changes to taxation of business entities and the deductibility of interest expense.  There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and the impact of any potential tax reform on our business and on the price of our common stock.

Non-U.S. stockholders may be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax upon the disposition of our shares.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a “U.S. real property interest” (“USRPI”) under the Foreign Investment in Real Property Tax Act of 1980 (the “FIRPTA”). Our common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe that we are a domestically-controlled qualified investment entity. However, because our common stock is and will be publicly traded, no assurance can be given that we are or will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our common stock is “regularly traded,” as defined by applicable Treasury regulations, on an established

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securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 10% or less of our common stock at any time during the five-year period ending on the date of the sale. We anticipate that our shares will be “regularly traded” on an established securities market for the foreseeable future, although, no assurance can be given that this will be the case. We encourage you to consult your tax advisor to determine the tax consequences applicable to you if you are a non-U.S. stockholder.
Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash flows.
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay some state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase and if any such increase is not reimbursable under the terms of our lease, then our cash flows will be impacted, and our ability to pay expected distributions to our stockholders and unitholders could be adversely affected.
The share ownership restrictions of the Internal Revenue Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Internal Revenue Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help insure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by the Board of Directors, for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Internal Revenue Code) more than 9.8% in value of the aggregate of our outstanding shares of stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. The Board of Directors, in its sole discretion and upon receipt of certain representations and undertakings, may exempt a person (prospectively or retrospectively) from the ownership limits. However, the Board of Directors may not, among other limitations, grant an exemption from these ownership restrictions to any proposed transferee whose ownership, direct or indirect, in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if the Board of Directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT. These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal corporate offices are located at 2325 E. Camelback Road, Suite 1100, Phoenix, Arizona 85016. We have additional office space in New York, New York; Orlando, Florida; Alpharetta, Georgia; Austin, Texas; Washington, D.C.; Los Angeles, California; and Glenview, Illinois. We lease all of these offices, other than our office space in Glenview, Illinois, which was acquired in 2013. We believe these properties we own and lease are suitable for our operations for the foreseeable future.
As of December 31, 2016, the Company owned 4,142 properties comprising 93.3 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 98.3% leased with a weighted-average remaining lease term of 9.9 years. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Real Estate Portfolio Metrics for a discussion of the properties we hold for rental operations and Schedule III – Real Estate and Accumulated Depreciation for a detailed listing of such properties.
Item 3. Legal Proceedings.
The information contained under the heading “Litigation” in “Note 15 – Commitments and Contingencies” to our consolidated financial statements is incorporated by reference into this Part I, Item 3. Except as set forth therein, as of the end of the period covered by this Annual Report on Form 10-K, we are not a party to, and none of our properties are subject to, any material pending legal proceedings.

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Item 4. Mine Safety Disclosures.
Not applicable.


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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Effective July 31, 2015, we transferred the listing of the General Partner’s common stock and Series F Preferred Stock to the NYSE from NASDAQ Global Select Market (“NASDAQ”). The General Partner’s common stock and Series F Preferred Stock trade under the trading symbols, “VER” and “VER PRF,” respectively.
Stock Price Performance Graph
Set forth below is a line graph comparing the cumulative total stockholder return on the General Partner’s common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the FTSE National Association of Real Estate Investment Trusts All Equity REITs Index (“FTSE NAREIT All Equity REITs”) and the S&P 500 Index (“S&P 500”) for the period commencing December 31, 2011 and ending December 31, 2016. The graph assumes an investment of $100 on December 31, 2011.
38193811_vereit1231_chart-54179.jpg
The graph above and the accompanying text are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by us under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. In addition, the stock price performance in the graph above is not indicative of future stock price performance.
Stock Price and Distributions
For each quarter indicated, the following table reflects the respective high and low sales prices for the General Partner’s common stock as quoted by NASDAQ or NYSE, as applicable, and the dividend or distribution declared per share of common stock or OP Unit by the General Partner or the Operating Partnership, respectively, in each such period:
 
 
First Quarter 2015 (1)
 
Second Quarter 2015 (1)
 
Third Quarter 2015
 
Fourth Quarter 2015
 
First Quarter 2016
 
Second Quarter 2016
 
Third Quarter 2016
 
Fourth Quarter 2016
High
 
$
10.38

 
$
10.15

 
$
9.08

 
$
8.66

 
$
8.92

 
$
10.14

 
$
11.09

 
$
10.35

Low
 
$
8.82

 
$
8.10

 
$
7.50

 
$
7.55

 
$
6.68

 
$
8.67

 
$
9.76

 
$
7.99

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends or distributions declared on common stock or OP Units (2)
 
$

 
$

 
$
0.1375

 
$
0.1375

 
$
0.1375

 
$
0.1375

 
$
0.1375

 
$
0.1375

_______________________________________________
(1)
We agreed to suspend the payment of dividends on the General Partner’s common stock until the Company complied with certain periodic financial reporting and related requirements in connection with the amendments to the Credit Facility. On March 30, 2015, the Company satisfied these periodic financial reporting and related requirements. On August 5, 2015, the Board of Directors authorized the reinstatement of a dividend on our common stock.
(2)
The dividend that the General Partner pays on its common stock is equal to the distributions that the Operating Partnership makes on its OP Units pursuant to the terms of the LPA. However, the Operating Partnership did not make distributions in respect of a substantial portion of the outstanding OP Units held by its limited partners beginning on October 15, 2015 and continuing through January 15, 2017 when the dividend on the General Partner’s common stock was paid, as further discussed in “Note 16 - Equity” in our consolidated financial statements.

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On February 22, 2017, the Company’s board of directors declared a quarterly cash dividend of $0.1375 per share of common stock (equaling an annualized dividend rate of $0.55 per share) for the first quarter of 2017 to stockholders of record as of March 31, 2017, which will be paid on April 17, 2017. An equivalent distribution by the Operating Partnership is applicable per OP Unit. Our future distributions may vary and will be determined by the General Partner’s Board of Directors based upon the circumstances prevailing at the time, including our financial condition, operating results, estimated taxable income and REIT distribution requirements, and may be adjusted at the discretion of the Board.
As of February 22, 2017, the General Partner had approximately 4,200 registered stockholders of record of its common stock. This figure does not reflect the beneficial ownership of shares held in nominee name. There is no established trading market for the Operating Partnership's OP Units. As of February 22, 2017, there were 29 record holders of the OP Units.
Recent Sales of Unregistered Securities
During the year ended December 31, 2016, the Company redeemed 15,450 Limited Partner OP Units for shares of the General Partner's common stock. These shares of common stock were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act. We relied on the exemption under Section 4(a)(2) based upon factual representations received from the limited partner who received the shares of common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows the amount of securities remaining available for future issuance under our equity compensation plans as of December 31, 2016:
Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Securities Available For Future Issuance Under Equity Compensation Plans (1)
Equity compensation plans approved by security holders
 

 

 
92,059,754

Equity compensation plans not approved by security holders
 

 

 

Total
 

 

