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CIM REAL ESTATE FINANCE TRUST, INC. - Quarter Report: 2019 June (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 June 30, 2019
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)
 
 
2398 East Camelback Road, 4th Floor
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) 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of each exchange on which registered
None
 
None
 
None
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 every Interactive Data File required to be submitted 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 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

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 August 5, 2019, there were approximately 310.5 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)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Real estate assets:
 
 
 
Land
$
1,075,564

 
$
1,172,449

Buildings, fixtures and improvements
2,883,836

 
3,271,592

Intangible lease assets
500,997

 
554,868

Total real estate assets, at cost
4,460,397

 
4,998,909

Less: accumulated depreciation and amortization
(564,867
)
 
(597,756
)
Total real estate assets, net
3,895,530

 
4,401,153

Loans held-for-investment and related receivables, net
145,471

 
89,762

Cash and cash equivalents
3,399

 
10,533

Restricted cash
9,557

 
9,141

Rents and tenant receivables
82,407

 
81,686

Prepaid expenses, interest receivable and other assets
12,122

 
16,229

Deferred costs, net
1,657

 
2,087

Assets held for sale
269,695

 
6,780

Total assets
$
4,419,838

 
$
4,617,371

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Notes payable and credit facility, net
$
2,421,283

 
$
2,516,914

Accounts payable and accrued expenses
27,329

 
25,014

Due to affiliates
2,185

 
5,156

Intangible lease liabilities, net
30,395

 
36,418

Distributions payable
15,985

 
16,518

Deferred rental income, derivative liabilities and other liabilities
15,314

 
16,254

Total liabilities
2,512,491

 
2,616,274

Commitments and contingencies

 

Redeemable common stock and noncontrolling interest
184,189

 
184,247

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, 311,325,669 and 311,381,396 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
3,113

 
3,114

Capital in excess of par value
2,606,851

 
2,607,330

Accumulated distributions in excess of earnings
(883,277
)
 
(804,617
)
Accumulated other comprehensive (loss) income
(3,529
)
 
11,023

Total stockholders’ equity
1,723,158

 
1,816,850

Total liabilities, redeemable common stock, noncontrolling interest and stockholders’ equity
$
4,419,838

 
$
4,617,371

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


3
Table of Contents


COLE CREDIT PROPERTY TRUST IV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except share and per share amounts) (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Rental and other property income
$
100,450

 
$
107,395

 
$
205,212

 
$
216,898

Interest income
5,079

 
—

 
9,577

 
—

Total revenues
105,529

 
107,395

 
214,789

 
216,898

Operating expenses:
 
 
 
 
 
 


General and administrative
3,293

 
3,754

 
6,740

 
7,070

Property operating
6,867

 
6,501

 
16,184

 
15,059

Real estate tax
9,444

 
9,463

 
18,862

 
19,017

Advisory fees and expenses
10,191

 
10,855

 
20,210

 
21,443

Transaction-related
1,517

 
168

 
1,708

 
203

Depreciation and amortization
30,142

 
37,491

 
62,134

 
72,482

Impairment
13,082

 
—

 
33,155

 
—

Total operating expenses
74,536

 
68,232

 
158,993

 
135,274

Gain on disposition of real estate, net
3,460

 
1,987

 
13,400

 
2,251

Operating income
34,453

 
41,150

 
69,196

 
83,875

Other expense:
 
 
 
 
 
 
 
Interest expense and other, net
(25,447
)
 
(23,325
)
 
(51,339
)
 
(46,977
)
Net income
9,006

 
17,825

 
17,857

 
36,898

Net income allocated to noncontrolling interest
33

 
33

 
67

 
67

Net income attributable to the Company
$
8,973

 
$
17,792

 
$
17,790

 
$
36,831

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
311,306,447

 
311,502,128

 
311,349,760

 
311,543,723

Net income per common share:
 
 
 
 
 
 
 
Basic and diluted
$
0.03

 
$
0.06

 
$
0.06

 
$
0.12

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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
9,006

 
$
17,825

 
$
17,857

 
$
36,898

Other comprehensive (loss) income
 
 
 
 
 
 
 
Unrealized (loss) gain on interest rate swaps
(7,957
)
 
4,406

 
(11,801
)
 
14,336

Amount of gain reclassified from other comprehensive income into income as interest expense and other, net
(1,274
)
 
(1,460
)
 
(2,751
)
 
(2,001
)
Total other comprehensive (loss) income
(9,231
)
 
2,946

 
(14,552
)
 
12,335

 
 
 
 
 
 
 
 
Comprehensive (loss) income
(225
)
 
20,771

 
3,305

 
49,233

Comprehensive income allocated to noncontrolling interest
33

 
33

 
67

 
67

Comprehensive (loss) income attributable to the Company
$
(258
)
 
$
20,738

 
$
3,238

 
$
49,166

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 STATEMENTS 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 as of January 1, 2019
311,381,396

 
$
3,114

 
$
2,607,330

 
$
(804,617
)
 
$
11,023

 
$
1,816,850

Issuance of common stock
2,267,609

 
22

 
21,225

 
—

 
—

 
21,247

Equity-based compensation
—

 
—

 
32

 
—

 
—

 
32

Distributions declared on common stock — $0.15 per common share
—

 
—

 
—

 
(47,963
)
 
—

 
(47,963
)
Redemptions of common stock
(2,318,505
)
 
(23
)
 
(21,701
)
 
—

 
—

 
(21,724
)
Changes in redeemable common stock
—

 
—

 
(67
)
 
—

 
—

 
(67
)
Comprehensive income (loss)
—

 
—

 
—

 
8,817

 
(5,321
)
 
3,496

Balance as of March 31, 2019
311,330,500

 
$
3,113

 
$
2,606,819

 
$
(843,763
)
 
$
5,702

 
$
1,771,871

Issuance of common stock
2,436,153

 
25

 
21,048

 
—

 
—

 
21,073

Equity-based compensation
—

 
—

 
32

 
—

 
—

 
32

Distributions declared on common stock — $0.16 per common share
—

 
—

 
—

 
(48,487
)
 
—

 
(48,487
)
Redemptions of common stock
(2,440,984
)
 
(25
)
 
(21,090
)
 
—

 
—

 
(21,115
)
Changes in redeemable common stock
—

 
—

 
42

 
—

 
—

 
42

Comprehensive income (loss)
—

 
—

 
—

 
8,973

 
(9,231
)
 
(258
)
Balance as of June 30, 2019
311,325,669

 
$
3,113

 
$
2,606,851

 
$
(883,277
)
 
$
(3,529
)
 
$
1,723,158


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Table of Contents


COLE CREDIT PROPERTY TRUST IV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 (in thousands, except share amounts) (Unaudited) – (Continued)
 
Common Stock
 
Capital in Excess
of Par Value
 
Accumulated
Distributions in Excess of Earnings
 
Accumulated
Other Comprehensive Income
 
Total
Stockholders’
Equity
 
Number of
Shares
 
Par Value
 
Balance as of January 1, 2018
311,582,319

 
$
3,116

 
$
2,607,300

 
$
(646,834
)
 
$
6,630

 
$
1,970,212

Cumulative effect of accounting changes
—

 
—

 
—

 
(487
)
 
487

 
—

Issuance of common stock
2,343,076

 
23

 
23,595

 
—

 
—

 
23,618

Distributions declared on common stock — $0.15 per common share
—

 
—

 
—

 
(47,993
)
 
—

 
(47,993
)
Redemptions of common stock
(2,411,145
)
 
(24
)
 
(24,280
)
 
—

 
—

 
(24,304
)
Changes in redeemable common stock
—

 
—

 
686

 
—

 
—

 
686

Comprehensive income
—

 
—

 
—

 
19,039

 
9,390

 
28,429

Balance as of March 31, 2018
311,514,250

 
$
3,115

 
$
2,607,301

 
$
(676,275
)
 
$
16,507

 
$
1,950,648

Cumulative effect of accounting changes
—

 
—

 
—

 
(1
)
 
1

 
—

Issuance of common stock
2,502,612

 
25

 
23,424

 
—

 
—

 
23,449

Distributions declared on common stock — $0.16 per common share
—

 
—

 
—

 
(48,512
)
 
—

 
(48,512
)
Redemptions of common stock
(2,515,287
)
 
(25
)
 
(23,548
)
 
—

 
—

 
(23,573
)
Changes in redeemable common stock
—

 
—

 
119

 
—

 
—

 
119

Comprehensive income
—

 
—

 
—

 
17,792

 
2,945

 
20,737

Balance as of June 30, 2018
311,501,575

 
$
3,115

 
$
2,607,296

 
$
(706,996
)
 
$
19,453

 
$
1,922,868

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


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COLE CREDIT PROPERTY TRUST IV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands) (Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
17,857

 
$
36,898

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net
61,149

 
71,872

Amortization of deferred financing costs
2,639

 
2,704

Amortization of fair value adjustment of mortgage notes payable assumed
(44
)
 
(43
)
Amortization and (accretion) on deferred loan fees
(1,529
)
 
—

Capitalized interest income
(2,643
)
 
—

Equity-based compensation
64

 
—

Straight-line rental income, net
(3,008
)
 
(4,293
)
Gain on disposition of real estate assets, net
(13,400
)
 
(2,251
)
Amortization of gain on swap termination
(10
)
 
—

Impairment of real estate assets
33,155

 
—

Changes in assets and liabilities:
 
 
 
Rents and tenant receivables
1,769

 
1,673

Prepaid expenses and other assets
(6,059
)
 
(230
)
Accounts payable and accrued expenses
2,428

 
2,601

Deferred rental income and other liabilities
(5,336
)
 
542

Due from affiliates
—

 
56

Due to affiliates
(2,971
)
 
