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EX-32.4 - EXHIBIT 32.4 - VEREIT, Inc.vereit3312016-ex324.htm
EX-31.2 - EXHIBIT 31.2 - VEREIT, Inc.vereit3312016-ex312.htm
EX-32.1 - EXHIBIT 32.1 - VEREIT, Inc.vereit3312016-ex321.htm
EX-31.1 - EXHIBIT 31.1 - VEREIT, Inc.vereit3312016-ex311.htm
EX-31.3 - EXHIBIT 31.3 - VEREIT, Inc.vereit3312016-ex313.htm
EX-31.4 - EXHIBIT 31.4 - VEREIT, Inc.vereit3312016-ex314.htm
EX-32.2 - EXHIBIT 32.2 - VEREIT, Inc.vereit3312016-ex322.htm
EX-32.3 - EXHIBIT 32.3 - VEREIT, Inc.vereit3312016-ex323.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________

Commission file numbers: 001-35263 and 333-197780

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. VEREIT, Inc. Yes x No o VEREIT Operating Partnership, L.P. Yes x No o
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). VEREIT, Inc. Yes x No o VEREIT Operating Partnership, L.P. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
VEREIT, Inc.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
VEREIT Operating Partnership, L.P.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
VEREIT, Inc. Yes o No x VEREIT Operating Partnership, L.P. Yes o No x
There were 904,842,650 shares of common stock of VEREIT, Inc. outstanding as of May 3, 2016.




EXPLANATORY NOTE

This report combines the Quarterly Reports on Form 10-Q for the three months ended March 31, 2016 of VEREIT, Inc., a Maryland corporation, and VEREIT Operating Partnership, L.P., a Delaware limited partnership, of which VEREIT, Inc. is the sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” the “Company” or the “General Partner” mean VEREIT, Inc. together with its consolidated subsidiaries, including VEREIT Operating Partnership, L.P., and all references to the “Operating Partnership” or “OP” mean VEREIT Operating Partnership, L.P. together with its consolidated subsidiaries.
As the sole general partner of VEREIT Operating Partnership, L.P., VEREIT, Inc. has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control.
We believe combining the Quarterly Reports on Form 10-Q of VEREIT, Inc. and VEREIT Operating Partnership, L.P. into this single report results in the following benefits:
enhancing investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminating duplicative disclosure and providing a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.
There are a few differences between the Company and the Operating Partnership, which are reflected in the disclosure in this report. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how we operate as an interrelated consolidated company. VEREIT, Inc. is a real estate investment trust whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, VEREIT, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity or debt from time to time and guaranteeing certain unsecured debt of the Operating Partnership and certain of its subsidiaries. The Operating Partnership holds substantially all of the assets of the Company and holds the ownership interests in the Company’s joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from public equity issuances by VEREIT, Inc., which are generally contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units. To help investors understand the significant differences between VEREIT, Inc. and the Operating Partnership, there are separate sections in this report, as applicable, that separately discuss VEREIT, Inc. and the Operating Partnership, including the consolidated financial statements and certain notes to the consolidated financial statements as well as separate Exhibit 31 and Exhibit 32 certifications. As general partner with control of the Operating Partnership, VEREIT, Inc. consolidates the Operating Partnership for financial reporting purposes. Therefore, the assets and liabilities of VEREIT, Inc. and VEREIT Operating Partnership, L.P. are the same on their respective consolidated financial statements. The separate discussions of VEREIT, Inc. and VEREIT Operating Partnership, L.P. in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.



VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
For the quarterly period ended March 31, 2016

 
Page

1

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

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
 
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
3,058,879

 
$
3,120,653

Buildings, fixtures and improvements
 
11,161,327

 
11,445,690

Intangible lease assets
 
2,145,734

 
2,218,378

Total real estate investments, at cost
 
16,365,940

 
16,784,721

Less: accumulated depreciation and amortization
 
1,865,674

 
1,778,597

Total real estate investments, net
 
14,500,266

 
15,006,124

Investment in unconsolidated entities
 
23,445

 
56,824

Investment in direct financing leases, net
 
45,611

 
46,312

Investment securities, at fair value
 
48,162

 
53,304

Mortgage notes receivable, net
 
23,559

 
24,238

Cash and cash equivalents
 
104,450

 
69,103

Restricted cash
 
60,132

 
59,767

Intangible assets, net
 
43,327

 
50,779

Rent and tenant receivables and other assets, net
 
313,903

 
303,637

Goodwill
 
1,642,858

 
1,656,374

Due from affiliates
 
11,617

 
60,633

Real estate assets held for sale, net
 
26,282

 
18,771

Total assets
 
$
16,843,612


$
17,405,866

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Mortgage notes payable and other debt, net
 
$
3,029,666

 
$
3,111,985

Corporate bonds, net
 
2,537,699

 
2,536,333

Convertible debt, net
 
965,469

 
962,894

Credit facility, net
 
1,269,731

 
1,448,590

Below-market lease liabilities, net
 
245,093

 
251,692

Accounts payable and accrued expenses
 
118,970

 
151,877

Deferred rent, derivative and other liabilities
 
88,997

 
87,490

Distributions payable
 
143,973

 
140,816

Due to affiliates
 

 
230

Total liabilities
 
8,399,598

 
8,691,907

Commitments and contingencies (Note 14)
 

 


Preferred stock, $0.01 par value, 100,000,000 shares authorized and 42,834,138 issued and outstanding as of each of March 31, 2016 and December 31, 2015
 
428

 
428

Common stock, $0.01 par value, 1,500,000,000 shares authorized and 904,757,365 and 904,884,394 issued and outstanding as of March, 31, 2016 and December, 31, 2015, respectively
 
9,048

 
9,049

Additional paid-in-capital
 
11,932,859

 
11,931,768

Accumulated other comprehensive loss
 
(11,345
)
 
(2,025
)
Accumulated deficit
 
(3,671,050
)
 
(3,415,233
)
Total stockholders’ equity
 
8,259,940

 
8,523,987

Non-controlling interests
 
184,074

 
189,972

Total equity
 
8,444,014

 
8,713,959

Total liabilities and equity
 
$
16,843,612


$
17,405,866


The accompanying notes are an integral part of these statements.