 
92,059,754

_______________________________________________
(1)
The total number of shares of common stock reserved for the issuance of equity incentive awards under our Equity Plan is equal to 10.0% of the total number of issued and outstanding shares of our common stock (on a fully diluted basis assuming the redemption of all OP Units for shares of common stock) at any time.  As such, the number of shares available for issuance under the Equity Plan changes automatically with changes in the total number of outstanding shares of common stock, outstanding OP Units, and dilutive securities. See “Note 17 – Equity-based Compensation” to our consolidated financial statements for a discussion of the Company’s equity plans.
Repurchases of Equity Securities
We are authorized to repurchase shares of the General Partner’s common stock to satisfy employee withholding tax obligations related to stock-based compensation. During the year ended December 31, 2016, the General Partner and the Operating Partnership repurchased the following shares of common stock and corresponding OP Units that were issued to the General Partner, respectively, in order to satisfy the minimum tax withholding obligation for state and federal payroll taxes on employee stock awards:
Period
 
Total Number of Shares/ Units Purchased
 
Average Price Paid Per Share/Unit (1)
January 1, 2016 - January 31, 2016
 
40,714

 
$
7.52

February 1, 2016 - February 29, 2016
 
42,316

 
7.30

March 1, 2016 - March 31, 2016
 
42,126

 
8.55

April 1, 2016 - April 30, 2016
 
1,391

 
8.95

May 1, 2016 - May 31, 2016
 
2,434

 
9.89

June 1, 2016 - June 30, 2016
 

 

July 1, 2016 - July 31, 2016
 
18,991

 
10.17

August 1, 2016 - August 31, 2016
 

 

September 1, 2016 - September 30, 2016
 
552

 
10.45

October 1, 2016 - October 31, 2016
 
25,996

 
9.65

November 1, 2016 - November 30, 2016
 
2,081

 
8.86

December 1, 2016 - December 31, 2016
 
25,141

 
8.53

Total
 
201,742

 
$
8.40

_______________________________________________
(1) With respect to these shares/units, the price paid per share/unit is based on the weighted average closing price on the respective vesting date.

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Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. Prior periods have been reclassified to conform to current presentation, as discussed in “Note 2 – Summary of Significant Accounting Policies” to our consolidated financial statements. The selected financial data (in thousands, except share and per share amounts) presented below was derived from our consolidated financial statements:
 
 
December 31,
 
 
2016
 
2015
 
2014 (1)
 
2013
 
2012
Balance sheet data:
 
 
 
 
 
 
 
 
 
 
Total real estate investments, at cost
 
$
15,584,442

 
$
16,784,721

 
$
18,292,560

 
$
7,459,142

 
$
1,875,615

Total assets
 
$
15,587,574

 
$
17,405,866

 
$
20,427,136

 
$
7,747,494

 
$
2,168,429

Total debt, net
 
$
6,367,248

 
$
8,059,802

 
$
10,425,778

 
$
4,136,619

 
$
375,956

Total liabilities
 
$
6,968,041

 
$
8,691,907

 
$
11,044,806

 
$
5,248,967

 
$
499,669

Temporary equity
 
$

 
$

 
$

 
$
269,299

 
$

Total equity
 
$
8,619,533

 
$
8,713,959

 
$
9,382,330

 
$
2,229,228

 
$
1,668,760

 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014 (1)
 
2013 (1)
 
2012
Operating data:
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
1,454,823

 
$
1,556,017

 
$
1,579,257

 
$
329,323

 
$
67,207

Total operating expenses
 
1,401,352

 
1,488,692

 
1,949,835

 
663,067

 
97,822

Operating income (loss)
 
53,471


67,325


(370,578
)

(333,744
)

(30,615
)
Total other expenses, net
 
(303,520
)
 
(354,809
)
 
(396,567
)
 
(171,876
)
 
(10,877
)
Gain (loss) on disposition of real estate and held for sale assets, net
 
45,524

 
(72,311
)
 
(277,031
)
 

 

Benefit from (provision for) income taxes
 
3,701

 
36,303

 
33,264

 
(2,195
)
 

Loss from continuing operations
 
(200,824
)

(323,492
)

(1,010,912
)

(507,815
)

(41,492
)
Net loss from discontinued operations
 

 

 

 

 
(745
)
Net loss
 
(200,824
)

(323,492
)

(1,010,912
)

(507,815
)

(42,237
)
Net loss attributable to non-controlling interests(2)
 
4,961

 
7,139

 
33,727

 
16,316

 
585

Net loss attributable to General Partner
 
$
(195,863
)

$
(316,353
)

$
(977,185
)

$
(491,499
)

$
(41,652
)
 
 
 
 
 
 
 
 
 
 
 
Cash flow data:
 
 
 
 
 
 
 
 
 
 
Net cash flows provided by operating activities
 
$
800,528

 
$
867,013

 
$
502,887

 
$
11,918

 
$
9,440

Net cash flows provided by (used in) investing activities
 
$
890,193

 
$
932,595

 
$
(2,554,456
)
 
$
(4,541,718
)
 
$
(1,701,422
)
Net cash flows (used in) provided by financing activities
 
$
(1,503,372
)
 
$
(2,147,216
)
 
$
2,415,555

 
$
4,289,950

 
$
1,965,226

 
 
 
 
 
 
 
 
 
 
 
Per share data:
 
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share from continuing operations attributable to common stockholders
 
$
(0.29
)
 
$
(0.43
)
 
$
(1.36
)
 
$
(2.41
)
 
$
(0.40
)
Basic and diluted net loss per share attributable to common stockholders
 
$
(0.29
)
 
$
(0.43
)
 
$
(1.36
)
 
$
(2.41
)
 
$
(0.41
)
Weighted-average number of shares of common stock outstanding - basic (3)
 
931,422,844

 
903,360,763

 
793,150,098

 
205,341,431

 
103,306,366

Cash dividends declared per common share
 
$
0.55

 
$
0.28

 
$
1.08

 
$
0.91

 
$
0.89

_______________________________________________
(1)
See “Note 6 – Mergers with Real Estate Businesses” to our consolidated financial statements for discussion of the impact of significant mergers on the Company’s operations during these periods.
(2)
Represents loss attributable to limited partners and consolidated joint venture partners.
(3)
For all periods presented, the effect of certain OP Units outstanding, long-term incentive plan units of the Operating Partnership (“LTIP Units”), unvested restricted shares or units and convertible preferred shares were excluded from the weighted-average share calculation as the effect would be anti-dilutive.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “Forward-Looking Statements.” Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this report entitled “Risk Factors.”
Overview
We are a full-service real estate operating company that operates through two business segments, our real estate investment segment, REI, and our investment management segment, Cole Capital, as further discussed in “Note 3 – Segment Reporting” to our consolidated financial statements. Through our REI segment, we own and actively manage a diversified portfolio of 4,142 retail, restaurant, office and industrial real estate properties with an aggregate of 93.3 million square feet, of which 98.3% was leased as of December 31, 2016, with a weighted-average remaining lease term of 9.9 years. Through our Cole Capital segment, we are responsible for raising capital for and managing the affairs of the Cole REITs on a day-to-day basis, identifying and making acquisitions and investments on behalf of the Cole REITs, 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. As of December 31, 2016, the Cole REITs and other real estate programs’ assets under management were $7.3 billion.
Mergers and Major Acquisitions
See “Note 6 – Mergers with Real Estate Businesses” to our consolidated financial statements for a discussion of the mergers consummated during the year ended December 31, 2014 with American Realty Capital Trust IV, Inc. and Cole Real Estate Investments, Inc.
Our Business Environment and Current Outlook
Current conditions in the global capital markets remain volatile as the world’s economic growth has been affected by geopolitical and economic events. In addition, there is uncertainty surrounding the policy stance of the new U.S. administration and its global ramifications. In the United States, the overall economic environment continued to improve in 2016. During 2016, the U.S. real gross domestic product increased 1.6% to $16.66 trillion, the unemployment rate decreased 0.3 percentage points to 4.7%, and Core CPI, a measure of inflation which removes food & energy prices and is seasonally adjusted, increased 2.2%, as compared to the same period a year earlier.
Economic trends and government policies affect global and regional commercial real estate markets as well as our operations directly. These include: overall economic activity and employment growth, interest rate levels, the cost and availability of credit and the impact of tax and regulatory policies.
Critical Accounting Policies and Significant Accounting Estimates
Our accounting policies have been established to conform with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us 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. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the 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 assumptions or estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in “Note 2 – Summary of Significant Accounting Policies” to our consolidated financial statements.

