Real Estate Investments

During the six months ended June 30, 2017, the Company acquired controlling financial interests in 54 commercial properties and three land parcels for an aggregate purchase price of $204.4 million (the “2017 Acquisitions”), which includes $1.3 million of external acquisition-related expenses that were capitalized in accordance with ASU 2017-01 and includes 22 properties acquired in a nonmonetary exchange discussed below. Prior to the adoption of ASU 2017-01, costs related to property acquisitions were expensed as incurred. During the six months ended June 30, 2016, the Company acquired a controlling interest in one commercial property for a purchase price of $20.0 million (the “2016 Acquisitions”).

The following table presents the allocation of the fair values of the assets acquired and liabilities assumed during the periods presented (in thousands):



	Six Months Ended June 30,
	2017			2016
Real estate investments, at cost:
Land	$	46,744		$	4,215
Buildings, fixtures and improvements	115,490			14,555
Total tangible assets	162,234			18,770
Acquired intangible assets:
In-place leases ⁽¹⁾	35,495			1,182
Above-market leases⁽²⁾	7,720			—
Assumed intangible liabilities:
Below-market leases ⁽³⁾	(1,011		)	—
Total purchase price of assets acquired	$	204,438		$	19,952

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(1)	The weighted average amortization period for acquired in-place leases is 14.9 years and 14.5 years for 2017 Acquisitions and 2016 Acquisitions, respectively.


(2)	The weighted average amortization period for acquired above-market leases is 19.9 years for 2017 Acquisitions.


(3)	The weighted average amortization period for acquired intangible lease liabilities is 17.2 years for 2017 Acquisitions.

Future Lease Payments

The following table presents future minimum base rent payments due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items (in thousands):



	Future Minimum Operating Lease Base Rent Payments		Future Minimum Direct Financing Lease Payments ⁽¹⁾
July 1, 2017 - December 31, 2017	$	535,666	$	1,733
2018	1,079,604		3,016
2019	1,043,000		2,397
2020	1,007,214		2,023
2021	966,448		1,899
Thereafter	6,345,494		3,993
Total	$	10,977,426	$	15,061

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(1)	29 properties are subject to direct financing leases and, therefore, revenue is recognized as direct financing lease income on the discounted cash flows of the lease payments. Amounts reflected are the minimum base rental cash payments due to the Company under the lease agreements on these respective properties.

Investment in Direct Financing Leases, Net

The components of the Company’s net investment in direct financing leases as of June 30, 2017 and December 31, 2016 are as follows (in thousands):



	June 30, 2017			December 31, 2016
Future minimum lease payments receivable	$	15,061		$	17,147
Unguaranteed residual value of property	23,146			27,450
Unearned income	(4,315		)	(5,142		)
Net investment in direct financing leases	$	33,892		$	39,455

Property Dispositions and Held for Sale Assets

During the six months ended June 30, 2017, the Company disposed of 87 properties, including four properties conveyed to a lender in a deed-in-lieu of foreclosure transaction as discussed in Note 10 – Debt, for an aggregate gross sales price of $439.2 million, including 15 properties disposed of in connection with the nonmonetary exchange discussed below, of which our share was $425.6 million after the profit participation payments related to the disposition of 20 Red Lobster properties. The dispositions resulted in proceeds of $301.3 million after a mortgage loan assumption of $66.0 million and closing costs. Additionally, the Company’s tax provision for the six months ended June 30, 2017 included $1.7 million of Canadian tax on the gain on sale of certain Canadian properties. The Company recorded a gain of $55.6 million related to the sales which is included in gain on disposition of real estate and held for sale assets, net in the accompanying consolidated statements of operations.

During the six months ended June 30, 2016, the Company disposed of 145 properties for an aggregate gross sales price of $381.3 million, of which our share was $368.4 million after the profit participation payment related to the disposition of 24 Red Lobsters. The dispositions resulted in proceeds of $303.0 million after a debt assumption of $55.0 million and closing costs. The Company recorded a gain of $22.2 million, which included $21.5 million of goodwill allocation related to the sales. The Company has no continuing involvement with these properties.

During the six months ended June 30, 2016, the Company also disposed of one property owned by an unconsolidated joint venture for a gross sales price of $113.5 million, of which our share was $102.1 million based on our ownership interest in the joint venture, resulting in proceeds of $42.3 million after debt repayments of $57.0 million and closing costs. The Company recorded a gain of $10.2 million related to the sale, which is included in equity in income and gain on disposition of unconsolidated entities in the accompanying consolidated statements of operations.

As of June 30, 2017, there were five properties classified as held for sale which are expected to be sold in the next 12 months as part of the Company’s portfolio management strategy. During the six months ended June 30, 2017, there was a loss of $0.5 million related to held for sale properties. No goodwill was allocated to the cost basis of any additional properties classified as held for sale during the six months ended June 30, 2017. During the six months ended June 30, 2016, the Company recorded a loss of $4.6 million related to properties classified as held for sale during the respective period, which included $14.6 million of goodwill allocated to the cost basis of such properties. The loss on properties held for sale is included in gain on disposition of real estate and held for sale assets, net in the accompanying consolidated statements of operations.

Nonmonetary Exchange

During the three months ended June 30, 2017, the Company completed a nonmonetary exchange through the simultaneous acquisition of 22 Bob Evans properties and disposition of 15 Red Lobster properties. Pursuant to Nonmonetary Transactions, ASC (Topic 845), the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain the acquired nonmonetary asset, and a gain or loss should be recognized on the exchange. The fair value of the asset received should be used to measure the cost if the fair value of the asset received is more reliable than the fair value of the asset surrendered. The Company estimated the fair value of the Bob Evans and Red Lobster properties using valuation techniques consistent with the income approach and concluded that the fair value was $50.1 million. As the fair value of the assets received exceeded the book value of the assets surrendered, the Company recorded a gain of $7.4 million, which is included in gain on disposition of real estate and held for sale assets, net in the accompanying consolidated statements of operations.

