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CIM REAL ESTATE FINANCE TRUST, INC. - Quarter Report: 2017 September (Form 10-Q)

Table of Contents


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-54939
 
 
 
COLE CREDIT PROPERTY TRUST IV, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Maryland
27-3148022
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
2325 East Camelback Road, Suite 1100
Phoenix, Arizona 85016
(602) 778-8700
(Address of principal executive offices; zip code)
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
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.
Large accelerated filer
¨
 
Accelerated filer
¨
 
Non-accelerated filer
(Do not check if a smaller reporting company)
x
 
 
 
 
 
 
 
Smaller reporting company
¨
 
Emerging growth company
¨
 
 
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 provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of November 9, 2017, there were approximately 310.8 million shares of common stock, par value $0.01 per share, of Cole Credit Property Trust IV, Inc. outstanding.
 
 

Table of Contents


COLE CREDIT PROPERTY TRUST IV, INC.
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents


PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
COLE CREDIT PROPERTY TRUST IV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share amounts) (Unaudited)
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Investment in real estate assets:
 
 
 
Land
$
1,193,043

 
$
1,156,417

Buildings, fixtures and improvements
3,364,812

 
3,214,212

Intangible lease assets
587,189

 
553,149

Total real estate investments, at cost
5,145,044

 
4,923,778

Less: accumulated depreciation and amortization
(490,178
)
 
(389,768
)
Total real estate investments, net
4,654,866

 
4,534,010

Cash and cash equivalents
4,231

 
9,754

Restricted cash
11,002

 
8,040

Rents and tenant receivables, net
68,916

 
65,446

Due from affiliates
4

 
58

Prepaid expenses, derivative assets, revenue bonds and other assets
9,638

 
5,513

Deferred costs, net
3,270

 
1,514

Assets held for sale
1,594

 
—

Total assets
$
4,753,521

 
$
4,624,335

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Notes payable and credit facility, net
$
2,454,282

 
$
2,246,259

Accounts payable and accrued expenses
32,989

 
25,310

Due to affiliates
3,784

 
5,333

Intangible lease liabilities, net
47,607

 
49,075

Distributions payable
16,001

 
16,498

Deferred rental income, derivative liabilities and other liabilities
14,890

 
15,091

Total liabilities
2,569,553

 
2,357,566

Commitments and contingencies

 

Redeemable common stock and noncontrolling interest
187,056

 
188,938

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

 
—

Common stock, $0.01 par value per share; 490,000,000 shares authorized, 311,637,622 and 311,817,004 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
3,116

 
3,118

Capital in excess of par value
2,607,301

 
2,607,304

Accumulated distributions in excess of earnings
(613,163
)
 
(531,567
)
Accumulated other comprehensive loss
(342
)
 
(1,024
)
Total stockholders’ equity
1,996,912

 
2,077,831

Total liabilities, redeemable common stock, noncontrolling interest and stockholders’ equity
$
4,753,521

 
$
4,624,335

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

3
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COLE CREDIT PROPERTY TRUST IV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except share and per share amounts) (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rental income
$
94,103

 
$
89,370

 
$
278,354

 
$
265,341

Tenant reimbursement income
12,921

 
12,426

 
37,954

 
37,599

Total revenues
107,024

 
101,796

 
316,308

 
302,940

Operating expenses:
 
 
 
 
 
 
 
General and administrative
3,270

 
3,246

 
10,301

 
9,735

Property operating
7,345

 
5,738

 
20,881

 
16,603

Real estate tax
9,276

 
8,612

 
27,646

 
25,939

Advisory fees and expenses
11,149

 
10,587

 
32,863

 
31,100

Acquisition-related
110

 
1,417

 
1,520

 
3,592

Depreciation and amortization
36,461

 
33,452

 
106,145

 
100,399

Impairment
1,658

 
1,430

 
1,658

 
1,430

Total operating expenses
69,269

 
64,482

 
201,014

 
188,798

Operating income
37,755

 
37,314

 
115,294

 
114,142

Other income (expense):
 
 
 
 
 
 
 
Interest expense and other, net
(23,335
)
 
(20,473
)
 
(67,968
)
 
(58,416
)
Loss recognized on equity interest re-measured to fair value
—

 
(652
)
 
—

 
(652
)
Income before real estate dispositions
14,420

 
16,189

 
47,326

 
55,074

Gain on dispositions of real estate, net
15,349

 
1,939

 
16,801

 
2,053

Net income
29,769

 
18,128

 
64,127

 
57,127

Net income allocated to noncontrolling interest
33

 
32

 
99

 
99

Net income attributable to the Company
$
29,736

 
$
18,096

 
$
64,028

 
$
57,028

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
311,649,032

 
311,558,083

 
311,698,622

 
311,871,727

Net income per common share:
 
 
 
 
 
 
 
Basic and diluted
$
0.10

 
$
0.06

 
$
0.21

 
$
0.18

Distributions declared per common share
$
0.16

 
$
0.16

 
$
0.47

 
$
0.47

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


4
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COLE CREDIT PROPERTY TRUST IV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (in thousands) (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
29,769

 
$
18,128

 
$
64,127

 
$
57,127

Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate swaps
99

 
3,751

 
(2,175
)
 
(13,535
)
Amount of loss reclassified from other comprehensive income into income as interest expense
447

 
2,181

 
2,857

 
6,768

Total other comprehensive income (loss)
546

 
5,932

 
682

 
(6,767
)
 
 
 
 
 
 
 
 
Comprehensive income
30,315

 
24,060

 
64,809

 
50,360

Comprehensive income allocated to noncontrolling interest
33

 
32

 
99

 
99

Comprehensive income attributable to the Company
$
30,282

 
$
24,028

 
$
64,710

 
$
50,261

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


5
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COLE CREDIT PROPERTY TRUST IV, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 (in thousands, except share amounts) (Unaudited)
 
Common Stock
 
Capital in Excess
of Par Value
 
Accumulated
Distributions in Excess of Earnings
 
Accumulated
Other Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
Number of
Shares
 
Par Value
 
Balance, January 1, 2017
311,817,004

 
$
3,118

 
$
2,607,304

 
$
(531,567
)
 
$
(1,024
)
 
$
2,077,831

Issuance of common stock
7,665,673

 
76

 
76,775

 
—

 
—

 
76,851

Distributions to investors
—

 
—

 
—

 
(145,624
)
 
—

 
(145,624
)
Redemptions of common stock
(7,845,055
)
 
(78
)
 
(78,545
)
 
—

 
—

 
(78,623
)
Changes in redeemable common stock
—

 
—

 
1,767

 
—

 
—

 
1,767

Comprehensive income
—

 
—

 
—

 
64,028

 
682

 
64,710

Balance, September 30, 2017
311,637,622

 
$
3,116

 
$
2,607,301

 
$
(613,163
)
 
$
(342
)
 
$
1,996,912

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


6
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COLE CREDIT PROPERTY TRUST IV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands) (Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
64,127

 
$
57,127

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net
104,220

 
99,555

Amortization of deferred financing costs
3,958

 
4,190

Amortization of fair value adjustment of mortgage notes payable assumed
(64
)
 
(63
)
Straight-line rental income
(7,651
)
 
(8,888
)
Bad debt expense
1,637

 
(1
)
Equity in income of unconsolidated joint venture
—

 
(615
)
Return on investment from unconsolidated joint venture
—

 
615

Impairment of real estate assets
1,658

 
1,430

Fair value adjustment to contingent consideration
(337
)
 
(2,672
)
Ineffectiveness of interest rate swaps
(80
)
 
—

Write-off of deferred financing costs
896

 
—

Gain on disposition of real estate assets, net
(16,801
)
 
(2,053
)
Loss recognized on equity interest re-measured to fair value
—

 
652

Changes in assets and liabilities:
 
 
 
Rents and tenant receivables
1,667

 
139

Prepaid expenses and other assets
(1,443
)
 
(618
)
Accounts payable and accrued expenses
7,819

 
8,237

Deferred rental income and other liabilities
47

 
(1,404
)
Due from affiliates
54

 
47

Due to affiliates
(1,549
)
 
(161
)
Net cash provided by operating activities
158,158

 
155,517

Cash flows from investing activities:
 
 
 
Investment in real estate assets and capital expenditures
(309,412
)
 
(197,038
)
Investment in revenue bonds
(2,081
)
 
—

Return of investment in unconsolidated joint venture
—

 
1,033

Acquisition of unconsolidated joint venture partner's interest
—

 
(1,626
)
Proceeds from disposition of real estate assets
97,154

 
25,947

Payment of property escrow deposits
(11,416
)
 
(5,404
)
Refund of property escrow deposits
11,666

 
6,404

Change in restricted cash
(2,962
)
 
(1,714
)
Net cash used in investing activities
(217,051
)
 
(172,398
)
Cash flows from financing activities:
 
 
 
Redemptions of common stock
(78,623
)
 
(83,517
)
Offering costs related to DRIP Offerings
—

 
(66
)
Distributions to investors
(69,270
)
 
(64,068
)
Proceeds from notes payable and credit facility
1,514,706

 
441,420

Repayments of credit facility and notes payable
(1,300,001
)
 
(279,315
)
Payment of loan deposits
(1,064
)
 
(3,378
)
Refund of loan deposits
1,064

 
3,378

Deferred financing costs paid
(13,228
)
 
(3,341
)
Distributions to noncontrolling interest
(214
)
 
(199
)
Earnout liability paid
—

 
(1,866
)
Net cash provided by financing activities
53,370

 
9,048

Net decrease in cash and cash equivalents
(5,523
)
 
(7,833
)
Cash and cash equivalents, beginning of period
9,754

 
26,316

Cash and cash equivalents, end of period
$
4,231

 
$
18,483

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

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Table of Contents


COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited)
NOTE 1 — ORGANIZATION AND BUSINESS
Cole Credit Property Trust IV, Inc. (the “Company”) is a Maryland corporation, incorporated on July 27, 2010, that elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2012. The Company is the sole general partner of, and owns, directly or indirectly, 100% of the partnership interests in Cole Operating Partnership IV, LP, a Delaware limited partnership. The Company is externally managed by Cole REIT Advisors IV, LLC (“CR IV Advisors”), a Delaware limited liability company and an affiliate of the Company’s sponsor, Cole Capital®, which is a trade name used to refer to a group of affiliated entities directly or indirectly controlled by VEREIT, Inc. (“VEREIT”), a widely-held public company whose shares of common stock are listed on the New York Stock Exchange (NYSE: VER). VEREIT indirectly owns and/or controls the Company’s external advisor, CR IV Advisors, the Company’s dealer manager for the Offering (as defined below), Cole Capital Corporation (“CCC”), the Company’s property manager, CREI Advisors, LLC (“CREI Advisors”), and the Company’s sponsor, Cole Capital. 
On January 26, 2012, pursuant to a Registration Statement on Form S-11 (Registration No. 333-169533) (the “Registration Statement”) filed under the Securities Act of 1933, as amended (the “Securities Act”), the Company commenced its initial public offering on a “best efforts” basis of up to a maximum of $2.975 billion in shares of common stock (the “Offering”). On November 25, 2013, the Company reallocated $400.0 million in shares from the distribution reinvestment plan (the “DRIP”) portion of the Offering to the primary portion of the Offering, and on February 18, 2014, the Company reallocated an additional $23.0 million in shares from the DRIP portion of the Offering to the primary portion of the Offering. As a result of these reallocations, the Offering offered up to a maximum of approximately 292.3 million shares of common stock at a price of $10.00 per share in the primary portion of the Offering and up to approximately 5.5 million additional shares pursuant to the DRIP portion of the Offering under which the Company’s stockholders could have elected to have distributions reinvested in additional shares of common stock at a price of $9.50 per share.
The Company ceased issuing shares in the Offering on April 4, 2014. At the completion of the Offering, a total of approximately 297.4 million shares of common stock had been issued, including approximately 292.3 million shares of common stock sold to the public pursuant to the primary portion of the Offering and approximately 5.1 million shares of common stock issued pursuant to the DRIP portion of the Offering. The remaining approximately 404,000 unsold shares from the Offering were deregistered.
The Company registered $247.0 million of shares of common stock under the DRIP pursuant to a Registration Statement filed on Form S-3 (Registration No. 333-192958) (the “Initial DRIP Offering”), which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 19, 2013 and automatically became effective with the SEC upon filing. The Company ceased issuing shares under the Initial DRIP Offering effective as of June 30, 2016. At the completion of the Initial DRIP Offering, a total of approximately $241.7 million of common stock had been issued. The remaining $5.3 million of unsold shares from the Initial DRIP Offering were deregistered.
The Company registered an additional $600.0 million of shares of common stock under the DRIP pursuant to a Registration Statement filed on Form S-3 (Registration No. 333-212832) (the “Secondary DRIP Offering,” and together with the Initial DRIP Offering, the “DRIP Offerings,” and the DRIP Offerings collectively with the Offering, the “Offerings”), which was filed with the SEC on August 2, 2016 and automatically became effective with the SEC upon filing. The Company began to issue shares under the Secondary DRIP Offering on August 2, 2016 and will continue to issue shares under the Secondary DRIP Offering.
On September 27, 2015, the Company announced that its board of directors (the “Board”) had established an estimated value of the Company’s common stock, as of August 31, 2015, of $9.70 per share for purposes of assisting broker-dealers that participated in the Offering in meeting their customer account statement reporting obligations under National Association of Securities Dealers Conduct Rule 2340. On November 10, 2016, the Board established an updated estimated per share net asset value (“NAV”) of the Company’s common stock, as of September 30, 2016, of $9.92 per share. On March 24, 2017, the Board established an updated estimated per share NAV of the Company’s common stock, as of December 31, 2016, of $10.08 per share. In determining the estimated per share NAVs as of August 31, 2015, September 30, 2016 and December 31, 2016, the Board considered information and analysis, including valuation materials that were provided by a third-party valuation expert, information provided by CR IV Advisors, and the estimated per share NAV recommendation made by the valuation committee of the Board, which committee is comprised entirely of independent directors. The Company’s estimated per share NAVs are not audited or reviewed by its independent registered public accounting firm.

