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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________

Commission file numbers: 001-35263 and 333-197780

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. VEREIT, Inc. Yes x No o VEREIT Operating Partnership, L.P. Yes x No o
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). VEREIT, Inc. Yes x No o VEREIT Operating Partnership, L.P. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
VEREIT, Inc.
Large accelerated filer
x
 
Accelerated filer
o
 
Non-accelerated filer
(Do not check if a smaller reporting company)
o
 
 
 
 
 
 
 
 
 
Smaller reporting company
o
 
Emerging growth company
o
 
 
VEREIT Operating Partnership, L.P.
Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
(Do not check if a smaller reporting company)
x
 
 
 
 
 
 
 
 
 
Smaller reporting company
o
 
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. VEREIT, Inc. ¨ VEREIT Operating Partnership, L.P. 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
There were 968,262,219 shares of common stock of VEREIT, Inc. outstanding as of May 2, 2018.





EXPLANATORY NOTE

This report combines the Quarterly Reports on Form 10-Q for the three months ended March 31, 2018 of VEREIT, Inc., a Maryland corporation, and VEREIT Operating Partnership, L.P., a Delaware limited partnership, of which VEREIT, Inc. is the sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “VEREIT,” the “Company” or the “General Partner” mean VEREIT, Inc. together with its consolidated subsidiaries, including VEREIT Operating Partnership, L.P., and all references to the “Operating Partnership” or “OP” mean VEREIT Operating Partnership, L.P. together with its consolidated subsidiaries.
As the sole general partner of VEREIT Operating Partnership, L.P., VEREIT, Inc. has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control.
We believe combining the Quarterly Reports on Form 10-Q of VEREIT, Inc. and VEREIT Operating Partnership, L.P. into this single report results in the following benefits:
enhancing investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminating duplicative disclosure and providing a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.
There are a few differences between the Company and the Operating Partnership, which are reflected in the disclosure in this report. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how we operate as an interrelated consolidated company. VEREIT, Inc. is a real estate investment trust whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, VEREIT, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing 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 or debt 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 disclosures in Item 4. Controls and Procedures and Exhibit 31 and Exhibit 32 certifications. As general partner with control of the Operating Partnership, VEREIT, Inc. consolidates the Operating Partnership for financial reporting purposes. Therefore, the assets and liabilities of VEREIT, Inc. and VEREIT Operating Partnership, L.P. are the same on their respective consolidated financial statements. The separate discussions of VEREIT, Inc. and VEREIT Operating Partnership, L.P. in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.



VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
For the quarterly period ended March 31, 2018

 
Page


1

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

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
 
 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
2,871,533

 
$
2,865,855

Buildings, fixtures and improvements
 
10,753,190

 
10,711,845

Intangible lease assets
 
2,035,004

 
2,037,675

Total real estate investments, at cost
 
15,659,727

 
15,615,375

Less: accumulated depreciation and amortization
 
3,059,955

 
2,908,028

Total real estate investments, net
 
12,599,772

 
12,707,347

Investment in unconsolidated entities
 
33,736

 
39,520

Investment in direct financing leases, net
 
17,476

 
19,539

Investment securities, at fair value
 
35,741

 
40,974

Mortgage notes receivable, net
 
20,072

 
20,294

Cash and cash equivalents
 
28,435

 
34,176

Restricted cash
 
28,049

 
27,662

Rent and tenant receivables and other assets, net
 
335,622

 
308,253

Goodwill
 
1,337,773

 
1,337,773

Due from affiliates, net
 

 
6,041

Assets related to real estate assets held for sale and discontinued operations, net
 
15,113

 
163,999

Total assets
 
$
14,451,789


$
14,705,578

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Mortgage notes payable, net
 
$
2,078,593

 
$
2,082,692

Corporate bonds, net
 
2,822,830

 
2,821,494

Convertible debt, net
 
987,071

 
984,258

Credit facility, net
 
120,000

 
185,000

Below-market lease liabilities, net
 
193,703

 
198,551

Accounts payable and accrued expenses
 
126,724

 
136,474

Deferred rent and other liabilities
 
68,718

 
62,985

Distributions payable
 
177,645

 
175,301

Due to affiliates
 

 
66

Liabilities related to discontinued operations
 

 
15,881

Total liabilities
 
6,575,284

 
6,662,702

Commitments and contingencies (Note 13)
 

 


Preferred stock, $0.01 par value, 100,000,000 shares authorized and 42,834,138 issued and outstanding as of each of March 31, 2018 and December 31, 2017
 
428

 
428

Common stock, $0.01 par value, 1,500,000,000 shares authorized and 968,154,486 and 974,208,583 issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
 
9,681

 
9,742

Additional paid-in-capital
 
12,611,006

 
12,654,258

Accumulated other comprehensive loss
 
(4,284
)
 
(3,569
)
Accumulated deficit
 
(4,896,349
)
 
(4,776,581
)
Total stockholders’ equity
 
7,720,482

 
7,884,278

Non-controlling interests
 
156,023

 
158,598

Total equity
 
7,876,505

 
8,042,876

Total liabilities and equity
 
$
14,451,789


$
14,705,578


The accompanying notes are an integral part of these statements.

2

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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Revenues:
 
 
 
 
Rental income
 
$
290,631

 
$
294,172

Operating expense reimbursements
 
24,443

 
26,726

Total revenues
 
315,074


320,898

Operating expenses:
 
 
 
 
Acquisition-related
 
777

 
617

Litigation and other non-routine costs, net of insurance recoveries
 
21,740

 
12,875

Property operating
 
30,565

 
34,016

General and administrative
 
15,240

 
12,679

Depreciation and amortization
 
166,152

 
179,012

Impairments
 
6,036

 
6,725

Total operating expenses
 
240,510


245,924

Operating income
 
74,564


74,974

Other (expense) income:
 
 
 
 
Interest expense
 
(70,425
)
 
(73,743
)
Loss on extinguishment and forgiveness of debt, net
 

 
(70
)
Other income, net
 
7,436

 
659

Equity in income (loss) and gain on disposition of unconsolidated entities
 
1,065

 
(82
)
Gain on derivative instruments, net
 
273

 
824

Total other expenses, net
 
(61,651
)

(72,412
)
Income before taxes and real estate dispositions
 
12,913


2,562

Gain on disposition of real estate and real estate assets held for sale, net
 
17,335

 
12,481

Income before taxes
 
30,248


15,043

Provision for income taxes
 
(1,212
)
 
(3,108
)
Income from continuing operations
 
29,036


11,935

Income from discontinued operations, net of income taxes
 
3,501

 
2,855

Net income
 
32,537

 
14,790

Net income attributable to non-controlling interests (1)
 
(742
)
 
(352
)
Net income attributable to the General Partner
 
$
31,795


$
14,438

 
 
 
 
 
Basic and diluted net income (loss) per share from continuing operations attributable to common stockholders
 
$
0.01

 
$
(0.01
)
Basic and diluted net income per share from discontinued operations attributable to common stockholders
 
$
0.00

 
$
0.00

Basic and diluted net income (loss) per share attributable to common stockholders
 
$
0.01

 
$
(0.00
)
Distributions declared per common share
 
$
0.1375

 
$
0.1375

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

The accompanying notes are an integral part of these statements.