Impairment of Real Estate Investments

The Company performs quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to, decrease in net operating income, bankruptcy or other credit concerns of a property’s major tenant or tenants, such as history of late payments, rental concessions and other factors, as well as significant decreases in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses or reduced lease rates.

When impairment indicators are identified or if a property is considered to have a more likely than not probability of being disposed of within the next 12 to 24 months, the Company assesses the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value is determined using a discounted cash flow analysis and recent comparable sales transactions.

As part of the Company’s quarterly impairment review procedures and considering the factors mentioned above, real estate assets and an investment in a property subject to a direct financing lease with carrying values totaling $74.5 million were deemed to be impaired and their carrying values were reduced to their estimated fair values of $50.0 million resulting in impairment charges of $24.5 million during the six months ended June 30, 2017. During 2017, the Company identified additional office properties for potential sale and certain restaurant and other properties for potential sale that management has determined, based on discussions with the current tenant, will not be re-leased. During the six months ended June 30, 2016, management identified certain properties for potential sale as part of its portfolio management strategy to reduce exposure to office properties. Additionally, a tenant of 59 restaurants filed for bankruptcy. As a result, during the six months ended June 30, 2016, real estate assets with carrying values totaling $641.9 million were deemed to be impaired and their carrying values were reduced to their estimated fair values of $472.6 million, resulting in impairment charges of $169.3 million.

Consolidated Joint Ventures

The Company had interests in two joint ventures that owned two properties as of each of June 30, 2017 and December 31, 2016 (the “Consolidated Joint Ventures”). As of June 30, 2017 and December 31, 2016, the Consolidated Joint Ventures had total assets of $64.3 million and $64.8 million, respectively, of which $59.8 million and $58.8 million were real estate investments, net of accumulated depreciation and amortization, for the respective periods. One property is secured by a mortgage note payable of $14.3 million, which was non-recourse to the Company. The Company has the ability to control operating and financial policies of the Consolidated Joint Ventures. There are restrictions on the use of these assets as the Company would generally be required to obtain the approval of each partner (the “Partner”) in accordance with the joint venture agreement for any major transactions. The Company and each Partner are subject to the provisions of each joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.

The Partners’ share of the Consolidated Joint Ventures’ loss was $14,000 and $21,000 for the three and six months ended June 30, 2017. The Partners’ share of the Consolidated Joint Ventures’ income was $4,000 for the three months ended June 30, 2016 and the Partners’ share of the Consolidated Joint Ventures’ loss was $35,000 for the six months ended June 30, 2016 and is included in net loss (income) attributable to non-controlling interests in the consolidated statements of operations.

Unconsolidated Joint Ventures

The Company’s investment in unconsolidated joint venture arrangements (the “Unconsolidated Joint Ventures”) consisted of interests in two joint ventures that owned two properties as of each of June 30, 2017 and December 31, 2016. As of June 30, 2017 and December 31, 2016, the Company owned aggregate equity investments of $41.0 million and $41.3 million, respectively, in Unconsolidated Joint Ventures. The Company accounts for its investments in Unconsolidated Joint Ventures using the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over operating and financial policies of these investments. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in earnings and distributions from the joint ventures. As of June 30, 2017, the Company’s maximum exposure to risk was $41.0 million, the carrying value of the investments, which is presented in investment in unconsolidated entities in the consolidated balance sheet. The Unconsolidated Joint Ventures had total debt outstanding of $20.4 million as of June 30, 2017, none of which is recourse to the Company, as discussed in Note 10 – Debt. The Company and the respective unconsolidated joint venture partners are subject to the provisions of the applicable joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.

The Company records its proportionate share of net income (loss) from the Unconsolidated Joint Ventures in the equity in income and gain on disposition of unconsolidated entities in the consolidated statements of operations. During each of the three and six months ended June 30, 2017, the Company recognized $0.6 million and $0.9 million of net income, respectively, from two Unconsolidated Joint Ventures. During the three and six months ended June 30, 2016, the Company recognized $0.1 million and $0.4 million of net income, respectively, from the unconsolidated joint ventures which owned two and three properties, during those respective periods.

The following is a summary of the Company’s percentage ownership and carrying amount related to each of the Unconsolidated Joint Ventures as of June 30, 2017 (dollar amounts in thousands):



Name of Joint Venture	Partner	Ownership % ⁽¹⁾	Carrying Amount of Investment ⁽²⁾
Cole/Mosaic JV South Elgin IL, LLC	Affiliate of Mosaic Properties and Development, LLC	50%	$	5,745
Cole/Faison JV Bethlehem GA, LLC	Faison-Winder Investors, LLC	90%	35,208
			$	40,953

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(1)

The Company’s ownership interest in this table reflects its legal ownership interest. Legal ownership may, at times, not equal the Company’s economic interest in the listed properties because of various provisions in certain joint venture agreements regarding distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. As a result, the Company’s actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with its legal ownership interests.

(2)

The total carrying amount of the investments is greater than the underlying equity in net assets by $6.2 million. This difference relates to a purchase price allocation of goodwill and a step up in fair value of the investment assets acquired in connection with the Cole Merger. The step up in fair value was allocated to the individual investment assets and is being amortized in accordance with the Company’s depreciation policy.