Goodwill and Other Intangibles

3 Months Ended

Mar. 31, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

In connection with prior mergers, the Company recorded goodwill as a result of the merger consideration exceeding the net assets acquired. The goodwill recorded as a result of the merger of Cole with and into a wholly owned subsidiary of the Company (the “Cole Merger”) was allocated between the Company’s two segments, the REI segment and the Cole Capital segment. The REI segment and the Cole Capital segment each comprise one reporting unit.

As of each of March 31, 2017 and December 31, 2016, $1.3 billion and $124.8 million of goodwill was allocated to the REI segment and the Cole Capital segment, respectively. During the three months ended March 31, 2017, one property classified as held for sale as of December 31, 2016 was classified as held and used, resulting in an increase to the goodwill allocated to the REI segment of $0.4 million. During the three months ended March 31, 2016, the Company allocated $13.5 million of goodwill to dispositions and held for sale assets, which was included in gain on disposition of real estate and held for sale assets, net in the consolidated statement of operations.

The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value, by reporting unit, may not be recoverable. The Company’s annual testing date is during the fourth quarter. The Company tests goodwill for impairment by first comparing the carrying value of net assets to the fair value of each reporting unit. If the fair value is determined to be less than the carrying value or if qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the fair value of goodwill and the carrying value. The Company estimates the fair value of the reporting units using discounted cash flows and relevant competitor multiples. The evaluation of goodwill for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions. While the Company believes its assumptions are reasonable, there are no guarantees as to actual results. Changes in assumptions based on actual results may have a material impact on the Company’s financial results.

The fair value of the Cole Capital segment is dependent upon actual results, including, but not limited to, the timing and amount of aggregate capital raised and deployed on behalf of the Cole REITs, which is influenced by the Company’s ability to continue to reinstate certain selling agreements that were suspended as a result of the Audit Committee Investigation and the resulting restatements, as well as regulatory requirements affecting broker-dealers. If the Company is unable to continue to reinstate selling agreements or raise and deploy capital as estimated, the fair values of the Cole Capital segment and intangible assets may be less than the respective carrying value, resulting in an impairment that could have a material effect on the Company’s financial results. In addition, the actual timing of closing an offering or executing a liquidity event on behalf of a Cole REIT or the commencement of operations of newly formed REITs, which are not yet effective, may differ from the Company’s assumptions.

During the three months ended March 31, 2017 and 2016, management monitored the actual performance of the business segments relative to the fair value assumptions used during the annual goodwill impairment test. For the periods presented, management determined it remained more likely than not that the fair value of the reporting unit was greater than its carrying value.

Intangible Assets

The intangible assets primarily consisted of management and advisory contracts that the Company has with certain Cole REITs, which are subject to an estimated remaining useful life of approximately three years.

The Company evaluates intangible assets for impairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company tests intangible assets for impairment by first comparing the carrying value of the asset group to the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, the Company will adjust the intangible assets to their respective fair values and recognize an impairment loss.

The Company will estimate the fair value of the intangible assets using a discounted cash flow model specific to the applicable Cole REITs. The evaluation of intangible assets for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions. While the Company believes its assumptions are reasonable, there are no guarantees as to actual results. Changes in assumptions based on actual results may have a material impact on the Company’s financial results. There were no events or changes in circumstances that indicated that intangible assets were impaired during the three months ended March 31, 2017 or 2016.

The Company recorded $4.1 million and $7.5 million of amortization expense related to the intangible assets for the three months ended March 31, 2017 and 2016, respectively. The estimated amortization expense is expected to be $12.4 million for the remainder of the year ending December 31, 2017, $4.0 million for the year ending December 31, 2018 and $3.8 million for the nine months ending September 30, 2019. The intangible assets were $20.5 million and $24.6 million, net of accumulated amortization of $33.7 million and $29.6 million, respectively, as of March 31, 2017 and December 31, 2016.

Intangible Lease Assets and Liabilities

Intangible lease assets and liabilities of the Company consisted of the following as of March 31, 2017 and December 31, 2016 (amounts in thousands, except weighted-average useful life):



	Weighted-Average Useful Life	March 31, 2017		December 31, 2016
Intangible lease assets:
In-place leases, net of accumulated amortization of $525,079 and $494,131, respectively	14.7	$	1,148,158	$	1,192,756
Leasing commissions, net of accumulated amortization of $2,158 and $1,836, respectively	10.3	10,570		10,231
Above-market lease assets and deferred lease incentives, net of accumulated amortization of $74,206 and $69,670, respectively	16.1	257,568		275,897
Total intangible lease assets, net		$	1,416,296	$	1,478,884

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $61,631 and $56,891, respectively	18.1	$	217,721	$	224,023

The following table provides the projected amortization expense and adjustments to rental income related to the intangible lease assets and liabilities for the next five years as of March 31, 2017 (amounts in thousands):



	April 1, 2017 - December 31, 2017		2018		2019		2020		2021
In-place leases:
Total projected to be included in amortization expense	$	111,195	$	136,056	$	124,895	$	116,752	$	107,913
Leasing commissions:
Total projected to be included in amortization expense	1,008		1,164		1,098		1,076		1,038
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental income	18,533		24,098		22,184		21,748		21,234
Below-market lease liabilities:
Total projected to be included in rental income	16,204		19,672		18,939		17,775		16,425

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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