CapLease Acquisition

On November 5, 2013 (the “CapLease Acquisition Date”), the Company completed the CapLease Merger, an acquisition of a real estate investment trust that primarily owned and managed a diversified portfolio of single tenant commercial real estate properties subject to long-term leases, the majority of which were net leases, to high credit quality tenants, by acquiring 100% of the outstanding common stock and voting interests of CapLease. The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The Company’s consolidated financial statements include the results of operations of CapLease subsequent to the CapLease Acquisition Date.

The purchase price includes a cash payment of $920.7 million, which was funded by the Company through additional borrowings under its revolving credit facility and the credit facility assumed from CapLease. See Note 12 — Other Debt and Note 13 — Credit Facilities.

The purchase price allocation for the CapLease Merger is considered preliminary, and additional adjustments may be recorded during the measurement period in accordance with U.S. GAAP. The purchase price allocation will be finalized as the Company receives additional information relevant to the acquisition, including a final valuation of the assets purchased and liabilities assumed.

The preliminary purchase price for the acquisition was allocated to assets acquired and liabilities assumed based on their estimated fair value. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the CapLease Acquisition Date initially recorded, as well as measurement period adjustments made and the revised estimated fair values of the assets acquired and liabilities assumed at the CapLease Acquisition Date (in thousands):



	Preliminary
	Amounts Previously Recognized as of the CapLease Acquisition Date ⁽¹⁾		Measurement Period Adjustments			Adjusted Amounts Recognized as of the CapLease Acquisition Date
Fair value of consideration given	$	920,697	$	—		$	920,697

Assets purchased, at fair value:
Land	235,843		(2,778		)	233,065
Buildings, fixtures and improvements	1,596,481		(8,147		)	1,588,334
Land and construction in process	12,352		—			12,352
Acquired intangible lease assets	191,964		(1,102		)	190,862
Total real estate investments	2,036,640		(12,027		)	2,024,613
Cash and cash equivalents	41,799		—			41,799
Investment securities	60,730		—			60,730
Loans held for investment	26,457		—			26,457
Restricted cash	29,159		—			29,159
Deferred costs and other assets, net	21,564		—			21,564
Deferred costs	325		—			325
Total identifiable assets purchased	2,216,674		(12,027		)	2,204,647

Liabilities assumed, at fair value:
Mortgage notes payable	1,037,510		—			1,037,510
Secured credit facility	121,000		—			121,000
Other debt	114,208		—			114,208
Below-market leases	57,058		—			57,058
Derivative liabilities	158		—			158
Accounts payable and accrued expenses	46,484		517			47,001
Deferred rent, derivative and other liabilities	8,867		—			8,867
Total liabilities assumed	1,385,285		517			1,385,802

Non-controlling interest retained by third party	567		—			567

Net identifiable assets acquired by Company	830,822		(12,544		)	818,278
Goodwill	$	89,875	$	12,544		$	102,419

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(1)	As reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

After the December 31, 2013 financial statements were issued, the Company received final purchase and sale agreements for two properties that were sold to third parties during the first quarter of 2014. After giving consideration to the sales price of these properties, the Company has estimated that the fair value of these properties originally acquired as part of the CapLease Merger to be $12.0 million. As a result of the sale, the carrying amount of real estate investments was retrospectively decreased by $12.0 million as of the CapLease Acquisition Date, with a corresponding increase to goodwill in the accompanying consolidated balance sheet as of December 31, 2013. The impact to depreciation expense recognized during the year ended December 31, 2013 was not significant, and, therefore, the Company has not retrospectively adjusted its consolidated statements of operations. In addition to the adjustment above, the Company identified $0.5 million of additional accrued expenses that were outstanding as of the CapLease Acquisition Date.

Management is in the process of further evaluating the purchase price accounting. The fair value of real estate investments and below-market leases have been estimated by the Company with the assistance of third-party valuation firms. Based on a preliminary analysis received to date, the estimated fair value of these assets and liabilities total $2.0 billion and $57.1 million, respectively. The recorded values represent the estimated fair values related to such assets and liabilities. Upon completion of the analysis, including a review of the appraisals and assessment of current market rates, changes to the estimated fair values may result. Such post-closing adjustments are customary in nature in accordance with ASC 805, Business Combinations.

The ascribed value of the noncontrolling interest has been estimated based on the fair value of the percentage ownership of The Woodlands, Texas development activity not held by the Company. See to Note 6 — Real Estate Investments.

The fair value of the remaining CapLease assets and liabilities have been calculated in accordance with the Company’s policy on purchase price allocation, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Goodwill of approximately $102.4 million is expected to be assigned to the REI segment upon completion of the valuation. The goodwill recognized is attributed to the enhancement of the Company’s year-round rental revenue stream, expected synergies and the assembled work force at CapLease.

The pro forma consolidated statements of operations in Note 6 — Real Estate Investments are presented as if CapLease had been included in the consolidated results of the Company for the entire periods ended March 31, 2014 and 2013.

Cole Acquisition

On February 7, 2014, the Company completed its acquisition of Cole, as discussed in Note 2 — Mergers and Acquisitions. The Company accounted for the Cole Merger as a business combination under the acquisition method of accounting. Therefore, the Company’s consolidated financial statements include the results of operations of Cole subsequent to the Cole Acquisition Date.