91

Net cash provided by operating activities
84,061

 
109,620

Cash flows from investing activities:
 
 
 
Investment in real estate assets and capital expenditures
(2,866
)
 
(2,774
)
Purchase of loans held-for-investment
(62,761
)
 
—

Proceeds from loans held-for-investment
11,112

 
—

Exit fees received on loans held-for-investment
112

 
—

Net proceeds from disposition of real estate assets
159,052

 
17,425

Proceeds from the settlement of insurance claims
20

 
113

Net cash provided by investing activities
104,669

 
14,764

Cash flows from financing activities:
 
 
 
Redemptions of common stock
(42,839
)
 
(47,877
)
Distributions to stockholders
(54,663
)
 
(49,975
)
Proceeds from notes payable and credit facility
239,500

 
96,500

Repayments of notes payable and credit facility
(337,248
)
 
(122,472
)
Deferred financing costs paid
(48
)
 
—

Distributions to noncontrolling interest
(150
)
 
(134
)
Net cash used in financing activities
(195,448
)
 
(123,958
)
Net (decrease) increase in cash and cash equivalents and restricted cash
(6,718
)
 
426

Cash and cash equivalents and restricted cash, beginning of period
19,674

 
13,843

Cash and cash equivalents and restricted cash, end of period
$
12,956

 
$
14,269

Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets:
 
 
 
Cash and cash equivalents
$
3,399

 
$
4,356

Restricted cash
9,557

 
9,913

Total cash and cash equivalents and restricted cash
$
12,956

 
$
14,269

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


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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited)
NOTE 1 — ORGANIZATION AND BUSINESS
Cole Credit Property Trust IV, Inc. (the “Company”) is a non-exchange traded real estate investment trust (“REIT”) formed as a Maryland corporation on July 27, 2010, that elected to be taxed, and currently qualifies, as a REIT for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2012. The Company operates a diversified portfolio of core commercial real estate assets primarily consisting of net leased properties located throughout the United States. As of June 30, 2019, the Company owned 852 properties, including nine properties owned through a consolidated joint venture arrangement (the “Consolidated Joint Venture”), comprising 25.3 million rentable square feet of commercial space located in 45 states. As of June 30, 2019, the rentable square feet at these properties was 95.1% leased, including month-to-month agreements, if any. In addition to core commercial real estate assets, the Company intends to also focus on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage‑backed securities (“CMBS”), corporate credit investments, and other commercial real estate investments in the U.S. As of June 30, 2019, the Company’s loan portfolio consisted of eight loans with a net book value of $145.5 million.
Substantially all of the Company’s business is conducted through Cole Operating Partnership IV, LP, a Delaware limited partnership, of which the Company is the sole general partner and owns, directly or indirectly, 100% of the partnership interests.
The Company is externally managed by Cole REIT Management IV, LLC, a Delaware limited liability company (“CR IV Management”), an affiliate of CIM Group, LLC (“CIM”), a vertically-integrated owner and operator of real assets with multidisciplinary expertise and in-house research, acquisition, credit analysis, development, finance, leasing, and asset management capabilities headquartered in Los Angeles, California with offices in Oakland, California; Bethesda, Maryland; Dallas, Texas; New York, New York; Chicago, Illinois; and Phoenix, Arizona.
CCO Group, LLC owns and controls CR IV Management, the Company’s advisor, and is the indirect owner of CCO Capital, LLC (“CCO Capital”), the Company’s dealer manager, and CREI Advisors, LLC (“CREI Advisors”), the Company’s property manager. CCO Group, LLC and its subsidiaries (collectively, “CCO Group”) serve as the Company’s sponsor and as a sponsor to Cole Credit Property Trust V, Inc. (“CCPT V”), Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”), Cole Office & Industrial REIT (CCIT III), Inc. (“CCIT III”) and CIM Income NAV, Inc. (formerly known as Cole Real Estate Income Strategy (Daily NAV), Inc.) (“CIM Income NAV”).
On January 26, 2012, 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”). The Company ceased issuing shares in the Offering on April 4, 2014.
The Company registered $247.0 million of shares of common stock under the distribution reinvestment plan (the “DRIP”) (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.
The Company registered an additional $600.0 million of shares of common stock under the DRIP (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.
The Company’s board of directors (the “Board”) establishes an updated estimated per share net asset value (“NAV”) of the Company’s common stock on at least an annual basis for purposes of assisting broker-dealers that participated in the Offering in meeting their customer account reporting obligations under National Association of Securities Dealers Conduct Rule 2340. Distributions are reinvested in shares of the Company’s common stock under the DRIP at the estimated per share NAV as determined by the Board. Additionally, the estimated per share NAV as determined by the Board serves as the per share NAV for purposes of the share redemption program. On March 20, 2019, the Board established an updated estimated per share NAV of the Company’s common stock, using a valuation date of December 31, 2018, of $8.65 per share. Commencing on March 26, 2019, distributions are reinvested in shares of the Company’s common stock under the DRIP at a price of $8.65 per share. The Board previously established a per share NAV as of August 31, 2015, September 30, 2016, December 31, 2016 and December 31, 2017. The Company’s estimated per share NAVs are not audited or reviewed by its independent registered public accounting firm.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


As of June 30, 2019, the Company had issued approximately 353.5 million shares of its common stock in the Offerings, including 55.2 million shares issued in the DRIP Offerings, for gross offering proceeds of $3.5 billion before organization and offering costs, selling commissions and dealer manager fees of $306.0 million.
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, 2018, and related notes thereto, set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. 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.
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 condensed 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 June 30, 2019 and December 31, 2018, the Company determined that it had a controlling interest in the Consolidated Joint Venture and therefore met the GAAP requirements for consolidation.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


Reclassifications
Certain amounts in the Company’s prior period condensed consolidated financial statements have been reclassified to conform to the current period presentation.
In November 2018, the SEC finalized the Disclosure Update Simplification Project, which eliminated Rule 3-15(a)(1) reporting of Gain or Loss on Sale of Properties by REITs. To conform with Accounting Standards Codification (“ASC”) 360, Property, Plant, and Equipment and the SEC rule change, the Company has classified the gain on dispositions of real estate assets, net as operating income in the Company’s condensed consolidated statements of operations. This change resulted in an increase in operating income of $2.0 million and $2.3 million during the three and six months ended June 30, 2018, respectively.
The Company combined rental income of $93.3 million and tenant reimbursement income of $14.1 million for the three months ended June 30, 2018, and rental income of $187.3 million and tenant reimbursement income of $29.6 million for the six months ended June 30, 2018, into a single financial statement line item, rental and other property income, in the condensed consolidated statements of operations for the three and six months ended June 30, 2018.
Additionally, the Company is combining bad debt expense of $209,000 and straight-line rental income of $4.5 million for the six months ended June 30, 2018 into a single line item, straight-line rental income, net, of $4.3 million in the condensed consolidated statements of cash flows.
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 Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. 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; changes in anticipated holding periods; 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. During the six months ended June 30, 2019, as part of the Company’s quarterly impairment review procedures, the Company recorded impairment charges of $33.2 million related to 13 properties with revised expected holding periods. The Company’s impairment assessment as of June 30, 2019 was based on the most current information available to the Company, including expected holding periods. If the Company’s expected holding periods for assets change, subsequent tests for impairment could result in additional impairment charges in the future. The Company cannot provide any assurance that material impairment charges with respect to the Company’s real estate assets will not occur during 2019 or in future periods. No impairment indicators were identified and no impairment losses were recorded during the six months ended June 30, 2018. The assumptions and uncertainties utilized in the evaluation of the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


impairment of real estate assets are discussed in detail in Note 3 — Fair Value Measurements. See also Note 4 — Real Estate Assets for further discussion regarding real estate investment activity. Over the next 12-24 months, the Company expects to sell a substantial portion of its anchored shopping center portfolio and certain single tenant properties. These will be sold in pools or on a standalone basis. As of June 30, 2019, the Company intended to sell properties with a net book value of at least $2.0 billion, subject to market conditions.
Assets Held for Sale
When a real estate asset is identified by the Company as held for sale, the Company will cease recording depreciation and amortization of the assets related to the property and estimate its 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 is then recorded to reflect the estimated fair value of the property, net of selling costs. As of June 30, 2019, the Company identified 12 properties with a carrying value of $269.7 million as held for sale. The Company has mortgage notes payable of $122.0 million that are related to the held for sale properties, which the Company expects to repay in connection with the disposition of the underlying held for sale properties. As of December 31, 2018, the Company identified one property with a carrying value of $6.8 million as held for sale, which was sold subsequent to December 31, 2018.
Disposition of Real Estate Assets
Gains and losses from dispositions are recognized once the various criteria relating to the terms of sale and any subsequent involvement by the Company with the asset sold are met. A discontinued operation includes only the disposal of a component of an entity and represents a strategic shift that has (or will have) a major effect on an entity’s financial results. The disposition of the Company’s individual properties did not qualify for discontinued operations presentation, and, thus, the results of the properties that were sold will remain in operating income, and any associated gains or losses from the disposition are included in gain on disposition of real estate, net.
Allocation of Purchase Price of Real Estate Assets
Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings and improvements, and to identified intangible assets and liabilities, consisting of the value of above- and below-market leases and the value of in-place leases and other intangibles, 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.
All real estate acquisitions in the periods presented qualified as asset acquisitions, and as such, acquisition–related fees and certain acquisition–related expenses related to these asset acquisitions were capitalized and allocated to tangible and intangible assets and liabilities, as described above.
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 June 30, 2019, 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 $67,000 and paid distributions of $150,000 related to the noncontrolling interest during the six months ended June 30, 2019. The Company recorded the noncontrolling interest of $2.2 million and $2.3 million as of June 30, 2019 and December 31, 2018, respectively, 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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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