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Goodwill Impairment
We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value, by reporting unit, may not be recoverable. The risks and uncertainties involved in applying the principles related to goodwill impairment include, but are not limited to, the following:
We estimate the fair value of the reporting units, which we have determined is the same as our reportable segments, using discounted cash flows and relevant competitor multiples.
We monitor factors that may impact the fair value including market comparable company multiples, interest rates and global economic conditions.
We use a combined income and market approach in evaluations for potential impairment, which requires management to make key assumptions related to revenue growth rate, cash flow assumptions, discount rate and selection of comparable companies.
See Note 10 – Fair Value Measures for discussion regarding our sensitivity analysis performed around these assumptions.
Intangible Asset Impairment
The Company evaluates intangible assets for impairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The risks and uncertainties involved in applying the principles related to intangible impairment include, but are not limited to, the following:
We estimate fair value using a discounted cash flow model specific to the applicable Cole REITs. 
We monitor factors that could impact fair value including the ability to timely reinstate certain selling agreements, timing of and aggregate capital raised and deployed on behalf of the Cole REITs, the actual timing of closing an offering or executing a liquidity event on behalf of a Cole REIT and operations of future managed real estate programs.
We utilized the income approach in evaluation for impairment, which requires management to make key assumptions related to future cash flows and a discount rate.
See Note 10 – Fair Value Measures for discussion regarding our sensitivity analysis performed around these assumptions.
Real Estate Investment Impairment
We invest in real estate assets and subsequently monitor those investments quarterly for impairment, including the review of real estate properties subject to direct financing leases. Additionally, we record depreciation and amortization related to our investments. The risks and uncertainties involved in applying the principles related to real estate investments include, but are not limited to, the following:
The estimated useful lives of our depreciable assets affects the amount of depreciation and amortization recognized on our investments.
The review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the value of assets and recognize an impairment loss.
The fair value of held for sale assets is estimated by management. This estimated value could result in a reduction of the carrying value of the asset.
Changes in assumptions based on actual results may have a material impact on the Company’s financial results.
Loans Held for Investment Impairment
We evaluate loans held for investment on a quarterly basis. As a first step in the notes receivable impairment process, we must determine, based on current information and events, if it is probable that we will be unable to collect the amounts due in accordance with the loan agreement. The risks and uncertainties involved in applying the principles related to notes receivable include, but are not limited to, the following:
Evaluating the financial condition and other current obligations of the borrower involves judgment in assessing their liquidity and financial stability.
Program Development Costs
We assess the collectability of the program development costs, considering the offering period and historical and forecasted sales of shares under the Cole REITs’ respective offerings and reserve for any balances considered not collectible. Additional reserves are generally recorded if actual proceeds raised from the offerings and corresponding program development costs incurred differ from management’s assumptions. The risks and uncertainties involved in applying the principles related to program development costs include, but are not limited to, the following:

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Estimating recoverability for each program which involves an analysis of expected reimbursement revenue and projected organization and offering costs.
Utilizing assumptions to calculate impairment charges related to goodwill and impairment, as discussed above.
Assessing the impact of the change in calculations of recoverability percentages.
Consolidation of Equity Investments
We hold equity investments in unconsolidated joint ventures and each of the Cole REITs and account for these investments using the equity method of accounting as we have the ability to exercise significant influence, but not control, over operating and financial policies of these investments. We must continually evaluate these and other non-controlling interests for consolidation based on standards set forth in U.S. GAAP. For legal entities being evaluated, we must first determine whether the interests that we hold and fees we receive qualify as variable interests in the entity, as discussed in “Note 2 – Summary of Significant Accounting Policies” to our consolidated financial statements. 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 risks and uncertainties involved in applying the principles related to equity investments include, but are not limited to, the following:
Consideration for variable interest entities involves determining their ability to finance their operations without additional subordinated financial support, whether the equity holders lack the characteristic of controlling financial interest, or whether the entity is established with non-substantive voting rights.
We perform significance calculations based on investments, total assets and income, on an individual basis or on an aggregated basis, by any combination of unconsolidated subsidiaries and equity-method investees.
Allocation of Purchase Price of Business Combinations, including Acquired Properties
In connection with our acquisition of properties, we allocate the purchase price to the tangible and intangible assets and
liabilities acquired based on their respective estimated fair values. Tangible assets consist of land, buildings, fixtures and tenant improvements. Intangible assets consist of above- and below- market lease values and the value of in-place leases. Our purchase price allocations are developed utilizing third-party appraisal reports, industry standards and management experience. The risks and uncertainties involved in applying the principles related to purchase price allocations include, but are not limited to, the following:
The value allocated to land as opposed to buildings, fixtures and tenant improvements affects the amount of depreciation expense we record. If more value is attributed to land, depreciation expense is lower than if more value is attributed to buildings, fixtures and tenant improvements;
Intangible lease assets and liabilities can be significantly affected by estimates, including market rent, lease term including renewal options at rental rates below estimated market rental rates, carrying costs of the property during a hypothetical expected lease-up period, and current market conditions and costs, including tenant improvement allowances and rent concessions; and
We determine whether any financing assumed is above- or below- market based upon comparison to similar financing terms for similar investment properties.
Income Taxes
As a REIT, the General Partner generally is not subject to federal income tax on taxable income that it distributes to its shareholders as long as it distributes at least 90% of its annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains), with the exception of its TRS entities. However, the General Partner, including its TRS entities, and the Operating Partnership are still subject to certain state and local income and franchise taxes in the various jurisdictions in which they operate.
We provide for income taxes in accordance with current authoritative accounting and tax guidance. The tax provision or benefit related to significant or unusual items is recognized in the quarter in which those items occur. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the quarter in which the change occurs. The risks and uncertainties involved in applying the principles related to income taxes include, but are not limited to, the following:
Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in the application of complex tax laws and regulations across the tax jurisdictions where we operate;
We file income tax returns in the U.S. federal jurisdiction, the Canadian federal jurisdiction and various state and local jurisdictions, and are subject to routine examinations by the respective tax authorities. We may be challenged upon review by the applicable taxing authorities, and positions we have taken may not be sustained; and
The accounting estimates used to compute the provision for or benefit from income taxes may change as new events occur, additional information is obtained or the tax environment changes.