2

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

 
 
Three Months Ended March 31,
 
 
2016
 
2015
Revenues:
 
 
 
 
Rental income
 
$
313,971

 
$
342,759

Direct financing lease income
 
569

 
741

Operating expense reimbursements
 
23,247

 
22,974

Cole Capital revenue
 
31,233

 
27,494

Total revenues
 
369,020


393,968

Operating expenses:
 
 
 
 
Cole Capital reallowed fees and commissions
 
8,068

 
2,031

Acquisition related 
 
242

 
2,182

Litigation and other non-routine costs, net of insurance recoveries
 
(5,175
)
 
16,423

Property operating
 
34,813

 
30,999

General and administrative
 
29,400

 
33,106

Depreciation and amortization
 
204,308

 
219,141

Impairments
 
160,517

 

Total operating expenses
 
432,173


303,882

Operating (loss) income
 
(63,153
)

90,086

Other (expense) income:
 
 
 
 
Interest expense
 
(80,426
)
 
(95,699
)
Gain on extinguishment and forgiveness of debt, net
 

 
5,302

Other income, net
 
1,062

 
4,060

Equity in income and gain on disposition of unconsolidated entities
 
10,404

 
28

Loss on derivative instruments, net
 
(1,086
)
 
(1,028
)
Total other expenses, net
 
(70,046
)

(87,337
)
(Loss) income before taxes and real estate dispositions
 
(133,199
)
 
2,749

Gain (loss) on disposition of real estate, net
 
17,175

 
(31,368
)
Loss before taxes
 
(116,024
)

(28,619
)
Provision for income taxes
 
(56
)
 
(2,074
)
Net loss
 
(116,080
)

(30,693
)
Net loss attributable to non-controlling interests (1)
 
2,994

 
723

Net loss attributable to the General Partner
 
$
(113,086
)

$
(29,970
)
 
 
 
 
 
Basic and diluted net loss per share attributable to common stockholders
 
$
(0.15
)
 
$
(0.05
)
Distributions declared per common share
 
$
0.14

 
$

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

The accompanying notes are an integral part of these statements.

3

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

 
 
Three Months Ended March 31,
 
 
2016
 
2015
Net loss
 
$
(116,080
)
 
$
(30,693
)
Other comprehensive loss:
 
 
 
 
Unrealized loss on interest rate derivatives
 
(9,702
)
 
(10,396
)
Amount of loss reclassified from accumulated other comprehensive loss into net loss as interest expense
 
2,099

 
2,736

Unrealized (loss) gain on investment securities, net
 
(1,961
)
 
796

Total other comprehensive loss
 
(9,564
)

(6,864
)
 
 
 
 
 
Total comprehensive loss
 
(125,644
)
 
(37,557
)
Comprehensive loss attributable to non-controlling interests (1)
 
3,238

 
723

Total comprehensive loss attributable to the General Partner

$
(122,406
)

$
(36,834
)
_______________________________________________
(1)
Represents loss attributable to limited partners and consolidated joint venture partners.

The accompanying notes are an integral part of these statements.



4

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

 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of Shares
 
Par
Value
 
Number
of Shares
 
Par
Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Accumulated
Deficit
 
Total Stock-holders’ Equity
 
Non-Controlling Interests
 
Total Equity
Balance, January 1, 2016
 
42,834,138

 
$
428

 
904,884,394

 
$
9,049

 
$
11,931,768

 
$
(2,025
)
 
$
(3,415,233
)
 
$
8,523,987

 
$
189,972

 
$
8,713,959

Repurchases of common stock to settle tax obligation
 

 

 
(127,741
)
 
(1
)
 
(1,023
)
 

 

 
(1,024
)
 

 
(1,024
)
Equity-based compensation, net
 

 

 
712

 

 
1,730

 

 

 
1,730

 

 
1,730

Contributions from non-controlling interest holders
 

 

 

 

 

 

 

 

 
675

 
675

Distributions declared on common stock
 

 

 

 

 

 

 
(124,285
)
 
(124,285
)
 

 
(124,285
)
Distributions to non-controlling interest holders
 

 

 

 

 

 

 

 

 
(3,299
)
 
(3,299
)
Distributions to participating securities
 

 

 

 

 

 

 
(125
)
 
(125
)
 

 
(125
)
Distributions to preferred shareholders and unitholders
 

 

 

 

 

 

 
(17,937
)
 
(17,937
)
 
(36
)
 
(17,973
)
Cumulative-effect adjustment for equity-based compensation forfeitures
 

 

 

 

 
384

 

 
(384
)
 

 

 

Net loss
 

 

 

 

 

 

 
(113,086
)
 
(113,086
)
 
(2,994
)
 
(116,080
)
Other comprehensive loss
 

 

 

 

 

 
(9,320
)
 

 
(9,320
)
 
(244
)
 
(9,564
)
Balance, March 31, 2016
 
42,834,138

 
$
428

 
904,757,365

 
$
9,048

 
$
11,932,859

 
$
(11,345
)
 
$
(3,671,050
)
 
$
8,259,940

 
$
184,074

 
$
8,444,014


 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of Shares
 
Par
Value
 
Number
of Shares
 
Par
Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Accumulated
Deficit
 
Total Stock-holders’ Equity
 
Non-Controlling Interests
 
Total Equity
Balance, January 1, 2015

42,834,138

 
$
428

 
905,530,431

 
$
9,055

 
$
11,920,253

 
$
2,728

 
$
(2,778,576
)

$
9,153,888


$
228,442


$
9,382,330

Repurchases of common stock to settle tax obligation
 

 

 
(132,826
)
 
(1
)
 