Restricted Cash
The Company had $9.6 million and $9.1 million in restricted cash as of June 30, 2019 and December 31, 2018, respectively. Included in restricted cash was $2.4 million and $3.4 million held by lenders in lockbox accounts, as of June 30, 2019 and December 31, 2018, 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 $7.2 million and $5.7 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 June 30, 2019 and December 31, 2018, respectively.
Loans Held-for-Investment
The Company has acquired, and may continue to acquire, loans related to real estate assets. The Company may acquire first, second and third mortgage loans, mezzanine loans, bridge loans, wraparound mortgage loans, construction mortgage loans on real property and loans on leasehold interest mortgages. The Company intends to hold the loans held-for-investment for the foreseeable future or until maturity. Loans held-for-investment are carried on the Company’s consolidated balance sheets at amortized cost, net of any allowance for loans receivable losses. Discounts or premiums, origination fees and exit fees are amortized as a component of interest income using the effective interest method over the life of the respective loans. Loan acquisition fees paid to CR IV Management or its affiliates are expensed as incurred and are included in transaction-related expenses on the accompanying condensed consolidated statements of operations.
Interest earned is either received in cash or capitalized to loans held-for-investment and related receivables, net in the Company’s condensed consolidated balance sheets. Interest is capitalized when certain conditions are met as specified in each loan agreement. For the six months ended June 30, 2019, the Company recorded $9.6 million in interest income, of which $2.6 million was capitalized to loans held-for-investment and related receivables, net.
Generally, an allowance for loan losses is provided when management determines that the Company will be unable to collect any remaining amounts due under the loan agreement. The Company evaluates the collectability of its loans held-for-investment at least quarterly. The evaluation of collectability involves judgment, estimates, and a review of the ability of the borrower to make principal and interest payments and the underlying collateral. For the six months ended June 30, 2019, the Company recorded no impairment on its loans held-for-investment.
Leases
The Company has lease agreements with lease and non-lease components. The Company has elected to not separate non-lease components from lease components for all classes of underlying assets (primarily real estate assets) and will account for the combined components as rental and other property income. Non-lease components included in rental and other property income include certain tenant reimbursements for maintenance services (including common-area maintenance services or “CAM”), real estate taxes, insurance and utilities paid for by the lessor but consumed by the lessee. As a lessor, the Company has further determined that this policy will be effective only on a lease that has been classified as an operating lease and the revenue recognition pattern and timing is the same for both types of components. Therefore, ASC Topic 842, Leases (“ASC 842”), has been applied to these lease contracts for both types of components. The Company does not have material leases where it is the lessee.
Significant judgments and assumptions are inherent in not only determining if a contract contains a lease but also the lease classification, terms, payments, and, if needed, discount rates. Judgments include the nature of any options, including if they will be exercised, evaluation of implicit discount rates and the assessment and consideration of “fixed” payments for straight-line rent revenue calculations.
The Company has an investment in a real estate property that is subject to a ground lease, for which a lease liability and right of use (“ROU”) asset of $2.6 million was recorded as of June 30, 2019. See Note 14 — Leases for a further discussion regarding this ground lease.
Lease costs represent the initial direct costs incurred in the origination, negotiation and processing of a lease agreement. Such costs include outside broker commissions and other independent third-party costs and are amortized over the life of the lease on a straight-line basis. Costs related to salaries and benefits, supervision, administration, unsuccessful origination efforts and other activities not directly related to completed lease agreements are expensed as incurred. Leasing commissions subsequent to successful lease execution are capitalized.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


Revenue Recognition
Revenue from leasing activities
Rental and other property income is primarily derived from fixed contractual payments from operating leases and, therefore, is generally recognized on a straight-line basis over the term of the lease, which typically begins the date the tenant takes control of the space. 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. Variable rental and other property income consists primarily of tenant reimbursements for recoverable real estate taxes and operating expenses which are included in rental and other property income in the period when such costs are incurred, with offsetting expenses in real estate taxes and property operating expenses, respectively, within the condensed consolidated statements of operations. The Company defers the recognition of variable rental and other property income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
The Company continually reviews whether collection of lease-related receivables, including any straight-line rent, and current and future operating expense reimbursements from tenants are probable. The determination of whether collectability is probable takes 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. Upon the determination that the collectability of a receivable is not probable, the Company will record a reduction to rental and other property income for amounts previously recorded and a decrease in the outstanding receivable. Revenue from leases where collection is deemed to be less than probable is recorded on a cash basis until collectability becomes probable. Management’s estimate of the collectability of lease-related receivables is based on the best information available to management at the time of evaluation. The Company does not use a general reserve approach and lease-related receivables are adjusted and taken against rental and other property income only when collectability becomes not probable.
Revenue from lending activities
Interest income is comprised of interest earned on loans and the accretion and amortization of net loan origination fees and discounts. Interest income on loans is accrued as earned.
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 new accounting requirements may have on the Company’s accounting and related reporting and disclosures in the Company’s condensed consolidated financial statements.
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The Company used the optional alternative transition method upon adoption of the new standard on January 1, 2019 and used the effective date as the date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. The Company elected the “package of practical expedients,” which permits the Company to not reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. The adoption of ASU 2016-02 has not had a material impact on the accounting treatment and disclosure of the Company’s net leases, which are the primary source of the Company’s revenues.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), which was subsequently amended by ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (“ASU 2018-19”), in November 2018. ASU 2016-13 and the related updates are 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, 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 2018-19 clarified that receivables arising from operating leases are not within the scope of Topic 326. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. ASU 2016-13 and ASU 2018-19 are 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


years, beginning after December 15, 2018. The Company is currently evaluating the impact this amendment will have on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This ASU amends and removes several disclosure requirements including the valuation processes for Level 3 fair value measurements. ASU 2018-13 also modifies some disclosure requirements and requires additional disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and requires the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The provisions of ASU 2018-13 are effective January 1, 2020 using a prospective transition method for amendments effecting changes in unrealized gains and losses, significant unobservable inputs used to develop Level 3 fair value measurements and narrative description on uncertainty of measurements. The remaining provisions of the ASU are to be applied retrospectively, and early adoption is permitted. The Company is evaluating the impact of this ASU’s adoption, and does not believe this ASU will have a material impact on its condensed consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-16, Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2018-16”). The amendments in this ASU permit the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes. The SOFR is a volume-weighted median interest rate that is calculated daily based on overnight transactions from the prior day’s activity in specified segments of the U.S. Treasury repo market. It has been selected as the preferred replacement for the U.S. dollar London Interbank Offered Rate (“LIBOR”), which will be phased out by the end of 2021. ASU 2018-16 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2018-16 is required to be adopted on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Company currently uses LIBOR as its benchmark interest rate in the Company’s interest rate swaps associated with the Company’s LIBOR-based variable rate borrowings. The Company has not entered into any new or redesignated hedging relationships on or after the date of adoption of ASU 2018-16; as such, the Company is currently evaluating the potential effect this new benchmark interest rate option will have on its condensed consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The guidance changes the guidance for determining whether a decision-making fee is a variable interest. Under the new ASU, indirect interests held through related parties under common control will now be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. Such indirect interests were previously treated the same as direct interests. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new standard will have on its condensed consolidated financial statements and footnote disclosures.   
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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


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 June 30, 2019, the estimated fair value of the Company’s debt was $2.45 billion, compared to a carrying value of $2.43 billion. The estimated fair value of the Company’s debt as of December 31, 2018 was $2.46 billion, compared to a carrying value of $2.53 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 June 30, 2019 and December 31, 2018, 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 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.
Revenue bonds — The Company’s revenue bonds were 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. These investments are initially recognized in prepaid expenses, interest receivable and other assets on the condensed consolidated balance sheets and are subsequently measured using amortized cost. 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 June 30, 2019 and December 31, 2018, the estimated fair value of the Company’s revenue bonds was $2.0 million. The Company has these investments classified as held-to-maturity securities. 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.
Loans held-for-investment — The Company’s loans held-for-investment are recorded at cost upon origination and adjusted by net loan origination fees and discounts. The Company estimates the fair value of its loans held-for-investment by performing a present value analysis for the anticipated future cash flows using an appropriate market discount rate taking into consideration the credit risk. As a result, the Company has determined that its loans held-for-investment are classified in Level 3 of the fair value hierarchy. As of June 30, 2019, the estimated fair value of the Company’s loans held-for-investment was $142.3 million, compared to its carrying value of $143.3 million. As of December 31, 2018, the Company determined that the estimated fair value of its loans held-for-investment was equal to its carrying value given that the loans were originated during the fourth quarter of 2018.
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 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 June 30, 2019 and December 31, 2018, there have been no transfers of financial assets or liabilities between fair value hierarchy levels.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


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 June 30, 2019 and December 31, 2018 (in thousands):
 
Balance as of
June 30, 2019
 
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
$
847

 
$
—

 
$
847

 
$
—

Total financial assets
$
847

 
$
—

 
$
847

 
$
—

Financial liability:
 
 
 
 
 
 
 
Interest rate swap
$
(4,396
)
 
$
—

 
$
(4,396
)
 
$
—

Total financial liability
$
(4,396
)
 
$
—

 
$
(4,396
)
 
$
—

 
 
 
 
 
 
 
 
  
Balance as of
December 31, 2018
 
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
$
10,993

 
$
—

 
$
10,993

 
$
—

Total financial assets
$
10,993

 
$
—

 
$
10,993

 
$
—

The following are reconciliations of the changes in financial assets and liabilities with Level 3 inputs in the fair value hierarchy for the six months ended June 30, 2019 and 2018 (in thousands):
 
 
Revenue Bonds
Beginning Balance, December 31, 2018
 
$
2,044

Payments received
 
(1
)
Ending Balance, June 30, 2019
 
$
2,043

 
 