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Table of Contents
COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


Prior to October 1, 2015, distributions were reinvested in shares of the Company’s common stock under the DRIP at a price of $9.50 per share. From October 1, 2015 to November 13, 2016, distributions were reinvested in shares of the Company’s common stock under the DRIP at a price of $9.70 per share, the estimated value per share as of August 31, 2015, as determined by the Board. From November 14, 2016 to March 27, 2017, distributions were reinvested in shares of the Company’s common stock under the DRIP at a price of $9.92 per share, the estimated per share NAV as of September 30, 2016, as determined by the Board. Commencing on March 28, 2017, distributions are reinvested in shares of the Company’s common stock under the DRIP at a price of $10.08 per share, the estimated per share NAV as of December 31, 2016, as determined by the Board.
As of September 30, 2017, the Company had issued approximately 336.8 million shares of its common stock in the Offerings, including 38.5 million shares issued in the DRIP Offerings, for gross offering proceeds of $3.3 billion before organization and offering costs, selling commissions and dealer manager fees of $306.0 million. As of September 30, 2017, the Company owned 908 properties, which includes nine properties owned through a consolidated joint venture arrangement (the “Consolidated Joint Venture”), comprising 26.8 million rentable square feet of commercial space located in 45 states. As of September 30, 2017, the rentable square feet at these properties was 97.5% leased, including month-to-month agreements, if any.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”), in all material respects, and have been consistently applied in preparing the accompanying condensed consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the SEC regarding interim financial reporting, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements for the interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of full year results.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016, and related notes thereto, set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The condensed consolidated financial statements should also be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.
The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the Consolidated Joint Venture in which the Company has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.
The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity (“VIE”). 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 consolidates any VIEs when it is determined to be the primary beneficiary of the VIE’s operations.

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 VIE.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


A VIE must be consolidated by its primary beneficiary, which is generally defined as the party who has a controlling financial interest in the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance 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 any VIEs based on standards set forth in GAAP as described above.
As of September 30, 2017 and December 31, 2016, the Company determined that it had a controlling interest in the Consolidated Joint Venture and therefore met the GAAP requirements for consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Investments
Real estate assets are stated at cost, less accumulated depreciation and amortization. Amounts capitalized to real estate assets consist of the costs of acquisition, including acquisition-related fees and certain acquisition-related expenses, construction and any tenant improvements, major improvements and betterments that extend the useful life of the real estate assets and leasing costs. All repairs and maintenance costs are expensed as incurred. In April 2017, the Company early adopted Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company’s acquisitions qualify as asset acquisitions, and as such, acquisition-related fees and certain acquisition-related expenses related to these asset acquisitions are capitalized. Prior to the adoption of ASU 2017-01, all acquisition-related fees and expenses were expensed as incurred, and all of the Company’s acquisitions were accounted for as business combinations.
The Company considers the period of future benefit of each respective asset to determine the appropriate useful life. The estimated useful lives of the Company’s real estate assets by class are generally as follows:
Buildings
40 years
Site improvements
15 years
Tenant improvements
Lesser of useful life or lease term
Intangible lease assets
Lease term
Recoverability of Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to, bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value is determined using a discounted cash flow analysis and recent comparable sales transactions. As part of the Company’s quarterly impairment review procedures, the Company recorded impairment charges of $1.7 million related to one property as a result of delinquent rental payments during the nine months ended September 30, 2017. As part of the Company’s quarterly impairment review procedures, the Company recorded impairment charges of $1.4 million related to one property leased to a tenant that filed for bankruptcy during the nine months ended September 30, 2016. The assumptions and uncertainties utilized in the evaluation of the impairment of real estate

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


assets are discussed in detail in Note 3 — Fair Value Measurements. See also Note 4 — Real Estate Investments for further discussion regarding real estate investment activity.
Assets Held for Sale
When a real estate asset is identified by the Company as held for sale, the Company will cease depreciation and amortization of the assets related to the property and estimate the fair value, net of selling costs. If, in management’s opinion, the fair value, net of selling costs, of the asset is less than the carrying amount of the asset, an adjustment to the carrying amount would be recorded to reflect the estimated fair value of the property, net of selling costs. During the nine months ended September 30, 2017, the Company identified one property as held for sale, which was sold subsequent to September 30, 2017, as discussed in Note 14 — Subsequent Events. There were no assets identified as held for sale as of December 31, 2016.
Allocation of Purchase Price of Real Estate Assets
Upon the acquisition of real properties, the Company allocates the purchase price, including acquisition-related fees and certain acquisition-related expenses after the adoption of ASU 2017-01, to acquired tangible assets, consisting of land, buildings and improvements, and to identified intangible assets and liabilities, consisting of the value of above- and below-market leases and the value of in-place leases, based in each case on their respective fair values. The Company utilizes independent appraisals to assist in the determination of the fair values of the tangible assets of an acquired property (which includes land and buildings). The information in the appraisal, along with any additional information available to the Company’s management, is used in estimating the amount of the purchase price that is allocated to land. Other information in the appraisal, such as building value and market rents, may be used by the Company’s management in estimating the allocation of purchase price to the building and to intangible lease assets and liabilities. The appraisal firm has no involvement in management’s allocation decisions other than providing this market information.
The determination of the fair values of the real estate assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables. The use of alternative estimates may result in a different allocation of the Company’s purchase price, which could materially impact the Company’s results of operations.
Investment in Held-to-Maturity Securities
The Company has investments classified as held-to-maturity securities, which consist of revenue bonds acquired in connection with the purchase of an anchored shopping center. The bonds have a 9.0% interest rate and mature on November 1, 2044. As of September 30, 2017, the Company classified these investments as held-to-maturity as the Company has the intent and ability to hold the securities to maturity. These investments are initially recognized in prepaid expenses, derivative assets, revenue bonds and other assets on the condensed consolidated balance sheets and are subsequently measured using amortized cost.
The Company’s investments in revenue bonds are reviewed for impairment, including the evaluation of changes in events or circumstances that may indicate that the carrying amount of the investment may not be recoverable. Realization is dependent on a number of factors, including investment performance, market conditions and payment structure. The Company will record an impairment charge if it is determined that a decline in the value of the investment below its carrying amount is other than temporary, recovery of its cost basis is uncertain, and/or it is uncertain if the investment will be held to maturity. The analysis of determining whether the impairment of a security is deemed to be other-than-temporary requires significant judgments and assumptions. The use of alternative judgments and assumptions could result in a different conclusion.
Redeemable Noncontrolling Interest in Consolidated Joint Venture
On June 27, 2014, the Company completed the formation of the Consolidated Joint Venture. Pursuant to the joint venture agreement, the joint venture partner has a right to exercise an option (the “Option”), which became effective on June 27, 2016, whereby the Company will be required to purchase the ownership interest of the joint venture partner at fair market value. As of September 30, 2017, the Option has not been exercised. The Company determined it had a controlling interest in the Consolidated Joint Venture and, therefore, met the GAAP requirements for consolidation. The Company recorded net income of $99,000 and paid distributions of $214,000 related to the noncontrolling interest during the nine months ended September 30, 2017. The Company recorded the noncontrolling interest of $2.4 million as temporary equity in the mezzanine section of the condensed consolidated balance sheets, due to the ability to exercise the Option being outside the control of the Company.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


Restricted Cash
The Company had $11.0 million and $8.0 million in restricted cash as of September 30, 2017 and December 31, 2016, respectively. Included in restricted cash was $3.9 million and $4.0 million held by lenders in lockbox accounts as of September 30, 2017 and December 31, 2016, respectively. As part of certain debt agreements, rents from certain encumbered properties are deposited directly into a lockbox account, from which the monthly debt service payment is disbursed to the lender and the excess is disbursed to the Company. Also included in restricted cash was $7.1 million and $4.0 million held by lenders in escrow accounts for real estate taxes and other lender reserves for certain properties, in accordance with the associated lender’s loan agreement, as of September 30, 2017 and December 31, 2016, respectively.
Revenue Recognition
Certain properties have leases where minimum rental payments increase during the term of the lease. The Company records rental income for the full term of each lease on a straight-line basis when earned and collectability is reasonably assured. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purpose of this calculation. The Company defers the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Expected reimbursements from tenants for recoverable real estate taxes and operating expenses are included in tenant reimbursement income in the period when such costs are incurred.
The Company continually reviews receivables related to rent, including any straight-line rent, and current and future operating expense reimbursements from tenants and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is uncertain, the Company will record an increase in the allowance for uncollectible accounts. As of September 30, 2017 and December 31, 2016, the Company had an allowance for uncollectible accounts of $1.4 million and $221,000, respectively.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on the Company’s accounting and reporting. Except as otherwise stated below, the Company is currently evaluating the effect that certain of these new accounting requirements may have on the Company’s accounting and related reporting and disclosures in the Company’s condensed consolidated financial statements:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in Revenue Recognition, Accounting Standards Codification  (“ASC”) (Topic 605) and will require an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public business entities, the guidance should be applied to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company plans to use the modified retrospective approach to adopt ASU 2014-09. In accordance with the Company’s plan for the adoption of ASU 2014-09, the Company’s implementation team has identified the Company’s revenue streams, performed an in-depth review of the Company’s revenue contracts and identified the related performance obligations and is evaluating the impact on the Company’s consolidated financial statements and internal accounting processes and controls. Once ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which, as discussed below, sets forth principles for the recognition, measurement, presentation and disclosure of leases, goes into effect, ASU 2014-09 may apply to non-lease components in the lease agreements.
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 current guidance; however it limits the capitalization of initial direct leasing costs, such as internally generated costs. ASU 2016-02 retains a distinction between finance leases (i.e., capital leases under current GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


leases that have not expired upon adoption and provides for certain practical expedients. The Company’s implementation team 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 insurance and real estate taxes, and the related operating expense reimbursement revenue, with no impact on net income. Based upon a preliminary analysis, the Company does not expect the accounting for leases pursuant to which the Company is the lessor to materially change as a result of the adoption of ASU 2016-02. The Company does not expect the accounting for one ground lease pursuant to which the Company is the lessee to have a material impact on its consolidated financial statements.
ASU No. 2016-01, Financial Instruments (Subtopic 825-10) — The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income (loss) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the consolidated balance sheets or the accompanying notes to the consolidated financial statements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting 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 GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. 
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to address diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, and requires retrospective adoption unless it is impracticable to apply, in which case it is to be applied prospectively as of the earliest date practicable. The Company plans to adopt ASU 2016-15 during the fourth quarter of fiscal year 2017 and has determined that this standard is relevant to its presentation of debt prepayment and debt extinguishment costs and contingent consideration payments made after a business combination.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. In accordance with ASU 2016-18, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of ASU 2016-18 are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company plans to adopt ASU 2016-18 during the fourth quarter of 2017 and apply the standard retrospectively for all periods presented. The Company does not expect it will have a material impact on its consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), which clarifies the following: (1) nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty; (2) an entity should allocate consideration to each distinct asset by applying the guidance in Topic 606 on allocating the transaction price to performance obligations; and (3) entities are required 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 may result in higher gains on the sale of partial real estate interests, including contributions of

