COLE CORPORATE INCOME TRUST, INC. - FORM 10-Q - November 13, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 000-54940
 
 
 
 
COLE CORPORATE INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Maryland
 
27-2431980
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
2325 East Camelback Road, Suite 1100
Phoenix, Arizona 85016
 
(602) 778-8700
(Address of principal executive offices; zip code)
 
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
o
 
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
x  (Do not check if smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o No  x
As of November 12, 2014, there were approximately 198.4 million shares of common stock, par value $0.01, of Cole Corporate Income Trust, Inc. outstanding.
 
 


COLE CORPORATE INCOME TRUST, INC.
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements

COLE CORPORATE INCOME TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
 
Investment in real estate assets:
 
 
 
 
 Land
 
$
305,996

 
$
266,088

 Buildings and improvements, less accumulated depreciation of $69,201 and $25,289, respectively
 
2,026,451

 
1,815,652

 Intangible lease assets, less accumulated amortization of $29,436 and $10,935, respectively
 
281,621

 
264,485

 Total investment in real estate assets, net
 
2,614,068

 
2,346,225

 Cash and cash equivalents
 
29,057

 
64,073

 Restricted cash
 
6,257

 
4,853

 Rents and tenant receivables
 
33,004

 
14,388

Derivative asset, prepaid expenses, and other assets
 
4,242

 
4,654

 Deferred financing costs, less accumulated amortization of $3,978 and $1,841, respectively
 
10,102

 
11,484

Total assets
 
$
2,696,730

 
$
2,445,677

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Credit facility and notes payable
 
$
1,012,616

 
$
752,616

Accounts payable and accrued expenses
 
17,013

 
12,921

Due to affiliates
 
532

 
2,321

Acquired below market lease intangibles, less accumulated amortization of $4,580 and $1,943, respectively
 
44,397

 
34,435

Distributions payable
 
10,568

 
10,650

Deferred rental income and other liabilities
 
12,233

 
10,877

Total liabilities
 
1,097,359

 
823,820

Commitments and contingencies
 


 


Redeemable common stock and noncontrolling interest
 
79,636

 
33,272

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

 
—

Common stock, $0.01 par value; 490,000,000 shares authorized, 197,817,978 and 192,919,054 shares issued and outstanding, respectively
 
1,978

 
1,929

Capital in excess of par value
 
1,696,276

 
1,696,395

Accumulated distributions in excess of earnings
 
(180,512
)
 
(111,977
)
Accumulated other comprehensive income
 
1,993

 
2,238

Total stockholders’ equity
 
1,519,735

 
1,588,585

Total liabilities and stockholders’ equity
 
$
2,696,730

 
$
2,445,677

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

3

COLE CORPORATE INCOME TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental and other property income
$
49,883

 
$
21,195

 
$
143,833

 
$
40,016

Tenant reimbursement income
8,888

 
4,394

 
25,013

 
7,925

Total revenue
58,771

 
25,589

 
168,846

 
47,941

Expenses:
 
 
 
 
 
 
 
General and administrative expenses
1,794

 
1,746

 
5,198

 
3,411

Property operating expenses
9,961

 
4,438

 
27,719

 
8,000

Advisory fees and expenses
5,131

 
2,387

 
14,760

 
4,445

Acquisition and merger-related expenses
4,401

 
11,754

 
11,455

 
29,691

Depreciation
15,269

 
7,028

 
43,912

 
13,068

Amortization
6,347

 
2,854

 
18,175

 
5,439

Total operating expenses
42,903

 
30,207

 
121,219

 
64,054

Operating income (loss)
15,868

 
(4,618
)
 
47,627

 
(16,113
)
Other income (expense):
 
 
 
 
 
 
 
Interest and other income
21

 
21

 
81

 
34

Interest expense
(7,442
)
 
(3,113
)
 
(20,810
)
 
(7,919
)
Total other expense
(7,421
)
 
(3,092
)
 
(20,729
)
 
(7,885
)
Net income (loss)
8,447

 
(7,710
)
 
26,898

 
(23,998
)
Net income allocated to noncontrolling interest
54

 
—

 
157

 
—

Net income (loss) attributable to the Company
$
8,393

 
$
(7,710
)
 
$
26,741

 
$
(23,998
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
197,657,793

 
107,828,254

 
195,975,569

 
58,430,293

Net income (loss) per common share:
 
 
 
 
 
 
 
Basic and diluted
$
0.04

 
$
(0.07
)
 
$
0.14

 
$
(0.41
)
Distributions declared per common share
$
0.16

 
$
0.16

 
$
0.49

 
$
0.49

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

4

COLE CORPORATE INCOME TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
8,447

 
$
(7,710
)
 
$
26,898

 
$
(23,998
)
Net income allocated to noncontrolling interest
54

 
—

 
157

 
—

Net income (loss) attributable to the Company
8,393

 
(7,710
)
 
26,741

 
(23,998
)
Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate swaps
2,744

 
(559
)
 
(245
)
 
(559
)
Total comprehensive income (loss) attributable to the Company
$
11,137

 
$
(8,269
)
 
$
26,496

 
$
(24,557
)
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.


5

COLE CORPORATE INCOME TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)

 
 
 
Common Stock
 
Capital in
Excess
of Par Value
 
Accumulated
Distributions
in Excess of
Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
 
Number of
Shares
 
Par
Value
 
Balance, January 1, 2014
 
192,919,054

 
$
1,929

 
$
1,696,395

 
$
(111,977
)
 
$
2,238

 
$
1,588,585

Issuance of common stock
 
5,363,314

 
54

 
50,891

 
—

 
—

 
50,945

Distributions to investors
 
—

 
—

 
—

 
(95,276
)
 
—

 
(95,276
)
Redemptions and cancellations of common stock
 
(464,390
)
 
(5
)
 
(4,525
)
 
—

 
—

 
(4,530
)
Changes in redeemable common stock
 
—

 
—

 
(46,485
)
 
—

 
—

 
(46,485
)
Comprehensive income (loss)
 
—

 
—

 
—

 
26,741

 
(245
)
 
26,496

Balance, September 30, 2014
 
197,817,978

 
$
1,978

 
$
1,696,276

 
$
(180,512
)
 
$
1,993

 
$
1,519,735

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

6

COLE CORPORATE INCOME TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
26,898

 
$
(23,998
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation
43,912

 
13,068

Amortization of intangible lease assets and below market lease intangibles, net
15,864

 
4,741

Amortization of deferred financing costs
2,137

 
1,021

Changes in assets and liabilities:
 
 
 
Rents and tenant receivables
(18,616
)
 
(7,383
)
Derivative asset, prepaid expenses, and other assets
612

 
(887
)
Accounts payable and accrued expenses
4,291

 
6,329

Deferred rental income and other liabilities
787

 
3,997

Due to affiliates
(1,789
)
 
6,383

Net cash provided by operating activities
74,096

 
3,271

Cash flows from investing activities:
 
 
 
Investment in real estate assets and capital expenditures
(317,855
)
 
(1,104,819
)
Payment of property escrow deposits
(5,750
)
 
(18,314
)
Refund of property escrow deposits
5,875

 
17,139

Change in restricted cash
(1,404
)
 
(17,658
)
Net cash used in investing activities
(319,134
)
 
(1,123,652
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
—

 
1,483,225

Offering costs on issuance of common stock
—

 
(152,333
)
Redemptions of common stock
(4,530
)
 
(514
)
Proceeds from credit facility and notes payable
304,000

 
670,360

Repayment of credit facility and notes payable
(44,000
)
 
(636,053
)
Distributions to investors
(44,413
)
 
(9,482
)
Escrowed investor proceeds
—

 
15,657

Deferred financing costs paid
(755
)
 
(4,216
)
Payment of loan deposit
—

 
(1,200
)
Refund of loan deposit
—

 
1,150

Distributions to noncontrolling interest
(280
)
 
—

Net cash provided by financing activities
210,022

 
1,366,594

Net (decrease) increase in cash and cash equivalents
(35,016
)
 
246,213

Cash and cash equivalents, beginning of period
64,073

 
12,188

Cash and cash equivalents, end of period
$
29,057

 
$
258,401

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Distributions declared and unpaid
$
10,568

 
$
7,654

Accrued capital expenditures
$
54

 
$
75

Common stock issued through distribution reinvestment plan
$
50,945

 
$
12,247

Net unrealized loss on interest rate swaps
$
(245
)
 
$
(559
)
Supplemental cash flow disclosures:
 
 
 
Interest paid
$
18,598

 
$
6,634

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

7

COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 30, 2014
NOTE 1 — ORGANIZATION AND BUSINESS
Cole Corporate Income Trust, Inc. (the “Company”) is a Maryland corporation that was formed on April 6, 2010, which has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes. The Company is the sole general partner of and owns, directly or indirectly, 100% of the partnership interests in Cole Corporate Income Operating Partnership, LP, a Delaware limited partnership. The Company is externally managed by Cole Corporate Income Advisors, LLC, a Delaware limited liability company (“CCI Advisors”), an affiliate of the Company’s sponsor, Cole Capital®, which is a trade name used to refer to a group of affiliated entities directly or indirectly controlled by American Realty Capital Properties, Inc. (“ARCP”), a self-managed publicly traded REIT, organized as a Maryland corporation and listed on The NASDAQ Global Select Market. On February 7, 2014, ARCP acquired Cole Real Estate Investments, Inc. (“Cole”), which, prior to its acquisition, indirectly owned and/or controlled the Company’s external advisor, CCI Advisors, the Company’s dealer manager, Cole Capital Corporation (“CCC”), the Company’s property manager, CREI Advisors, LLC (“CREI Advisors”), and the Company’s sponsor, Cole Capital. As a result of ARCP’s acquisition of Cole, ARCP indirectly owns and/or controls CCI Advisors, CCC, CREI Advisors and Cole Capital.
As of September 30, 2014, the Company owned 87 properties, including a property owned through a consolidated joint venture arrangement, comprising 18.3 million rentable square feet of income-producing necessity corporate office and industrial properties located in 30 states. As of September 30, 2014, the rentable space at these properties was 100% leased.
The Company ceased offering shares of common stock in its $2.975 billion initial public offering (the “Offering”) on November 21, 2013. At the completion of the Offering, a total of approximately 192.4 million shares of common stock had been issued, including approximately 189.8 million shares issued in the primary portion of the Offering and approximately 2.6 million shares issued pursuant to a distribution reinvestment plan (the “DRIP”).
In addition, the Company registered 10.0 million shares of common stock under the DRIP pursuant to a registration statement filed on Form S-3 (Registration No. 333-191400) (the “DRIP Offering” and collectively with the Offering, the “Offerings”), which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on September 26, 2013 and automatically became effective with the SEC upon filing.
On August 20, 2014, the Board of Directors of the Company (the “Board”), including all of the Company’s independent directors, resolved to suspend the Company’s DRIP and the Company’s share redemption program (the “SRP”). Beginning with the distributions previously authorized by the Board for the month of July 2014, which were paid in August 2014, and continuing until such time as the Board may approve the resumption of the DRIP, if ever, all distributions authorized by the Board will be paid to the Company’s stockholders in cash. As a result of the suspension of the share redemption program, all redemption requests received from stockholders during the second quarter of 2014 and determined by the Company to be in good order on or before September 30, 2014 were honored in accordance with the terms, conditions and limitations of the share redemption program. The Company did not process or accept any requests for redemption that were not in good order on or before that date.
On August 30, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Select Income REIT, a Maryland real estate investment trust (“SIR”) and SC Merger Sub LLC, a Maryland limited liability company and wholly-owned subsidiary of SIR (“Merger Sub”). The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions, the Company will be merged with and into Merger Sub (the “Merger”), with Merger Sub surviving as a wholly-owned subsidiary of SIR and the separate corporate existence of the Company will cease. Refer to Note 2 to these condensed consolidated unaudited financial statements for further discussion regarding the Merger.
Effective September 5, 2014, Brian S. Block was appointed executive vice president, chief financial officer and treasurer of the Company by the Company’s board of directors. Mr. Block replaced D. Kirk McAllaster, Jr., who gave notice of his retirement from Cole Capital on August 29, 2014, including from his positions with the Company. Subsequent to September 30, 2014, Mr. Block resigned as the Company’s executive vice president, chief financial officer and treasurer. Refer to Note 11 to these condensed consolidated unaudited financial statements for further discussion regarding executive appointments and resignations.
As of September 30, 2014, the Company had issued approximately 198.4 million shares of its common stock in the Offerings for gross offering proceeds of $2.0 billion, before share redemptions of $5.8 million and offering costs, selling commissions and dealer manager fees of $194.4 million.