Revenue Bonds
Beginning Balance, December 31, 2017
 
$
2,067

Payments received
 
(5
)
Ending Balance, June 30, 2018
 
$
2,062

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 Assets, during the six months ended June 30, 2019, real estate assets related to 13 properties totaling approximately 1.9 million square feet were deemed to be impaired and their carrying values were reduced to an estimated fair value of $220.6 million, resulting in impairment charges of $33.2 million. No impairment charges were recorded during the six months ended June 30, 2018. 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.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


The following table presents the impairment charges by asset class recorded during the six months ended June 30, 2019 and 2018 (in thousands):
 
 
Six Months Ended
 
 
June 30, 2019
 
June 30, 2018
Asset class impaired:
 
 
 
 
Land
 
$
5,180

 
$
—

Buildings, fixtures and improvements
 
27,034

 
—

Intangible lease assets
 
1,044

 
—

Intangible lease liabilities
 
(103
)
 
—

Total impairment loss
 
$
33,155

 
$
—

NOTE 4 — REAL ESTATE ASSETS
Property Acquisitions
During the six months ended June 30, 2019 and 2018, the Company did not acquire any properties.
2019 Property Dispositions and Real Estate Assets Held for Sale
During the six months ended June 30, 2019, the Company disposed of 39 properties, consisting of 35 retail properties and four anchored shopping centers, excluding a related outparcel of land, for an aggregate gross sales price of $163.9 million, resulting in proceeds of $159.1 million after closing costs and disposition fees due to CR IV Management or its affiliates, and a gain of $13.4 million. 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 condensed consolidated statements of operations. The disposition of these properties did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of these disposed properties are reflected in the Company’s results from continuing operations for all periods presented through their respective date of disposition.
As of June 30, 2019, there were 12 properties classified as held for sale with a carrying value of $269.7 million included in assets held for sale in the accompanying condensed consolidated balance sheets. The Company has mortgage notes payable of $122.0 million that are related to the held for sale properties, which the Company expects to repay in connection with the disposition of the underlying held for sale properties.
2019 Impairment of Properties
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 six months ended June 30, 2019, 13 properties with a carrying value of $253.8 million were deemed to be impaired and their carrying values were reduced to an estimated fair value of $220.6 million, resulting in impairment charges of $33.2 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.
2018 Property Dispositions
During the six months ended June 30, 2018, the Company disposed of 12 retail properties for an aggregate gross sales price of $17.9 million, resulting in proceeds of $17.4 million after closing costs and a gain of $2.3 million. No disposition fees were paid to CR IV Management or its affiliates in connection with the sale of the property and the Company has no continuing involvement with this property. The gain on sale of real estate is included in gain on disposition of real estate, net in the condensed consolidated statements of operations.

18
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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


Consolidated Joint Venture
As of June 30, 2019, the Company had an interest in a Consolidated Joint Venture that owns and manages nine properties, with total assets of $50.1 million, which included $9.3 million of land, $42.0 million of buildings and improvements, and $5.6 million of intangible lease assets, net of accumulated depreciation and amortization of $7.7 million, and total liabilities of $646,000. The Consolidated Joint Venture does not have any debt outstanding as of June 30, 2019. 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.
NOTE 5 — INTANGIBLE LEASE ASSETS AND LIABILITIES
Intangible lease assets and liabilities consisted of the following as of June 30, 2019 and December 31, 2018 (in thousands, except weighted average life remaining):
 
June 30, 2019
 
December 31, 2018
Intangible lease assets:
 
 
 
In-place leases and other intangibles, net of accumulated amortization of $170,930 and $184,532, respectively (with a weighted average life remaining of 10.0 years and 10.1 years, respectively)
 
 
 
$
275,436

 
$
307,895

Acquired above-market leases, net of accumulated amortization of $24,748 and $27,979, respectively (with a weighted average life remaining of 8.5 years and 8.4 years, respectively)
 
 
 
29,883

 
34,462

Total intangible lease assets, net
$
305,319

 
$
342,357

Intangible lease liabilities:
 
 
 
Acquired below-market leases, net of accumulated amortization of $30,105 and $34,732, respectively (with a weighted average life remaining of 7.4 years and 7.2 years, respectively)
 
 
 
$
30,395

 
$
36,418

Amortization of the above-market leases is recorded as a reduction to rental and other property income, 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. Amortization of below-market leases is recorded as an increase to rental and other property income in the accompanying condensed consolidated statements of operations. The following table summarizes the amortization related to the intangible lease assets and liabilities for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
In-place lease and other intangible amortization
$
8,880

 
$
13,618

 
$
18,354

 
$
24,613

Above-market lease amortization
$
1,177

 
$
1,973

 
$
2,467

 
$
3,703

Below-market lease amortization
$
1,666

 
$
2,204

 
$
3,482

 
$
4,343

As of June 30, 2019, the estimated amortization relating to the intangible lease assets and liabilities is as follows (in thousands):
 
 
Amortization
 
 
In-Place Leases and
Other Intangibles
 
Above-Market Leases
 
Below-Market Leases
Remainder of 2019
 
$
16,861

 
$
2,235

 
$
3,091

2020
 
32,417

 
4,105

 
5,824

2021
 
29,585

 
3,497

 
3,827

2022
 
28,092

 
3,283

 
3,357

2023
 
25,397

 
2,979

 
2,829

Thereafter
 
143,084

 
13,784

 
11,467

Total
 
$
275,436

 
$
29,883

 
$
30,395


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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


NOTE 6 — LOANS HELD-FOR-INVESTMENT
During the six months ended June 30, 2019, the Company purchased four senior mezzanine loans secured by a pledge of the equity interests in the portfolio of four condominium properties in New York (the “Senior Mezzanine Loans”). The Senior Mezzanine Loans are related to the same four condominium projects as the existing four junior mezzanine loans (the “Junior Mezzanine Loans”). As of June 30, 2019, the Company had eight mezzanine loans. The following table details overall statistics for the Company’s loans held-for-investment as of June 30, 2019 and December 31, 2018 (dollar amounts in thousands):
 
As of June 30,
 
As of December 31,
 
2019
 
2018
Number of loans
8

 
4

Principal balance (1)
$
143,274

 
$
89,679

Net book value
$
145,471

 
$
89,762

Weighted-average interest rate (1)
14.3
%
 
17.2
%
Weighted-average maximum years to maturity (2)
1.9

 
2.4

____________________________________
(1)
As of June 30, 2019, the Junior Mezzanine Loans and the Senior Mezzanine Loans were indexed to one-month LIBOR plus an interest rate spread of 14.85% and 8.00%, respectively.
(2)
Maximum maturity date of May 9, 2021 for both the Junior Mezzanine Loans and the Senior Mezzanine Loans assumes all extension options are exercised by the borrower; however, the Company’s loans may be repaid prior to such date.
Activity relating to the Company’s loans held-for-investment portfolio was as follows (dollar amounts in thousands):
 
 
Principal Balance
 
Deferred Fees / Other Items (1)
 
Loan Fees Receivable
 
Net Book Value
Beginning Balance, December 31, 2018
 
$
89,679

 
$
(6,540
)
 
$
6,623

 
$
89,762

Loan fundings
 
62,064

 
(75
)
 
772

 
62,761

Principal repayments received
 
(11,112
)
 
—

 
—

 
(11,112
)
Capitalized interest (2)
 
2,643

 
—

 
—

 
2,643

Deferred fees and other items
 
—

 
—

 
(112
)
 
(112
)
Accretion (amortization) of fees and other items
 
—

 
1,529

 
—

 
1,529

Ending Balance, June 30, 2019
 
$
143,274

 
$
(5,086
)
 
$
7,283

 
$
145,471

____________________________________
(1)
Other items primarily consist of purchase discounts or premiums, accretion of exit fees and deferred origination expenses.
(2)
Represents accrued interest on loans whose terms do not require a current cash payment of interest.
NOTE 7 — 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. During the six months ended June 30, 2019, one of the Company’s interest rate swap agreements matured. As of June 30, 2019, the Company had six executed interest rate swap agreements. The following table summarizes the terms of the Company’s executed interest rate swap agreements designated as hedging instruments as of June 30, 2019 and December 31, 2018 (dollar amounts in thousands):
 
 

 Outstanding Notional

 

 

 

Fair Value of Assets (Liability)

Balance Sheet

Amount as of

Interest

Effective

Maturity

June 30,

December 31,

Location

June 30, 2019

Rates (1)

Dates

Dates

2019

2018
Interest Rate Swaps
Prepaid expenses, interest receivable and other assets

$
129,100


2.55% to 3.62%

10/1/2015 to 6/29/2016

10/1/2020 to 7/1/2021

$
847


$
10,993

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

$
811,666


3.77%

8/15/2018

3/15/2021

$
(4,396
)

$
—

____________________________________

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


(1)
The interest rates consist of the underlying index swapped to a fixed rate and the applicable interest rate spread as of June 30, 2019.
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 derivative instruments that are designated as hedges is recorded in other comprehensive (loss) income, 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 June 30, 2019 and 2018, the amount of gains reclassified from other comprehensive income as a decrease to interest expense was $1.3 million and $1.5 million, respectively. For the six months ended June 30, 2019 and 2018, the amount of gains reclassified from other comprehensive income as a decrease to interest expense was $2.8 million and $2.0 million, respectively. The amounts reclassified during the three and six months ended June 30, 2019 included amounts related to an interest rate swap agreement that was terminated prior to its maturity date during the year ended December 31, 2018. During the next 12 months, the Company estimates that an additional $620,000 will be reclassified from other comprehensive (loss) income as an increase to interest expense. The Company includes cash flows from interest rate swap agreements in net cash flows provided by operating activities on its condensed consolidated statements of cash flows, as the Company’s accounting policy is to present cash flows from hedging instruments in the same category in its condensed consolidated statements of cash flows as the category for cash flows from the hedged items.
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 and accrued interest, of $4.3 million at June 30, 2019. 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 June 30, 2019.
NOTE 8 — NOTES PAYABLE AND CREDIT FACILITY
As of June 30, 2019, the Company had $2.4 billion of debt outstanding, including net deferred financing costs, with a weighted average years to maturity of 2.8 years and a weighted average interest rate of 3.9%. 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 June 30, 2019 and December 31, 2018, and the debt activity for the six months ended June 30, 2019 (in thousands):
 