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


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. Early adoption is permitted.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). 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 plans to adopt ASU 2017-12 during the first quarter of fiscal year 2018 and does not expect that it will have a material impact on its consolidated financial statements.
NOTE 3 — FAIR VALUE MEASUREMENTS
GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 — Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:
Notes payable and credit facility — The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of the measurement date. Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs. These financial instruments are valued using Level 2 inputs. As of September 30, 2017, the estimated fair value of the Company’s debt was $2.48 billion, compared to the carrying value of $2.47 billion. The estimated fair value of the Company’s debt as of December 31, 2016 was $2.25 billion, compared to the carrying value of $2.26 billion.
Derivative instruments — The Company’s derivative instruments are comprised of interest rate swaps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the respective counterparties.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2017 and December 31, 2016, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Contingent consideration arrangements — The contingent consideration arrangements are carried at fair value and are valued using Level 3 inputs. The fair value of additional consideration paid in connection with the acquisition of properties subject to contingent consideration arrangements is determined based on key assumptions, including, but not limited to, rental rates, discount rates and the estimated timing and probability of successfully leasing vacant space subsequent to the Company’s acquisition of certain properties. 
Revenue bonds — The fair value estimates of the Company’s revenue bonds are based on assumptions that management believes market participants would use in pricing, using widely accepted valuation techniques including discounted cash flow analysis. This analysis reflects the contractual terms of the bonds, including the period to maturity, and uses unobservable market-based inputs, including discount rates ranging from 7.75% to 9.0%. As a result, the Company has determined that its revenue bonds are classified in Level 3 of the fair value hierarchy. As of September 30, 2017, the estimated fair value of the Company’s revenue bonds was $2.1 million.
Other financial instruments — The Company considers the carrying values of its cash and cash equivalents, restricted cash, tenant receivables, accounts payable and accrued expenses, other liabilities, due to affiliates and distributions payable in order to approximate their fair values because of the short period of time between their origination and their expected realization as well as their highly-liquid nature. Due to the short-term maturities of these instruments, Level 1 inputs are utilized to estimate the fair value of these financial instruments.
Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, upon disposition of the financial assets and liabilities. As of September 30, 2017 and December 31, 2016, there have been no transfers of financial assets or liabilities between fair value hierarchy levels.
Items Measured at Fair Value on a Recurring Basis
In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 (in thousands):
 
Balance as of
September 30, 2017
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
Interest rate swaps
$
3,178

 
$
—

 
$
3,178

 
$
—

Total financial assets
$
3,178

 
$
—

 
$
3,178

 
$
—

Financial liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
(3,440
)
 
$
—

 
$
(3,440
)
 
$
—

Total financial liabilities
$
(3,440
)
 
$
—

 
$
(3,440
)
 
$
—

 
 
 
 
 
 
 
 
  
Balance as of
December 31, 2016
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
Interest rate swaps
$
2,327

 
$
—

 
$
2,327

 
$
—

Total financial assets
$
2,327

 
$
—

 
$
2,327

 
$
—

Financial liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
(3,351
)
 
$
—

 
$
(3,351
)
 
$
—

Contingent consideration
(337
)
 
—

 
—

 
(337
)
Total financial liabilities
$
(3,688
)
 
$
—

 
$
(3,351
)
 
$
(337
)

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


The following are reconciliations of the changes in financial assets and liabilities with Level 3 inputs in the fair value hierarchy for the nine months ended September 30, 2017 and 2016 (in thousands):
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Beginning Balance, December 31, 2016
 
$
(337
)
Purchases and fair value adjustments:
 
 
Purchases
 
2,081

Fair value adjustments
 
337

Ending Balance, September 30, 2017
 
$
2,081

 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Beginning Balance, December 31, 2015
 
$
(4,538
)
Purchases and fair value adjustments:
 
 
Purchases
 
(332
)
Fair value adjustments
 
2,672

Payments made
 
1,866

Ending Balance, September 30, 2016
 
$
(332
)
Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

Certain financial and nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The Company’s process for identifying and recording impairment related to real estate assets and intangible assets is discussed in Note 2 — Summary of Significant Accounting Policies.
As discussed in Note 4 — Real Estate Investments, during the nine months ended September 30, 2017, real estate assets related to one property totaling approximately 5,000 square feet were deemed to be impaired, and its carrying value was reduced to an estimated fair value of $1.0 million, resulting in impairment charges of $1.7 million. During the nine months ended September 30, 2016, real estate assets related to one property totaling approximately 7,000 square feet were deemed to be impaired, and its carrying value was reduced to an estimated fair value of $1.4 million, resulting in impairment charges of $1.4 million. The Company estimates fair values using Level 3 inputs and using a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and to make certain key assumptions, including, but not limited to, the following: (1) terminal capitalization; (2) discount rates; (3) the number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions, including the number of months to re-lease, market rental income and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and the future performance and sustainability of the Company’s tenants.
The following table presents the impairment charges by asset class recorded during the nine months ended September 30, 2017 and 2016 (in thousands):
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Asset class impaired:
 
 
 
 
Land
 
375

 
$
502

Buildings, fixtures and improvements
 
887

 
713

Intangible lease assets
 
396

 
215

Total impairment loss
 
$
1,658

 
$
1,430


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


NOTE 4 — REAL ESTATE INVESTMENTS
2017 Property Acquisitions
During the nine months ended September 30, 2017, the Company acquired 40 commercial properties for an aggregate purchase price of $300.5 million (the “2017 Acquisitions”), of which 36 were determined to be asset acquisitions and four were accounted for as business combinations as they were acquired prior to the adoption of ASU 2017-01 in April 2017. The Company funded the 2017 Acquisitions with net cash provided by operations and available borrowings.
The following table summarizes the consideration transferred for the properties purchased during the nine months ended September 30, 2017 (in thousands):
 
2017 Acquisitions
Investments in real estate:
 
Purchase price of asset acquisitions
$
245,138

Purchase price of business combinations
55,386

Total purchase price of real estate investments acquired (1)
$
300,524

______________________
(1)
The weighted average amortization period for the 2017 Acquisitions is 16.6 years for acquired in-place leases and other intangibles, 13.6 years for acquired above-market leases and 8.5 years for acquired intangible lease liabilities.
During the nine months ended September 30, 2017, the Company acquired a 100% interest in 36 commercial properties for an aggregate purchase price of $245.1 million, which were accounted for as asset acquisitions (the “2017 Asset Acquisitions”). The aggregate purchase price includes $5.9 million of external acquisition-related expenses that were capitalized in accordance with ASU 2017-01. Prior to the adoption of ASU 2017-01, costs related to property acquisitions were expensed as incurred. The following table summarizes the purchase price allocation for the 2017 Asset Acquisitions purchased during the nine months ended September 30, 2017 (in thousands):
 
2017 Asset Acquisitions
Land
$
32,583

Buildings, fixtures and improvements
173,681

Acquired in-place leases and other intangibles
36,733

Acquired above-market leases
3,624

Revenue bonds
2,081

Intangible lease liabilities
(3,564
)
Total purchase price
$
245,138

During the nine months ended September 30, 2017, the Company acquired a 100% interest in four commercial properties for an aggregate purchase price of $55.4 million, which were accounted for as business combinations (the “2017 Business Combination Acquisitions”). The purchase price allocation for each of the Company’s 2017 Business Combination Acquisitions is preliminary and subject to change as the Company finalizes the allocations, which the Company expects will be prior to the end of the current fiscal year. The Company preliminarily allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the preliminary purchase price allocations for the 2017 Business Combination Acquisitions purchased during the nine months ended September 30, 2017 (in thousands):
 
2017 Business Combination Acquisitions
Land
$
9,873

Buildings, fixtures and improvements
41,186

Acquired in-place leases and other intangibles
5,974

Acquired above-market leases
988

Intangible lease liabilities
(2,635
)
Total purchase price
$
55,386


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


The Company recorded revenue for the three and nine months ended September 30, 2017 of $1.3 million and $3.6 million, respectively, and net income of $491,000 and $163,000 for the three and nine months ended September 30, 2017, respectively, related to the 2017 Business Combination Acquisitions. In addition, the Company recorded $1.3 million of acquisition-related expenses for the nine months ended September 30, 2017, which is included in acquisition-related expenses on the condensed consolidated statements of operations.
The following information summarizes selected financial information of the Company as if all of the 2017 Business Combination Acquisitions were completed on January 1, 2016 for each period presented below. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the three and nine months ended September 30, 2017 and 2016, respectively (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Pro forma basis:
 
 
 
 
 
 
 
Revenue
$
107,024

 
$
103,140

 
$
316,619

 
$
306,864

Net income
$
29,736

 
$
18,374

 
$
65,114

 
$
56,740

The pro forma information for the nine months ended September 30, 2017 was adjusted to exclude $1.3 million of acquisition-related fees and expenses recorded during such periods related to the 2017 Business Combination Acquisitions. Accordingly, these expenses were instead recognized in the pro forma information for the nine months ended September 30, 2016.
The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2016, nor does it purport to represent the results of future operations.
2017 Property Dispositions
During the nine months ended September 30, 2017, the Company disposed of 14 retail properties for an aggregate gross sales price of $98.6 million, resulting in proceeds of $64.1 million after closing costs and the repayment of the $33.0 million variable rate debt secured by one of the disposed properties and a gain of $16.8 million. No disposition fees were paid to CR IV Advisors or its affiliates in connection with the sale of the properties and the Company has no continuing involvement with these properties. The gain on sale of real estate is included in gain on disposition of real estate, net in the consolidated statements of operations.
2017 Impairment of a Property
The Company performs quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate that the carrying value of certain of its real estate assets may not be recoverable. See Note 2 — Summary of Significant Accounting Policies for a discussion of the Company’s accounting policies regarding impairment of real estate assets.
During the nine months ended September 30, 2017, one property with a carrying value of $2.7 million was deemed to be impaired and its carrying value was reduced to an estimated fair value of $1.0 million, resulting in impairment charges of $1.7 million, which were recorded in the condensed consolidated statements of operations. See Note 3 — Fair Value Measurements for a further discussion regarding these impairment charges.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


2016 Property Acquisitions
During the nine months ended September 30, 2016, the Company acquired 14 commercial properties for an aggregate purchase price of $197.0 million (the “2016 Acquisitions”). The 2016 Acquisitions were accounted for as business combinations. The Company funded the 2016 Acquisitions with net proceeds from the Initial DRIP Offering, net cash provided by operations and available borrowings. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocations for the 2016 Acquisitions (in thousands):
 
2016 Acquisitions
Land
$
45,741

Buildings, fixtures and improvements
134,375

Acquired in-place leases and other intangibles (1)
16,807

Acquired above-market leases (2)
3,398

Intangible lease liabilities (3)
(3,295
)
Total purchase price
$
197,026

____________________________________
(1)
The weighted average amortization period for acquired in-place leases and other intangibles was 7.2 years for the 2016 Acquisitions.
(2)
The weighted average amortization period for acquired above-market leases was 5.2 years for the 2016 Acquisitions.
(3)
The weighted average amortization period for acquired intangible lease liabilities was 6.1 years for the 2016 Acquisitions.
The Company recorded revenue for the three and nine months ended September 30, 2016 of $3.4 million and $5.3 million, respectively, and a net loss for the three and nine months ended September 30, 2016 of $313,000 and $2.1 million, respectively, related to the 2016 Acquisitions.
The following information summarizes selected financial information of the Company as if all of the 2016 Acquisitions were completed on January 1, 2015 for each period presented below. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the three and nine months ended September 30, 2016 and 2015, respectively (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Pro forma basis:
 
 
 
 
 
 
 