Fair Value of Consideration Transferred

The Company is in the process of gathering certain additional information in order to finalize its assessment of the fair value of the consideration transferred; thus, the fair values of currently recorded assets and liabilities are subject to change. The estimated fair value of the consideration transferred at the Cole Acquisition Date totaled approximately $7.5 billion and consisted of the following (in thousands):



	As of Cole Acquisition Date (Preliminary)
Estimated Fair Value of Consideration Transferred:
Cash	$	181,775
Common stock	7,285,868
Total consideration transferred	$	7,467,643

The fair value of the 520.8 million shares of common stock issued, excluding those common shares transferred to former Cole executives, was determined based on the closing market price of the Company’s common stock on the Cole Acquisition Date.

Allocation of Consideration

The consideration transferred pursuant to the Cole Merger Agreement was allocated to the assets acquired and liabilities assumed for the REI segment and Cole Capital, based upon their preliminary estimated fair values as of the Cole Acquisition Date. The Company is in the process of gathering certain additional information in order to finalize its assessment of the fair value of certain intangible assets; thus, the provisional measurements of intangible assets and goodwill are subject to change. Such post-closing adjustments are customary in nature in accordance with ASC 805, Business Combinations. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed by segment at the Cole Acquisition Date (in thousands):



	Preliminary
	REI Segment		Cole Capital		Total as of Cole Acquisition Date
Identifiable Assets Acquired at Fair Value:
Land	$	1,737,390	$	—	$	1,737,390
Buildings, fixtures and improvements	5,898,895		—		5,898,895
Land and construction in process	—		—		—
Acquired intangible lease assets	1,323,614		—		1,323,614
Total real estate investments	8,959,899		—		8,959,899
Investment in unconsolidated entities	100,659		3,307		103,965
Investment securities, at fair value	151,197		—		151,197
Loans held for investment, net	72,326		—		72,326
Cash and cash equivalents	130,747		20,413		151,160
Restricted cash	15,704		—		15,704
Intangible assets	—		385,368		385,368
Deferred costs and other assets	45,081		50,893		95,974
Due from affiliates	—		3,301		3,301
Total identifiable assets acquired	9,475,613		463,282		9,938,894

Identifiable Liabilities Assumed at Fair Value:
Mortgage notes payable, net	2,719,072		—		2,719,072
Credit facilities	1,309,000		—		1,309,000
Other debt	49,013		—		49,013
Below-market lease liabilities	212,377		—		212,377
Accounts payable and accrued expenses	73,441		60,468		133,909
Deferred rent, derivative and other liabilities	42,764		110,529		153,293
Dividends payable	6,271		—		6,271
Contingent consideration	3,606		48,373		51,979
Due to affiliates	—		44		44
Total liabilities assumed	4,415,544		219,414		4,634,958

Noncontrolling interests	20,996		—		20,996

Net identifiable assets acquired	5,039,073		243,868		5,282,940
Goodwill	1,628,571		556,132		2,184,703
Net assets acquired	$	6,667,644	$	800,000	$	7,467,643

The fair value of real estate investments and below-market lease liabilities allocated to the REI segment have been estimated by the Company with the assistance of a third-party valuation firm. Based on a preliminary analysis received to date, the estimated fair value of these assets and liabilities total $9.0 billion and $212.4 million, respectively. The recorded values represent the estimated fair values related to such assets and liabilities. Upon completion of the analysis, including a review of the appraisals and assessment of current market rates, changes to the estimated fair values may result.

The intangible assets acquired primarily consist of management and advisory contracts that the Company has with the Managed REITs and are subject to an estimated useful life of approximately four years. The Company recorded $14.0 million of amortization expense for the period from the Cole Acquisition Date to March 31, 2014. The estimated amortization expense for the remainder of the year ending December 31, 2014 is $72.6 million. The estimated amortization expense for each of the years ending December 31, 2015, 2016 and 2017 is $96.3 million and the estimated amortization expense for the year ending December 31, 2018 is $9.8 million.

Goodwill of approximately $1.6 billion is expected to be assigned to the REI segment upon completion of the external valuation. The goodwill recognized is attributed to the enhancement of the Company’s year-round rental revenue stream, realized and expected synergies, the impact of the merger on lowering the Company’s cost of capital, as well as the benefits of critical mass, improved portfolio diversification, and enhanced access to capital markets. Goodwill of approximately $556.1 million is expected to be assigned to Cole Capital upon completion of the external valuation. The goodwill is primarily supported by management’s belief that Cole Capital brings an established management platform with numerous strategic benefits including growth from new income streams and the ability to offer new products. None of the goodwill is expected to be deductible for income tax purposes.

The fair value of the remaining Cole assets and liabilities have been calculated in accordance with the Company’s policy on purchase price allocation, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The amounts of revenue and net income related to Cole property acquisitions and Cole Capital included in the accompanying consolidated statements of operations from the Cole Acquisition Date to the period ended March 31, 2014 was $162.6 million and $0.7 million respectively.

The pro forma consolidated statements of operations in Note 6 — Real Estate Investments are presented as if Cole had been included in the consolidated results of the Company for the entire periods ended March 31, 2014 and 2013.