Acquisitions of CapLease, Cole and CCPT

CapLease Acquisition

On November 5, 2013 (the “CapLease Acquisition Date”), the Company completed the CapLease Merger, an acquisition of a REIT 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 13 – Other Debt and Note 14 – Credit Facilities.

The 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 (in thousands). The measurement period adjustments did not have a significant impact on the Company’s consolidated statement of operations in any period; therefore, the Company has not retrospectively adjusted its financial statements.



	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- cash	$	920,697	$	—	$	920,697

Identifiable assets acquired at fair value:
Land	235,843		—		235,843
Buildings, fixtures and improvements	1,596,481		—		1,596,481
Land and construction in process	12,352		—		12,352
Acquired intangible lease assets	191,964		—		191,964
Total real estate investments	2,036,640		—		2,036,640
Cash and cash equivalents	41,799		—		41,799
Investment securities	60,730		—		60,730
Loans held for investment	26,457		—		26,457
Restricted cash	29,119		—		29,119
Deferred costs and other assets, net	21,574		—		21,574
Total identifiable assets purchased	2,216,319		—		2,216,319



	Amounts Previously Recognized as of the CapLease Acquisition Date ⁽¹⁾		Measurement Period Adjustments			Adjusted Amounts Recognized as of the CapLease Acquisition Date
Identifiable liabilities assumed at fair value:
Mortgage notes payable	$	1,037,510	$	(27,339	)	$	1,010,171
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	49,291		—			49,291
Deferred rent, derivative and other liabilities	8,619		—			8,619
Total liabilities assumed	1,387,844		(27,339		)	1,360,505

Non-controlling interests	567		—			567

Goodwill	92,789		(27,339		)	65,450
Net identifiable assets acquired by Company	$	827,908	$	27,339		$	855,247

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(1)	As reported in Amendment No. 2 to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2013 filed with the SEC on March 2, 2015 (the “Amended 10-K”).

During the three months ended December 31, 2014, the Company completed the fair value analysis of the NIH Loan, as defined in Note 12 – Mortgage Notes Payable. The Company initially recorded a premium of $2.9 million for the NIH Loan in the previously reported purchase price allocation. Based upon further analysis, the Company concluded that the fair value of the NIH Loan was $30.4 million, resulting in a discount of $24.5 million. As such the Company decreased the fair value of the mortgage debt assumed by $27.3 million with a corresponding adjustment to goodwill.

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. The estimated fair values of these assets and liabilities total $2.0 billion and $57.1 million, respectively.

The ascribed value of the non-controlling interest has been estimated based on the fair value at the acquisition date of the percentage ownership of The Woodlands, Texas development activity not held by the Company. See Note 7 – Real Estate Investments for further information on this development project.

The fair values of the remaining CapLease assets and liabilities have been calculated in accordance with the Company’s policy on purchase price allocation, as discussed in Note 3 – Summary of Significant Accounting Policies.

Goodwill of $92.8 million has been assigned to the REI segment. 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 unaudited pro forma information in Note 7 – Real Estate Investments is presented as if CapLease had been included in the consolidated results of the Company for the years ended December 31, 2014 and 2013.

Cole Acquisition

On February 7, 2014, ARCP completed its acquisition of Cole, as discussed in Note 2 – Mergers and Significant Acquisitions and Sales. 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 fair value of the consideration transferred at the Cole Acquisition Date totaled $7.5 billion and consisted of the following (in thousands):



	As of Cole Acquisition Date
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 ARCP’s common stock issued, excluding those common shares transferred to former Cole executives, was determined based on the closing market price of ARCP’s common stock on the Cole Acquisition Date. In accordance with the LPA, the Operating Partnership issued a corresponding number of General Partner OP Units to ARCP when shares of ARCP’s common stock were issued to former stockholders of Cole.

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 estimated fair values as of the Cole Acquisition Date. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, including all measurement period adjustments, at the Cole Acquisition Date (in thousands). The measurement period adjustments did not have a significant impact on the Company’s consolidated statement of operations in any period; therefore, the Company has not retrospectively adjusted its financial statements.



	REI Segment (As initially recorded)		Cole Capital (As initially recorded)		Measurement Period Adjustments			Cole Capital (As Adjusted)		Total as of Cole Acquisition Date
Identifiable assets acquired at fair value:
Land	$	1,737,839	$	—	$	—		$	—	$	1,737,839
Buildings, fixtures and improvements	5,901,827		—		—			—		5,901,827
Acquired intangible lease assets	1,324,217		—		—			—		1,324,217
Total real estate investments	8,963,883		—		—			—		8,963,883
Investment in unconsolidated entities	100,659		3,307		—			3,307		103,966
Investment securities, at fair value	151,197		—		—			—		151,197
Loans held for investment, net	72,326		—		—			—		72,326
Cash and cash equivalents	129,552		20,413		—			20,413		149,965
Restricted cash	15,704		—		—			—		15,704
Intangible assets	—		385,368		(80,368		)	305,000		305,000
Deferred costs and other assets	43,774		50,893		—			50,893		94,667
Due from affiliates	—		3,301		—			3,301		3,301
Total identifiable assets acquired	9,477,095		463,282		(80,368		)	382,914		9,860,009