Revenue
$
103,315

 
$
98,982

 
$
311,312

 
$
284,660

Net income
$
17,973

 
$
18,728

 
$
58,777

 
$
51,839

The pro forma information for the three and nine months ended September 30, 2016 was adjusted to exclude $1.4 million and $3.6 million, respectively, of acquisition-related fees and expenses recorded during the three and nine months ended September 30, 2016. Accordingly, these costs were instead recognized in the pro forma information for the three and nine months ended September 30, 2015.
The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2015, nor does it purport to represent the results of future operations.
2016 Property Dispositions
During the nine months ended September 30, 2016, the Company disposed of three retail properties and one anchored shopping center for an aggregate gross sales price of $26.6 million, resulting in proceeds of $25.9 million after closing costs and a gain of $2.1 million. No disposition fees were paid to CR IV Advisors or its affiliates in connection with the sale of the properties and the Company has no continuing involvement with these properties. The gain on sale of real estate is included in gain on disposition of real estate, net in the consolidated statements of operations.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


2016 Impairment of a Property
During the nine months ended September 30, 2016, one property with a carrying value of $2.8 million was deemed to be impaired and its carrying value was reduced to an estimated fair value of $1.4 million, resulting in impairment charges of $1.4 million, which were recorded in the condensed consolidated statements of operations.
2016 Unconsolidated Joint Venture
During the nine months ended September 30, 2016, the Company acquired the partner’s (the “Unconsolidated Joint Venture Partner”) approximately 10% interest in a multi-tenant property comprising 176,000 rentable square feet of commercial space (the “Unconsolidated Joint Venture”). The Company has determined that this transaction qualified as a business combination to be accounted for under the acquisition method. Accordingly, the assets and liabilities of this transaction were recorded in the Company’s condensed consolidated balance sheets at their estimated fair value as of the acquisition date. The fair value of the assets acquired, liabilities assumed and equity interests were estimated using significant assumptions consistent with the Company’s policy concerning the allocation of the purchase price of real estate assets, including current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables. The results of this transaction are included in the Company’s condensed consolidated statements of operations beginning September 22, 2016.
The following table summarizes the transaction related to the business combination, including the preliminary amounts recognized for assets acquired and liabilities assumed, as indicated (in thousands):
 
September 22, 2016
Carrying value of the Company’s equity interest before business combination (1)
$
18,952

Fair value of amounts recognized for assets acquired and liabilities assumed:
 
Land
4,685

Buildings, fixtures and improvements
11,615

Acquired in-place leases and other intangibles
1,340

Acquired above-market leases
1,168

Intangible lease liabilities
(618
)
Other assets and liabilities
110

Total net assets
18,300

Loss recognized on equity interest re-measured to fair value
$
(652
)
____________________________________
(1)    Includes $1.6 million of cash paid to the Unconsolidated Joint Venture Partner.
Consolidated Joint Venture
As of September 30, 2017, the Company had an interest in a Consolidated Joint Venture that owns and manages nine properties, with total assets of $52.7 million, which included $52.1 million of real estate assets, net of accumulated depreciation and amortization of $4.8 million, and total liabilities of $769,000. The Consolidated Joint Venture does not have any debt outstanding as of September 30, 2017. The Company has the ability to control operating and financial policies of the Consolidated Joint Venture. There are restrictions on the use of these assets as the Company would generally be required to obtain the partner’s (the “Consolidated Joint Venture Partner”) approval in accordance with the joint venture agreement for any major transactions. The Company and the Consolidated Joint Venture Partner are subject to the provisions of the joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


NOTE 5 — INTANGIBLE LEASE ASSETS
Intangible lease assets consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands, except weighted average life remaining):
 
 
September 30, 2017
 
December 31, 2016
In-place leases and other intangibles, net of accumulated amortization of $155,772 and $125,620, respectively (with a weighted average life remaining of 10.6 and 10.7 years, respectively)
 
 
 
$
363,977

 
$
364,038

Acquired above-market leases, net of accumulated amortization of $23,888 and $18,723, respectively
 
 
 
 
(with a weighted average life remaining of 8.8 and 8.9 years, respectively)
43,552

 
44,768

 
 
$
407,529

 
$
408,806

Amortization of the above-market leases is recorded as a reduction to rental revenue, and amortization expense for the in-place leases and other intangibles is included in depreciation and amortization in the accompanying condensed consolidated statements of operations. The following table summarizes the amortization expense related to the intangible lease assets for the three and nine months ended September 30, 2017 and September 30, 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
In-place lease and other intangible amortization
$
12,567

 
$
11,055

 
$
35,402

 
$
34,486

Above-market lease amortization
$
1,877

 
$
1,705

 
$
5,498

 
$
4,901

As of September 30, 2017, the estimated amortization expense relating to the intangible lease assets for each of the five succeeding fiscal years is as follows (in thousands):
 
 
Amortization Expense
 
 
In-Place Leases and
Other Intangibles
 
Above-Market Leases
Remainder of 2017
 
$
10,923

 
$
1,774

2018
 
$
42,289

 
$
6,397

2019
 
$
38,454

 
$
5,299

2020
 
$
36,120

 
$
4,724

2021
 
$
32,685

 
$
4,100

NOTE 6 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risk. As of September 30, 2017, the Company had 12 executed interest rate swap agreements. The following table summarizes the terms of the Company’s 11 interest rate swap agreements designated as hedging instruments effective as of September 30, 2017 and December 31, 2016 (dollar amounts in thousands):
 
 

 Outstanding Notional

 

 

 

Fair Value of Assets and (Liabilities)

Balance Sheet

Amount as of

Interest

Effective

Maturity

September 30,

December 31,

Location

September 30, 2017

Rates (1)

Dates

Dates

2017

2016
Interest Rate Swaps
Prepaid expenses, derivative assets, revenue bonds and other assets

$
690,066


2.55% to 3.91%

6/30/2015 to 9/1/2016

8/15/2018 to 7/1/2021

$
3,178


$
2,327

Interest Rate Swaps
Deferred rental income, derivative liabilities and other liabilities

$
338,737


3.46% to 4.75%

6/24/2013 to 8/23/2013

6/24/2018 to 8/24/2020

$
(923
)

$
(3,351
)
____________________________________
(1)
The interest rates consist of the underlying index swapped to a fixed rate and the applicable interest rate spread as of September 30, 2017.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


During the nine months ended September 30, 2017, the Company entered into one interest rate swap agreement associated with a $811.7 million notional amount, effective on August 15, 2018. The following table summarizes the terms of this interest rate swap agreement designated as a hedging instrument as of September 30, 2017 and December 31, 2016 (dollar amounts in thousands):
 
 
 
 Outstanding Notional
 
 
 
 
 
 
 
Fair Value of Liability
 
Balance Sheet
 
Amount as of
 
Interest
 
Effective
 
Maturity
 
September 30,
 
December 31,
 
Location
 
September 30, 2017
 
Rate (1)
 
Date
 
Date
 
2017
 
2016
Interest Rate Swap
Deferred rental income, derivative liabilities and other liabilities
 
$
811,666

 
3.77
%
 
8/15/2018
 
3/15/2021
 
$
(2,517
)
 
$
—

____________________________________
(1)
The interest rate consists of the underlying index swapped to a fixed rate and the applicable interest rate spread as of September 30, 2017.
Additional disclosures related to the fair value of the Company’s derivative instruments are included in Note 3 — Fair Value Measurements. The notional amount under the interest rate swap agreements is an indication of the extent of the Company’s involvement in each instrument, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges in order to hedge the variability of the anticipated cash flows on its variable rate debt. The change in fair value of the effective portion of the derivative instruments that are designated as hedges is recorded in other comprehensive income (loss), with a portion of the amount subsequently reclassified to interest expense as interest payments are made on the Company’s variable rate debt. For the three months ended September 30, 2017 and 2016, the amounts reclassified were $447,000 and $2.2 million, respectively, and for the nine months ended September 30, 2017 and 2016, the amounts reclassified were $2.9 million and $6.8 million, respectively. During the next 12 months, the Company estimates that an additional $180,000 will be reclassified from other comprehensive income (loss) as an increase to interest expense.
Any ineffective portion of the change in fair value of the derivative instruments is recorded in interest expense. During the nine months ended September 30, 2017, $79,000 of the change in the fair value of the interest rate swaps was considered ineffective. There were no portions of the change in the fair value of the interest rate swaps that were considered ineffective during the nine months ended September 30, 2016.
The Company has agreements with each of its derivative counterparties that contain provisions whereby if the Company defaults on certain of its unsecured indebtedness, the Company could also be declared in default on its derivative obligations, resulting in an acceleration of payment. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value, inclusive of interest payments, of $3.7 million at September 30, 2017. In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the credit quality of the Company and the respective counterparty. There were no termination events or events of default related to the interest rate swaps as of September 30, 2017.
NOTE 7 — NOTES PAYABLE AND CREDIT FACILITY
As of September 30, 2017, the Company had $2.5 billion of debt outstanding, including net deferred financing costs, with weighted average years to maturity of 4.5 years and a weighted average interest rate of 3.5%. The weighted average years to maturity is computed using the scheduled repayment date as specified in each loan agreement where applicable. The weighted average interest rate is computed using the interest rate in effect until the scheduled repayment date. Should a loan not be repaid by its scheduled repayment date, the applicable interest rate will increase as specified in the respective loan agreement. The following table summarizes the debt balances as of September 30, 2017 and December 31, 2016, and the debt activity for the nine months ended September 30, 2017 (in thousands):

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


 
 
 
During the Nine Months Ended September 30, 2017
 
 
 
Balance as of December 31, 2016
 
Debt Issuances & Assumptions (1)
 
Repayments and Modifications
 
Accretion and (Amortization)
 
Balance as of
September 30, 2017
Fixed rate debt
$
1,164,622

 
$
53,206

 
$
(335
)
 
$
—

 
$
1,217,493

Variable rate debt
53,500

 
—

 
(33,000
)
 
—

 
20,500

Credit facility
1,039,666

 
1,461,500

 
(1,266,666
)
 
—

 
1,234,500

Total debt
2,257,788

 
1,514,706

 
(1,300,001
)
 
—

 
2,472,493

Net premiums (2)
506

 
—

 
—

 
(65
)
 
441

Deferred costs (3)
(12,035
)
 
(10,078
)
 
717

(4
)
2,744

 
(18,652
)
Total debt, net
$
2,246,259

 
$
1,504,628

 
$
(1,299,284
)
 
$
2,679

 
$
2,454,282

____________________________________
(1)
Includes deferred financing costs incurred during the period.
(2)
Net premiums on mortgage notes payable were recorded upon the assumption of the respective debt instruments. Amortization of these net premiums is recorded as a reduction to interest expense over the remaining term of the respective debt instruments using the effective-interest method.
(3)
Deferred costs relate to mortgage notes payable and the term portion of the Credit Facility (as defined below).
(4)
Includes $503,000 of deferred financing costs of the term portion of the Credit Facility written off during the period resulting from the Second Amended and Restated Credit Agreement, as defined below.
As of September 30, 2017, the fixed rate debt outstanding of $1.2 billion included $217.1 million of variable rate debt that is fixed through interest rate swap agreements, which has the effect of fixing the variable interest rates per annum through the maturity date of the variable rate debt. The fixed rate debt has interest rates ranging from 2.6% to 5.0% per annum. The fixed rate debt outstanding matures on various dates from June 2018 through October 2025. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the fixed rate debt outstanding was $2.2 billion as of September 30, 2017. Each of the mortgage notes payable, comprising the fixed rate debt, is secured by the respective properties on which the debt was placed. As of September 30, 2017, the variable rate debt outstanding of $20.5 million had a weighted average interest rate of 4.5%. The variable rate debt outstanding matures on February 26, 2020. With respect to the Company’s $24.2 million of debt maturing within the next year, the Company expects to use borrowings available under the Credit Facility or enter into new financing arrangements in order to meet its debt obligations. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the variable rate debt outstanding was $40.8 million as of September 30, 2017.
During the nine months ended September 30, 2017, the Company entered into a second amended and restated unsecured credit agreement (the “Second Amended and Restated Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent (“JPMorgan Chase”), and the other lenders party thereto that provides for borrowings of up to $1.40 billion, which includes a $1.05 billion unsecured term loan (the “Term Loan”) and up to $350.0 million in unsecured revolving loans (the “Revolving Loans” and collectively, with the Term Loan, the “Credit Facility”). The Term Loan matures on March 15, 2022 and the Revolving Loans mature on March 15, 2021; however, the Company has the right to extend the maturity date of the Revolving Loans to March 15, 2022.
Depending upon the type of loan specified and overall leverage ratio, the Credit Facility bears interest at (i) the one-month, two-month, three-month or six-month London Interbank Offered Rate (“LIBOR”) multiplied by the statutory reserve rate (the “Eurodollar Rate”) plus an interest rate spread ranging from 1.65% to 2.25% or (ii) a base rate, ranging from 0.65% to 1.25%, plus the greater of: (a) JPMorgan Chase’s Prime Rate; (b) the Federal Funds Effective Rate (as defined in the Second Amended and Restated Credit Agreement) plus 0.50%; or (c) the one-month LIBOR multiplied by the statutory reserve rate plus 1.00%. As of September 30, 2017, the Revolving Loans outstanding totaled $184.5 million at a weighted average interest rate of 3.0%. As of September 30, 2017, the Term Loan outstanding totaled $1.05 billion, $811.7 million of which is subject to interest rate swap agreements (the “Swapped Term Loan”). The interest rate swap agreements had the effect of fixing the Eurodollar Rate per annum of the Swapped Term Loan. As of September 30, 2017, the weighted average all-in rate for the Swapped Term Loan was 3.2%. As of September 30, 2017, the Company had $1.23 billion outstanding under the Credit Facility at a weighted average interest rate of 3.1% and $164.9 million in unused capacity, subject to borrowing availability.
The Second Amended and Restated Credit Agreement contains provisions with respect to covenants, events of default and remedies customary for facilities of this nature. In particular, the Second Amended and Restated Credit Agreement requires the Company to maintain a minimum consolidated net worth greater than or equal to the sum of (i) $2.0 billion plus (ii) 75% of the equity issued minus (iii) the aggregate amount of any redemptions or similar transaction from the date of the Second Amended