(1,206
)
 

 

 
(1,207
)
 

 
(1,207
)
Equity-based compensation, net
 

 

 
(262,886
)
 
(3
)
 
821

 

 

 
818

 

 
818

Tax shortfall from equity-based compensation
 

 

 

 

 
(510
)
 

 

 
(510
)
 

 
(510
)
Distributions to non-controlling interest holders
 

 

 

 

 

 

 

 

 
(464
)
 
(464
)
Distributions to participating securities
 

 

 

 

 

 

 
(5
)
 
(5
)
 

 
(5
)
Distributions to preferred shareholders
 

 

 

 

 

 

 
(17,973
)
 
(17,973
)
 

 
(17,973
)
Net loss
 

 

 

 

 

 

 
(29,970
)
 
(29,970
)
 
(723
)
 
(30,693
)
Other comprehensive loss
 

 

 

 

 

 
(6,864
)
 

 
(6,864
)
 

 
(6,864
)
Balance, March 31, 2015
 
42,834,138


$
428


905,134,719


$
9,051


$
11,919,358


$
(4,136
)

$
(2,826,524
)

$
9,098,177


$
227,255


$
9,325,432



The accompanying notes are an integral part of these statements.

5

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

 
 
Three Months Ended March 31,
 
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(116,080
)
 
$
(30,693
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
208,362

 
224,111

(Gain) loss on real estate assets and joint venture, net
 
(27,373
)
 
31,368

Impairments
 
160,517

 

Equity-based compensation
 
1,730

 
818

Equity in income of unconsolidated entities
 
(206
)
 
(28
)
Distributions from unconsolidated entities
 
1,491

 
2,866

    Loss on derivative instruments
 
1,086

 
1,028

(Gain) on investment securities
 

 
(233
)
Gain on extinguishment and forgiveness of debt, net
 

 
(5,307
)
Changes in assets and liabilities:
Investment in direct financing leases
 
701

 
495

Rent and tenant receivables and other assets, net
 
(13,024
)
 
(30,757
)
Due from affiliates
 
(984
)
 
27,665

Accounts payable and accrued expenses
 
(32,556
)
 
2,013

Deferred rent, derivative and other liabilities
 
(4,822
)
 
6,798

Due to affiliates
 
(230
)
 
(12
)
Net cash provided by operating activities
 
178,612

 
230,132

Cash flows from investing activities:
 
 
 
 
Investments in real estate assets
 
(19,952
)
 
(7,627
)
Capital expenditures and leasing costs
 
(5,388
)
 
(3,649
)
Real estate developments
 
(554
)
 
(15,998
)
Principal repayments received from borrowers
 
3,863

 
3,668

Proceeds from disposition of real estate and joint venture
 
176,137

 
245,548

Investment in leasehold improvements and other assets
 
(574
)
 

Deposits for real estate assets
 
(3,818
)
 
(3,509
)
Uses and refunds of deposits for real estate assets
 
2,019

 
7,939

Line of credit advances to affiliates
 

 
(10,000
)
Line of credit repayments from affiliates
 
50,000

 
10,000

Change in restricted cash
 
(365
)
 
(6,315
)
Net cash provided by investing activities
 
201,368

 
220,057

Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
206

 
1,158

Payments on mortgage notes payable and other debt
 
(21,948
)
 
(59,308
)
Proceeds from credit facilities
 
203,000

 

Payments on credit facilities
 
(383,000
)
 

Payments of deferred financing costs
 
(240
)
 
(326
)
Repurchases of common stock to settle tax obligations
 
(801
)
 
(1,207
)
Contributions from non-controlling interest holders
 
675

 

Distributions paid
 
(142,525
)
 
(18,478
)
Net cash used in financing activities
 
(344,633
)
 
(78,161
)
Net change in cash and cash equivalents
 
35,347

 
372,028

Cash and cash equivalents, beginning of period
 
69,103

 
416,711

Cash and cash equivalents, end of period
 
$
104,450

 
$
788,739


The accompanying notes are an integral part of these statements.

6

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

 
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
3,058,879

 
$
3,120,653

Buildings, fixtures and improvements
 
11,161,327

 
11,445,690

Intangible lease assets
 
2,145,734

 
2,218,378

Total real estate investments, at cost
 
16,365,940


16,784,721

Less: accumulated depreciation and amortization
 
1,865,674

 
1,778,597

Total real estate investments, net
 
14,500,266


15,006,124

Investment in unconsolidated entities
 
23,445

 
56,824

Investment in direct financing leases, net
 
45,611

 
46,312

Investment securities, at fair value
 
48,162

 
53,304

Mortgage notes receivable, net
 
23,559

 
24,238

Cash and cash equivalents
 
104,450

 
69,103

Restricted cash
 
60,132

 
59,767

Intangible assets, net
 
43,327

 
50,779

Rent and tenant receivables and other assets, net
 
313,903

 
303,637

Goodwill
 
1,642,858

 
1,656,374

Due from affiliates
 
11,617

 
60,633

Real estate assets held for sale, net
 
26,282

 
18,771

Total assets
 
$
16,843,612


$
17,405,866

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 

Mortgage notes payable and other debt, net
 
$
3,029,666

 
$
3,111,985

Corporate bonds, net
 
2,537,699

 
2,536,333

Convertible debt, net
 
965,469

 
962,894

Credit facility, net
 
1,269,731

 
1,448,590

Below-market lease liabilities, net
 
245,093

 
251,692

Accounts payable and accrued expenses
 
118,970

 
151,877

Deferred rent, derivative and other liabilities
 
88,997

 
87,490

Distributions payable
 
143,973

 
140,816

Due to affiliates
 

 
230

Total liabilities
 
8,399,598


8,691,907

Commitments and contingencies (Note 14)
 


 


General partner's preferred equity, 42,834,138 General Partner Preferred Units issued and outstanding as of each of March 31, 2016 and December 31, 2015
 
907,632

 
925,569

General partner's common equity, 904,757,365 and 904,884,394 General Partner OP Units issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
 
7,352,308

 
7,598,418

Limited partner's preferred equity, 86,874 Limited Partner Preferred Units issued and outstanding as of each of March 31, 2016 and December 31, 2015
 
3,279

 
3,315

Limited partner's common equity, 23,763,797 Limited Partner OP Units issued and outstanding as of each of March 31, 2016 and December 31, 2015
 
178,332

 
184,800

Total partners’ equity
 
8,441,551


8,712,102

Non-controlling interests
 
2,463

 
1,857

Total equity
 
8,444,014


8,713,959

Total liabilities and equity
 
$
16,843,612


$
17,405,866


The accompanying notes are an integral part of these statements.