 
 
During the Six Months Ended June 30, 2019
 
 
 
Balance as of December 31, 2018
 
Debt Issuances & Assumptions (1)
 
Repayments & Modifications (4)
 
Accretion and (Amortization)
 
Balance as of
June 30, 2019
Fixed rate debt
$
1,178,166

 
$
—

 
$
(49,548
)
 
$
—

 
$
1,128,618

Variable rate debt
20,500

 
—

 
49,300

 
—

 
69,800

Credit facility
1,331,000

 
239,500

 
(337,000
)
 
—

 
1,233,500

Total debt
2,529,666

 
239,500

 
(337,248
)
 
—

 
2,431,918

Net premiums (2)
331

 
—

 
—

 
(44
)
 
287

Deferred costs – credit facility (3)
(6,731
)
 
—

 
—

 
1,049

 
(5,682
)
Deferred costs – fixed rate debt
(6,352
)
 
—

 
—

 
1,112

 
(5,240
)
Total debt, net
$
2,516,914

 
$
239,500

 
$
(337,248
)
 
$
2,117

 
$
2,421,283

____________________________________
(1)
Includes deferred financing costs incurred during the period.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


(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 related to the term portion of the Credit Facility (as defined below).
(4)
During the six months ended June 30, 2019, an interest rate swap agreement associated with $49.3 million of variable rate debt matured and as such the mortgage note is no longer considered to be fixed rate debt as of June 30, 2019.
As of June 30, 2019, the fixed rate debt outstanding of $1.1 billion included $129.1 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 April 1, 2020 through October 1, 2025. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the fixed rate debt outstanding was $2.0 billion as of June 30, 2019. 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 June 30, 2019, the variable rate debt outstanding of $69.8 million had a weighted average interest rate of 5.5%. The variable rate debt outstanding matures on various dates from September 1, 2019 through February 26, 2020. With respect to the $269.5 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 $143.6 million as of June 30, 2019.
Credit Facility
The Company has 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 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 June 30, 2019, the Revolving Loans outstanding totaled $183.5 million at a weighted average interest rate of 4.2%. As of June 30, 2019, 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 at an all-in rate of 3.8%. As of June 30, 2019, the Company had $1.23 billion outstanding under the Credit Facility at a weighted average interest rate of 3.9% and $165.9 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 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 June 30, 2019.

22
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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


Maturities
The following table summarizes the scheduled aggregate principal repayments for the Company’s outstanding debt subsequent to June 30, 2019 (in thousands):
 
Principal Repayments
Remainder of 2019
$
49,551

2020
318,215

2021
284,103

2022
1,092,464

2023
491,375

Thereafter
196,210

Total
$
2,431,918

NOTE 9 — SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the six months ended June 30, 2019 and 2018 are as follows (in thousands):
 
Six Months Ended June 30,
 
2019
 
2018
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
 
 
Distributions declared and unpaid
$
15,985

 
$
15,994

Accrued capital expenditures
$
444

 
$
645

Interest income capitalized to loans held-for-investment
$
2,643

 
$
—

Common stock issued through distribution reinvestment plan
$
42,320

 
$
47,067

Change in fair value of interest rate swaps
$
(14,542
)
 
$
12,335

Supplemental Cash Flow Disclosures:
 
 
 
Interest paid
$
49,374

 
$
45,008

Cash paid for taxes
$
301

 
$
168

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, and will continue to incur, fees and expenses payable to CR IV Management and certain of its affiliates in connection with the acquisition, management and disposition of its assets.

23
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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


Acquisition fees and expenses
The Company pays CR IV Management 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 Management 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. Other transaction-related expenses, such as advisor reimbursements for disposition activities, are expensed as incurred and are included in transaction-related expenses on the condensed consolidated statements of operations.
Advisory fees and expenses
The Company pays CR IV Management a monthly advisory fee based upon the Company’s monthly average invested assets, which, effective January 1, 2018, is based on the estimated market value of such assets used to determine the Company’s estimated per share NAV as of December 31, 2017, as discussed in Note 1 — Organization and Business, and for those assets acquired subsequent to December 31, 2017, 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 Management or its affiliates for certain expenses CR IV Management 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 Management 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 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 Management or its affiliates for the salaries and benefits paid to personnel in connection with the services for which CR IV Management receives acquisition fees, and the Company will not reimburse CR IV Management for salaries and benefits paid to the Company’s executive officers.
Disposition fees
If CR IV Management 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 Management 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 Management, 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.
Subordinated performance fees
If the Company is sold or its assets are liquidated, CR IV Management will be entitled to receive a subordinated performance fee equal to 15.0% of the net sale proceeds remaining after stockholders 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 Management 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 stockholders and the amount of distributions necessary to generate an 8.0% annual cumulative, non-compounded return to stockholders. As an additional alternative, upon termination of the advisory agreement, CR IV Management may be entitled to a subordinated performance fee similar to the fee to which CR IV Management 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 six months ended June 30, 2019 and 2018, no subordinated performance fees were incurred related to any such events.

24
Table of Contents
COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


The Company recorded fees and expense reimbursements as shown in the table below for services provided by CR IV Management or its affiliates related to the services described above during the periods indicated (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Acquisition fees and expenses
$
1,439

 
$
168

 
$
1,625

 
$
198

Disposition fees
$
246

 
$
—

 
$
1,047

 
$
—

Advisory fees and expenses
$
10,191

 
$
10,855

 
$
20,210

 
$
21,443

Operating expenses
$
739

 
$
1,466

 
$
1,713

 
$
2,486

Of the amounts shown above, $2.2 million and $2.1 million had been incurred, but not yet paid, for services provided by CR IV Management or its affiliates in connection with the acquisition, disposition and operations activities during the six months ended June 30, 2019 and 2018, respectively, and such amounts were recorded as liabilities of the Company as of such dates.
Due to Affiliates
As of June 30, 2019 and December 31, 2018, $2.2 million and $5.2 million, respectively, had been incurred primarily for disposition fees and operating expenses by CR IV Management 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.
NOTE 12 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged and may in the future engage CR IV Management 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 stockholder relations. As a result of these relationships, the Company is dependent upon CR IV Management 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 — STOCKHOLDERS’ EQUITY
Equity-Based Compensation
On August 10, 2018, the Board approved the adoption of the Cole Credit Property Trust IV, Inc. 2018 Equity Incentive Plan (the “Plan”), under which 400,000 of the Company’s common shares were reserved for issuance and share awards of 386,000 are available for future grant as of June 30, 2019. On October 1, 2018, the Company granted awards of approximately 3,500 restricted shares to each of the independent members of the Board (approximately 14,000 restricted shares in aggregate) under the Plan, which fully vest on October 1, 2019 based on one year of continuous service. As of June 30, 2019 and December 31, 2018, none of the restricted shares had vested or been forfeited. The fair value of the Company’s share awards is determined using the Company’s NAV per share on the date of grant. Compensation expense related to these restricted shares is recognized over the vesting period. The Company recorded compensation expense of $32,000 and $64,000 for the three and six months ended June 30, 2019, respectively, related to these restricted shares which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations.
As of June 30, 2019, there was $34,000 of total unrecognized compensation expense related to these restricted shares, which will be recognized ratably over the remaining period of service prior to October 1, 2019.
NOTE 14 — LEASES
The Company’s real estate assets are leased to tenants under operating leases for which the terms, expirations and extension options vary. The Company’s operating leases do not convey to the lessee the right to purchase the underlying asset upon expiration of the lease period. To determine whether a contract contains a lease, the Company carefully reviews contracts to determine if the agreement conveys the right to control the use of an asset. The Company elected to apply the practical expedient for all of the Company’s leases to account for the lease and non-lease components as a single, combined operating lease component under ASC 842. Non-lease components primarily consist of maintenance services, including CAM, real estate taxes, insurance and utilities paid for by the lessor but consumed by the lessee. Non-lease components are considered to be variable rental and other property income and are recognized in the period incurred.

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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


As of June 30, 2019, the leases had a weighted-average remaining term of 8.8 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. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As of June 30, 2019, the future minimum rental income from the Company’s 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 2019
$
170,161

2020
335,390

2021
320,550

2022
305,235

2023
279,329

Thereafter
1,689,883

Total
$
3,100,548

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, Topic 840, the following table summarizes the future minimum rental income from the Company’s real estate assets under non-cancelable operating leases, assuming no exercise of renewal options for the succeeding five fiscal years and thereafter, as of December 31, 2018 (in thousands):
Year Ending December 31,
 
Future Minimum Rental Income
2019
$
352,699

2020
343,991

2021
327,661

2022
311,858

2023
284,510

Thereafter
1,718,650

Total
$
3,339,369

A certain amount of the Company’s rental and other property income is from tenants with leases which are subject to contingent rent provisions. These contingent rents are subject to the tenant achieving periodic revenues in excess of specified levels. For the six months ended June 30, 2019 and 2018, the amount of the contingent rent earned by the Company was not significant.
Rental and other property income during the three and six months ended June 30, 2019 and 2018 consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Fixed rental and other property income
$
87,567

 
$
92,194

 
$
177,302

 
$
186,046

Variable rental and other property income
12,883

 
15,201

 
$
27,910

 
$
30,852

Total rental and other property income
$
100,450

 
$
107,395

 
$
205,212

 
$
216,898

The Company has one property subject to a non-cancelable operating ground lease with a remaining term of 14.2 years. Upon initial adoption of ASC 842, the Company recognized a lease liability (in deferred rental income and other liabilities) and a related ROU asset (in prepaid expenses, derivative assets and other assets) of $2.7 million in the condensed consolidated balance sheets. The lease liability and ROU asset were initially measured at the present value of the future minimum lease payments using a discount rate of 4.3%. This reflects the Company’s incremental borrowing rate, which was calculated based on the interest rate the Company would incur to borrow on a fully collateralized basis over a term similar to the lease.