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


and Restated Credit Agreement, a leverage ratio less than or equal to 60%, a fixed charge coverage ratio greater than 1.50, an unsecured debt to unencumbered asset value ratio equal to or less than 60%, an unsecured debt service coverage ratio greater than 1.75, a secured debt ratio equal to or less than 40% and the amount of secured debt that is recourse debt at no greater than 15% of total asset value. The Company believes it was in compliance with the financial covenants under the Second Amended and Restated Credit Agreement, as well as the financial covenants under the Company’s various fixed and variable rate debt agreements, as of September 30, 2017.
Maturities
The following table summarizes the scheduled aggregate principal repayments for the Company’s outstanding debt subsequent to September 30, 2017 for each of the five succeeding fiscal years and the period thereafter (in thousands):
 
 
Principal Repayments
Remainder of 2017
$
116

2018
24,211

2019
49,799

2020
333,215

2021
285,102

Thereafter
1,780,050

Total
$
2,472,493

NOTE 8 — INTANGIBLE LEASE LIABILITIES
Intangible lease liabilities of the Company consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands, except weighted average life):
 
September 30, 2017
 
December 31, 2016
Acquired below-market liabilities, net of accumulated amortization of $29,396 and $23,241, respectively (with a weighted average life remaining of 7.6 and 7.8 years, respectively)
 
 
 
$
47,607

 
$
49,075

Amortization of below-market leases is recorded as an increase to rental revenue in the accompanying condensed consolidated statements of operations. The following table summarizes the amortization of intangible lease liabilities for the three and nine months ended September 30, 2017 and September 30, 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Amortization of below-market leases
$
2,898

 
$
2,012

 
$
7,469

 
$
5,788

As of September 30, 2017, the estimated amortization of the intangible lease liabilities for each of the five succeeding fiscal years is as follows (in thousands):
 
 
Amortization of Below-Market Leases
Remainder of 2017
 
$
2,329

2018
 
$
8,372

2019
 
$
7,508

2020
 
$
6,703

2021
 
$
4,573


24
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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


NOTE 9 — SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the nine months ended September 30, 2017 and 2016 are as follows (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
 
 
Distributions declared and unpaid
$
16,001

 
$
15,969

Accrued capital expenditures
$
535

 
$
1,115

Accrued deferred financing costs
$
—

 
$
4

Common stock issued through distribution reinvestment plan
$
76,851

 
$
82,383

Change in fair value of interest rate swaps
$
682

 
$
(6,767
)
Contingent consideration recorded upon property acquisitions
$
—

 
$
332

Consolidation of real estate joint venture
$
—

 
$
18,300

Supplemental Cash Flow Disclosures:
 
 
 
Interest paid
$
63,045

 
$
54,401

NOTE 10 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation and claims. The Company is not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which the Company’s properties are the subject.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. In addition, the Company may own or acquire certain properties that are subject to environmental remediation. Generally, the seller of the property, the tenant of the property and/or another third party is responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify the Company against future remediation costs. The Company also carries environmental liability insurance on its properties that provides limited coverage for any remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which the Company may be liable. The Company is not aware of any environmental matters which it believes are reasonably likely to have a material effect on its results of operations, financial condition or liquidity.
NOTE 11 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred commissions, fees and expenses payable to CR IV Advisors and certain of its affiliates in connection with the Offerings and the acquisition, management and disposition of its assets.
Acquisition fees and expenses
The Company pays CR IV Advisors or its affiliates acquisition fees of up to 2.0% of: (1) the contract purchase price of each property or asset the Company acquires; (2) the amount paid in respect of the development, construction or improvement of each asset the Company acquires; (3) the purchase price of any loan the Company acquires; and (4) the principal amount of any loan the Company originates. In addition, the Company reimburses CR IV Advisors or its affiliates for acquisition-related expenses incurred in the process of acquiring properties, so long as the total acquisition fees and expenses relating to the transaction do not exceed 6.0% of the contract purchase price, unless otherwise approved by a majority of the Board, including a majority of the Company’s independent directors, as commercially competitive, fair and reasonable to the Company.
Advisory fees and expenses
The Company pays CR IV Advisors a monthly advisory fee based upon the Company’s monthly average invested assets, which, effective January 1, 2017, is based on the estimated market value of such assets used to determine the Company’s estimated per share NAV as of December 31, 2016, as discussed in Note 1 — Organization and Business, and for those assets

25
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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


acquired subsequent to December 31, 2016, is based on the purchase price. The monthly advisory fee is equal to the following amounts: (1) an annualized rate of 0.75% paid on the Company’s average invested assets that are between $0 and $2.0 billion; (2) an annualized rate of 0.70% paid on the Company’s average invested assets that are between $2.0 billion and $4.0 billion; and (3) an annualized rate of 0.65% paid on the Company’s average invested assets that are over $4.0 billion.
Operating expenses
The Company reimburses CR IV Advisors or its affiliates for certain expenses CR IV Advisors or its affiliates paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse CR IV Advisors or its affiliates for any amount by which the operating expenses (including the advisory fee) at the end of the four preceding fiscal quarters exceed the greater of: (1) 2.0% of average invested assets, or (2) 25.0% of net income excluding any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period. The Company will not reimburse CR IV Advisors or its affiliates for the salaries and benefits paid to personnel in connection with the services for which CR IV Advisors receives acquisition fees, and the Company will not reimburse CR IV Advisors for salaries and benefits paid to the Company’s executive officers.
Disposition fees
If CR IV Advisors or its affiliates provide a substantial amount of services (as determined by a majority of the Company’s independent directors) in connection with the sale of one or more properties (or the Company’s entire portfolio), the Company will pay CR IV Advisors or its affiliates a disposition fee in an amount equal to up to one-half of the real estate or brokerage commission paid by the Company to third parties on the sale of such property, not to exceed 1.0% of the contract price of the property sold; provided, however, in no event may the total disposition fees paid to CR IV Advisors, its affiliates and unaffiliated third parties exceed the lesser of the customary competitive real estate commission or an amount equal to 6.0% of the contract sales price. During the three and nine months ended September 30, 2017 and 2016, no disposition fees were incurred for any such services provided by CR IV Advisors or its affiliates.
Subordinated performance fees
If the Company is sold or its assets are liquidated, CR IV Advisors will be entitled to receive a subordinated performance fee equal to 15.0% of the net sale proceeds remaining after investors have received, from regular distributions plus special distributions paid from proceeds of such sale, a return of their net capital invested and an 8.0% annual cumulative, non-compounded return. Alternatively, if the Company’s shares are listed on a national securities exchange, CR IV Advisors will be entitled to a subordinated performance fee equal to 15.0% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing, exceeds the sum of the total amount of capital raised from investors and the amount of distributions necessary to generate an 8.0% annual cumulative, non-compounded return to investors. As an additional alternative, upon termination of the advisory agreement, CR IV Advisors may be entitled to a subordinated performance fee similar to the fee to which CR IV Advisors would have been entitled had the portfolio been liquidated (based on an independent appraised value of the portfolio) on the date of termination. During the three and nine months ended September 30, 2017 and 2016, no subordinated performance fees were incurred related to any such events.
The Company recorded fees and expense reimbursements as shown in the table below for services provided by CR IV Advisors or its affiliates related to the services described above during the periods indicated (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Acquisition fees and expenses
$
2,338

 
$
2,087

 
$
6,336

 
$
4,442

Advisory fees and expenses
$
11,149

 
$
10,587

 
$
32,863

 
$
31,100

Operating expenses
$
1,072

 
$
1,121

 
$
3,495

 
$
3,135

Of the amounts shown above, $3.8 million and $5.5 million had been incurred, but not yet paid, for services provided by CR IV Advisors or its affiliates in connection with the acquisition and operations activities during the nine months ended September 30, 2017 and 2016, respectively, and such amounts were recorded as liabilities of the Company as of such dates.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


Due to/from Affiliates
As of September 30, 2017 and December 31, 2016, $3.8 million and $5.3 million, respectively, had been incurred primarily for advisory and operating expenses by CR IV Advisors or its affiliates, but had not yet been reimbursed by the Company. These amounts were included in due to affiliates in the condensed consolidated balance sheets for such periods.
As of September 30, 2017 and December 31, 2016, $4,000 and $58,000, respectively, were due from CR IV Advisors or its affiliates related to amounts received by affiliates of the advisor which were due to the Company.
NOTE 12 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged and may in the future engage CR IV Advisors or its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company including accounting services and investor relations. As a result of these relationships, the Company is dependent upon CR IV Advisors or its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.
NOTE 13 — OPERATING LEASES
The Company’s real estate assets are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2017, the leases had a weighted-average remaining term of 9.8 years. Certain leases include provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other negotiated terms and conditions. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. As of September 30, 2017, the future minimum rental income from the Company’s investment in real estate assets under non-cancelable operating leases, assuming no exercise of renewal options for the succeeding five fiscal years and thereafter, was as follows (in thousands):
 
 
Future Minimum Rental Income
Remainder of 2017
$
92,490

2018
358,539

2019
343,351

2020
330,829

2021
314,676

Thereafter
2,242,089

Total
$
3,681,974

NOTE 14 — SUBSEQUENT EVENTS
The following events occurred subsequent to September 30, 2017:
Redemption of Shares of Common Stock
Subsequent to September 30, 2017, the Company redeemed approximately 2.5 million shares pursuant to the Company’s share redemption program for $25.0 million (at an average price per share of $10.08). Management, in its discretion, limited the amount of shares redeemed for the three months ended September 30, 2017 to shares issued in the DRIP Offerings during the respective period. The remaining redemption requests totaling approximately 9.8 million shares went unfulfilled.
Investment in Real Estate Assets
Subsequent to September 30, 2017, the Company acquired one commercial real estate property for a purchase price of $3.2 million. The Company has not completed its initial purchase price allocation with respect to this property and therefore cannot provide similar disclosures to those included in Note 4 — Real Estate Investments in these condensed consolidated financial statements for this property.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 (Unaudited) – (Continued)


Property Disposition
As of September 30, 2017, one property was classified as held for sale, as discussed in Note 2 — Summary of Significant Accounting Policies. Subsequent to September 30, 2017, the Company disposed of this property for a gross sales price of $1.9 million, resulting in proceeds of $1.9 million after closing costs and a gain of $242,000. No disposition fees were paid to CR IV Advisors or its affiliates in connection with the sale of the property and the Company has no continuing involvement with this property.
Sale of Cole Capital
On November 13, 2017 the parent of the Company’s sponsor entered into a purchase and sale agreement to sell its ownership interest in the Company’s sponsor. The completion of this sale is subject to the receipt of regulatory approvals and other customary closing conditions and is expected to occur at the end of the fourth quarter of 2017 or during the first quarter of 2018.