3

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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net income
 
$
32,537

 
$
14,790

Other comprehensive income (loss):
 
 
 
 
Unrealized gain on interest rate derivatives
 

 
504

Reclassification of previous unrealized loss on interest rate derivatives into net income
 
105

 
470

Unrealized loss on investment securities, net
 
(837
)
 
(194
)
Total other comprehensive (loss) income
 
(732
)
 
780

 
 
 
 
 
Total comprehensive income
 
31,805

 
15,570

Comprehensive (income) attributable to non-controlling interests (1)
 
(725
)
 
(371
)
Total comprehensive income attributable to the General Partner
 
$
31,080

 
$
15,199

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

The accompanying notes are an integral part of these statements.

4

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

 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of Shares
 
Par
Value
 
Number
of Shares
 
Par
Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total Stock-holders’ Equity
 
Non-Controlling Interests
 
Total Equity
Balance, January 1, 2018
 
42,834,138

 
$
428

 
974,208,583

 
$
9,742

 
$
12,654,258

 
$
(3,569
)
 
$
(4,776,581
)
 
$
7,884,278

 
$
158,598

 
$
8,042,876

Repurchases of common stock under Share Repurchase Program (1)
 

 

 
(6,399,666
)
 
(64
)
 
(44,521
)
 

 

 
(44,585
)
 

 
(44,585
)
Repurchases of common stock to settle tax obligation
 

 

 
(230,436
)
 
(2
)
 
(1,658
)
 

 

 
(1,660
)
 

 
(1,660
)
Equity-based compensation, net
 

 

 
576,005

 
5

 
2,927

 

 

 
2,932

 

 
2,932

Distributions declared on common stock
 

 

 

 

 

 

 
(133,615
)
 
(133,615
)
 

 
(133,615
)
Distributions to non-controlling interest holders
 

 

 

 

 

 

 

 

 
(3,264
)
 
(3,264
)
Distributions to participating securities
 

 

 

 

 

 

 
(11
)
 
(11
)
 

 
(11
)
Distributions to preferred shareholders and unitholders
 

 

 

 

 

 

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

 

 

 

 

 

 
31,795

 
31,795

 
742

 
32,537

Other comprehensive (loss)
 

 

 

 

 

 
(715
)
 

 
(715
)
 
(17
)
 
(732
)
Balance, March 31, 2018
 
42,834,138


$
428


968,154,486


$
9,681


$
12,611,006


$
(4,284
)

$
(4,896,349
)

$
7,720,482


$
156,023


$
7,876,505

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

 
$
428

 
974,146,650

 
$
9,741

 
$
12,640,171

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

 
$
172,172

 
$
8,619,533

 Repurchases of common stock to settle tax obligation
 

 

 
(140,832
)
 
(1
)
 
(1,183
)
 

 

 
(1,184
)
 

 
(1,184
)
 Equity-based compensation, net
 

 

 
232,640

 
2

 
3,111

 

 

 
3,113

 

 
3,113

 Distributions declared on common stock
 

 

 

 

 

 

 
(133,929
)
 
(133,929
)
 

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

 

 

 

 

 

 

 

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

 

 

 

 

 

 
(178
)
 
(178
)
 

 
(178
)
 Distributions to preferred shareholders and unitholders
 

 

 

 

 

 

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

 

 

 

 

 

 
14,438

 
14,438

 
352

 
14,790

 Other comprehensive income
 

 

 

 

 

 
761

 

 
761

 
19

 
780

Balance, March 31, 2017
 
42,834,138

 
$
428

 
974,238,458

 
$
9,742

 
$
12,642,099

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

 
$
169,181

 
$
8,481,626

___________________________________
(1)
The Company’s Share Repurchase Program (as defined in Note 14 – Equity), which was authorized by the board of directors on May 12, 2017, allows for the repurchase of up to $200.0 million of the Company’s outstanding shares of Common Stock over 12 months from the date of authorization.

The accompanying notes are an integral part of these statements.

5

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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 

Net income
 
$
32,537

 
$
14,790

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
172,458

 
189,880

Gain on real estate assets and joint venture, net
 
(18,036
)
 
(12,481
)
Impairments
 
6,036

 
6,725

Equity-based compensation
 
2,927

 
3,111

Equity in (income) loss of unconsolidated entities
 
(364
)
 
82

Distributions from unconsolidated entities
 
936

 
443

Gain on investments
 
(5,638
)
 

Gain on derivative instruments, net
 
(273
)
 
(824
)
Loss on extinguishment and forgiveness of debt, net
 

 
70

Changes in assets and liabilities:
 
 
 
 
Investment in direct financing leases
 
538

 
621

Rent and tenant receivables and other assets, net
 
(23,344
)
 
(17,191
)
Assets held for sale classified as discontinued operations
 
(2,490
)
 

Accounts payable and accrued expenses
 
(7,653
)
 
(3,269
)
Deferred rent, derivative and other liabilities
 
6,158

 
1,935

Due to affiliates
 
(66
)
 
(9
)
Liabilities related to discontinued operations
 
(13,861
)
 

Net cash provided by operating activities
 
149,865

 
183,883

Cash flows from investing activities:
 
 
 
 
Investments in real estate assets
 
(139,882
)
 
(101,914
)
Capital expenditures and leasing costs
 
(4,993
)
 
(6,960
)
Real estate developments
 
(1,899
)
 
(5,615
)
Principal repayments received on investment securities and mortgage notes receivable
 