7

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

 
 
Three Months Ended March 31,
 
 
2016
 
2015
Revenues:
 
 
 
 
Rental income
 
$
313,971

 
$
342,759

Direct financing lease income
 
569

 
741

Operating expense reimbursements
 
23,247

 
22,974

Cole Capital revenue
 
31,233

 
27,494

Total revenues
 
369,020


393,968

Operating expenses:
 
 
 
 
Cole Capital reallowed fees and commissions
 
8,068

 
2,031

Acquisition related
 
242

 
2,182

Litigation and other non-routine costs, net of insurance recoveries
 
(5,175
)
 
16,423

Property operating
 
34,813

 
30,999

General and administrative
 
29,400

 
33,106

Depreciation and amortization
 
204,308

 
219,141

Impairments
 
160,517

 

Total operating expenses
 
432,173


303,882

Operating (loss) income
 
(63,153
)

90,086

Other (expense) income:
 
 
 
 
Interest expense
 
(80,426
)
 
(95,699
)
Gain on extinguishment and forgiveness of debt, net
 

 
5,302

Other income, net
 
1,062

 
4,060

Equity in income and gain on disposition of unconsolidated entities
 
10,404

 
28

Loss on derivative instruments, net
 
(1,086
)
 
(1,028
)
Total other expenses, net
 
(70,046
)

(87,337
)
Loss before taxes and real estate dispositions
 
(133,199
)

2,749

Gain (loss) on disposition of real estate, net
 
17,175

 
(31,368
)
Loss before taxes
 
(116,024
)
 
(28,619
)
Provision for income taxes
 
(56
)
 
(2,074
)
Net loss
 
(116,080
)

(30,693
)
Net loss (income) attributable to non-controlling interests (1)
 
39

 
(180
)
Net loss attributable to the OP
 
$
(116,041
)

$
(30,873
)
 
 
 
 
 
Basic and diluted net loss per unit attributable to common unitholders
 
$
(0.15
)
 
$
(0.05
)
Distributions declared per common unit
 
$
0.14

 
$

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

The accompanying notes are an integral part of these statements.

8

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

 
 
Three Months Ended March 31,
 
 
2016
 
2015
Net loss
 
$
(116,080
)
 
$
(30,693
)
Other comprehensive loss:
 
 
 
 
Unrealized loss on interest rate derivatives
 
(9,702
)
 
(10,396
)
Amount of loss reclassified from accumulated other comprehensive loss into income as interest expense
 
2,099

 
2,736

Unrealized (loss) gain on investment securities, net
 
(1,961
)
 
796

Total other comprehensive loss

(9,564
)

(6,864
)
 
 
 
 
 
Total comprehensive loss

(125,644
)

(37,557
)
Comprehensive (income) loss attributable to non-controlling interests (1)
 
39

 
(180
)
Total comprehensive loss attributable to the OP

$
(125,605
)

$
(37,737
)
_______________________________________________
(1)
Represents loss attributable to consolidated joint venture partners.

The accompanying notes are an integral part of these statements.


9

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

 
 
Preferred Units
 
Common Units
 
 
 
 
 
 
 
 
General Partner
 
Limited Partner
 
General Partner
 
Limited Partner
 
 
 
 
 
 
 
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Total Partners' Capital
 
Non-Controlling Interests
 
Total Capital
Balance, January 1, 2016
 
42,834,138

 
$
925,569

 
86,874

 
$
3,315

 
904,884,394

 
$
7,598,418

 
23,763,797

 
$
184,800

 
$
8,712,102

 
$
1,857

 
$
8,713,959

 Repurchases of common OP Units to settle tax obligation
 

 

 

 

 
(127,741
)
 
(1,024
)
 

 

 
(1,024
)
 

 
(1,024
)
 Equity-based compensation
 

 

 

 

 
712

 
1,730

 

 

 
1,730

 

 
1,730

 Contributions from non-controlling interest holders
 

 

 

 

 

 

 

 

 

 
675

 
675

 Distributions to Common OP Units and non-controlling interest holders
 

 

 

 

 

 
(124,410
)
 

 
(3,269
)
 
(127,679
)
 
(30
)
 
(127,709
)
 Distributions to Preferred OP Units
 

 
(17,937
)
 

 
(36
)
 

 

 

 

 
(17,973
)
 

 
(17,973
)
 Net loss
 

 

 

 

 

 
(113,086
)
 

 
(2,955
)
 
(116,041
)
 
(39
)
 
(116,080
)
 Other comprehensive loss
 

 

 

 

 

 
(9,320
)
 

 
(244
)
 
(9,564
)
 

 
(9,564
)
March 31, 2016
 
42,834,138


$
907,632


86,874


$
3,279


904,757,365


$
7,352,308


23,763,797


$
178,332


$
8,441,551


$
2,463


$
8,444,014


 
 
Preferred Units
 
Common Units
 
 
 
 
 
 
 
 
General Partner
 
Limited Partner
 
General Partner
 
Limited Partner
 
 
 
 
 
 
 