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Item 2.
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 condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see Item 1A — Risk Factors of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Capitalized terms used herein, but not otherwise defined, shall have the meaning ascribed to those terms in “Part I — Financial Information” of this Quarterly Report on Form 10-Q, including the notes to the condensed consolidated financial statements contained therein, and the terms “we,” “us,” “our” and the “Company” refer to Cole Credit Property Trust IV, Inc.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” (within the meaning of the federal securities laws, Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (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 to publicly 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 forward-looking statements should be read in light of the risk factors identified in Item 1A — Risk Factors of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016.
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, 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 of properties.
•
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 have substantial indebtedness, which may affect our ability to pay distributions, and expose us to interest rate fluctuation risk and the risk of default under our debt obligations.
•
We may be affected by the incurrence of additional secured or unsecured debt.
•
We may not be able to maintain profitability.
•
We may not generate cash flows sufficient to pay our distributions 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 REIT for U.S. federal income tax purposes.
•
Our advisor has the right to terminate the advisory agreement upon 60 days’ written notice without cause or penalty.

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Definitions
We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings:
The phrase “annualized rental income” refers to the straight-line rental revenue under our leases on operating properties owned as of the respective reporting date, 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.
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 to 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.
Overview
We were formed on July 27, 2010, and we elected to be taxed, and currently qualify, as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2012. We commenced our principal operations on April 13, 2012, when we satisfied the conditions of our escrow agreement regarding the minimum offering and issued approximately 308,000 shares of our common stock. We have no paid employees and are externally advised and managed by CR IV Advisors. VEREIT indirectly owns and/or controls our external advisor, CR IV Advisors, the dealer manager for the Offering, CCC, our property manager, CREI Advisors, and our sponsor, Cole Capital.
We ceased issuing shares in our Offering on April 4, 2014 and in the Initial DRIP Offering effective as of June 30, 2016, but will continue to issue shares of common stock under the Secondary DRIP Offering until a liquidity event occurs, such as the listing of our shares on a national securities exchange or the sale of our company, or the Secondary DRIP Offering is otherwise terminated by the Board. We expect that property acquisitions in 2017 and future periods will be funded by proceeds from financing of the acquired properties, cash flows from operations and the strategic sale of properties and other investments.
On September 27, 2015, the Board established an estimated value of our common stock, as of August 31, 2015, of $9.70 per share for purposes of assisting broker-dealers that participated in the Offering in meeting their customer account statement reporting obligations under National Association of Securities Dealers Conduct Rule 2340. On November 10, 2016, the Board established an updated estimated per share NAV of our common stock, as of September 30, 2016, of $9.92 per share. On March 24, 2017, the Board established an updated estimated per share NAV of our common stock, as of December 31, 2016, of $10.08 per share.
Our operating results and cash flows are primarily influenced by rental income from our commercial properties, interest expense on our indebtedness and acquisition and operating expenses. Rental and other property income accounted for 88% of our total revenue for both the three and nine months ended September 30, 2017 and 2016. As 97.5% of our rentable square feet was under lease, including any month-to-month agreements, as of September 30, 2017 with a weighted average remaining lease term of 9.8 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors. CR IV Advisors regularly monitors the creditworthiness of our tenants by reviewing each tenant’s financial results, credit rating agency reports, when available, on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment and other information for changes and possible trends. If CR IV Advisors identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property or identifying a possible replacement tenant should the current tenant fail to perform on the lease.

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Operating Highlights and Key Performance Indicators
2017 Activity
•
Acquired 40 commercial properties for an aggregate purchase price of $300.5 million.
•
Disposed of 14 retail properties for an aggregate sales price of $98.6 million.
•
Entered into the Second Amended and Restated Credit Agreement that increased the allowable borrowings and extended the maturity dates associated with the original amended and restated unsecured credit facility.
•
Total debt increased by $214.7 million, from $2.26 billion to $2.47 billion.
Portfolio Information
As of September 30, 2017, we owned 908 properties located in 45 states, the gross rentable square feet of which was 97.5% leased, including any month-to-month agreements, with a weighted average lease term remaining of 9.8 years. During the nine months ended September 30, 2017, we disposed of 14 properties for an aggregate sales price of $98.6 million. As of September 30, 2017, no single tenant accounted for greater than 10% of our 2017 annualized rental income. As of September 30, 2017, we had certain geographic and industry concentrations in our property holdings. In particular, as of September 30, 2017, 77 of our properties were located in California, which accounted for 10% of our 2017 annualized rental income. In addition, we had tenants in the discount store and pharmacy industries, which accounted for 14% and 10%, respectively, of our 2017 annualized rental income.
The following table shows the property statistics of our real estate assets, which exclude uncompleted development projects and any properties owned through unconsolidated joint ventures, as of September 30, 2017 and 2016:
 
 
September 30,
 
 
2017
 
2016
Number of commercial properties
908

 
882

Rentable square feet (in thousands) (1)
26,837

 
26,454

Percentage of rentable square feet leased
97.5
%
 
98.5
%
Percentage of investment-grade tenants (2)
34.0
%
 
36.2
%
 
 
 
 
 
 
 
 
 
 
(1) Includes square feet of the buildings on land parcels subject to ground leases.
 
 
(2) Investment-grade tenants are those with a credit rating of BBB- or higher by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”) or a credit rating of Baa3 or higher by Moody’s Investor Service, Inc. (“Moody’s”). The ratings may reflect those assigned by Standard & Poor’s or Moody’s to the lease guarantor or the parent company, as applicable.
The following table summarizes our real estate investment activity during the three and nine months ended September 30, 2017 and 2016:
  
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
2017
 
2016
Commercial properties acquired (1)
 
13

 
6

 
40

 
14

Purchase price of acquired properties (in thousands)
 
$
113,857

 
$
97,086

 
$
300,524

 
$
197,026

Rentable square feet (in thousands) (2)
 
516

 
592

 
1,352

 
1,175

____________________________________
(1) Excludes a property owned through the Unconsolidated Joint Venture that was consolidated during the nine months ended September 30, 2016.
(2) Includes square feet of buildings on land parcels subject to ground leases.


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Results of Operations
The following table provides summary information about our results of operations for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
 
Three Months Ended September 30,
 
2017 vs. 2016 Increase (Decrease)
 
Nine Months Ended September 30,
 
2017 vs. 2016 Increase (Decrease)
 
 
2017
 
2016
 
 
2017
 
2016
 
Total revenues
 
$
107,024

 
$
101,796

 
$
5,228

 
$
316,308

 
$
302,940

 
$
13,368

General and administrative expenses
 
$
3,270

 
$
3,246

 
$
24

 
$
10,301

 
$
9,735

 
$
566

Property operating expenses
 
$
7,345

 
$
5,738

 
$
1,607

 
$
20,881

 
$
16,603

 
$
4,278

Real estate tax expenses
 
$
9,276

 
$
8,612

 
$
664

 
$
27,646

 
$
25,939

 
$
1,707

Advisory fees and expenses
 
$
11,149

 
$
10,587

 
$
562

 
$
32,863

 
$
31,100

 
$
1,763

Acquisition-related expenses
 
$
110

 
$
1,417

 
$
(1,307
)
 
$
1,520

 
$
3,592

 
$
(2,072
)
Depreciation and amortization
 
$
36,461

 
$
33,452

 
$
3,009

 
$
106,145

 
$
100,399

 
$
5,746

Operating income
 
$
37,755

 
$
37,314

 
$
441

 
$
115,294

 
$
114,142

 
$
1,152

Interest expense and other, net
 
$
23,335

 
$
20,473

 
$
2,862

 
$
67,968

 
$
58,416

 
$
9,552

Net income attributable to the Company
 
$
29,736

 
$
18,096

 
$
11,640

 
$
64,028

 
$
57,028

 
$
7,000

Revenue
Our revenues consist primarily of rental and other property income from net leased commercial properties. We also incur certain operating expenses that are subject to reimbursement by our tenants, which results in tenant reimbursement income.
The increase in revenue of $5.2 million and $13.4 million during the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, was primarily due to the acquisition of 41 rental income-producing properties subsequent to September 30, 2016. Rental income from net leased commercial properties accounted for 88% of our total revenue for both the three and nine months ended September 30, 2017 and 2016. We also incurred certain operating expenses subject to reimbursement by our tenants, which resulted in $12.9 million and $38.0 million of tenant reimbursement income during the three and nine months ended September 30, 2017, respectively, compared to $12.4 million and $37.6 million, respectively, during the same periods in 2016.
General and Administrative Expenses
The primary general and administrative expense items are operating expense reimbursements to our advisor, escrow and trustee fees, state franchise and income taxes, office expenses and accounting fees.
The increase in general and administrative expenses of $24,000 and $566,000 during the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, was primarily due to increases in operating expense reimbursements to our advisor during the three and nine months ended September 30, 2017, primarily as a result of the acquisition of 41 additional rental income-producing properties subsequent to September 30, 2016.
Property Operating Expenses
Property operating expenses such as property repairs, maintenance and property-related insurance include both reimbursable and non-reimbursable property expenses. We are reimbursed by tenants for certain property operating expenses in accordance with the respective lease agreements.
The increase in property operating expenses of $1.6 million and $4.3 million during the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, was primarily due to the acquisition and management of 41 additional rental income-producing properties subsequent to September 30, 2016, as well as recognizing a full period of property operating expenses on six and 14 properties acquired during the three and nine months ended September 30, 2016, respectively.

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Real Estate Tax Expenses
The increase in real estate tax expenses of $664,000 and $1.7 million during the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, was primarily due to the acquisition of 41 additional rental income-producing properties subsequent to September 30, 2016, as well as recognizing a full period of real estate tax expenses on six and 14 properties acquired during the three and nine months ended September 30, 2016, respectively.
Advisory Fees and Expenses
Pursuant to the advisory agreement with CR IV Advisors and based upon the amount of our current invested assets, we are required to pay to CR IV Advisors a monthly advisory fee equal to one-twelfth of 0.75% of the average invested assets up to $2.0 billion, one-twelfth of 0.70% of the average invested assets over $2.0 billion up to $4.0 billion and one-twelfth of 0.65% of assets over $4.0 billion. Additionally, we may be required to reimburse certain expenses incurred by CR IV Advisors in providing such advisory services, subject to limitations as set forth in the advisory agreement.
The increase in advisory fees and expenses of $562,000 during the three months ended September 30, 2017, as compared to the same period in 2016, was due to an increase in our average invested assets to $5.6 billion over the three months ended September 30, 2017, compared to $5.2 billion over the three months ended September 30, 2016.
The increase in advisory fees and expenses of $1.8 million during the nine months ended September 30, 2017, as compared to the same period in 2016, was due to an increase in our average invested assets to $5.5 billion over the nine months ended September 30, 2017, compared to $5.2 billion over the nine months ended September 30, 2016.
Acquisition-Related Expenses
We reimburse CR IV Advisors or its affiliates for acquisition-related expenses incurred in the process of acquiring a property or the origination or acquisition of a loan, so long as the total acquisition fees and expenses relating to the transaction do not exceed 6.0% of the contract purchase price, unless otherwise approved by a majority of our board of directors, including a majority of our independent directors, as commercially competitive, fair and reasonable to us. In April 2017, we early adopted ASU 2017-01, which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Beginning in April 2017, our acquisitions qualify as asset acquisitions, and as such, acquisition-related fees and certain acquisition-related expenses related to these asset acquisitions are capitalized. Prior to the adoption of ASU 2017-01 in April 2017, costs related to property acquisitions, including acquisition fees described below, were expensed as incurred, and all of our acquisitions were accounted for as business combinations. Prior to April 2017, acquisition-related expenses primarily consisted of legal, deed transfer and other costs related to real estate purchase transactions, including costs incurred for deals that were not consummated. We also pay CR IV Advisors or its affiliates acquisition fees of up to 2.0% of: (1) the contract purchase price of each property or asset we acquire; (2) the amount paid in respect of the development, construction or improvement of each asset we acquire; (3) the purchase price of any loan we acquire; and (4) the principal amount of any loan we originate.
The decrease in acquisition-related expenses of $1.3 million during the three months ended September 30, 2017, as compared to the same period in 2016, was primarily due to the early adoption of ASU 2017-01, and as such, acquisition costs related to asset acquisitions were capitalized during the three months ended September 30, 2017. During the three months ended September 30, 2016, acquisition-related costs related to future property acquisitions were expensed as incurred.
The decrease in acquisition-related expenses of $2.1 million during the nine months ended September 30, 2017, as compared to the same period in 2016, was primarily due to the acquisition of four commercial properties prior to the adoption of ASU 2017-01, for an aggregate purchase price of $55.4 million during the nine months ended September 30, 2017, compared to the acquisition of fourteen commercial properties for an aggregate purchase price of $197.0 million during the nine months ended September 30, 2016. During the nine months ended September 30, 2016, acquisition-related costs related to property acquisitions were expensed as incurred.
Depreciation and Amortization
The increase in depreciation and amortization expenses of $3.0 million and $5.7 million during the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, was primarily due to the acquisition of 41 additional rental income-producing properties subsequent to September 30, 2016, as well as recognizing a full period of depreciation and amortization expenses on six and 14 properties acquired during the three and nine months ended September 30, 2016, respectively.