4,615

 
3,672

Return of investment from unconsolidated entities
 
386

 
408

Proceeds from disposition of real estate and joint venture
 
122,526

 
195,730

Proceeds from disposition of discontinued operations
 
123,925

 

Investment in leasehold improvements and other assets
 
(85
)
 
(99
)
Deposits for real estate assets
 
(4,000
)
 
(13,532
)
Proceeds from sale of investments and other assets
 
1,351

 

Uses and refunds of deposits for real estate assets
 
5,120

 
7,717

Proceeds from the settlement of property-related insurance claims
 
269

 
44

Line of credit advances to Cole REITs
 
(2,200
)
 

Line of credit repayments from Cole REITs
 
3,800

 
2,550

Net cash provided by investing activities
 
108,933

 
82,001

Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
89

 
2,403

 Payments on mortgage notes payable and other debt, including debt extinguishment costs
 
(2,676
)
 
(84,261
)
Proceeds from credit facility
 
380,000

 

Payments on credit facility
 
(445,000
)
 

Payments of deferred financing costs
 

 
(3
)
Repurchases of common stock under the Share Repurchase Program
 
(44,585
)
 

Repurchases of common stock to settle tax obligations
 
(1,659
)
 
(976
)
Distributions paid
 
(152,519
)
 
(152,219
)
Net cash used in financing activities
 
(266,350
)
 
(235,056
)
Net change in cash and cash equivalents and restricted cash
 
(7,552
)
 
30,828

 
 
 
 
 

6

Table of Contents
VEREIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)


 
 
Three Months Ended March 31,
 
 
2018
 
2017
Cash and cash equivalents and restricted cash, beginning of period
 
64,036

 
301,470

Less: cash and cash equivalents of discontinued operations
 
(2,198
)
 
(2,973
)
Cash and cash equivalents and restricted cash from continuing operations, beginning of period
 
61,838

 
298,497

 
 
 
 
 
Cash and cash equivalents, and restricted cash, end of period
 
56,484

 
332,298

Less: cash and cash equivalents of discontinued operations
 

 
(2,023
)
Cash and cash equivalents and restricted cash from continuing operations, end of period
 
$
56,484

 
$
330,275

Reconciliation of Cash and Cash Equivalents and Restricted Cash
 
 
 
 
Cash and cash equivalents at beginning of period
 
$
34,176

 
$
253,479

Restricted cash at beginning of period
 
27,662

 
45,018

Cash and cash equivalents and restricted cash at beginning of period
 
61,838

 
298,497

 
 
 
 
 
Cash and cash equivalents at end of period
 
28,435

 
283,563

Restricted cash at end of period
 
28,049

 
46,712

Cash and cash equivalents and restricted cash at end of period
 
$
56,484

 
$
330,275


The accompanying notes are an integral part of these statements.

7

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

 
 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
2,871,533

 
$
2,865,855

Buildings, fixtures and improvements
 
10,753,190

 
10,711,845

Intangible lease assets
 
2,035,004

 
2,037,675

Total real estate investments, at cost
 
15,659,727


15,615,375

Less: accumulated depreciation and amortization
 
3,059,955

 
2,908,028

Total real estate investments, net
 
12,599,772


12,707,347

Investment in unconsolidated entities
 
33,736

 
39,520

Investment in direct financing leases, net
 
17,476

 
19,539

Investment securities, at fair value
 
35,741

 
40,974

Mortgage notes receivable, net
 
20,072

 
20,294

Cash and cash equivalents
 
28,435

 
34,176

Restricted cash
 
28,049

 
27,662

Rent and tenant receivables and other assets, net
 
335,622

 
308,253

Goodwill
 
1,337,773

 
1,337,773

Due from affiliates, net
 

 
6,041

Assets related to real estate assets held for sale and discontinued operations, net
 
15,113

 
163,999

Total assets
 
$
14,451,789


$
14,705,578

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 

Mortgage notes payable, net
 
$
2,078,593

 
$
2,082,692

Corporate bonds, net
 
2,822,830

 
2,821,494

Convertible debt, net
 
987,071

 
984,258

Credit facility, net
 
120,000

 
185,000

Below-market lease liabilities, net
 
193,703

 
198,551

Accounts payable and accrued expenses
 
126,724

 
136,474

Deferred rent and other liabilities
 
68,718

 
62,985

Distributions payable
 
177,645

 
175,301

Due to affiliates
 

 
66

Liabilities related to discontinued operations
 

 
15,881

Total liabilities
 
6,575,284


6,662,702

Commitments and contingencies (Note 13)
 


 


General Partner's preferred equity, 42,834,138 General Partner Preferred Units issued and outstanding as of each of March 31, 2018 and December 31, 2017
 
764,136

 
782,073

General Partner's common equity, 968,154,486 and 974,208,583 General Partner OP Units issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
 
6,956,346

 
7,102,205

Limited Partner's preferred equity, 86,874 Limited Partner Preferred Units issued and outstanding as of each of March 31, 2018 and December 31, 2017
 
2,991

 
3,027

Limited Partner's common equity, 23,748,347 Limited Partner OP Units issued and outstanding as of each of March 31, 2018 and December 31, 2017, respectively
 
151,767

 
154,266

Total partners’ equity
 
7,875,240


8,041,571

Non-controlling interests
 
1,265

 
1,305

Total equity
 
7,876,505


8,042,876

Total liabilities and equity
 
$
14,451,789


$
14,705,578


The accompanying notes are an integral part of these statements.

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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Revenues:
 
 
 
 
Rental income
 
$
290,631

 
$
294,172

Operating expense reimbursements
 
24,443

 
26,726

Total revenues

315,074


320,898

Operating expenses:
 
 
 
 
Acquisition-related
 
777

 
617

Litigation and other non-routine costs, net of insurance recoveries
 
21,740

 
12,875

Property operating
 
30,565

 
34,016

General and administrative
 
15,240

 
12,679

Depreciation and amortization
 
166,152

 
179,012

Impairments
 
6,036

 
6,725

Total operating expenses

240,510


245,924

Operating income

74,564


74,974

Other (expense) income:
 
 
 
 
Interest expense
 
(70,425
)
 
(73,743
)
Loss on extinguishment and forgiveness of debt, net
 

 
(70
)
Other income, net
 
7,436

 
659

Equity in income (loss) and gain on disposition of unconsolidated entities
 
1,065

 
(82
)
Gain on derivative instruments, net
 
273

 
824

Total other expenses, net

(61,651
)