8
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


NOTE 2 - MERGER AGREEMENT
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each outstanding share of common stock, par value $0.01, of the Company (“Company Common Stock”) will be converted into the right to receive either: (i) $10.50 per share in cash (the “Cash Consideration”); or (ii) 0.360 of a common share of beneficial interest, par value $0.01, of SIR (“SIR Common Shares”) (the “Share Consideration” and together with the Cash Consideration, the “Merger Consideration”). Each holder of Company Common Stock may elect to receive Cash Consideration or Share Consideration. Each share of Company Common Stock without an election for Cash Consideration or Share Consideration shall receive Share Consideration. The maximum aggregate number of shares of Company Common Stock that may be converted into the right to receive Cash Consideration is 60% of the shares of Company Common Stock issued and outstanding immediately prior to the Effective Time (the “Maximum Cash Consideration Number”). The minimum aggregate number of the shares of Company Common Stock that may be converted into the right to receive Cash Consideration is 40% of the shares of Company Common Stock issued and outstanding immediately prior to the Effective Time (the “Minimum Cash Consideration Number”). If Cash Consideration exceeds the Maximum Cash Consideration Number or falls below the Minimum Cash Consideration Number, the Cash Consideration and Share Consideration shall be allocated in accordance with certain proration and allocation procedures set forth in the Merger Agreement such that the final allocation of the Merger Consideration does not respectively cause the Cash Consideration allocation to exceed the Maximum Cash Consideration Number or fall below the Minimum Cash Consideration Number.
The Company and SIR agreed to certain customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants by each party to conduct its business in all material respects in the ordinary course of business consistent with past practice, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the Merger.
The consummation of the Merger is subject to certain customary conditions, including, among others, the approval of the Merger by a majority of the outstanding shares of Company Common Stock and the approval of the issuance of SIR Common Shares in connection with the Merger by a majority of the SIR Common Shares cast on such proposal, the absence of certain legal impediments to the consummation of the Merger, the effectiveness of a Registration Statement on Form S-4 (the “Registration Statement”) filed by SIR in connection with the Merger, the receipt of certain third party consents, the absence of a material adverse effect on either the Company or SIR and compliance by the Company and SIR with their respective obligations under the Merger Agreement. The obligations of the parties to consummate the Merger are not subject to any financing condition or the receipt of any financing by SIR. The Merger currently is expected to close during the first quarter of 2015.
The Merger Agreement may be terminated under certain circumstances by the Company, including prior to the approval of the Merger Agreement by the Company’s stockholders, in the event that the Company receives a Competing Proposal that the Company concludes, after following certain procedures and adhering to certain restrictions set forth in the Merger Agreement, is a Superior Proposal (as defined in the Merger Agreement), so long as the Superior Proposal was not the result of a breach by the Company in any material respect of the non-solicitation provisions of the Merger Agreement (such circumstance would require the Company to make the Parent Termination Payment of $75 million (as defined in the Merger Agreement) in order to terminate the Merger Agreement). In addition, SIR may terminate the Merger Agreement under certain circumstances and subject to certain restrictions, including if the Board has made a Company Adverse Recommendation Change (as defined in the Merger Agreement). In addition to a termination by the Company in the event of the receipt of a Superior Proposal, upon a termination of the Merger Agreement in the event of certain other breaches or the consummation of a transaction resulting from a Competing Proposal within 12 months of a permissible termination of the Merger Agreement, the Company will be required to pay the Parent Termination Payment to SIR. If the Merger Agreement is terminated by the Company for SIR’s failure to obtain the approval of SIR’s shareholders, SIR will be required to pay the expenses of the Company in an aggregate amount not to exceed $20 million. If the Merger Agreement is terminated by SIR for the Company’s failure to obtain the approval of the Company’s stockholders, the Company will be required to pay the expenses of SIR in an aggregate amount not to exceed $20 million. In no event shall the Company be required to pay SIR the sum of the Parent Termination Payment and the $20 million expense reimbursement, and any payment of the expense reimbursement shall be credited against any subsequent payment of the Parent Termination Payment.
As of September 30, 2014, the Company had incurred $4.0 million for legal, consulting and other expenses related to the Merger, which were included in acquisition and merger-related expenses in the condensed consolidated unaudited statements of operations.

9
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The condensed consolidated unaudited 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 accounting principles generally accepted in the United States of America (“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, 2013, and related notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The condensed consolidated unaudited 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 unaudited financial statements include the accounts of the Company, its wholly-owned subsidiaries and a consolidated joint venture arrangement in which the Company has a controlling financial interest. All intercompany balances and transactions have been eliminated in such 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”). A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE’s operations.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to 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, its form of ownership interest, its representation on the entity’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and to replace the manager of and/or liquidate the entity. As of September 30, 2014 and December 31, 2013, the Company did not have any interests in a VIE.
The Company continually evaluates the need to consolidate its joint venture arrangement based on standards set forth in GAAP. In determining whether the Company has a controlling interest in a joint venture arrangement and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, power to make decisions and contractual and substantive participating rights of the partners/members as well as whether the entity is a VIE for which the Company may be the primary beneficiary. The Company determined it had a controlling interest in its joint venture arrangement (the “Consolidated Joint Venture”) and therefore met the GAAP requirements for consolidation as of September 30, 2014 and December 31, 2013. As of September 30, 2014 and December 31, 2013, the Consolidated Joint Venture held real estate assets with an aggregate book value of $71.1 million and $73.2 million, respectively.
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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investment in and Valuation of Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. Amounts capitalized to real estate assets consist of the cost of acquisition, excluding acquisition-related expenses, construction and any tenant improvements,

10
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


major improvements and betterments that extend the useful life of the real estate assets and leasing costs. All repairs and maintenance are expensed as incurred.
The Company is required to make subjective assessments as to the useful lives of its depreciable assets. The Company considers the period of future benefit of each respective asset to determine the appropriate useful life of the assets. Real estate assets, other than land, are depreciated or amortized on a straight-line basis. The estimated useful lives of the Company’s real estate assets by class are generally as follows:
 
Buildings
40 years
Tenant improvements
Lesser of useful life or lease term
Intangible lease assets
Lease term
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to, bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value is determined using a discounted cash flow analysis and recent comparable sales transactions. No impairment indicators were identified and no impairment losses were recorded during the nine months ended September 30, 2014 or 2013.
When developing estimates of expected future cash flows, the Company makes certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in estimating expected future cash flows could result in a different determination of the property’s expected future cash flows and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the fair value of the real estate assets.
When a real estate asset is identified by the Company as held for sale, the Company will cease depreciation and amortization of the assets related to the property and estimate the fair value, net of selling costs. If, in management’s opinion, the fair value, net of selling costs, of the asset is less than the carrying amount of the asset, an adjustment to the carrying amount would be recorded to reflect the estimated fair value of the property, net of selling costs. There were no assets identified as held for sale as of September 30, 2014 or December 31, 2013.
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 identified intangible assets and liabilities, consisting of the value of above market and below market leases and the value of in-place leases, based in each case on their respective fair values. Acquisition-related expenses are expensed as incurred. 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 building). The Company obtains an independent appraisal for each real property acquisition. 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 fair values of above market and below market lease intangibles are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) an estimate of fair market lease rates for the corresponding in-place leases, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease including any bargain renewal periods, with respect to a below market lease. The above market and below market lease intangibles are capitalized as intangible lease assets or liabilities, respectively. Above market leases are amortized as a

11
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


reduction to rental income over the remaining terms of the respective leases. Below market leases are amortized as an increase to rental income over the remaining terms of the respective leases, including any bargain renewal periods. In considering whether or not the Company expects a tenant to execute a bargain renewal option, the Company evaluates economic factors and certain qualitative factors at the time of acquisition, such as the financial strength of the tenant, remaining lease term, the tenant mix of the leased property, the Company’s relationship with the tenant and the availability of competing tenant space. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market or below market lease intangibles relating to that lease would be recorded as an adjustment to rental income.
 The fair values of in-place leases include estimates of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rental and other property income, which are avoided by acquiring a property with an in-place lease. Direct costs associated with obtaining a new tenant include commissions and other direct costs and are estimated in part by utilizing information obtained from independent appraisals and management’s consideration of current market costs to execute a similar lease. The intangible values of opportunity costs, which are calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease, are capitalized as intangible lease assets and are amortized to expense over the remaining term of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
The Company has acquired, and may continue to acquire, certain properties subject to contingent consideration arrangements that may obligate the Company to pay additional consideration to the seller based on the outcome of future events. Additionally, the Company may acquire certain properties for which it funds certain contingent consideration amounts into an escrow account pending the outcome of certain future events. The outcome may result in the release of all or a portion of the escrow funds to the Company or the seller or a combination thereof. Contingent consideration arrangements are based on a predetermined formula and have set time periods regarding the obligation to make future payments, including funds released to the seller from escrow accounts, or the right to receive escrowed funds as set forth in the respective purchase and sale agreement. Contingent consideration arrangements, including amounts funded through an escrow account, are recorded upon acquisition of the respective property at their estimated fair value, and any changes to the estimated fair value, subsequent to acquisition, are reflected in the accompanying condensed consolidated unaudited statements of operations. The determination of the amount of contingent consideration arrangements is based on the probability of several possible outcomes as identified by management.
The Company estimates the fair value of assumed mortgage notes payable based upon indications of current market pricing for similar types of debt financing with similar maturities. Assumed mortgage notes payable are initially recorded at their estimated fair value as of the assumption date, and any difference between such estimated fair value and the mortgage note’s outstanding principal balance is amortized to interest expense over the term of the respective mortgage note payable.
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 impact the Company’s results of operations.
Restricted Cash
Restricted cash included $6.3 million and $4.9 million held in lender cash management accounts as September 30, 2014 and December 31, 2013, respectively. As part of certain debt agreements, rent from certain of the Company’s tenants is deposited directly into a lockbox account, from which the monthly debt service payment is disbursed to the lender and the excess funds are disbursed to the Company.
Concentration of Credit Risk
As of September 30, 2014, the Company had cash on deposit, including restricted cash, at seven financial institutions, in all of which the Company had deposits in excess of federally insured levels, totaling $33.6 million; however, the Company has not experienced any losses in such accounts. The Company limits significant cash deposits to accounts held by financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits.
As of September 30, 2014, no single tenant accounted for greater than 10% of the Company’s 2014 gross annualized rental revenues. The Company had certain geographic concentrations in its property holdings. As of September 30, 2014, the Company had properties located in two states with respective gross annualized rental revenues greater than 10% of the Company’s 2014 total gross annualized rental revenues: Texas (22%) and California (11%). In addition, the Company had