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Interest Expense and Other, Net
Interest expense and other, net also includes amortization of deferred financing costs.
The increase in interest expense and other, net of $2.9 million during the three months ended September 30, 2017, as compared to the same period in 2016, was primarily due to an increase in the average aggregate amount of debt outstanding to $2.5 billion during the three months ended September 30, 2017 from $2.2 billion during the three months ended September 30, 2016.
The increase in interest expense and other, net of $9.6 million during the nine months ended September 30, 2017, as compared to the same period in 2016, was primarily due to an increase in the average aggregate amount of debt outstanding to $2.4 billion during the nine months ended September 30, 2017 from $2.2 billion during the nine months ended September 30, 2016.
Same Store Properties
We review our stabilized operating results, measured by contract rental revenue, from properties that we owned for the entirety of both the current and prior year reporting periods, referred to as “same store” properties. Contract rental revenue is a supplemental non-GAAP financial measure of real estate companies’ operating performance. Contract rental revenue is considered by management to be a helpful supplemental performance measure, as it provides a consistent method for the comparison of our properties. In determining the same store property pool, we include all properties that were owned for the entirety of both the current and prior reporting periods, except for properties during the current or prior year that were under development or redevelopment.
“Non-same store” properties, as reflected in the table below, includes properties acquired on or after July 1, 2016 and any properties under development or redevelopment. As shown in the table below, contract rental revenue on the 860 same store properties for the three months ended September 30, 2017 decreased $686,000 to $83.0 million, compared to $83.7 million for the three months ended September 30, 2017. The same store properties were 97.4% occupied as of September 30, 2017 and 98.5% occupied as of September 30, 2016. The following table shows the contract rental revenue from properties owned for both of the entire three months ended September 30, 2017 and 2016, along with a reconciliation to rental income, calculated in accordance with GAAP (dollar amounts in thousands):
  
 
Number of Properties
 
Three Months Ended September 30,
 
Increase (Decrease)
 
 
 
2017
 
2016
 
$ Change
 
% Change
Rental income – as reported
 
 
 
$
94,103

 
$
89,370

 
$
4,733

 
5
 %
Less: Amortization (1)
 
 
 
1,008

 
289

 
719

 
249
 %
Less: Straight-line rental income
 
 
 
2,912

 
2,984

 
(72
)
 
(2
)%
Total contract rental revenue
 
 
 
90,183

 
86,097

 
4,086

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
Less: “Non-same store” properties
 
48
 
6,231

 
837

 
5,394

 
644
 %
Less: Disposed properties (2)
 
19
 
959

 
1,581

 
(622
)
 
(39
)%
“Same store” properties
 
860
 
$
82,993

 
$
83,679

 
$
(686
)
 
(0.8
)%
____________________________________
(1) Includes amortization of above- and below-market lease intangibles and deferred lease incentives.
(2) We disposed of five properties during the year ended December 31, 2016 and 14 properties during the nine months ended September 30, 2017.
“Non-same store” properties, as reflected in the table below, includes properties acquired on or after January 1, 2016 and any properties under development or redevelopment. As shown in the table below, contract rental revenue on the 851 same store properties for the nine months ended September 30, 2017 decreased $1.4 million to $244.0 million, compared to $245.4 million for the nine months ended September 30, 2016. The same store properties were 97.4% occupied as of September 30, 2017 and 98.6% occupied as of September 30, 2016. The following table shows the contract rental revenue from properties owned for both of the entire nine months ended September 30, 2017 and 2016, along with a reconciliation to rental income, calculated in accordance with GAAP (dollar amounts in thousands):

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Number of Properties
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
 
 
2017
 
2016
 
$ Change
 
% Change
Rental income – as reported
 
 
 
$
278,354

 
$
265,341

 
$
13,013

 
5
 %
Less: Amortization (1)
 
 
 
1,926

 
844

 
1,082

 
128
 %
Less: Straight-line rental income
 
 
 
7,651

 
8,888

 
(1,237
)
 
(14
)%
Total contract rental revenue
 
 
 
268,777

 
255,609

 
13,168

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
Less: “Non-same store” properties
 
57
 
21,172

 
4,798

 
16,374

 
341
 %
Less: Disposed properties (2)
 
19
 
3,588

 
5,380

 
(1,792
)
 
(33
)%
“Same store” properties
 
851
 
$
244,017

 
$
245,431

 
$
(1,414
)
 
(0.6
)%
 ____________________________________
(1) Includes amortization of above- and below-market lease intangibles and deferred lease incentives.
(2) We disposed of five properties during the year ended December 31, 2016 and 14 properties during the nine months ended September 30, 2017.
Distributions
The Board authorized a daily distribution, based on 365 days in the calendar year, of $0.001711452 per share for stockholders of record as of the close of business on each day of the period commencing on January 1, 2017 and ending on March 31, 2018. As of September 30, 2017, we had distributions payable of $16.0 million.
During the nine months ended September 30, 2017 and 2016, we paid distributions of $146.1 million and $146.5 million, respectively, including $76.9 million and $82.4 million, respectively, through the issuance of shares pursuant to the DRIP Offerings. Net cash provided by operating activities for the nine months ended September 30, 2017 was $158.2 million and reflected a reduction for real-estate acquisition-related expenses incurred of $1.5 million in accordance with GAAP. For the nine months ended September 30, 2016, net cash provided by operating activities was $155.5 million and reflected a reduction for real estate acquisition-related expenses incurred of $3.6 million in accordance with GAAP. Our distributions paid during the nine months ended September 30, 2017 and 2016, including shares issued pursuant to the DRIP Offerings, were fully funded by net cash provided by operating activities.
Share Redemptions
Our share redemption program permits our stockholders to sell their shares of common stock back to us, subject to certain conditions and limitations. We will not redeem in excess of 5.0% of the weighted average number of shares outstanding during the trailing 12 months prior to the end of the fiscal quarter for which the redemptions are being paid. Funding for the redemption of shares will be limited to the cumulative net proceeds we receive from the sale of shares under the Secondary DRIP Offering, net of shares redeemed to date. In addition, we will generally limit quarterly redemptions to approximately 1.25% of the weighted average number of shares outstanding during the trailing 12-month period ending on the last day of the fiscal quarter for which the redemptions are being paid, and to the net proceeds we receive from the sale of shares in the respective quarter under the Secondary DRIP Offering. Any of the foregoing limits might prevent us from accommodating all redemption requests made in any fiscal quarter or in any 12-month period. We received redemption requests of approximately 9.8 million shares for $98.7 million in excess of the net proceeds we received from the issuance of shares under the Secondary DRIP Offering during the three months ended September 30, 2017. Management, in its discretion, limited the amount of shares redeemed for the three months ended September 30, 2017 to shares issued pursuant to the Secondary DRIP Offering during the respective period. During the nine months ended September 30, 2017, we received valid redemption requests under our share redemption program totaling approximately 30.7 million shares, of which we redeemed approximately 5.1 million shares as of September 30, 2017 for $51.5 million (at an average redemption price of $10.08 per share) and approximately 2.5 million shares subsequent to September 30, 2017 for $25.0 million at an average redemption price of $10.08 per share. The remaining redemption requests relating to approximately 23.1 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program. The share redemptions were funded with proceeds from the Secondary DRIP Offering.

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Liquidity and Capital Resources
General
We expect to utilize funds from cash flow from operations and future proceeds from secured or unsecured financing to complete future property acquisitions and for general corporate uses. The sources of our operating cash flows will primarily be provided by the rental income received from current and future leased properties.
Our Credit Facility provides for borrowings of up to $1.40 billion, which includes a $1.05 billion unsecured Term Loan and up to $350.0 million in unsecured Revolving Loans. As of September 30, 2017, we had $164.9 million in unused capacity under the Credit Facility, subject to borrowing availability. As of September 30, 2017, we also had cash and cash equivalents of $4.2 million.
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related investments and the payment of acquisition-related fees and expenses, operating expenses, distributions, redemptions and interest and principal on current and any future debt financings, including principal repayments of $24.2 million within the next 12 months. We expect to meet our short-term liquidity requirements through net cash provided by operations and proceeds from the Secondary DRIP Offering, as well as secured or unsecured borrowings from banks and other lenders to finance our future acquisitions. Operating cash flows are expected to increase as additional properties are added to our portfolio. With respect to our debt maturing within the next year, we expect to use borrowings available under the Credit Facility or to enter into new financing arrangements in order to meet our debt obligations. We believe that the resources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related investments and the payment of tenant improvements, acquisition-related fees and expenses, operating expenses, distributions and redemptions to stockholders and interest and principal on any current and future indebtedness. Generally, we expect to meet our long-term liquidity requirements through proceeds from cash flow from operations, borrowings on the Credit Facility, proceeds from secured or unsecured borrowings from banks and other lenders, and proceeds raised pursuant to the Secondary DRIP Offering.
We expect that substantially all net cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we have used, and may continue to use, other sources to fund distributions, as necessary, including borrowings on the Credit Facility and/or future borrowings on our unencumbered assets. To the extent that cash flows from operations are lower due to fewer properties being acquired or lower than expected returns on the properties, distributions paid to our stockholders may be lower. We expect that substantially all net cash flows from the Offerings or debt financings will be used to fund acquisitions, certain capital expenditures, repayments of outstanding debt or distributions and redemptions to our stockholders.

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Contractual Obligations
As of September 30, 2017, we had $2.5 billion of debt outstanding with a weighted average interest rate of 3.5%. See Note 7 — Notes Payable and Credit Facility to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for certain terms of our debt outstanding.
Our contractual obligations as of September 30, 2017 were as follows (in thousands):
 
  
Payments due by period (1)
 
  
Total
 
Less Than 1
Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
Principal payments — fixed rate debt (2)
$
1,217,493

 
$
24,205

 
$
311,935

 
$
192,398

 
$
688,955

Interest payments — fixed rate debt (3)
228,085

 
47,646

 
88,178

 
61,891

 
30,370

Principal payments — variable rate debt
20,500

 
—

 
20,500

 
—

 
—

Interest payments — variable rate debt (4)
2,220

 
923

 
1,297

 
—

 
—

Principal payments — credit facility
1,234,500

 
—

 
—

 
1,234,500

 
—

Interest payments — credit facility (5)
166,680

 
38,658

 
77,423

 
50,599

 
—

Total
$
2,869,478

 
$
111,432

 
$
499,333

 
$
1,539,388

 
$
719,325

____________________________________
(1)
The table does not include amounts due to CR IV Advisors or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable.
(2)
Principal payment amounts reflect actual payments based on the face amount of notes payable secured by our wholly-owned properties, which excludes the fair value adjustment, net of amortization, of mortgage notes assumed of $441,000 as of September 30, 2017.
(3)
As of September 30, 2017, we had $217.1 million of variable rate debt effectively fixed through the use of interest rate swap agreements. We used the effective interest rates fixed under our interest rate swap agreements to calculate the debt payment obligations in future periods.
(4)
As of September 30, 2017, we had variable rate debt outstanding of $20.5 million with a weighted average interest rate of 4.5%. We used the weighted average interest rate to calculate the debt payment obligations in future periods.
(5)
As of September 30, 2017, the Term Loan outstanding totaled $1.05 billion, $811.7 million of which is subject to interest rate swap agreements. As of September 30, 2017 the weighted average all-in interest rate for the Swapped Term Loan was 3.2%. The remaining $422.8 million outstanding under the Credit Facility had a weighted average interest rate of 3.0% as of September 30, 2017.
We expect to incur additional borrowings in the future to acquire additional properties and make other real estate-related investments. There is no limitation on the amount we may borrow against any single improved property. Our borrowings will not exceed 75% of the cost of our gross assets (or 300% of net assets) as of the date of any borrowing, which is the maximum level of indebtedness permitted under the North American Securities Administrators Association Statement of Policy Regarding Real Estate Investment Trusts; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to our stockholders in the next quarterly report along with justification for such excess borrowing. The Board has adopted a policy to further limit our borrowings to 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets, unless excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in the next quarterly report along with the justification for such excess borrowing. Our advisor has set a target leverage ratio of 40% to 50% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets. Fair market value is based on the estimated market value of our real estate assets as of December 31, 2016 that were used to determine our estimated per share NAV, and for those assets acquired from January 1, 2017 through September 30, 2017 is based on the purchase price. As of September 30, 2017, our ratio of debt to the cost (before deducting depreciation or other non-cash reserves) of our gross assets was 48.8% and our ratio of debt to the fair market value of our gross assets was 44.1%.
Our management reviews net debt as part of its management of our overall liquidity, financial flexibility, capital structure and leverage, and we therefore believe that the presentation of net debt provides useful information to investors. Net debt is a non-GAAP measure used to show our outstanding principal debt balance, excluding certain GAAP adjustments, such as premiums or discounts, financing and issuance costs, and related accumulated amortization, less all cash and cash equivalents. As of September 30, 2017, our net debt leverage ratio, which is the ratio of net debt to total gross real estate assets net of gross intangible lease liabilities, was 48.7%. The following table provides a reconciliation of the notes payable and credit facility, net balance, as reported on our condensed consolidated balance sheet, to net debt as of September 30, 2017 (dollar amounts in thousands):