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COLE CREDIT PROPERTY TRUST IV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019 (Unaudited) – (Continued)


The Company recognized $62,000 and $125,000 of ground lease expense during the three and six months ended June 30, 2019, respectively, of which $60,000 and $121,000 was paid in cash during the period it was recognized. As of June 30, 2019, the Company’s scheduled future minimum rental payments related to its operating ground lease is approximately $125,000 for the remainder of 2019, $250,000 annually for 2020 through 2023, and $2.4 million thereafter through the maturity date of the lease in August 2033.
NOTE 15 — SUBSEQUENT EVENTS
The following events occurred subsequent to June 30, 2019:
Redemption of Shares of Common Stock
Subsequent to June 30, 2019, the Company redeemed approximately 2.4 million shares pursuant to the Company’s share redemption program for $20.9 million (at an average price per share of $8.65). Management, in its discretion, limited the amount of shares redeemed for the three months ended June 30, 2019 to an amount equal to the net proceeds the Company received from the sale of shares in the DRIP Offerings during the respective period. The remaining redemption requests received during the three months ended June 30, 2019 totaling approximately 20.7 million shares went unfulfilled.
Acquisition of Real Estate Assets
Subsequent to June 30, 2019, the Company acquired one commercial real estate property for a purchase price of $6.2 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 Assets in these condensed consolidated financial statements for this property.

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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, 2018. 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, 2018.
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 dispositions.
•
We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties and we may suffer delays or 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 are subject to risks associated with 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 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. The tenant generally 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. There are various forms of net leases, most typically classified as either 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, including roof, structure and parking lot). Double-net leases typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance).
Overview
We were formed on July 27, 2010, and 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. 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 managed and operated by CR IV Management. CIM indirectly owns and/or controls CR IV Management; our dealer manager, CCO Capital; our property manager, CREI Advisors; and CCO Group.
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 certain liquidity events occur, 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 2019 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 asset acquisitions.
Our operating results and cash flows are primarily influenced by rental and other property income from our commercial properties, interest expense on our indebtedness and acquisition and operating expenses. As 95.1% of our rentable square feet was under lease, including any month-to-month agreements, as of June 30, 2019, with a weighted average remaining lease term of 8.8 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 Management regularly monitors the creditworthiness of our tenants by reviewing each tenant’s financial results, any available credit rating agency reports 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 Management 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.
We have primarily acquired core commercial real estate assets principally consisting of necessity retail properties located throughout the United States. As of June 30, 2019, we owned 852 properties, including nine properties owned through the Consolidated Joint Venture, comprising 25.3 million rentable square feet of commercial space located in 45 states.
Going forward, we intend to pursue a more diversified investment strategy across the capital structure, ultimately as a mortgage REIT, by balancing our existing core of necessity commercial real estate assets leased to creditworthy tenants under long-term net leases with a portfolio of commercial mortgage loans and other credit investments in which our sponsor and its affiliates have expertise. In order to execute on this strategy, over the next 12-24 months we intend, subject to market conditions, to sell a substantial portion of our anchored shopping centers and certain single tenant properties and redeploy the proceeds from those sales into the origination, participation in, and acquisition of commercial mortgage loans and other commercial real estate debt investments, commercial mortgage backed securities (“CMBS”), corporate credit investments, and other commercial real estate investments. Assuming the successful repositioning of our portfolio, we then intend to pursue a

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listing of our common stock on a national securities exchange. However, we cannot make assurances that we will successfully reposition our portfolio as a mortgage REIT in the time frame expected or at all, or that we will pursue a listing of our common stock in the time frame indicated, or at all. As of June 30, 2019, our loan portfolio consisted of eight loans with a net book value of $145.5 million.
Operating Highlights and Key Performance Indicators
2019 Activity
•
Acquired four senior mezzanine loans secured by a pledge of the equity interests in the portfolio of four condominium properties with a principal balance of $62.1 million.
•
Disposed of 39 properties, consisting of 35 retail properties and four anchored shopping centers, excluding a related outparcel of land, for an aggregate sales price of $163.9 million.
•
Total debt decreased by $97.7 million, from $2.53 billion to $2.43 billion.
Portfolio Information
As of June 30, 2019, we owned 852 properties located in 45 states, the gross rentable square feet of which was 95.1% leased, including any month-to-month agreements, with a weighted average lease term remaining of 8.8 years. As of June 30, 2019, no single tenant or geographic location accounted for greater than 10% of our 2019 annualized rental income. As of June 30, 2019, we had certain industry concentrations in our property holdings. In particular, we had tenants in the discount store and pharmacy industries, which accounted for 14% and 10%, respectively, of our 2019 annualized rental income.
The following table shows the property statistics of our real estate assets as of June 30, 2019 and 2018:
 
As of June 30,
 
2019
 
2018
Number of commercial properties
852

 
897

Rentable square feet (in thousands) (1)
25,259

 
26,793

Percentage of rentable square feet leased
95.1
%
 
96.3
%
Percentage of investment-grade tenants (2)
38.5
%
 
39.1
%
 
 
 
 
 
 
 
 
 
 
(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 weighted average credit rating is weighted based on annualized rental income and is for only those tenants rated by Standard & Poor’s.
During the three and six months ended June 30, 2019 and 2018, the Company did not acquire any properties.
Results of Operations
Overview
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact on our results from the acquisition, management and operation of properties other than those listed in the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2018.
Same Store Analysis
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate assets. We review our stabilized operating results, measured by net operating income (“NOI”), from properties that we owned for the entirety of both the current and prior year reporting periods, referred to as “same store” properties, and we believe that the presentation of operating results for same store properties provides useful information to stockholders. NOI is a supplemental non-GAAP financial measure of a real estate company’s operating performance. NOI is considered by management to be a helpful supplemental performance measure, as it enables management to evaluate the impact of occupancy, rents, leasing activity, and other controllable property operating results at our real estate properties, and it provides a consistent method for the comparison of our properties. We define NOI as operating revenues less operating expenses, which exclude (i) depreciation and amortization, (ii) interest expense and other non-property related revenue and expense items such as (a)

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general and administrative expenses, (b) advisory fees, (c) transaction-related expenses and (d) interest income. Our NOI may not be comparable to that of other REITs and should not be considered to be more relevant or accurate in evaluating our operating performance than the current GAAP methodology used in calculating net income (loss). 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.
Comparison of the Three Months Ended June 30, 2019 and 2018
A total of 850 properties were acquired before April 1, 2018 and represent our “same store” properties during the three months ended June 30, 2019 and 2018. “Non-same store” properties, for purposes of the table below, includes properties acquired on or after April 1, 2018. The following table details the components of net operating income broken out between same store and non-same store properties (dollar amounts in thousands):
 
Total
 
Same Store
 
Non-Same Store (1)
 
For the Three Months Ended June 30,
 
For the Three Months Ended June 30,
 
For the Three Months Ended June 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Rental and other property income
$
100,450

 
$
107,395

 
$
(6,945
)
 
$
100,337

 
$
102,090

 
$
(1,753
)
 
$
113

 
$
5,305

 
$
(5,192
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
6,867

 
6,501

 
366

 
7,340

 
5,970

 
1,370

 
(473
)
 
531

 
(1,004
)
Real estate tax expenses
9,444

 
9,463

 
(19
)
 
9,438

 
8,974

 
464

 
6

 
489

 
(483
)
Total property operating expenses
16,311

 
15,964

 
347

 
16,778

 
14,944

 
1,834

 
(467
)
 
1,020

 
(1,487
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net operating income
$
84,139

 
$
91,431

 
$
(7,292
)
 
$
83,559

 
$
87,146

 
$
(3,587
)
 
$
580

 
$
4,285

 
$
(3,705
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
5,079

 
$
—

 
$
5,079

 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
(3,293
)
 
(3,754
)
 
461

 
 
 
 
 
 
 
 
 
 
 
 
Advisory fees and expenses
(10,191
)
 
(10,855
)
 
664

 
 
 
 
 
 
 
 
 
 
 
 
Transaction-related expenses
(1,517
)
 
(168
)
 
(1,349
)
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
(30,142
)
 
(37,491
)
 
7,349

 
 
 
 
 
 
 
 
 
 
 
 
Impairment
(13,082
)
 
—

 
(13,082
)
 
 
 
 
 
 
 
 
 
 
 
 
Gain on disposition of real estate, net
3,460

 
1,987

 
1,473

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense and other, net
(25,447
)
 
(23,325
)
 
(2,122
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
9,006

 
$
17,825

 
$
(8,819
)
 
 
 
 
 
 
 
 
 
 
 
 
______________________
(1)
Includes income from properties disposed of subsequent to April 1, 2018.
Net Operating Income
Same store property net operating income decreased $3.6 million during the three months ended June 30, 2019, as compared to the same period in 2018. The decrease was primarily due to the decrease in same store occupancy to 95.1% as of June 30, 2019 from 96.2% as of June 30, 2018. Additionally, tenant bankruptcies at 17 same store properties accounted for $977,000 of the net decrease in rental and other property income for the three months ended June 30, 2019.
Non-same store property net operating income decreased $3.7 million during the three months ended June 30, 2019, as compared to the same period in 2018. The decrease is primarily due to the disposition of 47 properties subsequent to June 30, 2018.
Interest Income
The increase in interest income of $5.1 million for the three months ended June 30, 2019, compared to the same period in 2018, was due to the purchase and origination of eight mezzanine loans subsequent to June 30, 2018.
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.