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Total Partners' Capital
 
Non-Controlling Interests
 
Total Capital
Balance, January 1, 2015

42,834,138


$
996,987


86,874


$
3,375


905,530,431


$
8,157,167


23,763,797


$
201,102


$
9,358,631


$
23,699


$
9,382,330

 Repurchases of common OP units to settle tax obligation
 

 

 

 

 
(132,826
)
 
(1,207
)
 

 

 
(1,207
)
 

 
(1,207
)
 Equity-based compensation, net forfeitures
 

 

 

 

 
(262,886
)
 
818

 

 

 
818

 

 
818

 Excess tax benefit
 

 

 

 

 

 
(510
)
 

 

 
(510
)
 

 
(510
)
 Distributions to Common OP Units and non-controlling interests
 

 

 

 

 

 
(5
)
 

 

 
(5
)
 
(464
)
 
(469
)
 Distributions to Preferred OP Units
 

 
(17,973
)
 

 

 

 

 

 

 
(17,973
)
 

 
(17,973
)
 Net loss
 

 

 

 

 

 
(29,970
)
 

 
(903
)
 
(30,873
)
 
180

 
(30,693
)
 Other comprehensive loss
 

 

 

 

 

 
(6,657
)
 

 
(207
)
 
(6,864
)
 

 
(6,864
)
March 31, 2015
 
42,834,138


$
979,014


86,874


$
3,375


905,134,719


$
8,119,636


23,763,797


$
199,992


$
9,302,017


$
23,415


$
9,325,432



The accompanying notes are an integral part of these statements.


10

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

 
 
Three Months Ended March 31,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(116,080
)
 
$
(30,693
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
208,362

 
224,111

(Gain) loss on real estate assets and joint venture, net
 
(27,373
)
 
31,368

Impairments
 
160,517

 

Equity-based compensation
 
1,730

 
818

Equity in income of unconsolidated entities
 
(206
)
 
(28
)
Distributions from unconsolidated entities
 
1,491

 
2,866

Loss on derivative instruments
 
1,086

 
1,028

Gain on investment securities
 

 
(233
)
Gain on extinguishment and forgiveness of debt, net
 

 
(5,307
)
Changes in assets and liabilities:
Investment in direct financing leases
 
701

 
495

Rent and tenant receivables and other assets, net
 
(13,024
)
 
(30,757
)
Due from affiliates
 
(984
)
 
27,665

Accounts payable and accrued expenses
 
(32,556
)
 
2,013

Deferred rent, derivative and other liabilities
 
(4,822
)
 
6,798

Due to affiliates
 
(230
)
 
(12
)
Net cash provided by operating activities
 
178,612


230,132

Cash flows from investing activities:
 
 
 
 
Investments in real estate assets
 
(19,952
)
 
(7,627
)
Capital expenditures and leasing costs
 
(5,388
)
 
(3,649
)
Real estate developments
 
(554
)
 
(15,998
)
Principal repayments received from borrowers
 
3,863

 
3,668

Proceeds from disposition of real estate and joint venture
 
176,137

 
245,548

Investment in leasehold improvements and other assets
 
(574
)
 

Deposits for real estate assets
 
(3,818
)
 
(3,509
)
Uses and refunds of deposits for real estate assets
 
2,019

 
7,939

Line of credit advances to affiliates
 

 
(10,000
)
Line of credit repayments from affiliates
 
50,000

 
10,000

Change in restricted cash
 
(365
)
 
(6,315
)
Net cash provided by investing activities
 
201,368

 
220,057

Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
206

 
1,158

Payments on mortgage notes payable and other debt
 
(21,948
)
 
(59,308
)
Proceeds from credit facilities
 
203,000

 

Payments on credit facilities
 
(383,000
)
 

Payments of deferred financing costs
 
(240
)
 
(326
)
Repurchases of common units to settle tax obligations
 
(801
)
 
(1,207
)
Contributions from non-controlling interest holders
 
675

 

Distributions paid
 
(142,525
)
 
(18,478
)
Net cash used in financing activities
 
(344,633
)

(78,161
)
Net change in cash and cash equivalents
 
35,347

 
372,028

Cash and cash equivalents, beginning of period
 
69,103

 
416,711

Cash and cash equivalents, end of period
 
$
104,450


$
788,739


The accompanying notes are an integral part of these statements.

11

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016 (Unaudited)