12
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


tenants in three industries with respective gross annualized rental revenues greater than 10% of the Company’s 2014 total gross annualized rental revenues: manufacturing (16%), healthcare (15%), and mining and natural resources (12%).
Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments at fair value. Accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the designation of the derivative instrument. The change in fair value of the effective portion of the derivative instrument that is designated as a hedge is recorded as other comprehensive income (loss). The changes in fair value for derivative instruments that are not designated as a hedge or that do not meet the hedge accounting criteria are recorded as a gain or loss to operations.
Redeemable Common Stock
Under the Company’s share redemption program, the Company’s requirement to redeem shares of its outstanding common stock is limited, among other things, to the net proceeds received by the Company from the sale of shares under the DRIP, net of shares redeemed to date. The Company records amounts that are redeemable under the share redemption program as redeemable common stock outside of permanent equity in its condensed consolidated unaudited balance sheets. Changes in the amount of redeemable common stock from period to period are recorded as an adjustment to capital in excess of par value.
Reportable Segment
The Company’s operating segment consists of commercial properties, which include activities related to investing in real estate such as corporate office and industrial and other real estate-related assets. The commercial properties are geographically diversified throughout the United States and have similar economic characteristics. The Company evaluates operating performance on an overall portfolio level; therefore, the Company’s properties are one reportable segment.
Recent Accounting Pronouncements
In April 2014, the U.S. Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which amends the reporting requirements for discontinued operations by updating the definition of a discontinued operation to be a component of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, resulting in fewer disposals that qualify for discontinued operations reporting; yet, the pronouncement also requires expanded disclosures for discontinued operations. The adoption of ASU 2014-08 did not have a material impact on the Company’s condensed consolidated unaudited financial statements because the Company did not have any discontinued operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers, including real estate sales, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. The Company does not believe ASU 2014-09, when effective, will have a material impact on the Company’s condensed consolidated unaudited financial statements because the Company currently accounts for real estate sales in a manner that is consistent with ASU 2014-09.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early application permitted. The Company does not believe ASU 2014-15, when effective, will have a material impact on the Company’s condensed consolidated unaudited financial statements because the Company currently does not have any conditions that give rise to substantial doubt about its ability to continue as a going concern.


13
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


NOTE 4 — 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. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 – Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:
Cash and cash equivalents and restricted cash — The Company considers the carrying values of these financial assets to approximate fair value because of the short period of time between their origination and their expected realization. These financial assets are considered Level 1.
Credit facility and notes payable — 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. These financial instruments are considered Level 2. The estimated fair value of the Company’s debt was $962.1 million and $741.4 million as of September 30, 2014 and December 31, 2013, respectively, compared to the carrying value of $1.0 billion and $752.6 million as of September 30, 2014 and December 31, 2013, respectively.
Derivative instruments — The Company’s derivative instruments represent 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. The Company includes the impact of credit valuation adjustments on derivative instruments measured at fair value.
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, on disposition of the financial assets and liabilities. As of September 30, 2014, there have been no transfers of financial assets or liabilities between fair value hierarchy levels.

14
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 (in thousands):
 
Balance as of September 30, 2014
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Interest rate swap
$
2,563

 
$
—

 
$
2,563

 
$
—

Liabilities:


 
 
 
 
 
 
Interest rate swap
$
(570
)
 
$
—

 
$
(570
)
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of
December 31, 2013
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Interest rate swaps
$
2,238

 
$
—

 
$
2,238

 
$
—

NOTE 5 — REAL ESTATE ACQUISITIONS
2014 Property Acquisitions
During the nine months ended September 30, 2014, the Company acquired ten commercial properties for an aggregate purchase price of $315.8 million (the “2014 Acquisitions”). The Company purchased the 2014 Acquisitions with net proceeds from the Offerings and available borrowings. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation for acquisitions purchased during the nine months ended September 30, 2014 (in thousands):
 
2014 Acquisitions
Land
$
39,908

Building and improvements
252,857

Acquired in-place leases
33,472

Acquired above-market leases
2,165

Acquired below-market leases
(12,599
)
Total purchase price
$
315,803

The Company recorded revenue for the three and nine months ended September 30, 2014 of $5.7 million and $10.6 million, respectively, and net income for the three months ended September 30, 2014 of $982,000 and net loss for the nine months ended September 30, 2014 of $2.9 million related to the 2014 Acquisitions. In addition, the Company recorded $1.4 million and $7.5 million of acquisition-related expenses for the three and nine months ended September 30, 2014, respectively.
The following table summarizes selected financial information of the Company as if the 2014 Acquisitions were completed on January 1, 2013 for each period presented below. The table below presents the Company’s estimated revenue and net income (loss), on a pro forma basis, for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Pro forma basis:
 
 
 
 
 
 
 
Revenue
$
61,380

 
$
33,929

 
$
177,502

 
$
67,233

Net income (loss)
$
11,747

 
$
(4,796
)
 
$
40,542

 
$
(20,424
)

15
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


The pro forma information for the three and nine months ended September 30, 2014 was adjusted to exclude acquisition-related expenses recorded during such periods related to the 2014 Acquisitions. These expenses were recognized in the pro forma information for the nine months ended September 30, 2013. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2013, nor does it purport to represent the results of future operations.
Development Activities
During the nine months ended September 30, 2014, the Company acquired one land parcel, upon which an industrial property was expected to be constructed. The 158,497 square foot building was completed during the three months ended September 30, 2014 and was acquired by the Company for $26.3 million. The purchase of the land and building in separate transactions is considered to be one property purchase and is included in the 2014 acquisitions.
2013 Property Acquisitions
During the nine months ended September 30, 2013, the Company acquired 43 commercial properties for an aggregate purchase price of $1.1 billion (the “2013 Acquisitions”). The Company purchased the 2013 Acquisitions with net proceeds from the Offering and available borrowings. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation (in thousands):
 
2013 Acquisitions
Land
$
149,007

Building and improvements
850,670

Acquired in-place leases
122,827

Acquired above-market leases
5,970

Acquired below-market leases
(24,065
)
Total purchase price
$
1,104,409

The Company recorded revenue for the three and nine months ended September 30, 2013 of $18.3 million and $26.5 million, respectively, and a net loss for the three and nine months ended September 30, 2013 of $6.8 million and $22.1 million, respectively, related to the 2013 Acquisitions. In addition, the Company recorded $11.8 million and $29.7 million of acquisition-related expenses for the three and nine months ended September 30, 2013, respectively.
The following table summarizes selected financial information of the Company as if all of the 2013 Acquisitions were completed on January 1, 2012 for each period presented below. The table below presents the Company’s estimated revenue and net income (loss), on a pro forma basis, for the three and nine months ended September 30, 2013 and 2012 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Pro forma basis:
 
 
 
 
 
 
 
Revenue
$
30,190

 
$
24,610

 
$
90,142

 
$
72,448

Net income (loss)
$
7,347

 
$
7,148

 
$
23,018

 
$
(5,539
)
The pro forma information for the three and nine months ended September 30, 2013 was adjusted to exclude acquisition-related expenses recorded during such periods relating to the 2013 Acquisitions. These expenses were recognized in the pro forma information for the nine months ended September 30, 2012. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2012, nor does it purport to represent the results of future operations.

16
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


NOTE 6 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risks. The following table summarizes the terms of the Company’s executed swap agreements designated as hedging instruments as of September 30, 2014 (dollars in thousands). The Company did not have any executed swap agreements as of September 30, 2013.
 
 
 
 Outstanding Notional
 
 
 
 
 
 
 
Fair Value of Assets and (Liability)
 
Balance Sheet
 
Amount as of
 
Interest
 
Effective
 
Maturity
 
September 30,
 
December 31,
 
Location
 
September 30, 2014
 
Rate (1)
 
Date
 
Date
 
2014
 
2013
Interest Rate Swap
Derivative asset, prepaid expenses, and other assets
 
$
300,000

 
3.03
%
 
10/31/2013
 
10/25/2018
 
$
2,563

 
$
2,238

Interest Rate Swap
Deferred rental income and other liabilities
 
$
41,000

 
4.16
%
 
7/24/2013
 
8/3/2020
 
$
(570
)
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The interest rate consists of the underlying index swapped to a fixed rate and the applicable interest rate spread.
Additional disclosures related to the fair value of the Company’s derivative instruments are included in Note 4 to these condensed consolidated unaudited financial statements. 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, to hedge the variability of the anticipated cash flows on its variable rate debt. The change in fair value of the effective portion of the derivative instruments that are designated as hedges are recorded in other comprehensive income (loss). Any ineffective portion of the change in fair value of the derivative instruments is recorded in interest expense.
The following table summarizes the unrealized income (loss) on the Company’s derivative instruments and hedging activities for the nine months ended September 30, 2014 and 2013 (in thousands).
 
 
 
Amount of Income (Loss) Recognized as Other
Comprehensive Income (Loss)
 
 
 
Three Months Ended
 
Nine Months Ended
Derivatives in Cash Flow Hedging Relationships
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Interest Rate Swaps (1)
 
 
$
2,744

 
(559
)
 
$
(245
)
 
(559
)
 
 
 
 
 
 
 
 
 
 
(1)
There were no portions of the change in the fair value of the interest rate swap agreements that were considered ineffective during the three and nine months ended September 30, 2014 or 2013. No previously effective portions of the losses that were recorded in accumulated other comprehensive income (loss) during the term of the hedging relationship were reclassified into earnings during the three and nine months ended September 30, 2014 or 2013.
The Company has agreements with each of its derivative counterparties that contain provisions whereby if the Company defaults on certain of its unsecured indebtedness, then 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 of $617,000 at September 30, 2014. In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the credit quality of the Company and the respective counterparty. There were no termination events or events of default related to the interest rate swaps as of September 30, 2014.