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The decrease in general and administrative expenses of $461,000 for the three months ended June 30, 2019, compared to the same period in 2018, was primarily due to a decrease in operating expense reimbursements to our advisor, offset by an increase in proxy expenses for our annual meeting of stockholders.
Advisory Fees and Expenses
Pursuant to the advisory agreement with CR IV Management and based upon the amount of our current invested assets, we are required to pay to CR IV Management 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 the average invested assets over $4.0 billion. Additionally, we may be required to reimburse certain expenses incurred by CR IV Management in providing advisory services, subject to limitations as set forth in the advisory agreement.
The decrease in advisory fees and expenses of $664,000 during the three months ended June 30, 2019, as compared to the same period in 2018, was due to a decrease in our average invested assets to $5.0 billion over the three months ended June 30, 2019, compared to $5.4 billion over the three months ended June 30, 2018.
Transaction-Related Expenses
We pay CR IV Management 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. We also reimburse CR IV Management or its affiliates for transaction-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, including a majority of our independent directors, as commercially competitive, fair and reasonable to us. Other transaction-related expenses, such as advisor reimbursements for disposition activities, are expensed as incurred.
The increase in transaction-related expenses of $1.3 million during the three months ended June 30, 2019, as compared to the same period in 2018, was primarily due to acquisition fees paid to the advisor related to the purchase of $62.1 million of loans held-for-investment and reimbursements to our advisor for expenses related to the five dispositions that occurred during the three months ended June 30, 2019 for an aggregate gross sales price of $39.6 million, compared to 11 dispositions during the three months ended June 30, 2018 for an aggregate gross sales price of $15.9 million.
Depreciation and Amortization
The decrease in depreciation and amortization expenses of $7.3 million during the three months ended June 30, 2019, as compared to the same period in 2018, was primarily due to the disposition of 47 properties subsequent to June 30, 2018, offset by recognizing a full period of depreciation and amortization expenses on the one property acquired in 2018.
Impairment
Impairments increased $13.1 million during the three months ended June 30, 2019, as compared to the same period in 2018, due to six properties that were deemed to be impaired, resulting in impairment charges of $13.1 million during the three months ended June 30, 2019, compared to no impaired properties during the six months ended June 30, 2018.
Gain on Disposition of Real Estate, Net
The increase in gain on disposition of real estate during the three months ended June 30, 2019, as compared to the same period in 2018, was primarily due to the disposition of five properties for a gain of $3.5 million during the three months ended June 30, 2019 compared to the disposition of 11 properties for a gain of $2.0 million during the three months ended June 30, 2018.
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 $2.1 million for the three months ended June 30, 2019, as compared to the same period in 2018, was primarily due to an increase in the weighted average interest rate from 3.7% as of June 30, 2018 to 3.9% as of June 30, 2019.

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Comparison of the Six Months Ended June 30, 2019 and 2018
A total of 850 properties were acquired before January 1, 2018 and represent our “same store” properties during the six months ended June 30, 2019 and 2018. “Non-same store” properties, for purposes of the table below, includes properties acquired on or after January 1, 2018. The following table details the components of net operating income broken out between same store and non-same store properties (dollar amounts in thousands):
 
Total
 
Same Store
 
Non-Same Store (1)
 
For the Six Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Rental and other property income
$
205,212

 
$
216,898

 
$
(11,686
)
 
$
200,878

 
$
205,684

 
$
(4,806
)
 
$
4,334

 
$
11,214

 
$
(6,880
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
16,184

 
15,059

 
1,125

 
15,669

 
13,925

 
1,744

 
515

 
1,134

 
(619
)
Real estate tax expenses
18,862

 
19,017

 
(155
)
 
18,667

 
18,042

 
625

 
195

 
975

 
(780
)
Total property operating expenses
35,046

 
34,076

 
970

 
34,336

 
31,967

 
2,369

 
710

 
2,109

 
(1,399
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net operating income
$
170,166

 
$
182,822

 
$
(12,656
)
 
$
166,542

 
$
173,717

 
$
(7,175
)
 
$
3,624

 
$
9,105

 
$
(5,481
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
9,577

 
$
—

 
$
9,577

 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
(6,740
)
 
(7,070
)
 
330

 
 
 
 
 
 
 
 
 
 
 
 
Advisory fees and expenses
(20,210
)
 
(21,443
)
 
1,233

 
 
 
 
 
 
 
 
 
 
 
 
Transaction-related expenses
(1,708
)
 
(203
)
 
(1,505
)
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
(62,134
)
 
(72,482
)
 
10,348

 
 
 
 
 
 
 
 
 
 
 
 
Impairment
(33,155
)
 
—

 
(33,155
)
 
 
 
 
 
 
 
 
 
 
 
 
Gain on disposition of real estate, net
13,400

 
2,251

 
11,149

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense and other, net
(51,339
)
 
(46,977
)
 
(4,362
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
17,857

 
$
36,898

 
$
(19,041
)
 
 
 
 
 
 
 
 
 
 
 
 
______________________
(1)
Includes income from properties disposed of subsequent to January 1, 2018.
Net Operating Income
Same store property net operating income decreased $7.2 million during the six months ended June 30, 2019, as compared to the same period in 2018. The decrease was primarily due to the decrease in same store occupancy to 95.1% as of June 30, 2019 from 96.2% as of June 30, 2018. Additionally, tenant bankruptcies at 17 same store properties accounted for $2.6 million of the net decrease in rental and other property income for the six months ended June 30, 2019.
Non-same store property net operating income decreased $5.5 million during the six months ended 2019, as compared to the same period in 2018. The decrease is primarily due to the disposition of 47 properties subsequent to June 30, 2018.
Interest Income
The increase in interest income of $9.6 million for the six months ended June 30, 2019, compared to the same period in 2018, was due to the purchase and origination of eight mezzanine loans subsequent to June 30, 2018.
General and Administrative Expenses
The decrease in general and administrative expenses of $330,000 for the six months ended June 30, 2019, compared to the same period in 2018, was primarily due to a decrease in operating expense reimbursements to our advisor.
Advisory Fees and Expenses
The decrease in advisory fees and expenses of $1.2 million during the six months ended June 30, 2019, as compared to the same period in 2018, was due to a decrease in our average invested assets to $5.1 billion over the six months ended June 30, 2019, compared to $5.4 billion over the six months ended June 30, 2018.

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Transaction-Related Expenses
The increase in transaction-related expenses of $1.5 million during the six months ended June 30, 2019, as compared to the same period in 2018, was primarily due to acquisition fees paid to the advisor related to the purchase of $62.1 million of loans held-for-investment and reimbursements to our advisor related to the 39 dispositions that occurred during the six months ended June 30, 2019, compared to 12 dispositions during the six months ended June 30, 2018.
Depreciation and Amortization
The decrease in depreciation and amortization expenses of $10.3 million during the six months ended June 30, 2019, as compared to the same period in 2018, was primarily due to the disposition of 47 properties subsequent to June 30, 2018, offset by recognizing a full period of depreciation and amortization expenses on the one property acquired in 2018.
Impairment
Impairments increased $33.2 million during the six months ended June 30, 2019, as compared to the same period in 2018, due to 13 properties that were deemed to be impaired, resulting in impairment charges of $33.2 million during the six months ended June 30, 2019, compared to no impaired properties during the six months ended June 30, 2018.
Gain on Disposition of Real Estate, Net
The increase in gain on disposition of real estate during the six months ended June 30, 2019, as compared to the same period in 2018, was primarily due to the disposition of 39 properties for a gain of $13.4 million during the six months ended June 30, 2019 compared to the disposition of 12 properties for a gain of $2.3 million during the six months ended June 30, 2018.
Interest Expense and Other, Net
The increase in interest expense and other, net, of $4.4 million for the six months ended June 30, 2019, as compared to the same period in 2018, was primarily due to an increase in the weighted average interest rate from 3.7% as of June 30, 2018 to 3.9% as of June 30, 2019.
Distributions
On a quarterly basis, our Board authorizes a daily distribution for the succeeding quarter. The Board authorized the following daily distribution amounts per share for the periods indicated below:
Period Commencing
 
Period Ending
 
Daily Distribution Amount
April 14, 2012
 
December 31, 2012
 
$0.001707848
January 1, 2013
 
December 31, 2015
 
$0.001712523
January 1, 2016
 
December 31, 2016
 
$0.001706776
January 1, 2017
 
December 31, 2019
 
$0.001711452
As of June 30, 2019, we had distributions payable of $16.0 million.
The following table presents distributions and sources of distributions for the periods indicated below (dollar amounts in thousands):
 
Six Months Ended June 30,
 
2019
 
2018
 
Amount
 
Percent
 
Amount
 
Percent
Distributions paid in cash
$
54,663

 
56
%
 
$
49,975

 
51
%
Distributions reinvested
42,320

 
44
%
 
47,067

 
49
%
Total distributions
$
96,983

 
100
%
 
$
97,042

 
100
%
Sources of distributions:
 
 
 
 
 
 
 