(72,412
)
Income before taxes and real estate dispositions

12,913


2,562

Gain on disposition of real estate and real estate assets held for sale, net
 
17,335

 
12,481

Income before taxes

30,248

 
15,043

Provision for income taxes
 
(1,212
)
 
(3,108
)
Income from continuing operations
 
29,036

 
11,935

Income from discontinued operations, net of income taxes
 
3,501

 
2,855

Net income

32,537


14,790

Net loss attributable to non-controlling interests (1)
 
40

 
7

Net income attributable to the OP

$
32,577


$
14,797

 
 
 
 
 
Basic and diluted net income (loss) per unit from continuing operations attributable to common unitholders
 
$
0.01

 
$
(0.01
)
Basic and diluted net income per unit from discontinued operations attributable to common unitholders
 
$
0.00

 
$
0.00

Basic and diluted net income (loss) per unit attributable to common unitholders
 
$
0.01

 
$
(0.00
)
Distributions declared per common unit
 
$
0.1375

 
$
0.1375

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

The accompanying notes are an integral part of these statements.

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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net income
 
$
32,537

 
$
14,790

Other comprehensive income (loss):
 
 
 
 
Unrealized gain on interest rate derivatives
 

 
504

Reclassification of previous unrealized loss on interest rate derivatives into net income
 
105

 
470

Unrealized loss on investment securities, net
 
(837
)
 
(194
)
Total other comprehensive (loss) income
 
(732
)

780

 
 
 
 
 
Total comprehensive income
 
31,805


15,570

Comprehensive loss attributable to non-controlling interests (1)
 
40

 
7

Total comprehensive income attributable to the OP
 
$
31,845


$
15,577

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

The accompanying notes are an integral part of these statements.


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

 
 
Preferred Units
 
Common Units
 
 
 
 
 
 
 
 
General Partner
 
Limited Partner
 
General Partner
 
Limited Partner
 
 
 
 
 
 
 
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Total Partners' Capital
 
Non-Controlling Interests
 
Total Capital
Balance, January 1, 2018
 
42,834,138

 
$
782,073

 
86,874

 
$
3,027

 
974,208,583

 
$
7,102,205

 
23,748,347

 
$
154,266

 
$
8,041,571

 
$
1,305

 
$
8,042,876

 Repurchases of common stock under Share Repurchase Program
 

 

 

 

 
(6,399,666
)
 
(44,585
)
 

 

 
(44,585
)
 

 
(44,585
)
 Repurchases of common OP units to settle tax obligation
 

 

 

 

 
(230,436
)
 
(1,660
)
 

 

 
(1,660
)
 

 
(1,660
)
 Equity-based compensation, net forfeitures
 

 

 

 

 
576,005

 
2,932

 

 

 
2,932

 

 
2,932

 Distributions to Common OP Units and non-controlling interests
 

 

 

 

 

 
(133,626
)
 

 
(3,264
)
 
(136,890
)
 

 
(136,890
)
 Distributions to Preferred OP Units
 

 
(17,937
)
 

 
(36
)
 

 

 

 

 
(17,973
)
 

 
(17,973
)
 Net income
 

 

 

 

 

 
31,795

 

 
782

 
32,577

 
(40
)
 
32,537

 Other comprehensive loss
 

 

 

 

 

 
(715
)
 

 
(17
)
 
(732
)
 

 
(732
)
Balance, March 31, 2018
 
42,834,138


$
764,136


86,874


$
2,991


968,154,486


$
6,956,346


23,748,347


$
151,767


$
7,875,240


$
1,265


$
7,876,505

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

 
$
853,821

 
86,874


$
3,171

 
974,146,650

 
$
7,593,540

 
23,748,347

 
$
166,598

 
$
8,617,130

 
$
2,403

 
$
8,619,533

 Repurchases of common OP units to settle tax obligation
 

 

 

 

 
(140,832
)
 
(1,184
)
 

 

 
(1,184
)
 

 
(1,184
)
 Equity-based compensation, net
 

 

 

 

 
232,640

 
3,113

 

 

 
3,113

 

 
3,113

 Distributions to Common OP Units and non-controlling interests holders
 

 

 

 

 

 
(134,107
)
 

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

 
(17,937
)
 

 
(36
)
 

 

 

 

 
(17,973
)
 

 
(17,973
)
 Net income
 

 

 

 

 

 
14,438

 

 
359

 
14,797

 
(7
)
 
14,790

 Other comprehensive income
 

 

 

 

 

 
761

 

 
19

 
780

 

 
780

Balance, March 31, 2017
 
42,834,138

 
$
835,884

 
86,874


$
3,135

 
974,238,458

 
$
7,476,561

 
23,748,347

 
$
163,710

 
$
8,479,290

 
$
2,336

 
$
8,481,626


The accompanying notes are an integral part of these statements.

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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
32,537

 
$
14,790

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
172,458

 
189,880

Gain on real estate assets and joint venture, net
 
(18,036
)
 
(12,481
)
Impairments
 
6,036

 
6,725

Equity-based compensation
 
2,927

 
3,111

Equity in (income) loss of unconsolidated entities
 
(364
)
 
82

Distributions from unconsolidated entities
 
936

 
443

Gain on investments
 
(5,638
)
 

Gain on derivative instruments, net
 
(273
)
 
(824
)
Loss on extinguishment and forgiveness of debt, net
 

 
70

Changes in assets and liabilities:
 
 
 
 
Investment in direct financing leases
 
538

 
621

Rent and tenant receivables and other assets, net
 
(23,344
)
 
(17,191
)
Assets held for sale classified as discontinued operations
 
(2,490
)
 

Accounts payable and accrued expenses
 
(7,653
)
 
(3,269
)
Deferred rent, derivative and other liabilities
 
6,158

 
1,935

Due to affiliates
 
(66
)
 
(9
)
Liabilities related to discontinued operations
 
(13,861
)
 

Net cash provided by operating activities
 
149,865


183,883

Cash flows from investing activities:
 
 
 
 
Investments in real estate assets
 
(139,882
)
 
(101,914
)
Capital expenditures and leasing costs
 
(4,993
)
 
(6,960
)
Real estate developments
 
(1,899
)
 
(5,615
)
Principal repayments received on investment securities and mortgage notes receivable
 
4,615

 
3,672

Return of investment from unconsolidated entities
 
386

 
408

Proceeds from disposition of real estate and joint venture
 
122,526

 
195,730

Proceeds from disposition of discontinued operations
 
123,925

 