17
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


NOTE 7 — CREDIT FACILITY AND NOTES PAYABLE
As of September 30, 2014, the Company and the Consolidated Joint Venture had $1.0 billion of debt outstanding with a weighted average interest rate of 2.23% and a weighted average remaining term of 4.3 years.
The following table summarizes the debt activity for the nine months ended September 30, 2014 and the debt balances as of December 31, 2013 and September 30, 2014 (in thousands):
 
 
 
During the nine months ended September 30, 2014
 
 
Balance as of
December 31, 2013
 
Debt Issuance
 
Repayments
 
Balance as of September 30, 2014
Fixed rate debt
$
257,383

 
$
—

 
$
—

 
$
257,383

Variable rate debt
40,233

 
—

 
—

 
40,233

Credit facility
455,000

 
304,000

 
(44,000
)
 
715,000

Total
$
752,616

 
$
304,000

 
$
(44,000
)
 
$
1,012,616

As of September 30, 2014, the fixed rate debt included $41.0 million of variable rate debt subject to an interest rate swap agreement, which had the effect of fixing the variable interest rate per annum through the maturity date of the variable rate debt. In addition, the fixed rate debt included a mortgage note assumed with a face amount of $12.0 million and a fair value of $11.9 million at the date of assumption. The fixed rate debt has interest rates ranging from 3.55% to 4.85% per annum. The variable rate debt has a variable interest rate of LIBOR plus 140 basis points per annum. The debt outstanding matures on various dates from July 2016 through June 2023. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the fixed and variable rate debt outstanding was $555.4 million as of September 30, 2014. Each of the mortgage notes payable, comprising the fixed rate debt, is secured by the respective properties on which the debt was placed. Certain notes payable contain covenants, representations, warranties and borrowing conditions for similar credit arrangements. These notes also include usual and customary events of default and remedies for agreements of this nature. Based on the Company’s analysis and review of its results of operations and financial condition, the Company believes it was in compliance with the covenants of such notes payable as of September 30, 2014.
As of September 30, 2014, the Company had $715.0 million of debt outstanding under its unsecured revolving credit facility, as amended (the “Credit Facility”), with Bank of America as administrative agent pursuant to a credit agreement (the “Credit Agreement”). On April 28, 2014, the Company entered into a modification agreement with Bank of America that increased the amount available for borrowing under the Credit Facility to $1.0 billion, including a $300.0 million term loan (the “Term Loan”) and $700.0 million in revolving loans (the “Revolving Loans”). As of September 30, 2014, the Company had $285.0 million of available Revolving Loan borrowings under the Credit Facility. The maximum borrowing availability on the Revolving Loans is limited to 65% (or 60% subsequent to October 25, 2014) of the unencumbered asset value of the underlying collateral pool. Subject to meeting certain conditions described in the Credit Agreement and the payment of certain fees, the amount of the Credit Facility may be increased up to a maximum of $1.25 billion. The Term Loan matures on October 25, 2018 and the Revolving Loans mature on October 25, 2017. The maturity on the Revolving Loans may be extended to October 25, 2018 subject to satisfying certain conditions as outlined in the Credit Agreement. Depending upon the type of loan specified and overall leverage ratio, not to exceed 65% (or 60% subsequent to October 25, 2014), the Revolving Loans bear interest at one-month, two-month, three-month or six-month LIBOR (the “Eurodollar Rate”) plus an interest rate spread ranging from 1.60% to 2.40% (the “Spread”) or a base rate, ranging from 0.60% to 1.40%, plus the greater of: (a) Bank of America’s Prime Rate; (b) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50%; or (c) one-month Eurodollar Rate plus 1.00%. The Credit Agreement also includes an interest rate pricing structure should the Company obtain an investment grade rating. As of September 30, 2014, the weighted average interest rate in effect for the Revolving Loans was 1.75%. In connection with the Credit Agreement, the Company executed an interest rate swap agreement that effectively fixed the variable interest rate of the Term Loan at 3.03% based on the applicable margin at the current leverage ratio.
The Credit Agreement contains provisions with respect to covenants, events of default and remedies customary for facilities of this nature and borrowing conditions. In particular, the Credit Agreement requires the Company to maintain a minimum consolidated net worth of at least $1.3 billion as of September 30, 2014, a leverage ratio less than or equal to 65%, a fixed charge coverage ratio equal to or greater than 1.50, an unsecured debt to unencumbered asset value ratio less than or equal to 65%, an unsecured debt service coverage ratio equal to or greater than 1.75, a secured debt ratio less than 50%, and a maximum real estate recourse debt ratio of 15%. The Company believes it was in compliance with the covenants under the Credit Agreement as of September 30, 2014.

18
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


NOTE 8 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. The Company is not aware of any pending legal proceedings of which the outcome is reasonably possible to have a material effect on its results of operations, financial condition or liquidity.
Environmental Matters
In connection with the ownership and operation of real estate, the Company potentially may be liable for costs and damages related to environmental matters. In addition, the Company may acquire certain properties that are subject to environmental remediation. The Company carries environmental liability insurance on its properties that will provide limited coverage for remediation liability and pollution liability for third-party bodily injury and property damage claims. The Company is not aware of any environmental matters which it believes are reasonably possible to have a material effect on its results of operations, financial condition or liquidity.
NOTE 9 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred, and may continue to incur, fees and expenses payable to CCI Advisors and certain of its affiliates in connection with the acquisition, management and disposition of its assets.
Offering
In connection with the Offering, CCC received selling commissions of up to 7% of gross offering proceeds from the primary portion of the Offering before reallowance of commissions earned by participating broker-dealers. CCC reallowed 100% of selling commissions earned to participating broker-dealers. In addition, CCC received up to 2% of gross offering proceeds before reallowance to participating broker-dealers as a dealer manager fee in connection with the primary portion of the Offering. CCC, in its sole discretion, reallowed a portion of its dealer manager fee to such participating broker-dealers. No selling commissions or dealer manager fees are paid to CCC or other broker-dealers with respect to shares sold pursuant to the DRIP portion of the Offering or the DRIP Offering.
All organization and offering expenses with respect to the Offering (excluding selling commissions and the dealer manager fees) were paid for by CCI Advisors or its affiliates and were reimbursed by the Company up to 1.5% of aggregate gross offering proceeds.
The Company recorded commissions, fees and expense reimbursements as shown in the table below for services provided by CCI Advisors or its affiliates related to the services described above during the periods indicated (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Offering:
 
 
 
 
 
 
 
Selling commissions
$
—

 
$
71,379

 
$
—

 
$
100,190

Selling commissions reallowed by CCC
$
—

 
$
71,379

 
$
—

 
$
100,190

Dealer manager fee
$
—

 
$
21,244

 
$
—

 
$
29,702

Dealer manager fee reallowed by CCC
$
—

 
$
11,910

 
$
—

 
$
16,884

Other organization and offering expenses
$
—

 
$
16,009

 
$
—

 
$
22,440

All amounts related to the three and six months ended September 30, 2013 have been paid to CCI Advisors and its affiliates.
Acquisitions and Operations
CCI Advisors or its affiliates receive acquisition fees of up to 2% 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. Additionally, CCI Advisors or its affiliates are reimbursed for acquisition-related expenses incurred in the

19
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


process of acquiring properties, so long as the total acquisition fees and expenses relating to the transaction does not exceed 6% of the contract purchase price.
The Company pays CCI Advisors a monthly advisory fee based upon the Company’s monthly average invested assets, which 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 to $2 billion; (2) an annualized rate of 0.70% paid on the Company’s average invested assets that are between $2 billion to $4 billion; and (3) an annualized rate of 0.65% paid on the Company’s average invested assets that are over $4 billion.
The Company reimburses CCI Advisors for the expenses it paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse for any amount by which its operating expenses (including the advisory fee) at the end of the four preceding fiscal quarters exceeds the greater of (1) 2% of average invested assets, or (2) 25% of net income, other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period. The Company will not reimburse CCI Advisors for personnel costs in connection with services for which CCI Advisors receives acquisition fees or disposition fees. The Company recorded fees and expense reimbursements as shown in the table below for services provided by CCI Advisors and its affiliates related to the services described above during the periods indicated (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Acquisition and Operations:
 
 
 
 
 
 
 
Acquisition fees and expenses
$
1,249

 
$
9,794

 
$
6,661

 
$
22,634

Advisory fees and expenses
$
5,129

 
$
2,387

 
$
14,759

 
$
4,445

Operating expenses
$
393

 
$
737

 
$
1,070

 
$
1,399

For the nine months ended September 30, 2014, $22.0 million of the amounts shown above had been paid to CCI Advisors and its affiliates, and as of September 30, 2014, $532,000 had been incurred, but not yet paid, for services provided by CCI Advisors or its affiliates in connection with acquisitions and operations and was a liability to the Company. All amounts related to the three and nine months ended September 30, 2013 have been paid to CCI Advisors and its affiliates.
Liquidation/Listing
If CCI Advisors or its affiliates provide a substantial amount of services (as determined by a majority of the Company’s independent directors) in connection with the sale of properties, the Company will pay CCI Advisors or its affiliates a disposition fee in an amount equal to up to one-half of the brokerage commission paid on the sale of the property, not to exceed 1% of the contract price of each property sold; provided, however, in no event may the disposition fee paid to CCI Advisors or its affiliates, when added to the real estate commissions paid to unaffiliated third parties, exceed the lesser of the customary competitive real estate commission or an amount equal to 6% of the contract sales price.
If the Company is sold or its assets are liquidated, CCI Advisors will be entitled to receive a subordinated performance fee equal to 15% of the net sale proceeds remaining after investors have received a return of their net capital invested and an 8% annual cumulative, non-compounded return. Alternatively, if the Company’s shares are listed on a national securities exchange, CCI Advisors will be entitled to a subordinated performance fee equal to 15% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing exceeds the sum of the total amount of capital raised from investors and the amount of distributions necessary to generate an 8% annual cumulative, non-compounded return to investors. As an additional alternative, upon termination of the advisory agreement, CCI Advisors may be entitled to a subordinated performance fee similar to the fee to which CCI Advisors would have been entitled had the portfolio been liquidated (based on an independent appraised value of the portfolio) on the date of termination.
 During the three and nine months ended September 30, 2014 and 2013, no commissions or fees were incurred for any such services provided by CCI Advisors and its affiliates in connection with the liquidation/listing stage. Upon consummation of the Merger discussed in Note 2, we expect to pay a disposition fee and a performance fee not to exceed $14.35 million in the aggregate.