Note 1 – Organization
VEREIT, Inc. (the “General Partner” or “VEREIT”), is a Maryland corporation, incorporated on December 2, 2010, that qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning in the taxable year ended December 31, 2011. VEREIT Operating Partnership, L.P. (together with its subsidiaries, the “Operating Partnership” or the “OP”), is a Delaware limited partnership of which the General Partner is the sole general partner. VEREIT’s common stock, par value $0.01 per share (“Common Stock”), and its 6.70% Series F Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series F Preferred Stock”) trade on the New York Stock Exchange (“NYSE”) under the trading symbols, “VER” and “VER PRF,” respectively. As used herein, the terms the “Company,” “we,” “our” and “us” refer to VEREIT, together with its consolidated subsidiaries, including the OP.
The Company is a full-service real estate operating company with investment management capabilities that operates through two reportable segments, its real estate investment (“REI”) segment and its investment management segment, Cole Capital (“Cole Capital”), as further discussed in Note 3 – Segment Reporting. Through the REI segment, the Company owns and actively manages a diversified portfolio of retail, restaurant, office and industrial real estate properties subject to long-term net leases with creditworthy tenants. The Company actively manages its portfolio considering a number of metrics including property type, concentration and key economic factors for appropriate balance and diversity. Through the Cole Capital segment, the Company is responsible for raising capital for and managing the affairs of the Cole REITs (as defined in Note 3 – Segment Reporting) on a day-to-day basis, identifying and making acquisitions and investments on the Cole REITs’ behalf and recommending to the respective board of directors of each of the Cole REITs an approach for providing investors with liquidity. Cole Capital receives compensation and reimbursement for performing these services. To support both reportable segments, the Company employs a shared services model pursuant to which its personnel are integral in providing, among other things, transactional and operational functions to the Company’s owned portfolio and the Cole REITs.
Substantially all of the REI segment’s operations are conducted through the OP. VEREIT is the sole general partner and holder of 97.4% of the common equity interests in the OP as of March 31, 2016 with the remaining 2.6% of the common equity interests owned by unaffiliated investors and certain former directors, officers and employees of ARC Properties Advisors, LLC (the “Former Manager”). Under the limited partnership agreement of the OP, as amended (the “LPA”), after holding units of limited partner interests in the OP (“OP Units”) for a period of one year, unless an earlier redemption is otherwise consented to by VEREIT, holders of OP Units have the right to redeem the OP Units for the cash value of a corresponding number of shares of VEREIT’s Common Stock or, at the option of VEREIT, a corresponding number of shares of VEREIT’s Common Stock. The remaining rights of the holders of OP Units are limited, however, and do not include the ability to replace the General Partner or to approve the sale, purchase or refinancing of the OP’s assets. Substantially all of the Cole Capital segment’s operations are conducted through Cole Capital Advisors, Inc. (“CCA”), an Arizona corporation and a wholly owned subsidiary of the OP. CCA is treated as a taxable REIT subsidiary (“TRS”) under Section 856 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).
The actions of the OP and its relationship with the General Partner are governed by the LPA. The General Partner does not have any significant assets other than its investment in the OP. Therefore, the assets and liabilities of the General Partner and the OP are substantially the same. Additionally, pursuant to the LPA, all administrative expenses and expenses associated with the formation, continuity, existence and operation of the General Partner incurred by the General Partner on the OP’s behalf shall be treated as expenses of the OP. Further, when the General Partner issues any equity instrument that has been approved by the General Partner’s board of directors, the LPA requires the OP to issue to the General Partner equity instruments with substantially similar terms, to protect the integrity of the Company’s umbrella partnership REIT structure, pursuant to which each holder of interests in the OP has a proportionate economic interest in the OP reflecting its capital contributions thereto. OP Units issued to the General Partner are referred to as General Partner OP Units. OP Units issued to parties other than the General Partner are referred to as Limited Partner OP Units. The LPA also provides that the OP issue debt with terms and provisions consistent with debt issued by the General Partner. The LPA will be amended to provide for the issuance of any additional class of equivalent equity instruments to the extent the General Partner’s board of directors authorizes the issuance of any new class of equity securities.

12

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016 (Unaudited) (Continued)

Note 2 – Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements of the Company presented herein include the accounts of the General Partner and its consolidated subsidiaries, including the OP. All intercompany transactions have been eliminated upon consolidation. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2015 of the Company, which are included in the Company’s Annual Report on Form 10-K filed February 24, 2016. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2016. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries and consolidated joint venture arrangements. The portions of the consolidated joint venture arrangements not owned by the Company are presented as non-controlling interests in VEREIT’s and the OP’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. In addition, as described in Note 1 – Organization, certain third parties have been issued OP Units. Holders of OP Units are considered to be non-controlling interest holders in the OP and their ownership interest in the limited partner’s share is presented as non-controlling interests in VEREIT’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Upon conversion of OP Units to Common Stock, any difference between the fair value of shares of Common Stock issued and the carrying value of the OP Units converted is recorded as a component of equity. As of both March 31, 2016 and December 31, 2015, there were approximately 23.8 million Limited Partner OP Units outstanding.

During the year ended December 31, 2015, the Company early adopted the U.S. Financial Accounting Standards Board (the “FASB”) Accounting Standards Update, (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), which simplifies consolidation accounting by reducing the number of consolidation models and changing various aspects of current U.S. GAAP, including certain consolidation criteria for a variable interest entity (“VIE”). For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a VIE. VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity.
The Company then qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE, which is generally defined as the party who has a controlling financial interest in the VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE and the difference between consolidating the VIE and accounting for it using the equity method could be material to the Company’s consolidated financial statements. The Company continually evaluates the need to consolidate these VIEs based on standards set forth in U.S. GAAP as described above.

13

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016 (Unaudited) (Continued)

Reclassification
As described below, the following items previously reported have been reclassified to conform with the current period’s presentation.
The land and construction in progress line item from prior periods has been combined into the land caption in the consolidated balance sheets. The gain on forgiveness of debt previously included in other income, net has been combined into the caption gain on extinguishment and forgiveness of debt, net in the consolidated statements of operations. Additionally, equity in income of unconsolidated joint ventures previously included in other income net, in the consolidated statements of operations has been included in a separate caption entitled equity in income and gain on disposition of unconsolidated entities. Further, the previous gain on investment securities line item has been included in other income, net in the consolidated statements of operations.
Finally, the designated derivatives, fair value adjustments line item from the prior years has been disaggregated within the consolidated statements of other comprehensive loss into the captions unrealized loss on interest rate derivatives and amount of loss reclassified from accumulated other comprehensive loss into net loss as interest expense. These captions were previously included within the notes to consolidated financial statements.
Restricted Cash
The Company had $60.1 million and $59.8 million, respectively, in restricted cash as of March 31, 2016 and December 31, 2015. Restricted cash primarily consists of reserves related to lease expirations, as well as maintenance, structural and debt service reserves. Included in restricted cash at March 31, 2016 was $48.8 million in lender reserves and $11.3 million held in restricted lockbox accounts. Included in restricted cash at December 31, 2015 was $47.9 million in lender reserves and $11.9 million held in restricted lockbox accounts. 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 payments are disbursed to the lender and the excess funds are then disbursed to the Company.
Revenue Recognition – REI
The Company’s revenues, which primarily consist of rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial non-cancelable term of the lease. When the Company acquires a property, the term of each existing lease is considered to commence as of the acquisition date for the purposes of this calculation. Since many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. Straight-line rent receivables are included in rent and tenant receivables and other assets, net, in the consolidated balance sheets. See Note 8 – Rent and Tenant Receivables and Other Assets, Net. Cost recoveries from tenants are included in operating expense reimbursements in the consolidated statements of operations in the period the related costs are incurred. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. As of March 31, 2016 and December 31, 2015, the Company had $67.3 million and $67.2 million, respectively, of deferred rental income, which is included in deferred rent, derivative and other liabilities in the consolidated balance sheets.
The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is uncertain, the Company will record an increase in the allowance for uncollectible accounts in the consolidated balance sheets or record a direct write-off of the receivable in the consolidated statements of operations as a reduction to rental income. As of March 31, 2016 and December 31, 2015, the Company maintained an allowance for uncollectible accounts of $7.9 million and $6.6 million, respectively.