Investment in leasehold improvements and other assets
 
(85
)
 
(99
)
Deposits for real estate assets
 
(4,000
)
 
(13,532
)
Proceeds from sale of investments and other assets
 
1,351

 

Uses and refunds of deposits for real estate assets
 
5,120

 
7,717

Proceeds from the settlement of property-related insurance claims
 
269

 
44

Line of credit advances to Cole REITs
 
(2,200
)
 

Line of credit repayments from Cole REITs
 
3,800

 
2,550

Net cash provided by investing activities
 
108,933

 
82,001

Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
89

 
2,403

 Payments on mortgage notes payable and other debt, including debt extinguishment costs
 
(2,676
)
 
(84,261
)
Proceeds from credit facility
 
380,000

 

Payments on credit facility
 
(445,000
)
 

Payments of deferred financing costs
 

 
(3
)
Repurchases of common stock under the Share Repurchase Program
 
(44,585
)
 

Repurchases of common stock to settle tax obligations
 
(1,659
)
 
(976
)
Distributions paid
 
(152,519
)
 
(152,219
)
Net cash used in financing activities
 
(266,350
)

(235,056
)
Net change in cash and cash equivalents and restricted cash
 
(7,552
)
 
30,828

 
 
 
 
 

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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Cash and cash equivalents and restricted cash, beginning of period
 
64,036

 
301,470

Less: cash and cash equivalents of discontinued operations
 
(2,198
)
 
(2,973
)
Cash and cash equivalents and restricted cash from continuing operations, beginning of period
 
61,838

 
298,497

 
 
 
 
 
Cash and cash equivalents, and restricted cash, end of period
 
56,484

 
332,298

Less: cash and cash equivalents of discontinued operations
 

 
(2,023
)
Cash and cash equivalents and restricted cash from continuing operations, end of period
 
$
56,484

 
$
330,275

Reconciliation of Cash and Cash Equivalents and Restricted Cash
 
 
 
 
Cash and cash equivalents at beginning of period
 
$
34,176

 
$
253,479

Restricted cash at beginning of period
 
27,662

 
45,018

Cash and cash equivalents and restricted cash at beginning of period
 
61,838

 
298,497

 
 
 
 
 
Cash and cash equivalents at end of period
 
28,435

 
283,563

Restricted cash at end of period
 
28,049

 
46,712

Cash and cash equivalents and restricted cash at end of period
 
$
56,484

 
$
330,275


The accompanying notes are an integral part of these statements.

13

Table of Contents
VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)


Note 1 – Organization
VEREIT® is a Maryland corporation, incorporated on December 2, 2010, that qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning in the taxable year ended December 31, 2011. The OP is a Delaware limited partnership of which the General Partner is the sole general partner. VEREIT’s common stock, par value $0.01 per share (“Common Stock”), and its 6.70% Series F Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series F Preferred Stock”) trade on the New York Stock Exchange (“NYSE”) under the trading symbols, “VER” and “VER PRF,” respectively. As used herein, the terms the “Company,” “we,” “our” and “us” refer to VEREIT, together with its consolidated subsidiaries, including the OP.
VEREIT is a full-service real estate operating company which owns and manages one of the largest portfolios of single-tenant commercial properties in the U.S. VEREIT’s business model provides equity capital to creditworthy corporations in return for long-term leases on their properties. The Company actively manages its portfolio considering a number of metrics including property type, concentration and key economic factors for appropriate balance and diversity.
Substantially all of the Company’s operations are conducted through the OP. VEREIT is the sole general partner and holder of 97.6% of the common equity interests in the OP as of March 31, 2018 with the remaining 2.4% of the common equity interests owned by unaffiliated investors and certain former directors, officers and employees of ARC Properties Advisors, LLC (the “Former Manager”). Under the limited partnership agreement of the OP, as amended (the “LPA”), after holding units of limited partner interests in the OP (“OP Units”) for a period of one year, unless an earlier redemption is otherwise consented to by VEREIT, holders of OP Units have the right to redeem the OP Units for the cash value of a corresponding number of shares of VEREIT’s Common Stock or, at the option of VEREIT, a corresponding number of shares of VEREIT’s Common Stock. The remaining rights of the holders of OP Units are limited, however, and do not include the ability to replace the General Partner or to approve the sale, purchase or refinancing of the OP’s assets.
The actions of the OP and its relationship with the General Partner are governed by the LPA. The General Partner does not have any significant assets other than its investment in the OP. Therefore, the assets and liabilities of the General Partner and the OP are the same. Additionally, pursuant to the LPA, all administrative expenses and expenses associated with the formation, continuity, existence and operation of the General Partner incurred by the General Partner on the OP’s behalf shall be treated as expenses of the OP. Further, when the General Partner issues any equity instrument that has been approved by the General Partner’s board of directors, the LPA requires the OP to issue to the General Partner equity instruments with substantially similar terms, to protect the integrity of the Company’s umbrella partnership REIT structure, pursuant to which each holder of interests in the OP has a proportionate economic interest in the OP reflecting its capital contributions thereto. OP Units issued to the General Partner are referred to as General Partner OP Units. OP Units issued to parties other than the General Partner are referred to as Limited Partner OP Units. The LPA also provides that the OP issue debt with terms and provisions consistent with debt issued by the General Partner. The LPA will be amended to provide for the issuance of any additional class of equivalent equity instruments to the extent the General Partner’s board of directors authorizes the issuance of any new class of equity securities.
As discussed in Note 4 —Discontinued Operations, on February 1, 2018, the Company completed the sale of its investment management segment, Cole Capital. The assets, liabilities and related financial results of substantially all of the Cole Capital segment are reflected in the financial statements as discontinued operations.
Note 2 – Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements of the Company presented herein include the accounts of the General Partner and its consolidated subsidiaries, including the OP. All intercompany transactions have been eliminated upon consolidation. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results for the entire year or any subsequent interim period.