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Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are described in “Note 2 – Summary of Significant Accounting Policiesto our consolidated financial statements.
Operating Highlights and Key Performance Indicators
2016 Activity
Acquired controlling financial interests in eight commercial properties for an aggregate purchase price of $100.2 million.
Disposed of 301 properties and one property owned by an unconsolidated joint venture for an aggregate sales price of $1.20 billion, of which our share was $1.14 billion, resulting in consolidated proceeds of $1.00 billion after closing costs, $55.0 million of debt assumptions and $57.0 million of debt repayments by the unconsolidated joint venture.
Closed on a public offering to sell 69.0 million shares of common stock, as defined in Note 1 – Organization, for net proceeds, after underwriting discounts and offering costs, of $702.5 million.
Closed the 2016 Bond Offering of $1.0 billion and entered into a $300.0 million 2016 Term Loan, as defined in Note 11 – Debt, to the consolidated financial statements, which was subsequently repaid.
Registered a continuous offering program allowing for the issuance of up to $750.0 million in shares of common stock over three years.
Total debt decreased by $1.7 billion, from $8.1 billion to $6.4 billion, comprised of unsecured bonds of $0.3 billion, unsecured Credit Facility of $1.0 billion, and secured debt of $0.4 billion.
Declared a quarterly dividend of $0.1375 per share of common stock for each quarter of 2016, representing an annualized dividend rate of $0.55 per share.

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Real Estate Portfolio Metrics
In managing our portfolio, we are committed to diversification by property type, tenant, geography and industry. Below is a summary of our property type diversification and our top ten concentrations as of December 31, 2016, based on annualized rental income of $1.2 billion for the year ended December 31, 2016.
38193811_vereit1231_chart-55263.jpg
38193811_vereit1231_chart-56469.jpg38193811_vereit1231_chart-57538.jpg
38193811_vereit1231_chart-58444.jpg38193811_vereit1231_chart-59407.jpg

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Our financial performance is influenced by the timing of acquisitions and dispositions and the operating performance of our real estate properties. The following table shows the property statistics of our real estate assets, excluding properties owned through our unconsolidated joint ventures as of December 31, 2016, 2015 and 2014:

 
2016
 
2015
 
2014
Portfolio Metrics
 
 
 
 
 
 
Properties owned
 
4,142
 
4,435
 
4,648
Rentable square feet (in millions)
 
93.3
 
99.6
 
103.1
Economic occupancy rate (1)
 
98.3%
 
98.6%
 
99.3%
Investment-grade tenants (2)
 
41.2%
 
42.5%
 
46.9%
____________________________________
(1)
Economic occupancy rate equals the sum of square feet leased (including month-to-month) divided by total square feet.
(2)
Investment-grade tenants are those with a credit rating of BBB- or higher by Standard & Poor’s Rating Services or a credit rating of Baa3 or higher by Moody’s Investor Service, Inc. The ratings may reflect those assigned by Standard & Poor’s Rating Services or Moody’s Investor Service, Inc. to the lease guarantor or the parent company, as applicable.
The following table shows the economic metrics of our real estate assets, excluding properties owned through our unconsolidated joint ventures, as of and for the years ended December 31, 2016, 2015 and 2014:
 
 
2016
 
2015
 
2014
Economic Metrics
 
 
 
 
 
 
Weighted-average lease term (in years) (1)
 
9.9
 
10.6
 
11.8
Lease rollover (1)(2):
 
 
 
 
 
 
Annual average
 
4.3%
 
3.8%
 
3.2%
Maximum for a single year
 
7.4%
 
4.5%
 
4.3%
____________________________________
(1)
Based on annualized rental income of our real estate portfolio as of the respective reporting date.
(2)
Through the end of the next five years measured as of the end of each reporting period.

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Operating Performance
In addition, management uses the following financial metrics of our business segments to assess our operating performance (dollar amounts in thousands, except per share amounts).
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Financial Metrics
 
 
 
 
 
 
Real Estate Investment Segment
 
 
 
 
 
 
Revenues
 
$
1,335,447

 
$
1,441,135

 
$
1,375,699

Operating income (loss)
 
$
195,479

 
$
297,080

 
$
(30,706
)
Net loss
 
$
(69,373
)
 
$
(136,095
)
 
$
(714,238
)
Funds from operations attributable to common stockholders and limited partners (“FFO”) (1)
 
$
744,867

 
$
772,563

 
$
445,810

Adjusted funds from operations attributable to common stockholders and limited partners (“AFFO”) (1)
 
$
725,302

 
$
769,201

 
$
685,472

AFFO per diluted share (1)
 
$
0.76

 
$
0.83

 
$
0.82

 
 
 
 
 
 
 
Financial Metrics (continued)
 
 
 
 
 
 
Cole Capital Segment
 
 
 
 
 
 
Revenues
 
$
119,376

 
$
114,882

 
$
203,558

Operating loss
 
$
(142,008
)
 
$
(229,755
)
 
$
(339,872
)
Net loss
 
$
(131,451
)
 
$
(187,397
)
 
$
(296,674
)
FFO (1)
 
$
(131,451
)
 
$
(187,397
)
 
$
(296,674
)
AFFO (1)
 
$
16,155

 
$
12,857

 
$
65,242

AFFO per diluted share (1)
 
$
0.02

 
$
0.01

 
$
0.08

 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
Revenues
 
$
1,454,823


$
1,556,017


$
1,579,257

Operating income (loss)
 
$
53,471


$
67,325


$
(370,578
)
Net loss
 
$
(200,824
)

$
(323,492
)

$
(1,010,912
)
FFO (1)
 
$
613,416


$
585,166


$
149,136

AFFO (1)
 
$
741,457


$
782,058


$
750,714

AFFO per diluted share (1)
 
$
0.78

 
$
0.84

 
$
0.90

____________________________________
(1)
See the “Non-GAAP Measures” section below for descriptions of our non-GAAP measures and reconciliations to the most comparable U.S. GAAP measure.
The following table presents the total assets of the Company, by segment (in thousands):
 
 
Total Assets
 
 
December 31, 2016
 
December 31, 2015
REI segment
 
$
15,337,623

 
$
16,966,729

Cole Capital segment
 
249,951

 
439,137

Total
 
$
15,587,574

 
$
17,405,866


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Table of Contents

Property Financing
Our mortgage notes payable consisted of the following as of December 31, 2016, 2015 and 2014 (dollar amounts in thousands):
 
 
Encumbered Properties
 
Outstanding Loan Amount
 
Weighted Average
Effective Interest Rate
(1)(2)
 
Weighted Average Maturity (3)
December 31, 2016
 
619

 
$
2,629,949

 
4.95
%
 
4.6

December 31, 2015
 
654

 
$
3,039,882

 
5.08
%
 
5.1

December 31, 2014
 
776

 
$
3,689,795

 
4.88
%
 
6.2

_______________________________________________
(1)
Mortgage notes payable have fixed rates or are fixed by way of interest rate swap arrangements. Effective interest rates ranged from 2.00% to 7.75% at December 31, 2016, 3.10% to 10.68% at December 31, 2015 and 2.75% to 7.20% at December 31, 2014.
(2)
Weighted average interest rate is computed using the interest rate in effect until the anticipated repayment date. Should the loan not be repaid at the anticipated repayment date, the applicable interest rate would increase as specified in the respective loan agreement until the extended maturity date.
(3)
Weighted average remaining years to maturity as of December 31, 2016, 2015, and 2014, respectively. Weighted average years remaining to maturity is computed using the anticipated repayment date as specified in each loan agreement, where applicable.
In addition, we have financing which is not secured by interests in real property, which is described under “Liquidity and Capital Resources.”
Future Lease Expirations
The following is a summary of lease expirations for the next 10 years and beyond at the properties we owned as of December 31, 2016 (dollar amounts and square feet in thousands):
Year of Expiration
 