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Balance as of
September 30, 2017
Notes payable and credit facility, net
 
$
2,454,282

Deferred costs and net premiums (1)
 
18,211

Less: Cash and cash equivalents
 
(4,231
)
Net debt
 
$
2,468,262

 
 
 
Gross real estate assets, net (2)
 
$
5,069,802

Net debt leverage ratio
 
48.7
%
______________________
(1) Deferred costs relate to mortgage notes payable and the term portion of the Credit Facility.
(2) Net of gross intangible lease liabilities.
Cash Flow Analysis
Operating Activities. During the nine months ended September 30, 2017, net cash provided by operating activities increased $2.7 million to $158.2 million, compared to $155.5 million of net cash provided by operating activities for the nine months ended September 30, 2016. The change was primarily due to the acquisition of 41 additional rental income-producing properties subsequent to September 30, 2016, resulting in an increase in net income after non-cash adjustments for depreciation and amortization, net, of $11.7 million. Additionally, net cash provided by operating activities increased due to an increase in a contingent consideration fair value adjustment of $2.3 million, an increase in bad debt expense of $1.6 million, a decrease in straight-line rental income of $1.2 million and a net increase in working capital accounts of $355,000, offset by an increase in gain on dispositions of real estate assets, net, of $14.7 million. See “— Results of Operations” for a more complete discussion of the factors impacting our operating performance.
Investing Activities. Net cash used in investing activities increased $44.7 million to $217.1 million for the nine months ended September 30, 2017, compared to $172.4 million for the nine months ended September 30, 2016. The increase was primarily due to the acquisition of 40 commercial properties for an aggregate purchase price of $300.5 million during the nine months ended September 30, 2017, compared to the acquisition of 14 commercial properties for an aggregate purchase price of $197.0 million during the nine months ended September 30, 2016, as well as a decrease in the change in restricted cash of $1.2 million, offset by the disposal of 14 properties for an aggregate gross sales price of $98.6 million during the nine months ended September 30, 2017 compared to the disposal of four properties for an aggregate gross sales price of $26.6 million during the nine months ended September 30, 2016.
Financing Activities. During the nine months ended September 30, 2017, net cash provided by financing activities was $53.4 million, compared to net cash provided by financing activities of $9.0 million for the nine months ended September 30, 2016. The change was primarily due to an increase in net borrowings on notes payable and the Credit Facility of $52.6 million, offset by an increase in deferred financing costs paid of $9.9 million and an increase in distributions to investors of $5.2 million.
Election as a REIT
We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2012. To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains).
If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated financial statements. We are subject to certain state and local

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taxes related to the operations of properties in certain locations, which have been provided for in our accompanying condensed consolidated financial statements.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires 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 various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We 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 audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016. We consider our critical accounting policies to be the following:
•
Recoverability of Real Estate Assets; and
•
Allocation of Purchase Price of Real Estate Assets.
A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year ended December 31, 2016. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the period ended December 31, 2016 and related notes thereto.
Related-Party Transactions and Agreements
We have entered into agreements with CR IV Advisors or its affiliates whereby we agree to pay certain fees to, or reimburse certain expenses of, CR IV Advisors or its affiliates such as acquisition and advisory fees and expenses, organization and offering costs, leasing fees and reimbursement of certain operating costs. See Note 11 — Related-Party Transactions and Arrangements to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for a discussion of the various related-party transactions, agreements and fees.
Conflicts of Interest
Affiliates of CR IV Advisors act as an advisor to, and our chief financial officer and one of our directors act as executive officers and/or a director of, Cole Credit Property Trust V, Inc., Cole Office & Industrial REIT (CCIT II), Inc., Cole Real Estate Income Strategy (Daily NAV), Inc., Cole Office & Industrial REIT (CCIT III), Inc., and/or other real estate offerings in registration, all of which are or intend to be public, non-listed REITs offered, distributed and/or managed by affiliates of CR IV Advisors. As such, there are conflicts of interest where CR IV Advisors or its affiliates, while serving in the capacity as sponsor, general partner, officer, director, key personnel and/or advisor for VEREIT or another real estate program sponsored by Cole Capital, including other real estate offerings in registration, may be in conflict with us in connection with providing services to other real estate-related programs related to property acquisitions, property dispositions, and property management, among others. The compensation arrangements between affiliates of CR IV Advisors and VEREIT and these other real estate programs sponsored by Cole Capital could influence the advice provided to us. See Part I, Item 1. Business — Conflicts of Interest in our Annual Report on Form 10-K for the year ended December 31, 2016.
Off-Balance Sheet Arrangements
As of September 30, 2017 and December 31, 2016, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.

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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable-rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
Interest Rate Risk
As of September 30, 2017, we had variable rate debt of $443.3 million, excluding any debt subject to interest rate swap agreements, and therefore, we are exposed to interest rate changes in LIBOR. As of September 30, 2017, an increase or decrease of 50 basis points in interest rates would result in an increase or decrease in interest expense of $2.2 million per year.
As of September 30, 2017, we had 12 interest rate swap agreements outstanding, which mature on various dates from June 2018 through July 2021, with an aggregate notional amount of $1.0 billion and an aggregate fair value of the net derivative liability of $262,000. The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of September 30, 2017, an increase of 50 basis points in interest rates would result in a change of $15.7 million to the fair value of the net derivative liability, resulting in a net derivative asset of $15.4 million. A decrease of 50 basis points in interest rates would result in a $16.0 million change to the fair value of the net derivative liability, resulting in a net derivative liability of $16.2 million.
As the information presented above includes only those exposures that existed as of September 30, 2017, it does not consider exposures or positions arising after that date. The information presented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs and assume no other changes in our capital structure.
Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in economic conditions. We are subject to tenant, geographic and industry concentrations. Any downturn of the economic conditions in one or more of these tenants, states or industries could result in a material reduction of our cash flows or material losses to us.
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 believe 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 and mitigation options.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that no controls and procedures, no matter how well designed and operated, can provide absolute assurance of achieving the desired control objectives.

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As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of September 30, 2017 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of September 30, 2017, were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1.
Legal Proceedings
In the ordinary course of business, we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which our properties are the subject.
Item 1A.
Risk Factors
Except as set forth below, there have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.
We have paid, and may continue to pay, some of our distributions from sources other than cash flows from operations, including borrowings and proceeds from asset sales or the sale of our securities in the Offerings or future offerings, which may reduce the amount of capital we ultimately invest in real estate and may negatively impact the value of our stockholders’ investment in our common stock.
To the extent that cash flow from operations has been or is insufficient to fully cover our distributions to our stockholders, we have paid, and may continue to pay, some of our distributions from sources other than cash flow from operations. Such sources may include borrowings, proceeds from asset sales or the sale of our securities in the Offerings or future offerings. We have no limits on the amounts we may pay from sources other than cash flow from operations. The payment of distributions from sources other than cash provided by operating activities may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds, and may cause investors to experience dilution. This may negatively impact the value of our stockholders’ investment in our common stock.
During the nine months ended September 30, 2017, we paid distributions of $146.1 million, including $76.9 million through the issuance of shares pursuant to the Secondary DRIP Offering. Net cash provided by operating activities for the nine months ended September 30, 2017 was $158.2 million and reflected a reduction for real-estate acquisition-related expenses incurred of $1.5 million in accordance with GAAP. Our distributions for the nine months ended September 30, 2017, including shares issued pursuant to the Secondary DRIP Offering, were fully funded by net cash provided by operating activities.
During the year ended December 31, 2016, we paid distributions of $194.9 million, including $109.2 million through the issuance of shares pursuant to the DRIP Offerings. Net cash provided by operating activities for the year ended December 31, 2016 was $193.7 million and reflected a reduction for real estate acquisition-related fees and expenses incurred of $4.2 million, in accordance with GAAP. The distributions paid during the year ended December 31, 2016 were covered by cash flows from operations of $193.7 million, or 99%, and proceeds from the issuance of notes payable of $1.2 million, or 1%.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
We registered $247.0 million of shares of common stock under the Initial DRIP Offering, which was filed with the SEC on December 19, 2013 and automatically became effective with the SEC upon filing. We ceased issuing shares under the Initial DRIP Offering effective as of June 30, 2016.
In addition, we registered $600.0 million of shares of common stock under the Secondary DRIP Offering, which was filed with the SEC on August 2, 2016 and automatically became effective with the SEC upon filing. We will continue to issue shares of common stock in the Secondary DRIP Offering.
As of September 30, 2017, we had issued approximately 336.8 million shares of our common stock in the Offerings for gross proceeds of $3.3 billion, out of which we paid $256.5 million in selling commissions and dealer manager fees and $49.5 million in organization and offering costs to CR IV Advisors or its affiliates. With the net offering proceeds and indebtedness, we have acquired $5.2 billion in real estate and related assets and incurred acquisition costs of $141.6 million, including $108.5 million in acquisition fees and expense reimbursements to CR IV Advisors.
Our share redemption program permits our stockholders to sell their shares of common stock back to us, subject to significant conditions and limitations. Under our share redemption program, we will not redeem in excess of 5.0% of the weighted average number of shares outstanding during the trailing 12 months prior to the end of the fiscal quarter for which the redemptions are being paid. Funding for the redemption of shares will be limited to the cumulative net proceeds we receive from the sale of shares under the Secondary DRIP Offering, net of shares redeemed to date. In addition, generally we will limit quarterly redemptions to approximately 1.25% of the weighted average number of shares outstanding during the trailing 12-month period ending on the last day of the fiscal quarter for which the redemptions are being paid, and to the net proceeds we receive from the sale of shares in the respective quarter under the Secondary DRIP Offering. Any of the foregoing limits might prevent us from accommodating all redemption requests made in any fiscal quarter or in any 12-month period. We received

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redemption requests of approximately 9.8 million shares for $98.7 million in excess of the net proceeds we received from the issuance of shares under the Secondary DRIP Offering during the three months ended September 30, 2017. Management, in its discretion, limited the amount of shares redeemed for the three months ended September 30, 2017 to shares received from the Secondary DRIP Offering during the period. The estimated per share NAV of $10.08 determined by the Board as of December 31, 2016 serves as the most recent estimated value for purposes of the share redemption program, effective March 28, 2017, until such time as the Board determines a new estimated per share NAV.
In general, we redeem shares on a quarterly basis. During the three months ended September 30, 2017, we redeemed shares, including those redeemable due to death, as follows:
Period
 
Total Number
of Shares
Redeemed
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
July 1, 2017 - July 31, 2017
 
2,489

 
$
10.08

 
2,489

 
(1)
August 1, 2017 - August 31, 2017
 
2,539,426

 
$
10.08

 
2,539,426

 
(1)
September 1, 2017 - September 30, 2017
 
2,874

 
$
10.08

 
2,874

 
(1)
Total
 
2,544,789

 
 
 
2,544,789

 
(1)
____________________________________
(1)
A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table.
Unregistered Sales of Equity Securities
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
None.

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Item 6.
Exhibits
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
Description
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
31.1*
31.2*
32.1**
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
 
 
*
Filed herewith.
**
In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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Table of Contents


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Cole Credit Property Trust IV, Inc.
(Registrant)
 
By:
 
/s/ Nathan D. DeBacker
Name:
 
Nathan D. DeBacker
Title:
 
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: November 13, 2017


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