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Table of Contents
VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited) (Continued)

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2017 of the Company, which are included in the Company’s Annual Report on Form 10-K filed on February 22, 2018. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2018, except any policies that are no longer applicable due to the Company’s sale of Cole Capital, as discussed in Note 4 —Discontinued Operations, and the Company adopted the Revenue ASUs, as defined in the “Revenue Recognition” and “Recent Accounting Pronouncements” sections herein. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and U.S. GAAP.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and consolidated joint venture arrangements. The portions of the consolidated joint venture arrangements not owned by the Company are presented as non-controlling interests in VEREIT’s and the OP’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. In addition, as described in Note 1 – Organization, certain third parties have been issued OP Units. Holders of OP Units are considered to be non-controlling interest holders in the OP and their ownership interest in the limited partner’s share is presented as non-controlling interests in VEREIT’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Upon conversion of OP Units to Common Stock, any difference between the fair value of shares of Common Stock issued and the carrying value of the OP Units converted is recorded as a component of equity. As of each of March 31, 2018 and December 31, 2017, there were approximately 23.7 million Limited Partner OP Units outstanding.

For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity.
The Company then qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE, which is generally defined as the party who has a controlling financial interest in the VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE and the difference between consolidating the VIE and accounting for it using the equity method could be material to the Company’s consolidated financial statements. The Company continually evaluates the need to consolidate these VIEs based on standards set forth in U.S. GAAP.
Reclassification
As described below, the following items previously reported have been reclassified to conform with the current period’s presentation.
Direct financing lease income of $0.4 million has been reclassified to rental income during the three months ended March 31, 2017 and investments in the Cole REITs, as defined in “Investment in Cole REITs” section herein, of $3.3 million has been reclassified to rent and tenant receivables and other assets, net from investment in unconsolidated entities to be consistent with the current year presentation.
In connection with the adoption of Accounting Standards Update ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) and ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), during the fourth quarter of fiscal year 2017, as discussed in the Company’s Annual Report on Form 10-K filed on February 22, 2018, certain reclassifications have been made to prior period balances to conform to current presentation in the consolidated statement of cash flows. Under ASU 2016-15, the Company reclassified $0.4 million of distributions received from equity method investments from cash flows provided by operating activities to cash flows provided by investing activities in the consolidated statement of cash flows for the three months ended March 31, 2017. The Company also

15

Table of Contents
VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited) (Continued)

reclassified $44,000 of proceeds from the settlement of property-related insurance claims from cash flows provided by operating activities to cash flows provided by investing activities for the three months ended March 31, 2017. Under ASU 2016-18, transfers to or from restricted cash, which have previously been shown in the Company’s investing activities section of the consolidated statements of cash flows, are now required to be shown as part of the total change in cash, cash equivalents and restricted cash in the consolidated statements of cash flows. Accordingly, for the three months ended March 31, 2017, the Company included restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows and removed the change in restricted cash from cash flows used in investing activities. This change resulted in an increase in cash flows provided by investing activities of $1.7 million during the three months ended March 31, 2017.
Revenue Recognition
In May 2014, the U.S. Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition, Accounting Standards Codification  (“ASC”) (Topic 605) and requires an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequent to the issuance of ASU 2014-09, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) Identifying Performance Obligations and Licensing (“ASU 2016-10”), ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), ASU 2016-12, Revenue from Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”) and ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”), which provided various technical corrections and practical expedients to the requirements of ASU 2014-09. ASU 2014-09 together with ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 are referred to as the “Revenue ASUs”. The Company adopted the Revenue ASUs during the first quarter of 2018 using the modified retrospective approach, which allows a cumulative effect adjustment to beginning retained earnings equal to initially applying the Revenue ASUs to all contracts with customers not completed as of the date of adoption. Adoption of the Revenue ASUs did not result in a cumulative effect adjustment to retained earnings as all contracts not completed as of adoption within the scope of Topic 606 have the same revenue recognition timing and measurement under Topic 605. Revenues generated through leasing arrangements are excluded from the Revenue ASUs as discussed below.
Revenue Recognition - Real Estate
Revenue recognized as rental income is not within the scope of Topic 606 and therefore was not impacted by its adoption. Upon adoption of ASU 2016-02, Leases (“ASU 2016-02”) on January 1, 2019, operating expense reimbursement revenue will be within the scope of Topic 606 and may be considered a non-lease component, as defined in ASU 2016-02. Refer to “Recent Accounting Pronouncements” section herein for further discussion regarding ASU 2016-02. Operating expense reimbursement revenue was not impacted by the adoption of Topic 606 for the three months ended March 31, 2018.
Revenue Recognition - Cole Capital
As discussed in Note 4 —Discontinued Operations, on February 1, 2018, the Company completed the sale of its investment management segment, Cole Capital. The assets, liabilities and related financial results of substantially all of the Cole Capital segment are reflected in the financial statements as discontinued operations.
Cole Capital earned securities sales commissions, dealer manager fees, distribution and stockholder servicing fees, real estate acquisition fees, financing coordination fees, property management fees, advisory fees, asset management fees and performance fees for services relating to the Cole REITs’ offerings and the investment and management of their respective assets, in accordance with the respective dealer manager and advisory agreements.
Cole Capital recorded dealer manager fees, excluding those related to INAV, as defined in “Investment in Cole REITs” section herein, and securities sales commissions as revenue upon satisfying its performance obligation, which occurred at the point in time in which the sale was complete. Dealer manager fees from the sale of INAV shares and distribution and stockholder servicing fees were a form of variable consideration associated with the performance obligation of selling shares. Although the performance obligation of selling shares was completed upon sale, the variable consideration was constrained due to the uncertainty associated with estimating the transaction price. As the fees were accrued daily based upon the fund’s net asset value, revenue was recognized daily as the uncertainty was resolved. The Company recorded revenue related to acquisition and financing coordination fees upon satisfaction of the related performance obligations, which occurred upon completion of a transaction. Advisory, asset and property management fees were recorded over time as services were performed. Performance fees were a form of variable consideration relating to INAV earned at a point in time in which for any year the total return on stockholders’ capital exceeded 6% per annum