Number of Leases
Expiring
(1)
 
Square Feet
 
Square Feet as a % of Total Portfolio
 
Annualized Rental Income Expiring
 
Annualized Rental Income Expiring as a % of Total Portfolio
2017
 
126

 
1,973

 
2.1
%
 
$
27,663

 
2.4
%
2018
 
213

 
3,368

 
3.6
%
 
37,029

 
3.1
%
2019
 
184

 
3,242

 
3.5
%
 
55,142

 
4.7
%
2020
 
231

 
4,203

 
4.6
%
 
46,299

 
3.9
%
2021
 
194

 
11,046

 
11.8
%
 
87,378

 
7.4
%
2022
 
276

 
9,638

 
10.4
%
 
84,589

 
7.3
%
2023
 
212

 
5,935

 
6.3
%
 
72,330

 
6.2
%
2024
 
177

 
9,158

 
9.9
%
 
106,982

 
9.1
%
2025
 
266

 
4,233

 
4.5
%
 
61,111

 
5.2
%
2026
 
247

 
7,832

 
8.4
%
 
82,723

 
7.1
%
Thereafter
 
1,315

 
31,052

 
33.2
%
 
512,537

 
43.6
%
Total
 
3,441

 
91,680

 
98.3
%
 
$
1,173,783

 
100.0
%
_______________________________________________
(1)
The Company has certain leases comprised of multiple properties.


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Table of Contents

Results of Operations
Revenues
The table below sets forth, for the periods presented, certain revenue information and the dollar amount change year over year (in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2016 vs 2015
Increase/(Decrease)
 
2015 vs 2014
Increase/(Decrease)
Revenues:
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
1,227,937

 
$
1,339,787

 
$
1,271,574

 
$
(111,850
)

$
68,213

Direct financing lease income
 
2,055

 
2,720

 
3,603

 
(665
)

(883
)
Operating expense reimbursements
 
105,455

 
98,628

 
100,522

 
6,827


(1,894
)
Cole Capital revenue:
 
 
 
 
 
 
 


 
 
Offering-related fees and reimbursements
 
36,533

 
24,410

 
87,109

 
12,123


(62,699
)
Transaction service fees and reimbursements
 
12,959

 
30,109

 
64,956

 
(17,150
)

(34,847
)
Management fees and reimbursements
 
69,884

 
60,363

 
51,493

 
9,521


8,870

Total Cole Capital revenue
 
119,376

 
114,882


203,558

 
4,494


(88,676
)
Total revenues
 
$
1,454,823

 
$
1,556,017


$
1,579,257

 
$
(101,194
)

$
(23,240
)
Rental Income
2016 vs 2015 – Rental revenue decreased $111.9 million during the year ended December 31, 2016, of which $105.6 million was due to the disposition of 529 consolidated properties subsequent to January 1, 2015. The decrease was also due to an increase in tenant vacancies, particularly Ovation Brands, Inc., which filed for chapter 11 bankruptcy on March 7, 2016 (the “Ovation Bankruptcy”).
2015 vs 2014 – The increase in rental income during the year ended December 31, 2015 was primarily due to the acquisition of 1,107 properties in 2014, including the consummation of the Cole Merger in the first quarter of 2014 and the acquisition of over 500 Red Lobster® restaurants in the third quarter of 2014, offset by the disposition of 338 properties subsequent to January 1, 2014.
Cole Capital Revenue
Cole Capital’s results of operations are primarily impacted by capital raised on behalf of the Cole REITs in offerings as well as the timing and extent of real estate asset acquisitions, dispositions, assets under management and reimbursements, which are driven by the Cole REITs’ capital raised, cash flows provided by operations and available proceeds from debt financing.
Offering-Related Fees and Reimbursements
Offering-related fees and reimbursements include selling commissions, dealer manager fees and/or distribution and stockholder servicing fees earned from selling securities in the Cole REITs. The Company reallows 100% of selling commissions and may reallow all or a portion of our dealer manager and distribution and stockholder servicing fees to participating broker-dealers as a marketing and due diligence expense reimbursement, based on factors such as the volume of shares sold by such participating broker-dealers and the amount of marketing support provided by such participating broker-dealers. The following table represents offering-related fees and reimbursements as well as amounts reallowed for the periods presented and the dollar amount change year over year (in thousands).
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2016 vs 2015
Increase/(Decrease)
 
2015 vs 2014
Increase/(Decrease)
Offering-related fees
 
$
28,250

 
$
19,232

 
$
74,556

 
$
9,018


$
(55,324
)
Offering-related reimbursements
 
8,283

 
5,178

 
12,553

 
3,105


(7,375
)
Less: reallowed fees and commissions
 
23,174

 
16,195

 
66,228

 
6,979


(50,033
)
Offering-related fees and reimbursements, net of reallowed
 
$
13,359


$
8,215


$
20,881

 
$
5,144


$
(12,666
)
2016 vs 2015 – The increase in offering-related fees and reimbursements, net of reallowed fees and commissions of $5.1 million during the year ended December 31, 2016 was a direct result of a $216.2 million increase in capital raise to $487.2 million during the year ended December 31, 2016 from $271.0 million during the year ended December 31, 2015. The increase in capital raise was due to new broker-dealer relationships, as well as certain broker-dealers lifting the suspension of their selling agreements.

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Table of Contents

2015 vs 2014 – The net decrease in offering-related fees and reimbursements of $12.7 million for the year ended December 31, 2015 was a direct result of the decrease in capital raise related to the suspension of certain selling agreements, as discussed above. Additionally, the decrease was partly due to the closing of the offering of Cole Credit Property Trust IV, Inc. in the first quarter of 2014.
Transaction Service Fees and Reimbursements
2016 vs 2015 – Transaction service fees and reimbursement revenue consist primarily of acquisition and disposition fees earned from acquiring and selling properties on behalf of the Cole REITs and other real estate programs. The decrease of $17.2 million during the year ended December 31, 2016, was due to a decrease in property acquisitions from $992.2 million, during the year ended December 31, 2015, to $660.2 million for the year ended December 31, 2016. In addition, disposition fee revenue decreased as the Company received $4.4 million of such fees relating to the Cole Corporate Income Trust, Inc. disposition in 2015.
2015 vs 2014 – Transaction service fees were $27.9 million for the year ended December 31, 2015 as compared to $60.7 million during the same period in 2014. Transaction-related reimbursement revenues were $2.2 million for the year ended December 31, 2015, as compared to $4.3 million during the same period in 2014. The net decrease of $34.9 million for the year ended December 31, 2015 was primarily due to decreases in acquisition fee revenue as there were less funds raised by the Managed REITs’ offerings that could be deployed into real estate acquisitions on their behalf.
Management Fees and Reimbursements
2016 vs 2015 – The increase of $9.5 million for the year ended December 31, 2016 was primarily due to an increase in the average assets under management, excluding assets owned by CCIT, as CCIT merged with Select Income REIT on January 29, 2015, from $6.3 billion for the year ended December 31, 2015 to $7.0 billion for the year ended December 31, 2016 and an increase in reimbursement revenue of $3.7 million for the year ended December 31, 2016.
2015 vs 2014 – Management fees were $46.5 million for the year ended December 31, 2015 as compared to $42.7 million during the same period in 2014. Management reimbursement revenues were $13.8 million for the year ended December 31, 2015, as compared to $8.8 million during the same period in 2014. The overall net increase in fees and reimbursements of $8.8 million for the year ended December 31, 2015 primarily related to an increase in reimbursement revenue as the Company was no longer waiving certain expenses due from the Managed REITs in 2015, as well as an increase in advisory fees due to an increase in assets under management.
Operating Expenses
The table below sets forth, for the periods presented, certain operating expense information and the dollar amount change year over year (dollar amounts in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2016 vs 2015
Increase/(Decrease)
 