20
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


Due to Affiliates
As of September 30, 2014 and December 31, 2013, $532,000 and $2.3 million, respectively, had been incurred primarily for advisory, operating and acquisition-related expenses by CCI Advisors and its affiliates, but had not yet been reimbursed by the Company and were included in due to affiliates in the condensed consolidated unaudited balance sheets.
NOTE 10 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged or will engage CCI Advisors and 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, the sale of shares of the Company’s common stock available for issuance, as well as other administrative responsibilities for the Company including accounting services and investor relations. As a result of these relationships, the Company is dependent upon CCI Advisors and 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 11 — SUBSEQUENT EVENTS
Redemption of Shares of Common Stock
Subsequent to September 30, 2014, the Company redeemed approximately 212,000 shares for $2.1 million at an average price per share of $9.68.
Credit Facility
As of November 12, 2014, the Company had $715.0 million outstanding under the Credit Facility and available borrowings of $285.0 million.
ARCP/RCAP Agreement
On September 30, 2014, an affiliate of ARCP entered into a definitive agreement (the “RCAP Agreement”) with RCS Capital Corporation (“RCAP”) pursuant to which RCAP would acquire Cole Capital. The acquisition would include CCI Advisors and CCC. Despite the indirect change of control that would occur for the Company’s advisor, dealer manager and sponsor upon consummation of the transaction contemplated by the RCAP Agreement, such entities are expected to continue to serve in their respective capacities to the Company following the transaction.

The RCAP Agreement contemplates a strategic arrangement by which an indirect wholly-owned subsidiary of ARCP would act as sub-advisor (the “Sub-advisor”) to, and acquire and property manage real estate assets for, the non-traded real estate investment trusts sponsored by Cole Capital, including the Company, after completion of the transaction. As set forth in the RCAP Agreement, the Sub-advisor and RCAP (by way of its ownership of the Company’s advisor) would equally share the acquisition and advisory fees and expenses currently provided pursuant to the Company’s advisory agreement. In addition, the Sub-advisor would receive a portion of any disposition and incentive fees that may later become due to RCAP for advising the Company, except that the sub-advisor will be entitled to 100% of the disposition fees and performance fees with respect to the Merger. The Sub-advisor would also receive all acquisition fees and expenses for property acquisitions under any purchase and sale agreement or letter of intent executed on or prior to September 30, 2014. All fees and expenses payable to RCAP or the Sub-advisor under the sub-advisory arrangement would be limited to the total amounts payable to the Company’s advisor under the advisory agreement, which would not change as a result of this arrangement. The completion of the transaction contemplated by the RCAP Agreement is subject to various closing conditions.

On October 22, 2014, CCI Advisors entered into an interim sub-advisory agreement (the “Interim Agreement”) with RCAP Cole Corporate Income Advisors, LLC, a subsidiary of RCAP (the “RCAP Sub-advisor”), in connection with the first closing under the RCAP Agreement. Pursuant to the Interim Agreement, the RCAP Sub-advisor will use commercially reasonable best efforts to manage and supervise the operations and administration of the Company, other than the acquisition, operation and disposition of the Company’s assets, pending the final closing under the RCAP Agreement. The Interim Agreement provides for substantially the same allocation of advisory services and compensation as contemplated under the RCAP agreement.
On November 3, 2014, RCAP publicly announced that it had notified ARCP of its purported termination of the RCAP Agreement, and that the RCAP Sub-advisor would not act as sub-advisor with respect to the Company. Also on November 3,

21
COLE CORPORATE INCOME TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
September 30, 2014


2014, ARCP publicly announced that it had informed RCAP that RCAP’s attempt to terminate the RCAP Agreement constituted a breach of the RCAP Agreement.
On November 11, 2014, ARCP filed a complaint in the Court of Chancery of the State of Delaware against RCAP alleging that RCAP’s attempt to terminate the RCAP Agreement constitutes a breach of the RCAP Agreement and seeking, among other things, specific performance of the RCAP Agreement or, in the alternative, money damages.
Chief Financial Officer Resignation and Appointment
Subsequent to September 30, 2014, and subject to SIR’s approval, Simon J. Misselbrook has been appointed chief financial officer and treasurer of the Company by the Company’s board of directors. Also subsequent to September 30, 2014, Mr. Block resigned as the Company’s executive vice president, chief financial officer and treasurer.





22

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013. The terms “we,” “us,” “our” and the “Company” refer to Cole Corporate Income Trust, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated unaudited financial statements and the notes thereto.
Forward-Looking Statements
Except for historical information, this section contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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. Such statements include, in particular, discussion and analysis of our financial condition and our subsidiaries, our anticipated capital expenditures, amounts of anticipated cash distributions to our stockholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry. Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” or comparable words, variations and similar expressions are intended to identify forward-looking statements. All statements not based on historical fact are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Investors are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q. We make no representation or warranty (express or implied) about the accuracy of any such forward looking statements contained in this Quarterly Report on Form 10-Q. Additionally, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Quarterly Report on Form 10-Q include, among others, changes in general economic conditions, changes in real estate conditions, construction costs that may exceed estimates, construction delays, increases in interest rates, lease-up risks, rent relief, inability to obtain new tenants upon the expiration or termination of existing leases, inability to obtain financing or refinance existing debt and the potential need to fund tenant improvements or other capital expenditures out of operating cash flows. The forward-looking statements should be read in light of the risk factors identified under the “Item 1A – Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013.
Management’s discussion and analysis of financial condition and results of operations are based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed on April 6, 2010 to acquire and operate commercial real estate primarily consisting of single-tenant, income producing necessity corporate office and industrial properties net leased to investment grade and other creditworthy tenants located throughout the United States. We commenced our principal operations on June 28, 2011, when we issued the initial 370,727 shares of our common stock in the Offering. We have no paid employees and are externally advised and managed by CCI Advisors, our advisor. We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes.

23

We ceased offering shares of common stock in the Offering on November 21, 2013 and suspended the sale of shares of common stock under the DRIP Offering beginning with the distributions authorized by the Board for the month of August 2014, which were paid in September 2014. We expect that property acquisitions in 2014 and future periods, if any, will be funded by borrowings under the Credit Facility, proceeds from the DRIP Offering, proceeds from the strategic sale of properties and cash flows from operations.
On February 7, 2014, ARCP acquired Cole, which, prior to its acquisition, indirectly owned and/or controlled our external advisor, CCI Advisors, our dealer manager, CCC, our property manager, CREI Advisors, and our sponsor, Cole Capital. As a result of ARCP’s acquisition of Cole, ARCP indirectly owns and/or controls CCI Advisors, CCC, CREI Advisors and Cole Capital.
On August 30, 2014, we entered into the Merger Agreement with SIR and Merger Sub. The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions, the Company will be merged with and into Merger Sub, with Merger Sub surviving as a wholly-owned subsidiary of SIR and the separate corporate existence of the Company will cease. See Note 2 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further discussion regarding the Merger.
Our operating results and cash flows are primarily influenced by rental income from our commercial properties, interest expense on our property indebtedness, and acquisition and operating expenses. Rental and other property income accounted for 85% of total revenue for both the three and nine months ended September 30, 2014, and accounted for 83% of total revenue for the three and nine months ended September 30, 2013, respectively. As 100% of our rentable square feet was under lease as of September 30, 2014 with a weighted average remaining lease term of 11.3 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. Our advisor regularly monitors the creditworthiness of our tenants by reviewing the tenants’ financial results, credit rating agency reports, when available, on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment and other information for changes and possible trends. If our advisor 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.
As of September 30, 2014, the debt leverage ratio of our consolidated real estate assets, which is the ratio of debt to total gross real estate assets, net of gross intangible lease liabilities, was 38%. As we acquire additional commercial real estate, we will be subject to changes in real estate prices and changes in interest rates on any new indebtedness used to acquire such properties. We may manage our risk of changes in real estate prices on future property acquisitions, when applicable, by entering into purchase agreements and loan commitments simultaneously, or through loan assumption, so that our operating yield is determinable at the time we enter into a purchase agreement, by contracting with developers for future delivery of properties or by entering into sale-leaseback transactions. We manage our interest rate risk by monitoring the interest rate environment in connection with our future property acquisitions, when applicable, or upcoming debt maturities to determine the appropriate financing or refinancing terms, which may include fixed rate loans, variable rate loans or interest rate hedges. If we are unable to acquire suitable properties or obtain suitable financing terms for future acquisitions or refinancing, our results of operations may be adversely affected.
 As of September 30, 2014, 100% of the rentable square feet of our properties was under lease and we expect that occupancy will remain high as the real estate recovery continues. We may experience vacancies or be required to reduce rental rates on occupied space. If we do experience vacancies, our advisor will actively seek to lease our vacant space; nevertheless, such space may be leased at lower rental rates and for shorter lease terms than our current leases provide.

24

Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate assets, including the Consolidated Joint Venture. The following table shows the property statistics of our real estate assets as of September 30, 2014 and 2013:
 
September 30,
 
2014
 
2013
Number of properties
87

 
56

Approximate rentable square feet
18.3
 million
 
10.3
 million
Percentage of rentable square feet leased
100%
 
100%
The following table summarizes our real estate investment activity during the three and nine months ended September 30, 2014 and 2013: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Properties acquired
 
1

 
21

 
10

 
43

Approximate purchase price of acquired properties
 
$
60.8
 million
 
$
483.8
 million
 
$
315.8
 million
 
$
1.1
 billion
Approximate rentable square feet
 
0.7
 million
 
4.8
 million
 
2.7
 million
 
7.1
 million
Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
Revenue. Revenue increased $33.2 million to $58.8 million for the three months ended September 30, 2014, compared to $25.6 million for the three months ended September 30, 2013. Our revenue consisted primarily of rental and other property income, which accounted for 85% of total revenue during the three months ended September 30, 2014 and 83% for the three months ended September 30, 2013. We also recorded tenant reimbursement income of $8.9 million and $4.4 million during the three months ended September 30, 2014 and 2013, respectively, related to certain operating expenses subject to reimbursement by tenants. The increases were due to owning 86 income-producing properties for the entire three months ended September 30, 2014 and purchasing one additional property during such period, compared to owning 35 properties during the three months ended September 30, 2013 and purchasing 21 additional properties during such period.
General and administrative expenses. General and administrative expenses increased $48,000 to $1.8 million for the three months ended September 30, 2014, compared to $1.7 million for the three months ended September 30, 2013. The increase was primarily due to an increase in escrow and trustee fees and expenses incurred during the three months ended September 30, 2014, compared to the three months ended September 30, 2013.  
Property operating expenses. Property operating expenses increased $5.6 million to $10.0 million for the three months ended September 30, 2014, compared to $4.4 million for the three months ended September 30, 2013. The increase was primarily related to owning 86 properties for the entire three months ended September 30, 2014 and purchasing one additional property during such period, compared to owning 35 properties during the three months ended September 30, 2013 and purchasing 21 additional properties during such period. The primary property operating expenses were property taxes and repairs and maintenance.
Advisory expenses. Pursuant to the advisory agreement with CCI Advisors and based upon the amount of our current invested assets, we are required to pay to CCI Advisors a monthly advisory fee equal to one-twelfth of 0.75% of the average invested assets up to $2.0 billion and one-twelfth of 0.70% of the average invested assets between $2.0 billion to $4.0 billion. Additionally, we may be required to reimburse certain expenses incurred by CCI Advisors in providing such advisory services, subject to limitations as set forth in the advisory agreement. Advisory fees and expenses increased $2.7 million to $5.1 million for the three months ended September 30, 2014, compared to $2.4 million for the three months ended September 30, 2013. The increase was primarily related to owning 86 properties for the entire three months ended September 30, 2014 and purchasing one additional property during such period, compared to owning 35 properties during the three months ended September 30, 2013 and purchasing 21 additional properties during such period.
Acquisition and merger-related expenses. Acquisition and merger-related expenses consisted of $1.4 million for property-related acquisition expenses and $3.0 million for legal, consulting and other expenses related to the Merger for the three months ended September 30, 2014 and $11.8 million for property-related acquisition expenses for the three months ended