14

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016 (Unaudited) (Continued)

Revenue Recognition – Cole Capital
Revenue consists of securities sales commissions and dealer manager fees, real estate acquisition fees, property management fees, advisory fees, asset management fees and performance fees for services relating to the Cole REITs’ offerings and the investment and management of their respective assets, in accordance with the respective dealer manager and advisory agreements. The Company records revenue related to acquisition fees, securities sales commissions and dealer manager fees upon completion of a transaction and advisory, asset and property management fees as services are performed. The Company also earns property management, asset management and disposition fees from certain joint ventures and other real estate programs. The Company is also reimbursed for certain costs incurred in providing these services. Securities sales commissions and dealer manager reimbursements are recorded as revenue as the expenses are incurred, as long as reimbursement is reasonably assured. The Company, in its sole discretion, may reallow all or a portion of its dealer manager fee to such participating broker-dealers as a marketing and due diligence expense reimbursement, based on factors such as the volume of shares issued by such participating broker-dealers and the amount of marketing support provided by such participating broker-dealers. Refer to Note 17 – Related Party Transactions and Arrangements for further discussion.
Acquisition Related Expenses and Litigation and Other Non-routine Costs
All costs incurred as a result of a business combination are classified as acquisition related expenses or merger and other non-routine transaction related expenses and expensed as incurred. Acquisition related expenses include legal and other transaction related costs incurred in connection with self-originated acquisitions, including purchases of portfolios. In addition, indirect costs, such as internal salaries, that are tracked and documented in a manner that clearly indicates that the activities driving the cost directly relate to activities necessary to complete, or effect, self-originating purchases are classified as acquisition related expenses.
Similar costs incurred in relation to mergers, which are not considered self-originating purchases, and other non-routine transaction related expenses are included in litigation and other non-routine costs, net of insurance recoveries in the consolidated statements of operations. The Company has also incurred legal fees and other costs associated with the Audit Committee Investigation (defined below) and the litigations and investigations resulting therefrom, which are considered non-routine. The Company has directors’ and officers’ insurance and has recovered certain amounts related to such policies.
Litigation and other non-routine transaction related expenses include the following costs (amounts in thousands):
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Other non-routine transaction related expenses:
 
 
 
 
Audit Committee Investigation and related matters (1)
 
$
4,742

 
$
15,316

Legal fees and expenses (2)
 
83

 
475

Other fees and expenses
 

 
632

Total costs incurred
 
4,825


16,423

Insurance recoveries
 
(10,000
)
 

Total
 
$
(5,175
)
 
$
16,423

___________________________________
(1)
Includes all fees and costs associated with the previously-announced investigation conducted by the audit committee (the “Audit Committee”) of the General Partner’s board of directors (the “Audit Committee Investigation”) and various litigations and investigations prompted by the results of the Audit Committee Investigation, including fees and costs incurred pursuant to the Company’s indemnification obligations.
(2)
Includes legal fees and expenses associated with litigation resulting from prior mergers.

15

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016 (Unaudited) (Continued)

Income Taxes
The General Partner currently qualifies and has elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code. As a REIT, except as discussed below, the General Partner generally is not subject to federal income tax on taxable income that it distributes to its stockholders so long as it distributes at least 90% of its annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the General Partner maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, federal income taxes on certain income and excise taxes on its undistributed income.
The OP is classified as a partnership for U.S. federal income tax purposes. As a partnership, the OP is not a taxable entity for U.S. federal income tax purposes. Instead, each partner in the OP is required to take into account its allocable share of the OP’s income, gains, losses, deductions and credits for each taxable year. However, the OP may be subject to certain state and local taxes on its income and property.
As of March 31, 2016, the OP and the General Partner had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended December 31, 2011 remain open to examination by the major taxing jurisdictions to which the OP, the General Partner, American Realty Capital Trust III, Inc. (“ARCT III”), CapLease, Inc. (“CapLease”), American Realty Capital Trust IV, Inc., (“ARCT IV”), Cole Real Estate Investments, Inc. (“Cole”) and Cole Credit Property Trust, Inc. are subject.
Under the LPA, the OP is to conduct business in such a manner as to permit the General Partner at all times to qualify as a REIT.
The Company conducts substantially all of its Cole Capital segment business activities through a TRS. A TRS is a subsidiary of a REIT that is subject to corporate federal, state and local income taxes, as applicable. The Company’s use of a TRS enables it to engage in certain business activities while complying with the REIT qualification requirements and to retain any income generated by these businesses for reinvestment without the requirement to distribute those earnings. The Company conducts all of its business in the United States and Canada and, as a result, it files income tax returns in the U.S. federal jurisdiction, the Canadian federal jurisdiction and various state and local jurisdictions. Certain of the Company’s inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation.
The Company provides for income taxes in accordance with current authoritative accounting and tax guidance. The tax provision or benefit related to significant or unusual items is recognized in the quarter in which those items occur. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the quarter in which the change occurs. The accounting estimates used to compute the provision for or benefit from income taxes may change as new events occur, additional information is obtained or the tax environment changes.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in Revenue Recognition, Accounting Standards Codification (“ASC”) (Topic 605) and requires an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, an amendment to ASU 2014-09, ASU 2015-14, was issued to defer the effective date for all entities by one year. For public business entities, certain not-for-profit entities and certain employee benefit plans, the guidance should be applied to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the new standard on its financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10), which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the impact that this new guidance will have on its financial statements.