2015 vs 2014
Increase/(Decrease)
Operating expenses:
 
 
 
 
 
 
 


 
 
Cole Capital reallowed fees and commissions
 
$
23,174

 
$
16,195

 
$
66,228

 
$
6,979


$
(50,033
)
Acquisition related expenses
 
1,321

 
6,243

 
38,940

 
(4,922
)

(32,697
)
Litigation, merger and other non-routine costs, net of insurance recoveries
 
3,884

 
33,628

 
199,616

 
(29,744
)

(165,988
)
Property operating expenses
 
144,428

 
130,855

 
137,741

 
13,573


(6,886
)
Management fees to affiliates
 

 

 
13,888

 

 
(13,888
)
General and administrative expenses
 
136,608

 
149,066

 
167,428

 
(12,458
)

(18,362
)
Depreciation and amortization expenses
 
788,186

 
847,611

 
916,003

 
(59,425
)

(68,392
)
Impairments
 
303,751

 
305,094

 
409,991

 
(1,343
)

(104,897
)
Total operating expenses
 
$
1,401,352


$
1,488,692


$
1,949,835

 
$
(87,340
)

$
(461,143
)
Acquisition Related Expenses
2016 vs 2015 – Acquisition related expenses primarily consist of legal, deed transfer and other costs related to real estate purchase transactions, including costs incurred for deals that were not consummated. The Company acquired an interest in eight commercial properties for a purchase price of $100.2 million during the year ended December 31, 2016 as compared with the acquisition of 16 properties for an aggregate purchase price of $36.3 million during the year ended December 31, 2015. The decrease in acquisition related expenses of $4.9 million during the year ended December 31, 2016 was due to a decrease in costs incurred for deals that were not consummated and fewer properties acquired in 2016.

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Table of Contents

2015 vs 2014 – The Company acquired interests in 16 commercial properties, including nine land parcels for build-to-suit development, for an aggregate purchase price of $36.3 million during the year ended December 31, 2015 as compared with the acquisition of 1,107 properties including 31 land parcels, for an aggregate purchase price of $3.8 billion during the year ended December 31, 2014. The decrease in acquisition related expenses during the year ended December 31, 2015 was primarily due to a significant decrease in acquisition activity as compared to the same period in 2014.
Litigation, Merger and Other Non-Routine Costs, Net of Insurance Recoveries
2016 vs 2015 – The decrease of $29.7 million during the year ended December 31, 2016 was primarily due to a $20.0 million decrease in legal fees incurred for litigation arising from the results of the the Audit Committee Investigation and related litigation and investigations. Additionally, the Company recognized insurance recoveries of $21.2 million during the year ended December 31, 2016 as compared to $11.4 million in 2015.
2015 vs 2014 – The decrease of $166.0 million during the year ended December 31, 2015 was primarily related to costs incurred relating to the Cole Merger and the ARCT IV Merger, including a $78.2 million subordinated distribution fee to an affiliate of the Former Manager upon the consummation of the ARCT IV Merger that was settled with 6.7 million OP Units to the affiliate of the Former Manager during the year ended December 31, 2014. No such fees were incurred for any mergers during the year ended December 31, 2015. However, the Company incurred $44.2 million of expenses in connection with the Audit Committee Investigation and related litigation and investigations during the year ended December 31, 2015. These expenses were offset by $11.4 million of insurance proceeds, $10.5 of which related to expenses for litigation arising from the results of the Audit Committee Investigation.
Property Operating Expenses and Operating Expense Reimbursement
The table below sets forth, for the periods presented, the property operating expenses, net of operating expense reimbursements, and the dollar amount change year over year (dollar amounts in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2016 vs 2015
Increase/(Decrease)
 
2015 vs 2014
Increase/(Decrease)
Property operating expenses
 
$
144,428

 
$
130,855

 
$
137,741

 
$
13,573


$
(6,886
)
Less: Operating expense reimbursements
 
105,455

 
98,628

 
100,522

 
6,827


(1,894
)
Property operating expenses, net of operating expense reimbursements
 
$
38,973


$
32,227


$
37,219

 
$
6,746


$
(4,992
)
2016 vs 2015 – Property operating expenses such as taxes, insurance, ground rent and maintenance include both reimbursable and non-reimbursable property expenses. Operating expense reimbursement revenue represents reimbursements for such costs that are reimbursable by the tenants per their respective leases. The net increase of $6.7 million during the year ended December 31, 2016 was primarily due to an increase in tenant vacancies, particularly related to the Ovation Bankruptcy.
2015 vs 2014 – The net decrease of $5.0 million during the year ended December 31, 2015 was driven primarily by the disposal of our portfolio of anchored shopping centers, which generally have higher non-reimbursable operating expenses, during the fourth quarter of 2014, as well as the disposition of 228 properties in 2015.
Management Fees to Affiliates
2016 vs 2015 – There were no management fees to affiliates incurred during the years ended December 31, 2016 or 2015 as discussed in “Note 18 – Related Party Transactions and Arrangements” to our consolidated financial statements.
2015 vs 2014 – There were no management fees to affiliates incurred during the year ended December 31, 2015 as discussed in “Note 18 – Related Party Transactions and Arrangements” to our consolidated financial statements, as we completed our transition to self-management on January 8, 2014. During the year ended December 31, 2014, we incurred fees of $13.9 million related to asset management services.