25

September 30, 2013. Property-related acquisition expenses decreased $10.4 million to $1.4 million for the three months ended September 30, 2014, compared to $11.8 million for the three months ended September 30, 2013.
Depreciation and amortization expenses. Depreciation and amortization expenses increased $11.7 million to $21.6 million for the three months ended September 30, 2014, compared to $9.9 million for the three months ended September 30, 2013. The increase was primarily the result of incurring depreciation and amortization expenses related to 87 properties owned or acquired during the three months ended September 30, 2014, compared to depreciation and amortization expenses incurred on 56 properties owned or acquired during the three months ended September 30, 2013.
Interest expense. Interest expense increased $4.3 million to $7.4 million for the three months ended September 30, 2014, compared to $3.1 million for the three months ended September 30, 2013. The increase was primarily related to an increase in the average amount outstanding under the Credit Facility and notes payable to $979.1 million during the three months ended September 30, 2014, compared to $314.1 million for the three months ended September 30, 2013, partially offset by a decrease in the weighted average interest rate to 2.2% as of September 30, 2014, compared to 3.9% as of September 30, 2013.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended Ended September 30, 2013
Revenue. Revenue increased $120.9 million to $168.8 million for the nine months ended September 30, 2014, compared to $47.9 million for the nine months ended September 30, 2013. Our revenue consisted primarily of rental and other property income, which accounted for 85% and 83% of total revenue during the nine months ended September 30, 2014 and 2013, respectively. We also recorded tenant reimbursement income of $25.0 million and $7.9 million during the nine months ended September 30, 2014 and 2013, respectively, related to certain operating expenses subject to reimbursement by tenants. The increases were due to owning 77 income-producing properties for the entire nine months ended September 30, 2014 and purchasing ten additional properties during such period, compared to owning 13 properties during the nine months ended September 30, 2013 and purchasing 43 additional properties during such period.
General and administrative expenses. General and administrative expenses increased $1.8 million to $5.2 million for the nine months ended September 30, 2014, compared to $3.4 million for the nine months ended September 30, 2013. The increase was primarily due to an increase in escrow and trustee fees and expenses, unused fees on the Credit Facility, and corporate insurance incurred during the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013.  
Property operating expenses. Property operating expenses increased $19.7 million to $27.7 million for the nine months ended September 30, 2014, compared to $8.0 million for the nine months ended September 30, 2013. The increase was primarily related to owning 77 properties for the entire nine months ended September 30, 2014 and purchasing ten additional properties during such period, compared to owning 13 properties during the nine months ended September 30, 2013 and purchasing 43 additional properties during such period. The primary property operating expenses were property taxes and repairs and maintenance.
Advisory expenses. Pursuant to the advisory agreement with CCI Advisors and based upon the amount of our current invested assets, we are required to pay to CCI Advisors a monthly advisory fee equal to one-twelfth of 0.75% of the average invested assets up to $2.0 billion and one-twelfth of 0.70% of the average invested assets between $2.0 billion to $4.0 billion. Additionally, we may be required to reimburse certain expenses incurred by CCI Advisors in providing such advisory services, subject to limitations as set forth in the advisory agreement. Advisory fees and expenses increased $10.4 million to $14.8 million for the nine months ended September 30, 2014, compared to $4.4 million for the nine months ended September 30, 2013. The increase was primarily related to owning 77 properties for the entire nine months ended September 30, 2014 and purchasing ten additional properties during such period, compared to owning 13 properties during the nine months ended September 30, 2013 and purchasing 43 additional properties during such period.
Acquisition and merger-related expenses. Acquisition and merger-related expenses consisted of $7.5 million for property- related acquisition expenses and $4.0 million for legal, consulting and other expenses related to the Merger for the nine months ended September 30, 2014 and $29.7 million for property-related acquisition expenses for the nine months ended September 30, 2013. Property-related acquisition expenses decreased $22.2 million to $7.5 million for the nine months ended September 30, 2014, compared to $29.7 million for the nine months ended September 30, 2013.
Depreciation and amortization expenses. Depreciation and amortization expenses increased $43.6 million to $62.1 million for the nine months ended September 30, 2014, compared to $18.5 million for the nine months ended September 30, 2013. The increase was primarily the result of incurring depreciation and amortization expense related to 87 properties owned or acquired during the nine months ended September 30, 2014, compared to depreciation and amortization incurred on 56 properties owned or acquired during the nine months ended September 30, 2013.

26

Interest expense. Interest expense increased $12.9 million to $20.8 million for the nine months ended September 30, 2014, compared to $7.9 million for the nine months ended September 30, 2013. The increase was primarily related to an increase in the average amount outstanding under the Credit Facility and notes payable to $882.6 million during the nine months ended September 30, 2014, compared to $179.6 million for the nine months ended September 30, 2013, partially offset by a decrease in the weighted average interest rate to 2.2% as of September 30, 2014, compared to 3.9% as of September 30, 2013.
Funds From Operations, Modified Funds From Operations and Adjusted Funds From Operations
Funds From Operations (“FFO”) is a non-GAAP financial performance measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and widely recognized by investors as one measure of operating performance of a real estate company. The FFO calculation excludes items such as real estate depreciation and amortization. Depreciation and amortization as applied in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, it is management’s view, and we believe the view of many industry investors, that the presentation of operating results for real estate companies by using the historical cost accounting method alone is insufficient. We compute FFO in accordance with NAREIT’s definition.
In addition to FFO, we use Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental financial performance measure to evaluate the operating performance of our real estate portfolio. MFFO, as defined by our company, excludes from FFO acquisition and merger-related costs that are required to be expensed in accordance with GAAP. In evaluating the performance of our portfolio over time, management believes that excluding these costs from FFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the Company’s portfolio over time.
In addition to FFO and MFFO, we use Adjusted Funds from Operations (“AFFO”) as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company.  AFFO, as defined by our company, excludes from MFFO items such as straight-line rental revenue and certain charges such as amortization of intangibles. The Company’s management believes that excluding these costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of the Company’s portfolio over time, including after the Company ceases to acquire properties on a frequent and regular basis. AFFO also allows for a comparison of the performance of the Company’s operations with traded REITs that are not currently engaging in acquisitions and mergers, as well as a comparison of the Company’s performance with that of other non-traded REITs, as AFFO, or an equivalent measure, is routinely reported by traded and non-traded REITs, and we believe often used by investors for comparison purposes.
For all of these reasons, we believe FFO, MFFO, and AFFO, in addition to net income and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which the Company’s management evaluates the performance of the Company over time. However, not all REITs calculate FFO, MFFO and AFFO the same way, so comparisons with other REITs may not be meaningful. FFO, MFFO and AFFO should not be considered as alternatives to net income or to cash flows from operating activities, and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs.
MFFO and AFFO may provide investors with a view of our future performance and of the sustainability of our current distributions policy. However, because MFFO and AFFO exclude items that are an important component in an analysis of the historical performance of a property, MFFO and AFFO should not be construed as historic performance measures. None of the SEC, NAREIT, or any other regulatory body has evaluated the acceptability of the exclusions contemplated to adjust FFO in order to calculate MFFO and AFFO and its use as a non-GAAP financial performance measure.


27

FFO, MFFO and AFFO are influenced by the timing of acquisitions and the operating performance of our real estate investments. Our calculations of FFO, MFFO and AFFO, and reconciliation to net income, which is the most directly comparable GAAP financial measure, are presented in the table below for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss) attributable to the Company
 
$
8,393

 
$
(7,710
)
 
$
26,741

 
$
(23,998
)
Depreciation and amortization
 
21,546

 
9,882

 
61,878

 
18,507

Funds from operations (FFO)
 
29,939

 
2,172

 
88,619

 
(5,491
)
 
 
 
 
 
 
 
 
 
Acquisition and merger-related expenses
 
4,401

 
11,754

 
11,455

 
29,691

Modified funds from operations (MFFO)
 
34,340

 
13,926

 
100,074

 
24,200

 
 
 
 
 
 
 
 
 
Above market lease amortization
 
168

 
132

 
325

 
229

Below market lease amortization
 
(1,011
)
 
(478
)
 
(2,637
)
 
(927
)
Straight-line rent
 
(4,272
)
 
(3,384
)
 
(14,417
)
 
(5,911
)
Amortization of deferred financing costs
 
732

 
444

 
2,133

 
1,021

Adjusted funds from operations (AFFO)
 
$
29,957

 
$
10,640

 
$
85,478

 
$
18,612

Distributions
Our board of directors authorized a daily distribution, based on 365 days in the calendar year, of $0.001780821 per share (which equates to approximately 6.50% on an annualized basis calculated at the current rate, assuming a $10.00 per share purchase price) for stockholders of record as of the close of business on each day of the period, commencing on January 1, 2014 and ending on December 31, 2014.
During the nine months ended September 30, 2014, we paid distributions of $95.4 million, including $51.0 million through the issuance of shares pursuant to the DRIP. During the nine months ended September 30, 2013, we paid distributions of $21.7 million, including $12.2 million through the issuance of shares pursuant to the DRIP. Net cash provided by operating activities for the nine months ended September 30, 2014 was $74.1 million and reflected a reduction for real estate acquisition-related expenses incurred of $7.5 million, in accordance with GAAP. Net cash provided by operating activities for the nine months ended September 30, 2013 was $3.3 million and reflected a reduction for real estate acquisition-related expenses incurred of $29.7 million, in accordance with GAAP. We treat our real estate acquisition-related expenses as funded by proceeds from the Offerings, including proceeds from the DRIP. Therefore, for consistency, proceeds from the issuance of common stock for the nine months ended September 30, 2014 are considered a source of our distributions to the extent that real estate acquisition-related expenses have reduced net cash flows used in operating activities. As such, our 2014 distributions were funded by net cash provided by operating activities of $74.1 million, or 77.7%, proceeds from the issuance of common stock, including excess proceeds from the Offering from prior periods, of $16.0 million, or 16.8%, and proceeds from the Credit Facility of $5.3 million, or 5.5%. The distributions paid during the nine months ended September 30, 2013 were funded by net cash provided by operating activities of $3.3 million, or 15.2%, and the issuance of common stock of $18.4 million, or 84.8%.
Share Redemptions
Our share redemption program permits our stockholders to sell their shares back to us after they have held them for at least one year, subject to significant conditions and limitations. The share redemption program provides that we will redeem shares of our common stock from requesting stockholders, subject to the terms and conditions of the share redemption program. We will not redeem in excess of 5% 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 net proceeds we receive from the sale of shares under our DRIP Offering. In addition, we will redeem shares on a quarterly basis, at the rate of 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. During the nine months ended September 30, 2014, we redeemed 456,582 shares under our share redemption program for $4.5 million at an average redemption price of $9.68 per share. As of September 30, 2014, the Company had received valid redemption requests for an additional 212,000 shares, which were redeemed in full subsequent to September 30, 2014 for $2.1 million at an average redemption price of $9.68 per share. A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program. We have funded share redemptions with proceeds from the DRIP.
On August 20, 2014, the Board, including all of the Company’s independent directors, resolved to suspend the DRIP and the share redemption program.