16

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016 (Unaudited) (Continued)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than 12 months, with the result being the recognition of a right of use asset and a lease liability and the disclosure of key information about the entity's leasing arrangements. ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current U.S. GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current U.S. GAAP. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective approach is required for existing leases that have not expired upon adoption. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.
In March of 2016, the FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (Topic 815). The amendments in this update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. These provisions are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting, which affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. The guidance will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company has elected to early adopt this guidance during the first quarter of 2016, which does not have a material effect on the Company’s consolidated financial statements. In connection with the adoption, the Company has modified the consolidated statement of changes in equity to include the line item cumulative-effect adjustment for equity-based compensation forfeitures, which represents application of the accounting change on a modified retrospective basis.
Note 3 – Segment Reporting
The Company has two reportable segments as it has organized its operations into two segments for management and internal financial reporting purposes, REI and Cole Capital, as further discussed below.
REI – Through its REI segment, the Company owns and actively manages a diversified portfolio of retail, restaurant, office and industrial real estate properties subject to long-term net leases with creditworthy tenants. As of March 31, 2016, the Company owned 4,378 properties comprising 99.0 million square feet of retail and commercial space located in 49 states, the District of Columbia, Puerto Rico and Canada, which includes properties owned through consolidated joint ventures. The rentable space at these properties was 98.6% leased with a weighted-average remaining lease term of 10.4 years. In addition, as of March 31, 2016, the Company owned nine CMBS and nine mortgage notes receivable.
Cole Capital – Through its Cole Capital segment, the Company is responsible for managing the day-to-day affairs of Cole Credit Property Trust IV, Inc. (“CCPT IV”); Cole Real Estate Income Strategy (Daily NAV), Inc. (“INAV”); Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”); Cole Credit Property Trust V, Inc. (“CCPT V”); and other real estate offerings in registration (collectively with CCPT IV, INAV and CCIT II, the “Cole REITs”), raising capital for those Cole REITs still in offering, identifying and making acquisitions and investments on the Cole REITs’ behalf and recommending to the respective board of directors of each of the Cole REITs an approach for providing investors with liquidity. Cole Capital serves as the dealer manager and distributes shares of common stock for certain Cole REITs and advises them regarding offerings, manages relationships with participating broker-dealers and financial advisors and provides assistance in connection with compliance matters relating to the offerings. Cole Capital receives compensation and reimbursement for services relating to the Cole REITs’ offerings and the investment, management, financing and disposition of their respective assets, as applicable. Cole Capital also develops new REIT offerings and assists in obtaining regulatory approvals from the SEC, the Financial Industry Regulatory Authority, Inc. and various blue sky jurisdictions for such offerings. See Note 17 – Related Party Transactions and Arrangements for further discussion on the Cole REITs.

17

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016 (Unaudited) (Continued)

The Company allocates certain operating expenses, such as legal fees, employee related costs and benefits and general overhead expenses between its operating segments. The following tables present a summary of the comparative financial results and total assets for each segment (in thousands):
 
 
Three Months Ended March 31,
 
 
2016
 
2015
REI segment:
 
 
 
 
Revenues:
 
 
 
 
Rental income
 
$
313,971

 
$
342,759

Direct financing lease income
 
569

 
741

Operating expense reimbursements
 
23,247

 
22,974

Total real estate investment revenues
 
337,787


366,474

Operating expenses:
 
 
 
 
Acquisition related
 
217

 
1,723

Litigation and other non-routine costs, net of insurance recoveries
 
(5,175
)
 
16,423

Property operating
 
34,813

 
30,999

General and administrative
 
12,228

 
15,370

Depreciation and amortization
 
195,991

 
210,788

Impairment of real estate
 
160,517

 

Total operating expenses
 
398,591


275,303

Operating (loss) income
 
$
(60,804
)

$
91,171

Other (expense) income:
 
 
 
 
Interest expense
 
$
(80,426
)
 
$
(95,699
)
Gain on extinguishment and forgiveness of debt, net
 

 
5,302

Other income, net
 
568

 
2,841

Equity in income and gain on disposition of unconsolidated entities
 
10,404

 
28

Loss on derivative instruments, net
 
(1,086
)
 
(1,028
)
Total other expenses, net
 
(70,540
)

(88,556
)
(Loss) income before taxes and real estate dispositions
 
(131,344
)

2,615

Gain (loss) on disposition of real estate, net
 
17,175

 
(31,368
)
Loss before taxes
 
(114,169
)

(28,753
)
Provision for income taxes
 
(1,365
)
 
(1,854
)
Net loss
 
$
(115,534
)

$
(30,607
)

18

VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016 (Unaudited) (Continued)

 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
 
 
 
Cole Capital segment:
 
 
 
 
Revenues:
 
 
 
 
Offering-related fees and reimbursements
 
$
12,391

 
$
3,117

Transaction service fees and reimbursements
 
2,384

 
10,260

Management fees and reimbursements
 
16,458

 
14,117

Total Cole Capital revenues
 
31,233


27,494

Operating expenses:
 
 
 
 
Cole Capital reallowed fees and commissions
 
8,068

 
2,031

Acquisition related
 
25

 
459

General and administrative
 
17,172

 
17,736

Depreciation and amortization
 
8,317

 
8,353

Total operating expenses
 
33,582


28,579

Operating loss
 
(2,349
)

(1,085
)
Total other income, net
 
494

 
1,219

(Loss) income before taxes
 
(1,855
)

134

Benefit from (provision for) income taxes
 
1,309

 
(220
)
Net loss
 
$
(546
)

$
(86
)
 
 
 
 
 
Total Company:
 
 
 
 
Total revenues
 
$
369,020


$
393,968

Total operating expenses
 
$
432,173


$
303,882