16

Table of Contents
VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited) (Continued)

on a calendar year basis. Although the performance obligation associated with the performance fee would have been satisfied over time, revenue recognition was constrained due to the uncertainty associated with estimating the transaction price. The Company was also reimbursed for certain costs incurred in providing these services, which were recorded as revenue as the expenses were incurred subject to revenue constraint due to the limitations on the amount that was reimbursable based on the terms of the respective dealer manager and advisory agreements. Refer to Note 15 – Related Party Transactions and Arrangements for a disaggregation of Cole Capital revenues.
Revenue Recognition - Other
The Company entered into a services agreement (the “Services Agreement”) with the Cole Purchaser, as defined in Note 4 — Discontinued Operations, pursuant to which the Company will continue to provide certain services to the Cole Purchaser and the Cole REITs, including operational real estate support, over the next year (“Transition Services Revenues”). Under the terms of the Services Agreement, the Company will be entitled to receive reimbursement for certain of the services provided. The Company recorded Transition Services Revenues as costs associated with providing such services were incurred, which coincided with the timing in which the performance obligations of the contract had been met. During the period from February 1, 2018 through March 31, 2018, the Company incurred $3.2 million of costs as a result of providing such services and recognized revenues of $3.2 million, which are recorded in other income, net in the consolidated statement of operations.
The Company may also receive Net Revenue Payments, as defined in Note 4 — Discontinued Operations, over the next six years if future revenues of Cole Capital exceed a specified dollar threshold, up to an aggregate of $80.0 million in Net Revenue Payments. Net Revenue Payments represent variable consideration for which the performance obligation of closing on the Cole Capital sale has occurred but revenue recognition is constrained due to the large number and broad range of possible consideration amounts. Revenue will be recognized when any future Net Revenue Payments are realized.
Goodwill
In connection with prior mergers, the Company recorded goodwill as a result of the merger consideration exceeding the net assets acquired. As of March 31, 2018 and December 31, 2017, the carrying value of goodwill was $1.3 billion.
The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company’s annual testing date is during the fourth quarter. During the three months ended March 31, 2018 and 2017, management monitored the actual performance relative to the fair value assumptions used during the annual goodwill impairment testing. For the periods presented, management determined it remained more likely than not that the fair value was greater than its carrying value. Goodwill related to discontinued operations is discussed in Note 4 — Discontinued Operations.
Litigation and Other Non-routine Costs, Net of Insurance Recoveries
The Company incurred legal fees and other costs associated with the Audit Committee Investigation (defined below) and the litigations and investigations resulting therefrom, which are considered non-routine. The Company has directors’ and officers’ insurance and the insurance carriers have paid certain defense costs subject to standard reservation of rights under the respective policies.

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VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited) (Continued)

Litigation and other non-routine costs, net of insurance recoveries include the following costs (amounts in thousands):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Litigation and other non-routine costs:
 
 
 
 
Audit Committee Investigation and related matters (1)
 
$
21,728

 
$
12,671

Legal fees and expenses (2)
 
12

 
204

Total costs incurred
 
21,740


12,875

Insurance recoveries
 

 

Total
 
$
21,740

 
$
12,875

___________________________________
(1)
Includes all fees and costs associated with the 2014 investigation conducted by the audit committee (the “Audit Committee”) of the Company’s board of directors (the “Audit Committee Investigation”) and various litigations and investigations prompted by the results of the Audit Committee Investigation, including fees and costs incurred pursuant to the Company’s advancement obligations, litigation related thereto and in connection with related insurance recovery matters.
(2)
Includes legal fees and expenses associated with litigation resulting from prior mergers and excludes amounts presented in income from discontinued operations, net of income taxes in the consolidated statements of operations.
Investment in Cole REITs
As of December 31, 2017, the Company owned equity investments in Cole Credit Property Trust IV, Inc. (“CCPT IV”), Cole Real Estate Income Strategy (Daily NAV), Inc. (“INAV”), Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”), Cole Office & Industrial REIT (CCIT III), Inc. (“CCIT III”), and Cole Credit Property Trust V, Inc. (“CCPT V” and collectively with CCPT IV, INAV, CCIT II and CCIT III, the “Cole REITs”). During the three months ended March 31, 2018, the Company sold certain of its equity investments to the Cole Purchaser, retaining interests in CCIT II, CCIT III and CCPT V. Subsequent to the sale of Cole Capital and the adoption of ASU 2016-01, the Company carried these investments at fair value, as the Company does not exert significant influence over CCIT II, CCIT III or CCPT V, and changes in the fair value were recognized in other income, net in the accompanying consolidated statement of operations for the three months ended March 31, 2018. Prior to the sale of Cole Capital, the Company accounted for these investments using the equity method of accounting, which required the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the respective Cole REIT’s earnings and distributions. The Company recorded its proportionate share of net income or loss from the Cole REITs in equity in income (loss) and gain on disposition of unconsolidated entities in the consolidated statement of operations for the three months ended March 31, 2017. The Company’s equity investments in the Cole REITs, of which $7.8 million and $3.3 million are presented in rent and tenant receivables and other assets, net in the consolidated balance sheet as of March 31, 2018 and December 31, 2017, respectively.
Equity-based Compensation
The Company has an equity-based incentive award plan, which provides for the grant of stock options, stock appreciation rights, restricted shares of common stock, restricted stock units, deferred stock units and dividend equivalent rights and other stock-based awards to non-executive directors, officers, other employees and advisors or consultants who provide services to the Company, as applicable, and a non-executive director restricted share plan, which are accounted for under U.S. GAAP for share-based payments. The expense for such awards is recognized over the vesting period or when the requirements for exercise of the award have been met. As of March 31, 2018, approximately 4.0 million restricted shares, net of the forfeiture of 3.7 million restricted shares through that date, 5.8 million restricted stock units, net of the forfeiture/cancellation of 1.2 million restricted stock units through that date, 0.3 million deferred stock units, and 2.8 million stock options, collectively representing 12.9 million shares of Common Stock were granted under the Equity Plan for equity incentive awards. During the three months ended March 31, 2018, the Company recorded $0.1 million, $0.2 million, $1.4 million, $1.2 million and $0.1 million, respectively, of expense related to stock options, restricted shares of common stock, time-based restricted stock units, long-term incentive-based restricted stock units and deferred stock units, respectively. During the three months ended March 31, 2017, the Company recorded $0.4 million, $1.1 million, $1.5 million and $42,800, respectively, of expense related to restricted shares of common stock, time-based restricted stock units, long-term incentive-based restricted stock units and deferred stock units, respectively. During the three months ended March 31, 2017, there were no expenses recorded relating to stock options. As of March 31, 2018, total unrecognized compensation expense related to these awards was approximately $22.8 million, with an aggregate weighted-average remaining term of 2.2 years.