28

Liquidity and Capital Resources
General
Our principal demands for funds will be for real estate and real estate-related investments, for the payment of acquisition-related costs, operating expenses, distributions and principal and interest on any current and any future indebtedness. Generally, cash needs for items other than acquisitions and acquisition-related expenses will be generated from operations of our current and future investments. As the Offering has closed, we expect to meet cash needs for acquisitions from borrowings under the Credit Facility, proceeds from the strategic sale of properties and cash flows from operations. The sources of our operating cash flows will primarily be provided by the rental income received from current and future leased properties. As of September 30, 2014, we had issued approximately 198.4 million shares of our common stock in the Offerings for gross offering proceeds of $2.0 billion, before share redemptions of 5.8 million shares and offering costs, selling commissions and dealer manager fees of $194.4 million.
As of September 30, 2014, we had cash and cash equivalents of $29.1 million and available borrowings of $285.0 million under the Credit Facility. Additionally, as of September 30, 2014, we had unencumbered properties with a gross book value of $573.6 million, which may be used as collateral to secure additional financing in future periods or as additional collateral to facilitate the refinancing of current mortgage debt as it becomes due.
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for operating expenses, distributions, and interest and principal on current and any future debt financings. We expect to meet our short-term liquidity requirements through net cash flows provided by operations, as well as secured or unsecured borrowings from banks and other lenders to finance our expected future acquisitions.
We expect our operating cash flows to increase as we acquire additional properties. CCI Advisors paid the organizational and other offering costs associated with the sale of our common stock, which we reimbursed in an amount up to 1.5% of the gross proceeds of the Offering. As of September 30, 2014, CCI Advisors had paid offering and organization costs in excess of such 1.5% limit in connection with the Offering. These excess costs were not included in our financial statements because such costs were not a liability to us as they exceeded 1.5% of gross proceeds from the Offering.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the acquisition of real estate and real estate related investments and the payment of tenant improvements, acquisition-related expenses, operating expenses, distributions and interest and principal on any current and future indebtedness. We expect to meet our long-term liquidity requirements through proceeds from the cash flow from operations, and proceeds from secured or unsecured borrowings from banks and other lenders.
We expect that substantially all 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 may use other sources to fund distributions, as necessary, including proceeds from the Offering borrowings on the Credit Facility and/or future borrowings on 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 debt financings will be used to fund acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding debt or distributions to our stockholders in excess of cash flows from operations.

29

As of September 30, 2014, we and the Consolidated Joint Venture had $1.0 billion of debt outstanding, with a weighted average interest rate of 2.23%. Our contractual obligations as of September 30, 2014 were as follows (in thousands): 
  
 
Payments due by period (1) (2)
  
 
Total
 
Less Than 1
Year
 
1-3 Years
 
3-5 Years
 
More Than 5
Years
Principal payments - fixed rate debt (3)
 
$
257,510

 
$
166

 
$
18,479

 
$
5,497

 
$
233,368

Interest payments - fixed rate debt
 
69,618

 
10,245

 
19,361

 
18,572

 
21,440

Principal payments - variable rate debt (4)
 
40,233

 
—

 
40,233

 
—

 
—

Interest payments - variable rate debt
 
1,576

 
639

 
937

 
—

 
—

Principal payments - credit facility
 
715,000

 
—

 
—

 
715,000

 
—

Interest payments - credit facility (5)
 
55,643

 
15,182

 
30,363

 
10,098

 
—

Total
 
$
1,139,580

 
$
26,232

 
$
109,373

 
$
749,167

 
$
254,808

 
 
 
 
 
 
 
 
 
 
 
(1)
The table does not include amounts due to CCI Advisors or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable.
(2)
As of September 30, 2014, we had $41.0 million of variable rate debt effectively fixed through the use of an interest rate swap agreement. We used the effective interest rate fixed under our swap agreement to calculate the debt payment obligations in future periods.
(3)
Principal payment amounts reflect actual payments based on the face amount of notes payable secured by our wholly-owned properties and the Consolidated Joint Venture. As of September 30, 2014, the fair value adjustment, net of amortization, of mortgage notes assumed was $127,000.
(4)
A rate of 1.59% was used to calculate the variable debt payment obligations in future periods. This was the rate effective as of September 30, 2014.
(5)
Payment obligations for the Term Loan outstanding under the Credit Facility are based on the interest rate of 3.03% as of September 30, 2014, which was the rate fixed under the executed swap agreement that had the effect of fixing the variable interest rate per annum through the maturity date of October 2018. Payment obligations for the Revolving Loans outstanding were based on the weighted average interest rate in effect of 1.75% as of September 30, 2014.
We expect to incur additional borrowings in the future to acquire additional properties and make other real estate related investments. There is no limitation on the amount we may borrow against any single improved property. Our future borrowings will not exceed 300% of our net assets as of the date of any borrowing, which is the maximum level of indebtedness permitted under the North American Securities Administrators Association REIT Guidelines; however, we may exceed that limit if approved by a majority of our independent directors. Our board of directors 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 the excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in the next quarterly report along with the justification for such excess borrowing. Our advisor has set a target leverage ratio of 40% to 50% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets. As of September 30, 2014, our ratio of debt to total gross real estate assets, net of gross intangible lease liabilities, was 38%.
Cash Flow Analysis
Operating Activities. Net cash provided by operating activities increased $70.8 million to $74.1 million during the nine months ended September 30, 2014, compared to net cash provided by operating activities of $3.3 million for the nine months ended September 30, 2013. The increase was primarily due to an increase in net income of $50.9 million and an increase in depreciation and amortization of $43.1 million, partially offset by an increase in working capital accounts of $23.2 million. See “— Results of Operations” for a more complete discussion of the factors impacting our operating performance.
Investing Activities. Net cash used in investing activities was $319.1 million for the nine months ended September 30, 2014, compared to $1.1 billion for the nine months ended September 30, 2013. The decrease was primarily due to a decrease in investment in real estate assets of $787.0 million.
Financing Activities. Net cash provided by financing activities decreased $1.2 billion to $210.0 million for the nine months ended September 30, 2014, compared to $1.4 billion for the nine months ended September 30, 2013. The decrease was primarily due to a decrease in net proceeds from the issuance of common stock under the Offering of $1.3 billion, a decrease in proceeds from the Credit Facility and notes payable, net of repayments, of $225.7 million, and an increase in distributions to investors of $34.9 million.

30

Election as a REIT
We are taxed as a REIT under the Internal Revenue Code. 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, among other things, distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains).
If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated unaudited 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 unaudited financial statements.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform to 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. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We consider our critical accounting policies to be the following:
•
Investment in and Valuation of Real Estate Assets;
•
Allocation of Purchase Price of Real Estate Assets;
•
Derivative Instruments and Hedging Activities;
•
Revenue Recognition; and
•
Income Taxes.
Except as set forth below, 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, 2013. 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, 2013, and related notes thereto.
Commitments and Contingencies
We may be subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 8 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanations.
Related-Party Transactions and Agreements
We have entered into agreements with CCI Advisors and its affiliates whereby we have paid, and will continue to pay, certain fees to, or reimburse certain expenses of, CCI Advisors or its affiliates, such as acquisition and advisory fees and expenses, organization and offering costs, sales commissions, dealer manager fees and expenses, leasing fees and reimbursement of certain operating costs. See Note 9 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for a further explanation of the various related-party transactions, agreements and fees.
Subsequent Events
Certain events occurred subsequent to September 30, 2014 through the filing date of this Quarterly Report on Form 10-Q. Refer to Note 11 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanation.


31

Recent Accounting Pronouncements
Refer to Note 3 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for further explanation. There have been no accounting pronouncements issued, but not yet applied by us, that will significantly impact our financial statements.
Off-Balance Sheet Arrangements
As of September 30, 2014 and December 31, 2013, 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
We have obtained variable rate debt financing to fund certain property acquisitions and therefore we are exposed to changes in LIBOR. We intend to manage our interest rate risk by limiting the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We have entered and may continue to enter into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. We may also enter into rate lock arrangements to lock interest rates on future borrowings. We may be exposed to credit and market risks including, but not limited to, the failure of any counterparty to perform under the terms of the derivative contract or the adverse effect on the value of the financial instrument resulting from a change in interest rates.
As of September 30, 2014, we and the Consolidated Joint Venture had $455.2 million of variable rate debt, including the Revolving Loans, and therefore we are exposed to interest rate changes in LIBOR. As of September 30, 2014, a change of 50 basis points in interest rates would result in a change in interest expense of $2.3 million per year, assuming all of our derivatives remain effective hedges.
As of September 30, 2014, we had two interest rate swap agreements outstanding, which mature between October 2018 and August 2020, with an aggregate notional amount under the swap agreements of $341.0 million and an aggregate net fair value of  $1.8 million. The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of September 30, 2014, an increase of 50 basis points in interest rates would result in an increase to the fair value of the derivative asset of $6.1 million.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of September 30, 2014, were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act, and is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.
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 nine months ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

32

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
The following risk factors supplement the risk factors set forth in “Item 1A - Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. The risk factors contained in this “Item 1A - Risk Factors” should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto, and the other unaudited financial data, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q.
Certain members of our management and the management of our advisor have been and may continue to be required to devote time and resources to addressing issues created as a result of ARCP’s recent announcement that certain of ARCP’s financial statements should no longer be relied upon. To the extent such matters require further attention of the members of our management and the management of our advisor, such persons’ focus on our business strategy may be diminished.
On October 29, 2014, ARCP, the indirect parent of our sponsor, our advisor, our dealer manager and our property manager, announced that, as a result of an independent investigation being conducted by its audit committee, certain of ARCP’s financial statements should no longer be relied upon and that such independent investigation is ongoing. Certain members of our management and the management of our advisor have been and may continue to be required to devote time and resources to addressing issues created as a result of such announcement. Should such persons be required to devote further attention to these matters, their focus on our business strategy may be diminished.
The Merger and the other transactions contemplated by the Merger Agreement are subject to conditions that may not be satisfied or completed on a timely basis, if at all. Failure to complete these transactions could have material and adverse effects on the future value of our business and financial results.
        The completion of the Merger and the other transactions contemplated by the Merger Agreement are subject to a number of conditions, including the approval by SIR shareholders of the issuance of SIR Common Shares in connection with the Merger, the approval of the Merger by our stockholders and the receipt of certain lender consents which make the completion, and the timing of the completion, of the Merger uncertain. If the transactions contemplated by the Merger Agreement are not completed on a timely basis, or at all, we may be adversely affected and subject to a number of risks, including the following:
•
being required to pay our costs relating to the transactions contemplated by the Merger Agreement, such as legal, accounting, financial advisory and printing fees, whether or not such transactions are completed; 

•
being obligated, under certain circumstances, to reimburse SIR for its expenses in an aggregate amount not to exceed $20 million if we fail to obtain stockholder approval for the Merger; and

•
the time and resources committed by our management to matters relating to the transactions contemplated by the Merger Agreement could otherwise have been devoted to pursuing other beneficial opportunities.