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Table of Contents

General and Administrative Expenses
2016 vs 2015 – The decrease of $12.5 million during the year ended December 31, 2016 was primarily due to a decrease of $8.7 million in consulting and other professional fees in 2016, as well as a decrease in equity-based compensation of $3.8 million primarily due to certain awards which were fully expensed during 2015. Additionally, during the year ended December 31, 2016, accounting fees decreased $1.8 million, primarily due to the work performed during the first quarter of 2015 in connection with the restatements, and legal fees decreased $1.7 million, primarily due to costs incurred in 2015 related to strategic, tax and regulatory matters. These decreases were partially offset by an increase in the amount reserved related to the collectability of program development costs of $4.8 million during the year ended December 31, 2016 as compared to the same period in 2015. See Note 18 – Related Party Transactions and Arrangements for further discussion on the Cole REIT’s program development costs.
2015 vs 2014 – The decrease in general and administrative expense during the year ended December 31, 2015 was primarily related to a decrease in equity-based compensation of $18.8 million, from $33.3 million for the year ended December 31, 2014 to $14.5 million for the year ended December 31, 2015, largely as a result of the forfeiture of certain awards in connection with the departure of certain officers and directors in the fourth quarter of 2014. The overall decrease in compensation and benefits is also due to the Company’s headcount reduction as compared to the same period in 2014, partially offset by the increase in severance to former employees.
Depreciation and Amortization Expenses
2016 vs 2015 – The decrease of $59.4 million during the year ended December 31, 2016 primarily related to the disposition of 529 consolidated properties subsequent to January 1, 2015. The Company also recorded $182.8 million and $91.8 million of impairment charges on real estate investments during the year ended December 31, 2016 and 2015, respectively, which reduced the carrying value being depreciated and amortized.
2015 vs 2014 – The decrease in depreciation and amortization expense during the year ended December 31, 2015 was primarily related to a decrease in the amortization of the management and advisory contracts (the “Management Contracts”) with the Managed REITs of $42.6 million due to an impairment of $86.4 million recorded in the fourth quarter of 2014. Additionally, real estate depreciation and amortization expense decreased $27.0 million, primarily due to dispositions of 228 properties in 2015 and 110 properties in 2014. The Company also recorded $100.5 million of impairment charges on real estate investments from continuing operations during the year ended December 31, 2014, of which impairment charges totaling $96.7 million arose during the fourth quarter of 2014.
Impairments
2016 vs 2015 – The decrease in impairments of $1.3 million during the year ended December 31, 2016 was due to a decrease in the impairment of the intangible assets and goodwill in the Cole Capital segment of $92.4 million, as discussed in “Note 10 – Fair Value Measures” to our consolidated financial statements, offset by an increase in impairment charges recorded related to the REI segment of $91.1 million primarily due to management identifying certain properties for potential sale as part of its portfolio management strategy to reduce exposure to office properties, as well as the Ovation Bankruptcy.
2015 vs 2014 – The decrease in impairments during the year ended December 31, 2015 was primarily due to a decrease in the impairment of goodwill in the Cole Capital segment of $83.4 million from $223.0 million in 2014 to $139.7 million in 2015. There was also a decrease in the impairment of real estate assets of $8.7 million from an impairment of $100.5 million during the year ended December 31, 2014, as compared to an impairment of $91.8 million in 2015.

45

Table of Contents

Other (Expense) Income and Income Tax Benefit
The table below sets forth, for the periods presented, certain financial information and the dollar amount change year over year (dollar amounts in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2016 vs 2015
Increase/(Decrease)
 
2015 vs 2014
Increase/(Decrease)
Other (expense) income and tax benefit (provision):
 
 
 
 
 
 
 


 
 
Interest expense
 
$
(317,376
)
 
$
(358,392
)
 
$
(452,648
)
 
$
(41,016
)

$
(94,256
)
(Loss) gain on extinguishment and forgiveness of debt, net
 
(771
)
 
4,812

 
(21,869
)
 
(5,583
)

26,681

Other income, net
 
6,035

 
6,439

 
88,596

 
(404
)

(82,157
)
Reserve for loan loss
 

 
(15,300
)
 

 
15,300

 
 
Equity in income (loss) and gain on disposition of unconsolidated entities
 
9,783

 
9,092

 
(76
)
 
691


9,168

Loss on derivative instruments, net
 
(1,191
)
 
(1,460
)
 
(10,570
)
 
269


9,110

Gain (loss) on disposition of real estate and held for sale assets, net
 
45,524

 
(72,311
)
 
(277,031
)
 
117,835


204,720

Benefit from income taxes
 
3,701

 
36,303

 
33,264

 
(32,602
)

3,039

Interest Expense
2016 vs 2015 – The decrease of $41.0 million during the year ended December 31, 2016 was primarily a result of a decrease in the total outstanding debt balance from $8.1 billion as of December 31, 2015 to $6.4 billion as of December 31, 2016, largely due to the repayment of all outstanding borrowings under the revolving credit facility, repayment of $0.5 billion of the Credit Facility Term Loan, as well as reducing secured debt with proceeds from the public equity offering and property dispositions.
2015 vs 2014 – The decrease in interest expense during the year ended December 31, 2015 was primarily a result of a decrease in amortization expense in relation to a 2014 cumulative adjustment of amortization for premium on a loan in default of $16.7 million. The decrease also related to the decrease in total outstanding debt balance from $10.4 billion as of December 31, 2014 to $8.1 billion as of December 31, 2015, largely due to paying down $1.8 billion on the revolving credit facility as well as the prepayment of mortgage notes payable and assumption of debt by the buyer in property dispositions as discussed in “Note 11 – Debt” to our consolidated financial statements. These decreases were partially offset by an increase of $6.9 million in interest expense on bonds that were issued in February 2014.
(Loss) Gain on Extinguishment and Forgiveness of Debt, Net
2016 vs 2015 – During the year ended December 31, 2016, the Company recorded a loss of $0.8 million in relation to the write-off of deferred financing costs and net premiums consisting of losses relating to the early extinguishment of our 2017 Senior Notes of $13.2 million and the prepayment of a portion of the Credit Facility Term Loan of $4.3 million, as well as the 2016 Term Loan of $2.6 million, as discussed in “Note 11 – Debt” to our consolidated financial statements. These losses were partially offset by a gain on forgiveness of debt of $19.1 million related to a property foreclosed upon.
2015 vs 2014 – A gain on extinguishment and forgiveness of debt, net of $4.8 million was recorded for the year ended December 31, 2015, which primarily related to the foreclosure of the Company’s property in Bethseda, Maryland. During the year ended December 31, 2015, the Company also repaid an aggregate of $548.9 million of mortgage notes payable prior to maturity or assumed by the buyer in a property disposition as compared to $1.6 billion repaid prior to maturity in 2014. In connection with the extinguishments, we paid prepayment fees totaling $102,000 and $35.9 million for the years ended December 31, 2015 and 2014, respectively, which are also included in (loss) gain on extinguishment and forgiveness of debt, net in the consolidated financial statements.
Other Income, Net
2016 vs 2015 – Other income, net remained relatively constant, decreasing $0.4 million during the year ended December 31, 2016 as compared to the same period in 2015. The line items “Other income, net”, “Gain (loss) on disposition of interest in joint venture” and “Equity in income and gain on disposition of unconsolidated entities” previously reported have been reclassified to conform with the current period’s presentation, as discussed in “Note 2 – Summary of Significant Accounting Policiesto the consolidated financial statements.

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Table of Contents

2015 vs 2014 – The decrease in other income, net during the year ended December 31, 2015 was primarily a result of a litigation settlement with RCS Capital Corporation in 2014, from which the Company received $60.0 million in connection with the unconsummated sale of Cole Capital as discussed in “Note 18 – Related Party Transactions and Arrangements” to our consolidated financial statements. The decrease also related to the decrease in interest income from investment securities, largely resulting from the sale of 15 CMBS for $158.0 million during the third quarter of 2014, as well as a decrease in interest income from mortgage notes receivable, two of which were repaid in the fourth quarter of 2014.
Reserve for Loan Loss
The reserve for loan loss of $15.3 million for the year ended December 31, 2015 related to an unsecured note from RCS Capital Corporation in connection with the unconsummated sale of Cole Capital, as discussed in “Note 18 – Related Party Transactions and Arrangements” to the consolidated financial statements. During the three months ended December 31, 2015, the Company assessed the collectability of the note, determined it was unlikely to be repaid and recorded the reserve equal to the carrying value of the note.