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VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited) (Continued)

Income Taxes
The General Partner currently qualifies and has elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 or the Internal Revenue Code. As a REIT, the General Partner generally is not subject to federal income tax, 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, which are included in provision for income taxes in the accompanying consolidated statements of operations.
Recent Accounting Pronouncements
Refer to the section “Revenue Recognition” herein for ASU 2014-09 and related Revenue ASUs.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income (loss). An entity may choose to measure equity investments that do not have a readily determinable fair value at costs minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issue. ASU 2016-01 is effective for fiscal year, and interim periods within, beginning after December 15, 2017 and requires prospective treatment of equity securities without readily determinable fair values. The Company adopted ASU 2016-01 as of January 1, 2018 and recorded a $5.1 million gain, which is included in other income, net in the accompanying consolidated statements of operations, on measuring the Company’s investments in the Cole REITs at fair value after the investments were no longer accounted for using the equity method.
In February 2016, the FASB issued ASU 2016-02, which will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than 12 months, with the result being the recognition of a right of use asset and a lease liability and the disclosure of key information about the entity’s leasing arrangements. The lessor accounting model under ASU 2016-02 is similar to existing guidance, however it limits the capitalization of initial direct leasing costs, such as internally generated costs. ASU 2016-02 retains a distinction between a finance lease (i.e., capital leases under existing guidance) and an operating lease. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current U.S. GAAP. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective approach is required for existing leases that have not expired upon adoption and provides for certain practical expedients. The Company has developed an inventory of all leases and is identifying any non-lease components in the lease agreements and is evaluating the impact to the Company, both as lessor and lessee, and its consolidated financial statements. Upon the adoption of ASU 2016-02, the Company will record certain expenses paid directly by a tenant that protect the Company’s interests in its properties, such as real estate taxes, and the related operating expense reimbursement revenue, with no impact on net income. The Company currently does not record such expenses and the related operating expense reimbursement revenue. Upon adoption of ASU 2016-02, operating expense reimbursement revenue will be within the scope of Topic 606 and may be considered a non-lease component, as defined in ASU 2016-02, subject to certain proposed practical expedients. The Company expects the accounting for leases pursuant to which the Company is the lessee to change and is currently evaluating the impact. Leases pursuant to which the Company is the lessee primarily consist of corporate offices and ground leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring more timely recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology under current U.S. GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), which clarifies the following: 1) nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty; 2) an entity should allocate consideration to each distinct

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VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited) (Continued)

asset by applying the guidance in Topic 606 on allocating the transaction price to performance obligations; and 3) requires entities to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it (a) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Subtopic 810 and (b) transfers control of the asset in accordance with Topic 606. The adoption of this standard will result in higher gains on the sale of partial real estate interests, including contributions of nonfinancial assets to a joint venture or other noncontrolling investee, due to recognizing the full gain when the derecognition criteria are met and recording the retained noncontrolling interest at its fair value. ASU 2017-05 is effective for annual periods, and interim periods therein, beginning after December 15, 2017. ASU 2017-05 was adopted during the first quarter of fiscal year 2018, in conjunction with the Revenue ASUs, using the modified retrospective approach. The Company also elected the practical expedient to only apply the guidance to contracts that were not completed upon adoption. At adoption, the Company did not have any contracts that were not completed within the scope of ASU 2017-05 and as such, the adoption of ASU 2017-05 did not impact the Company’s financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods therein, with early adoption permitted. The standard is applied prospectively to an award modified on or after the adoption date. The Company adopted ASU 2017-09 during the first quarter of fiscal year 2018, which had no impact on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The targeted amendments in this ASU help simplify certain aspects of hedge accounting and result in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. This ASU applies to the Company’s interest rate swaps designated as cash flow hedges. Upon adoption of this ASU, all changes in the fair value of highly effective cash flow hedges will be recorded in accumulated other comprehensive income rather than recognized directly in earnings. Under current U.S. GAAP, the ineffective portion of the change in fair value of cash flow hedges is recognized directly in earnings. This eliminates the requirement to separately measure and disclose ineffectiveness for qualifying cash flow hedges. ASU 2017-12 is effective for public entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The ASU is required to be adopted using a modified retrospective approach with early adoption permitted. The Company adopted ASU 2017-12 during the first quarter of fiscal year 2018, which had no impact on the Company’s consolidated financial statements as the Company had no interest rate swaps designated as cash flow hedges as of the date of adoption. Refer to Note 10 – Derivatives and Hedging Activities for additional tabular disclosure of the effect of hedge accounting by income statement line items as required upon adoption of ASU 2017-12.
In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. The amendments to Topic 842 help address transition guidance as it relates to land easements. The ASU provides an optional practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The ASU is effective upon adoption of ASU 2016-02 and the Company is currently evaluating the impact this amendment will have on its consolidated financial statements.

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VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited) (Continued)

Note 3 – Real Estate Investments and Related Intangibles
Property Acquisitions
During the three months ended March 31, 2018, the Company acquired controlling financial interests in 12 commercial properties for an aggregate purchase price of $139.9 million (the “2018 Acquisitions”), which includes $0.7 million of external acquisition-related expenses that were capitalized. During the three months ended March 31, 2017, the Company acquired a controlling interest in 16 commercial properties and three land parcels for an aggregate purchase price of $101.9 million (the “2017 Acquisitions”), which includes $0.4 million of external acquisition-related expenses that were capitalized.
The following table presents the allocation of the fair values of the assets acquired and liabilities assumed during the periods presented (in thousands):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Real estate investments, at cost:
 
 
 
 
Land
 
$
27,049

 
$
24,107

Buildings, fixtures and improvements
 
96,044

 
59,261

Total tangible assets
 
123,093

 
83,368

Acquired intangible assets:
 
 
 
 
In-place leases and other intangibles (1)
 
14,037

 
15,916

Above-market leases (2)
 
2,752

 
2,815

Assumed intangible liabilities:
 
 
 
 
Below-market leases (3)
 

 
(185
)
Total purchase price of assets acquired
 
$
139,882

 
$
101,914

____________________________________
(1)
The weighted average amortization period for acquired in-place leases and other intangibles is 14.9 years and 10.8 years for 2018 Acquisitions and 2017 Acquisitions, respectively.
(2)
The weighted average amortization period for acquired above-market leases is 10.8 years and 20.0 years for 2018 Acquisitions and 2017 Acquisitions, respectively.
(3)
The weighted average amortization period for acquired intangible lease liabilities is 20.0 years for 2017 Acquisitions.
Future Lease Payments
The following table presents future minimum base rent payments due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items (in thousands):
 
 
Future Minimum Operating Lease
Base Rent Payments
 
Future Minimum
Direct Financing Lease Payments
(1)
April 1, 2018 - December 31, 2018