	REI Segment (As initially recorded)		Cole Capital (As initially recorded)		Measurement Period Adjustments			Cole Capital (As Adjusted)		Total as of Cole Acquisition Date
Identifiable liabilities assumed at fair value:
Mortgage notes payable, net	$	2,706,585	$	—	$	—		$	—	$	2,706,585
Credit facilities	1,309,000		—		—			—		1,309,000
Other debt	49,013		—		—			—		49,013
Below-market lease liabilities	212,433		—		—			—		212,433
Accounts payable and accrued expenses	87,628		54,615		—			54,615		142,243
Deferred rent, derivative and other liabilities	67,841		167,458		(30,741		)	136,717		204,558
Dividends payable	6,271		—		—			—		6,271
Due to affiliates	—		44		—			44,242		44,242
Total liabilities assumed	4,438,771		222,117		(30,741		)	191,376		4,630,147

Non-controlling interests	24,766		—		—			—		24,766

Net identifiable assets acquired	5,013,558		241,165		(49,627		)	191,538		5,205,096
Goodwill	1,654,085		558,835		49,627			608,462		2,262,547
Net assets acquired	$	6,667,643	$	800,000	$	—		$	800,000	$	7,467,643

During the three months ended December 31, 2014, the Company completed its fair value analysis of the management and advisory contracts with the Managed REITs. As a result of the updated analysis, certain assumptions used in the fair value calculation changed, including the discount rate and expected cash flows from the Managed REITs for liquidation events. These changes resulted in a decrease in the fair value of the management and advisory contracts and related deferred tax liability of $80.4 million and $30.7 million, respectively, and an increase of $49.6 million to goodwill as of the Cole Acquisition Date.

The fair values of real estate investments, including acquired lease intangibles, 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 the analysis received to date, the estimated fair values 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 $68.5 million of amortization expense for the period from the Cole Acquisition Date through December 31, 2014. As of December 31, 2014, the Company recorded an impairment loss on the management and advisory contracts of $86.4 million. In connection with the impairment, the Company adjusted the estimated the remaining life of the contracts to five years. As such, the estimated amortization expense for each of the next five years is $35.1 million.

Goodwill of $1.7 billion has been assigned to the REI segment. 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 $608.5 million has been assigned to Cole Capital. 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 Note 3 – Summary of Significant Accounting Policies.

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 December 31, 2014 was $814.8 million and $47.3 million respectively.

The unaudited pro forma information in Note 7 – Real Estate Investments are presented as if Cole had been included in the consolidated results of the Company for the entire periods ended December 31, 2014 and 2013.

CCPT Acquisition

On May 19, 2014, the Company completed its acquisition of CCPT, as discussed in Note 2 – Mergers and Significant Acquisitions and Sales. The Company accounted for the CCPT Merger as a business combination under the acquisition method of accounting. Therefore, the Company’s consolidated financial statements include the results of operations of CCPT subsequent to the CCPT 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 CCPT Acquisition Date totaled $73.2 million, which was paid in cash. The acquisition was funded by the Company through additional borrowings under its revolving credit facility.

Allocation of Consideration

The consideration transferred pursuant to the CCPT Merger Agreement was allocated to the assets acquired and liabilities assumed based upon their preliminary estimated fair values as of the CCPT 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 CCPT Acquisition Date (in thousands):



	May 19, 2014 (Preliminary)
Identifiable assets acquired at fair value:
Land	$	28,258
Buildings, fixtures and improvements	113,296
Acquired intangible lease assets	17,960
Total real estate investments	159,514
Cash and cash equivalents	167
Restricted cash	2,420
Prepaid expenses and other assets	297
Total identifiable assets acquired	162,398

Identifiable liabilities assumed at fair value:
Mortgage notes payable	85,286
Unsecured credit facility	800
Accounts payable and accrued expenses	443
Below-market lease liability	1,752
Due to affiliates	568
Deferred rent and other liabilities	390
Total liabilities assumed	89,239

Net identifiable assets acquired	$	73,159

The fair value of real estate investments, including acquired lease intangibles, and below-market lease liabilities 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 $159.5 million and $1.8 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 fair value of the remaining CCPT assets and liabilities have been calculated in accordance with the Company’s policy on purchase price allocation, as disclosed in the Amended 10-K.

The amounts of revenue and net loss related to CCPT property acquisitions included in the accompanying consolidated statements of operations from the CCPT Acquisition Date to the period ended December 31, 2014 were $8.2 million and $1.8 million, respectively.

The unaudited pro forma information in Note 7 – Real Estate Investments are presented as if CCPT had been included in the consolidated results of the Company for the year ended December 31, 2014 and 2013.