Equity in Income (Loss) and Gain on Disposition of Unconsolidated Entities
2016 vs 2015 – Equity in income (loss) and gain on disposition of unconsolidated entities increased $0.7 million during the year ended December 31, 2016 as compared to 2015. During the year ended December 31, 2016, the Company recored a gain of $10.2 million related to the disposition of one property, comprising 343 million square feet of office space, owned by an unconsolidated joint venture. During the year ended December 31, 2015, the Company recored a gain of $6.7 million related to the disposition of its interest in one consolidated joint venture, whose only assets consisted of investments in three unconsolidated joint ventures that owned three properties, comprising 752 million square feet of retail space. During the years ended December 31, 2016 and 2015, the Company recognized $0.9 million and $2.3 million of net income, respectively, from the unconsolidated joint ventures. The Company recorded equity in loss related to its investments in the Cole REITs of $1.3 million during the year ended December 31, 2016, as compared to equity in income of $49,000 during the year ended December 31, 2015. The line items “Other income, net”, “Gain (loss) on disposition of interest in joint venture” and “Equity in income and gain on disposition of unconsolidated entities” previously reported have been reclassified to conform with the current period’s presentation, as discussed in “Note 2 – Summary of Significant Accounting Policiesto the consolidated financial statements.
2015 vs 2014 – The increase of $9.2 million during the year ended December 31, 2015 as compared to 2014 is primarily due to a gain of $6.7 million related to the disposition of our interest in one consolidated joint venture as discussed above. 
Loss on Derivative Instruments, Net
2016 vs 2015 – The decrease during the year ended December 31, 2016, is due to the termination of two interest rate swaps in connection with the early repayment of a portion of the Credit Facility Term Loan, as discussed in “Note 11 – Debt” to our consolidated financial statements, which resulted in a loss of $3.3 million, offset by an increase in the fair value of the Company’s interest rate swaps.
2015 vs 2014 – Loss on derivative instruments, net related to the ineffective portion of changes in fair value of cash flow hedges. The decrease in loss on derivative instruments, net for the year ended December 31, 2015 primarily related to the fact that we recorded a loss of $18.8 million for the year ended December 31, 2014 relating to the Series D embedded derivative, which was settled in connection with the redemption of the Series D Preferred Stock in the third quarter of 2014.
Gain (Loss) on Disposition of Real Estate and Held For Sale Assets, Net
2016 vs 2015 – During the year ended December 31, 2016, the change of $117.8 million from a net loss on dispositions of real estate to a net gain is due to the Company’s disposition of 301 properties for an aggregate sales price of $1.1 billion, which resulted in an aggregate gain of $50.6 million, as compared to the disposal of 228 properties for an aggregate sales price of $1.4 billion during the same period in 2015 for a loss of $69.1 million. During the year ended December 31, 2016, the Company also recorded a loss of $5.1 million related to assets classified as held for sale, as compared to a loss of $3.2 million during the same period in 2015.
2015 vs 2014 – The loss on disposition of real estate and held for sale assets, net decreased $204.7 million due to the Company’s disposition of 228 properties, including two properties owned by consolidated joint ventures, for an aggregate sales price of $1.4 billion, which resulted in a loss of $69.1 million, as compared to the disposal of 110 properties for an aggregate price of $1.6 billion, which resulted in a loss of $277.0 million

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Benefit From Income Taxes
2016 vs 2015 – The decrease of $32.6 million during the year ended December 31, 2016 was primarily due to a decrease in the loss attributable to taxable subsidiaries of $90.8 million.
2015 vs 2014 – The benefit from income taxes of $36.3 million for the year ended December 31, 2015 reflected an increase of $3.0 million from a benefit from income taxes of $33.3 million during the same period in 2014. The increased benefit primarily related to a decrease in income taxes within the REI segment.
Non-GAAP Measures
Our results are presented in accordance with U.S. GAAP. We also disclose certain non-GAAP measures, as discussed further below. Management uses these non-GAAP financial measures in our internal analysis of results and believes these measures are useful to investors for the reasons explained below. These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP.
Funds from Operations and Adjusted Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), an industry trade group, has promulgated a supplemental performance measure known as funds from operations (“FFO”), which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income or loss as determined under U.S. GAAP.
NAREIT defines FFO as net income or loss computed in accordance with U.S. GAAP, excluding gains or losses from disposition of property, depreciation and amortization of real estate assets and impairment write-downs on real estate including the pro rata share of adjustments for unconsolidated partnerships and joint ventures. We calculated FFO in accordance with NAREIT’s definition described above.
In addition to FFO, we use adjusted funds from operations (“AFFO”) as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company. AFFO, as defined by the Company, excludes from FFO non-routine items such as acquisition related expenses, litigation and other non-routine costs, gains or losses on sale of investment securities or mortgage notes receivable and legal settlements and insurance recoveries not in the ordinary course of business. We also exclude certain non-cash items such as impairments of goodwill or intangible assets, straight-line rental revenue, unrealized gains or losses on derivatives, reserves for loan loss, gains or losses on the extinguishment or forgiveness of debt, non-current portion of the tax benefit or expense, equity-based compensation, amortization of intangible assets, deferred financing costs, above-market lease assets and below-market lease liabilities. Management believes that excluding these costs from FFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time. AFFO allows for a comparison of the performance of our operations with other publicly traded REITs, as AFFO, or an equivalent measure, is routinely reported by publicly traded REITs, and we believe often used by analysts and investors for comparison purposes.
For all of these reasons, we believe FFO and AFFO, in addition to net income (loss), as defined by U.S. GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of the Company over time. However, not all REITs calculate FFO and AFFO the same way, so comparisons with other REITs may not be meaningful. FFO and AFFO should not be considered as alternatives to net income (loss) and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. Neither the SEC, NAREIT, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate AFFO and its use as a non-GAAP financial performance measure.

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The table below presents FFO and AFFO for the years ended December 31, 2016, 2015 and 2014 (in thousands, except share and per share data).
 
 
Year Ended December 31,
Consolidated
 
2016
 
2015
 
2014
Net loss
 
$
(200,824
)
 
$
(323,492
)
 
$
(1,010,912
)
Dividends on non-convertible preferred stock
 
(71,892
)
 
(71,892
)
 
(71,094
)
(Gain) loss on real estate assets and interest in joint venture, net
 
(55,722
)
 
65,582

 
277,031

Depreciation and amortization of real estate assets
 
756,315

 
817,469

 
844,527

Impairment of real estate
 
182,820

 
91,755

 
100,547

Proportionate share of adjustments for unconsolidated entities
 
2,719

 
5,744

 
9,037

FFO attributable to common stockholders and limited partners
 
613,416

 
585,166


149,136

Acquisition related expenses
 
1,321

 
6,243

 
38,940

Litigation, merger and other non-routine costs, net of insurance recoveries
 
3,884

 
33,628

 
199,616

Impairment of intangible assets
 
120,931

 
213,339

 
309,444

Reserve for loan loss
 

 
15,300

 

Legal settlements
 

 
(1,250
)
 
(63,206
)
Gain on investment securities
 

 
(65
)
 
(6,357
)
Loss on derivative instruments, net
 
1,191

 
1,460

 
10,570

Amortization of premiums and discounts on debt and investments, net
 
(14,693
)
 
(19,183
)
 
(6,449
)
Amortization of above-market lease assets and deferred lease incentives, net of amortization of below-market lease liabilities
 
5,396

 
4,522

 
5,900

Net direct financing lease adjustments
 
2,264

 
2,037

 
1,595

Amortization and write-off of deferred financing costs
 
28,063