If the Merger is not completed, these risks could negatively impact the future value of our business and our financial results.
The pendency of the Merger could adversely affect our business and operations.
        In connection with the pending Merger and the other transactions contemplated by the Merger Agreement, some tenants or vendors may delay or defer decisions related to their business dealings with us, which could negatively impact our revenues, earnings, cash flows or expenses, regardless of whether the Merger and the related transactions are completed. In addition, due to operating covenants in the Merger Agreement, we may be unable, during the pendency of the Merger, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business, even if such actions could prove beneficial to us.
If we do not complete the Merger, there will continue to be no public trading market for shares of our common stock and a public market may never develop.
There currently is no public market for shares of our common stock and, absent the completion of the pending Merger or a similar transaction, there is no assurance that a public market may develop. In addition, our charter does not have a fixed date or method for providing stockholders with liquidity. If the Merger is not completed, our stockholders will not have the opportunity to sell their shares of our common stock and our Board will review other alternatives for a liquidity event, which

33

may not occur in the near term or on terms as attractive as the terms of the Merger. Furthermore, on August 20, 2014, our Board suspended our share redemption program and we do not anticipate that the Board will resume our share redemption program while the Merger is pending. As a result, if we do not complete the Merger, you may have to hold your shares of our common stock for an indefinite period of time or, if you are able to sell your shares of our common stock, you likely would have to sell them at a substantial discount to the price you paid for your shares of our common stock. If our share redemption program is resumed, the program contains numerous restrictions that may limit your ability to sell your shares.
The Merger Agreement contains provisions that limit our ability to pursue alternatives to the Merger, and could discourage a potential competing acquirer of our company from making a favorable alternative proposal or could result in any competing acquisition proposal being at a lower price that it might otherwise be.
        The Merger Agreement contains certain provisions that restrict our ability to solicit, initiate or knowingly facilitate or encourage or, subject to certain exceptions, engage in discussions or negotiations with respect to, or enter into any acquisition agreement with respect to, a competing acquisition proposal. Further, even if our Board withdraws or qualifies its recommendation with respect to approval of the Merger and the other transactions contemplated by the Merger Agreement, unless the Merger Agreement has been terminated in accordance with its terms, we will still be required to submit the Merger and the other transactions contemplated by the Merger Agreement to a vote of our stockholders. In addition, SIR generally has an opportunity to offer to modify the terms of the transactions contemplated by the Merger Agreement in response to any competing acquisition proposal before our Board may withdraw or qualify its recommendation with respect to the Merger.  Moreover, upon termination of the Merger Agreement in certain circumstances, we may be required to pay SIR’s expenses of up to $20 million or a termination fee to SIR of $75 million.
        These provisions could discourage a potential competing acquirer or merger partner that might have an interest in acquiring all or a significant portion of the Company or our portfolio from considering or proposing such a transaction, even if it were prepared to pay consideration with a higher per share cash or market value than the per share cash or market value proposed to be received or realized in the transactions contemplated by the Merger Agreement. These provisions also might result in a potential competing acquirer or merger partner proposing to pay a lower price to holders of our common stock than it might otherwise have proposed to pay because of the added expense of the payment of expenses or termination fee that may become payable to SIR.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
As of September 30, 2014, we had issued approximately 198.4 million shares of common stock in the Offerings for gross proceeds of $2.0 billion, out of which we paid $165.6 million in selling commissions and dealer manager fees, $28.8 million in organization and offering costs and $72.4 million in acquisition-related expenses to CCI Advisors or its affiliates. With the net offering proceeds, we acquired $2.6 billion in real estate assets. As of November 12, 2014, we had issued approximately 198.4 million shares in the Offerings for gross offering proceeds of $2.0 billion. The Company did not make any sales of unregistered securities during the nine months ended September 30, 2014.
Our share redemption program permits our stockholders to sell their shares back to us after they have held them for at least one year, subject to significant conditions and limitations. Our board of directors reserves the right in its sole discretion at any time, and from time to time, to waive the one-year holding period in the event of death, bankruptcy or other exigent circumstances or terminate, suspend or amend the share redemption program. The share redemption program provides that we will redeem shares of our common stock from requesting stockholders, subject to the terms and conditions of the share redemption program. Under the share redemption program, we will not redeem in excess of 5% 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 net proceeds we receive from the sale of shares under the DRIP. In addition, under the share redemption program, we will redeem shares on a quarterly basis, at the rate of 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. On August 20, 2014, the Board, including all of the Company’s independent directors, resolved to suspend the share redemption program.

34

The provisions of the share redemption program in no way limit our ability to repurchase shares from stockholders by any other legally available means for any reason that our board of directors, in its discretion, deems to be in our best interest. During the three months ended September 30, 2014, we redeemed shares, including those due to death, as follows:
Period
 
Total Number
of Shares
Redeemed
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
July 1, 2014 - July 31, 2014
 
—

 
$
—

 
—

 
(1)
August 1, 2014 - August 31, 2014
 
217,034

 
$
9.75

 
217,034

 
(1)
September 1, 2014 - September 30, 2014
 
—

 
$
—

 
—

 
(1)
Total
 
217,034

 
 
 
217,034

 
(1)
 
 
 
 
 
 
 
 
 
(1)
A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table.
Item 3.
Defaults Upon Senior Securities
No events occurred during the nine months ended September 30, 2014 that would require a response to this item.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
Effective November 11, 2014 (the “Effective Date”), subject to SIR’s consent under the Merger Agreement, Simon J. Misselbrook has been appointed chief financial officer and treasurer of the Company by the Company’s board of directors. Mr. Misselbrook also serves or served in the following positions for certain other programs sponsored by Cole Capital®:
Entity
 
Position(s)
 
Dates
Cole Credit Property Trust, Inc.
 
Senior vice president of accounting and principal accounting officer
 
March 2012 — May 2014
 
 
Vice president of accounting and principal accounting officer
 
November 2010 — March 2012
Cole Credit Property Trust II, Inc.
 
Vice president of accounting and principal accounting officer
 
November 2010 — March 2012
Cole Real Estate Investments, Inc. (formerly known as Cole Credit Property Trust III, Inc.)
 
Senior vice president of accounting and principal accounting officer
 
March 2012 — February 2014
 
Vice president of accounting and principal accounting officer
 
November 2010 — March 2012
Cole Credit Property Trust IV, Inc.
 
Chief financial officer and treasurer
 
September 2014 — Present
 
 
Senior vice president of accounting and principal accounting officer
 
March 2012 — March 2014
 
 
Vice president of accounting and principal accounting officer
 
May 2011 — March 2012
Cole Credit Property Trust V, Inc.
 
Chief financial officer and treasurer
 
September 2014 — Present
Cole Real Estate Income Strategy (Daily NAV), Inc.
 
Chief financial officer, treasurer and principal accounting officer
 
September 2014 — Present
 
 
Senior vice president of accounting and principal accounting officer
 
March 2012 — September 2014
 
 
Vice president of accounting and principal accounting officer
 
November 2011 — March 2012
Cole Office & Industrial REIT (CCIT II), Inc.
 
Chief financial officer and treasurer
 
November 2014 — Present
Mr. Misselbrook also serves as chief financial officer and treasurer — managed retail REITs, Cole Capital, at ARCP. Mr. Misselbrook has worked in the real estate industry for more than 13 years, nine of which were specific to the real estate investment trust (REIT) industry. Prior to joining Cole Capital and its affiliates in April 2007, he held the position of audit manager at Deloitte & Touche LLP in Los Angeles in the real estate group serving multiple clients including the world’s largest commercial real estate services firm, where he was the global engagement manager. Mr. Misselbrook earned his bachelor’s

35

degree in accounting and tax, as well as a master’s degree in accounting science, from the University of South Africa. He is a Certified Public Accountant (licensed in the state of California), a Chartered Accountant (licensed in South Africa) and a member of the American Institute of Certified Public Accountants. He is an active participant in the REIT industry and participates in the Investment Program Association’s Non-Traded REIT Financial Standards Sub-Committee.
Mr. Misselbrook did not enter into an employment agreement with the Company in connection with his appointment as the Company’s chief financial officer, and the appointment of Mr. Misselbrook as chief financial officer of the Company was not made pursuant to any arrangement or understanding between Mr. Misselbrook and any other person. Mr. Misselbrook has not had any direct or indirect material interests in any transaction with the Company or to which the Company is a party or in any currently proposed transaction with the Company or to which the Company is a party.
Item 6.
Exhibits
The exhibits listed on the Exhibit Index (following the signature section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.

36

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 Corporate Income Trust, Inc.
(Registrant)
 
By:
 
/s/ Gavin B. Brandon
Name:
 
Gavin B. Brandon
Title:
 
Senior Vice President of Accounting (Principal Accounting Officer)
Date: November 13, 2014

37

EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
 
Description
2.1
 
Agreement and Plan of Merger, dated as of August 30, 2014, by and among Cole Corporate Income Trust, Inc., SC Merger Sub LLC and Select Income REIT (Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K (File No. 000-54940), filed on September 2, 2014).
3.1
 
Articles of Amendment and Restatement of Cole Corporate Income Trust, Inc. dated January 19, 2011 (Incorporated by reference to Exhibit 3.1 to the Company’s Pre-Effective Amendment No. 5 to Form S-11 (File No. 333-166447), filed on January 25, 2011).
3.2
 
Bylaws of Cole Corporate Income Trust, Inc. adopted January 18, 2011 (Incorporated by reference to Exhibit 3.2 to the Company’s Pre-Effective Amendment No. 5 to Form S-11 (File No. 333-166447), filed on January 25, 2011).
3.3
 
Articles of Amendment to Articles of Amendment and Restatement effective February 23, 2011 (Incorporated by reference to Exhibit 3.3 to the Company’s Form 8-K (File No. 333-166447), filed on February 28, 2011).
3.4
 
Certificate of Correction to Articles of Amendment and Restatement, dated January 25, 2013 (Incorporated by reference to Exhibit 3.4 to the Company’s Form 10-K (File No. 333-166447), filed on March 28, 2013).
3.5
 
Second Articles of Amendment to Articles of Amendment and Restatement, dated May 29, 2014 (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K (File No. 000-54940), filed on June 2, 2014).
3.6
 
Amendment to Bylaws of Cole Corporate Income Trust, Inc., effective August 30, 2014 (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K (File No. 000-54940), filed on September 2, 2014).
10.1
 
Form of Indemnification Agreement (Incorporated by Reference to Exhibit 10.1 to the Company’s Form 8-K (File No. 000-54940), filed on September 2, 2014).
31.1*
 
Certifications of the Principal Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
 
Certifications of the Principal Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
 
Certifications of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.

COLE CORPORATE INCOME TRUST, INC. Reports