Net cash provided by operating activities (1)
$
96,983

 
100
%
 
$
97,042

 
100
%

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____________________________________
(1)
Includes cash flows from operating activities in excess of distributions from prior periods of $12.9 million. Net cash provided by operating activities for the six months ended June 30, 2019 and 2018 was $84.1 million and $109.6 million, respectively.
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 20.7 million shares for $178.7 million in excess of the net proceeds we received from the issuance of shares under the Secondary DRIP Offering during the three months ended June 30, 2019. Management, in its discretion, limited the amount of shares redeemed for the three months ended June 30, 2019 to an amount equal to net proceeds we received from the sale of shares pursuant to the Secondary DRIP Offering during the respective period. During the six months ended June 30, 2019, we received valid redemption requests under our share redemption program totaling approximately 42.7 million shares, of which we redeemed 2.4 million shares as of June 30, 2019 for $21.1 million (at an average redemption price of $8.65 per share) and 2.4 million shares were redeemed subsequent to June 30, 2019 for $20.9 million at an average redemption price of $8.65 per share. The remaining redemption requests relating to approximately 37.9 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of our share redemption program then in effect. The share redemptions were funded with proceeds from the Secondary DRIP Offering.
Liquidity and Capital Resources
General
We expect to utilize proceeds from real estate dispositions, cash flow from operations and future proceeds from secured or unsecured financing to complete future acquisitions and for general corporate uses. The sources of our operating cash flows will primarily be provided by the rental and other property 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 June 30, 2019, we had $165.9 million in unused capacity under the Credit Facility, subject to borrowing availability. As of June 30, 2019, we also had cash and cash equivalents of $3.4 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 assets 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 $269.5 million within the next 12 months. We expect to meet our short-term liquidity requirements through cash proceeds from real estate asset dispositions, 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 and loan originations. Operating cash flows are expected to increase as additional properties are added to our portfolio. 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 assets 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.

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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, loan originations, certain capital expenditures, repayments of outstanding debt or distributions and redemptions to our stockholders.
Contractual Obligations
As of June 30, 2019, we had debt outstanding with a carrying value of $2.4 billion and a weighted average interest rate of 3.9%. See Note 8 — 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 June 30, 2019 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)
$
1,128,618

 
$
199,679

 
$
217,436

 
$
584,444

 
$
127,059

Interest payments — fixed rate debt (3)
143,374

 
42,773

 
63,413

 
34,229

 
2,959

Principal payments — variable rate debt
69,800

 
69,800

 
—

 
—

 
—

Interest payments — variable rate debt (4)
1,202

 
1,202

 
—

 
—

 
—

Principal payments — credit facility
1,233,500

 
—

 
1,233,500

 
—

 
—

Interest payments — credit facility (5)
123,738

 
48,560

 
75,178

 
—

 
—

Total
$
2,700,232

 
$
362,014

 
$
1,589,527

 
$
618,673

 
$
130,018

____________________________________
(1)
The table does not include amounts due to CR IV Management 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 $287,000 as of June 30, 2019.
(3)
As of June 30, 2019, we had $129.1 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 June 30, 2019, we had variable rate debt outstanding of $69.8 million with a weighted average interest rate of 5.5%. We used the weighted average interest rate to calculate the debt payment obligations in future periods.
(5)
As of June 30, 2019, the Term Loan outstanding totaled $1.05 billion, $811.7 million of which is subject to interest rate swap agreements. As of June 30, 2019, the weighted average all-in interest rate for the Swapped Term Loan was 3.8%. The remaining $421.8 million outstanding under the Credit Facility had a weighted average interest rate of 4.2% as of June 30, 2019.
We expect to incur additional borrowings in the future to acquire additional properties and other real estate-related assets. 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 a justification for such excess borrowing. Consistent with CR IV Management’s approach toward the moderate use of leverage, our 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 the independent directors and disclosed to our stockholders in the next quarterly report along with a justification for such excess borrowing. As of June 30, 2019, our ratio of debt to total gross assets net of gross intangible lease liabilities was 50.1% and our ratio of debt to the fair market value of our gross assets was 48.7%. Fair market value is based on the estimated market value of our real estate assets as of December 31, 2017 that were used to determine our estimated per share NAV, and for those assets acquired from January 1, 2018 through June 30, 2019 is based on the purchase price.

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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 stockholders. 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 June 30, 2019, 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 50.1%. 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 June 30, 2019 (dollar amounts in thousands):
 
 
Balance as of
 
 
June 30, 2019
Notes payable and credit facility, net
 
$
2,421,283

Deferred costs and net premiums (1)
 
10,635

Less: Cash and cash equivalents
 
(3,399
)
Net debt
 
$
2,428,519

 
 
 
Gross real estate and related assets, net (2)
 
$
4,851,644

Net debt leverage ratio
 
50.1
%
______________________
(1) Deferred costs relate to mortgage notes payable and the term portion of the Credit Facility.
(2) Net of gross intangible lease liabilities. Includes loans held-for-investment principal balance of $143.3 million.
Cash Flow Analysis
Operating Activities. Net cash provided by operating activities decreased by $25.6 million for the six months ended June 30, 2019, as compared to the same period in 2018. The change was primarily due to lower net income after non-cash adjustments due to the disposition of 47 properties subsequent to June 30, 2018. See “— Results of Operations” for a more complete discussion of the factors impacting our operating performance.
Investing Activities. Net cash provided by investing activities increased by $89.9 million for the six months ended June 30, 2019, as compared to the same period in 2018. The increase was primarily due to an increase in proceeds from the disposition of real estate assets of $141.6 million and proceeds from loans held-for-investment of $11.1 million during the six months ended June 30, 2019, compared to the same period in 2018. These changes were offset by the purchase of four senior mezzanine loans for an aggregate cost of $62.8 million during the six months ended June 30, 2019.
Financing Activities. Net cash used in financing activities increased by $71.5 million for the six months ended June 30, 2019, compared to the same period in 2018. The increase was primarily due to an increase in net repayments on the Credit Facility and notes payable of $71.8 million during the six months ended June 30, 2019, compared to the same period in 2018.
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 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 taxes related to the operations of properties in certain locations, which have been provided for in our accompanying condensed consolidated financial statements.

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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, 2018. 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, 2018. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2018 and related notes thereto.
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate assets may not be recoverable. Impairment indicators that we consider 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; changes in anticipated holding periods; or other circumstances. We are in the process of determining if anticipated holding periods for certain properties may materially differ from the initial intended holding periods for such properties, which could result in an impairment charge in the future.
Related-Party Transactions and Agreements
We have entered into agreements with CR IV Management or its affiliates whereby we agree to pay certain fees to, or reimburse certain expenses of, CR IV Management 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
Richard S. Ressler, the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, is the chairman of the board, chief executive officer and president of CCIT III and CIM Income NAV, a director of CCPT V and CCIT II, and vice president of CR IV Management. One of our directors, Avraham Shemesh, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, serves as the chairman of the board of CCIT II and CCPT V and as a director of CCIT III and CIM Income NAV, and is president and treasurer of CR IV Management. One of our independent directors, W. Brian Kretzmer, also serves as an independent director of CCIT III and CIM Income NAV. Nathan D. DeBacker, our chief financial officer and treasurer, who is also an officer of other real estate programs sponsored by CCO Group, is a vice president of CR IV Management and is an officer of certain of its affiliates. In addition, affiliates of CR IV Management act as an advisor to CCPT V, CCIT II, CCIT III and CIM Income NAV, all of which are public, non-listed REITs sponsored or operated by CCO Group. As such, there may be conflicts of interest where CR IV Management or its affiliates, while serving in the capacity as sponsor, general partner, officer, director, key personnel and/or advisor for CIM or another real estate program sponsored or operated by CIM or CCO Group, 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 Management and these other real estate programs sponsored or

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operated by CCO Group 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, 2018.
Off-Balance Sheet Arrangements
As of June 30, 2019 and December 31, 2018, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
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 June 30, 2019, we had variable rate debt of $491.6 million, excluding any debt subject to interest rate swap agreements, and therefore, we are exposed to interest rate changes in LIBOR. As of June 30, 2019, an increase or decrease of 50 basis points in interest rates would result in an increase or decrease in interest expense of $2.5 million per annum.
As of June 30, 2019, we had six interest rate swap agreements outstanding, which mature on various dates from October 2020 through July 2021, with an aggregate notional amount of $940.8 million and an aggregate fair value of the net derivative liability of $3.5 million. The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of June 30, 2019, an increase of 50 basis points in interest rates would result in a change of $7.6 million to the fair value of the net derivative liability, resulting in a net derivative asset of $4.1 million. A decrease of 50 basis points in interest rates would result in a $7.8 million change to the fair value of the net derivative liability, resulting in a net derivative liability of $11.3 million. See Note 7 — Derivative Instruments and Hedging Activities to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for more detailed discussion about our derivative instruments.
As the information presented above includes only those exposures that existed as of June 30, 2019, 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.

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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.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of June 30, 2019 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 June 30, 2019, 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 June 30, 2019 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
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, 2018.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
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 redemption requests of approximately 20.7 million shares for $178.7 million in excess of the net proceeds we received from the issuance of shares under the Secondary DRIP Offering during the three months ended June 30, 2019. Management, in its discretion, limited the amount of shares redeemed for the three months ended June 30, 2019 to shares received from the Secondary DRIP Offering during the period. The estimated per share NAV of $8.65 determined by the Board as of December 31, 2018 serves as the most recent estimated value for purposes of the share redemption program, effective March 26, 2019, 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 June 30, 2019, 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
April 1, 2019 - April 30, 2019
 
—

 
$
—

 


 
(1)
May 1, 2019 - May 31, 2019
 
2,440,926

 
$
8.65

 
2,440,926

 
(1)
June 1, 2019 - June 30, 2019
 
58

 
$
8.65

 
58

 
(1)
Total
 
2,440,984

 
 
 
2,440,984

 
(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 June 30, 2019 (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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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: August 13, 2019


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