Real Estate Investments and Related Intangibles

Property Acquisitions

During the year ended December 31, 2017, the Company acquired controlling financial interests in 88 commercial properties and three land parcels for an aggregate purchase price of $748.8 million (the “2017 Acquisitions”), which includes $3.3 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 year ended December 31, 2016, the Company acquired a controlling interest in eight commercial properties for an aggregate purchase price of $100.2 million (the “2016 Acquisitions”). During the year ended December 31, 2015, the Company acquired 16 commercial properties and nine land parcels for an aggregate purchase price of $36.3 million (the “2015 Acquisitions”).

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



	Year Ended December 31,
	2017			2016			2015
Real estate investments, at cost:
Land	$	110,634		$	23,187		$	5,051
Buildings, fixtures and improvements	523,445			67,865			28,643
Total tangible assets	634,079			91,052			33,694
Acquired intangible assets:
In-place leases and other intangibles ⁽¹⁾	105,940			9,613			2,580
Above-market leases⁽²⁾	10,445			—			153
Assumed intangible liabilities:
Below-market leases ⁽³⁾	(1,680		)	(471		)	(108		)
Total purchase price of assets acquired	$	748,784		$	100,194		$	36,319

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(1)	The weighted average amortization period for acquired in-place leases and other intangibles is 15.8 years, 13.8 years and 11.0 years for 2017 Acquisitions, 2016 Acquisitions and 2015 Acquisitions, respectively.


(2)	The weighted average amortization period for acquired above-market leases is 18.0 years and 14.1 years for 2017 Acquisitions and 2015 Acquisitions, respectively. There were no acquired above-market leases during the year ended December 31, 2016.


(3)	The weighted average amortization period for acquired intangible lease liabilities is 13.8 years, 10.0 years and 15.0 years for 2017 Acquisitions, 2016 Acquisitions and 2015 Acquisitions, respectively.

The Company has not included pro forma information for the Company's 2016 Acquisitions or 2015 Acquisitions, which were acquired prior to the adoption of ASU 2017-01 and met the definition of a business combination, as they did not have a material impact on the Company's financial position or results of operations.

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⁾
2018	$	1,105,205	$	3,016
2019	1,082,111		2,397
2020	1,049,997		2,023
2021	1,009,474		1,899
2022	929,909		1,809
Thereafter	5,950,591		2,184
Total	$	11,127,287	$	13,328

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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.

Property Dispositions and Real Estate Assets Held for Sale

During the year ended December 31, 2017, the Company disposed of 137 properties, including one property owned by a consolidated joint venture, six properties transferred to the lender in either a deed-in-lieu of foreclosure or foreclosure sale transaction as discussed in Note 10 – Debt, and 15 properties disposed of in connection with the nonmonetary exchange discussed below, for an aggregate gross sales price of $594.9 million, of which our share was $574.4 million after the profit participation payments related to the disposition of 31 Red Lobster properties and the consolidated joint venture partner’s share of the sales price. The dispositions resulted in proceeds of $445.5 million after a mortgage loan assumption of $66.0 million and closing costs. Additionally, the Company’s tax provision for the year ended December 31, 2017 included $1.7 million of Canadian tax on the gain on sale of certain Canadian properties. The Company recorded a gain of $64.7 million related to the sales which is included in gain (loss) on disposition of real estate and real estate assets held for sale, net in the accompanying consolidated statements of operations.

During the year ended December 31, 2016, the Company disposed of 301 properties, for an aggregate gross sales price of $1.08 billion, of which our share was $1.04 billion after the profit participation payment related to the disposition of 70 Red Lobsters. The dispositions resulted in proceeds of $958.4 million after a mortgage loan assumption of $55.0 million and closing costs. The Company recorded a gain of $45.7 million, which included $67.8 million of goodwill allocated to the cost basis of such properties, which is included in gain (loss) on disposition of real estate and real estate assets held for sale, net in the accompanying consolidated statements of operations.

During the year ended December 31, 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.

During the year ended December 31, 2015, the Company disposed of 228 properties, including two properties owned by consolidated joint ventures, for an aggregate sales price of $1.4 billion, resulting in consolidated proceeds of $966.1 million after mortgage loan assumptions and closing costs. The Company recorded a loss of $69.1 million related to the sales, which included $96.7 million of goodwill allocated in the cost basis of such properties. The Company’s loss on the sales is included in gain (loss) on disposition of real estate and real estate assets held for sale, net in the accompanying consolidated statements of operations.

During the year ended December 31, 2015, the Company also disposed of its interest in one consolidated joint venture, whose only assets consisted of investments in three Unconsolidated Joint Ventures, for an aggregate gross sales price of $77.5 million, of which the Company’s share was $69.8 million based on its ownership interest, resulting in consolidated proceeds of $43.0 million after mortgage loan repayment and closing costs. The mortgage loan obligation of the consolidated joint venture was held by an unconsolidated entity. The Company recorded a gain of $6.7 million related to the sale of the consolidated joint venture, which is included in equity in income and gain on disposition of unconsolidated entities in the accompanying consolidated statements of operations.

As of December 31, 2017, there were 30 properties classified as held for sale with a carrying value of $38.3 million, included in assets related to discontinued operations and real estate assets held for sale, net in the accompanying consolidated balance sheet which are expected to be sold in the next 12 months as part of the Company’s portfolio management strategy. As of December 31, 2016, there were 11 properties classified as held for sale. During the year ended December 31, 2017, the Company recorded a loss of $3.1 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 year ended December 31, 2017. During the year ended December 31, 2016, the Company recorded a loss of $0.2 million related to properties classified as held for sale during the respective period, which included $3.2 million of goodwill allocated to the cost basis of such properties. The loss on properties held for sale is included in gain (loss) on disposition of real estate and real estate assets held for sale, net in the accompanying consolidated statements of operations.

Intangible Lease Assets and Liabilities

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



	Weighted-Average Useful Life	December 31, 2017		December 31, 2016
Intangible lease assets:
In-place leases and other intangibles, net of accumulated amortization of $599,680 and $494,131, respectively	15.2	$	1,091,433	$	1,192,756
Leasing commissions, net of accumulated amortization of $2,902 and $1,836, respectively	10.6	13,876		10,231
Above-market lease assets and deferred lease incentives, net of accumulated amortization of $88,335 and $69,670, respectively	16.3	241,449		275,897
Total intangible lease assets, net		$	1,346,758	$	1,478,884

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $73,916 and $56,891, respectively	18.7	$	198,551	$	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 December 31, 2017 (amounts in thousands):



	2018		2019		2020		2021		2022
In-place leases and other intangibles:
Total projected to be included in amortization expense	$	135,212	$	125,701	$	118,390	$	110,425	$	95,990
Leasing commissions:
Total projected to be included in amortization expense	1,186		1,172		1,150		1,112		1,056
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental income	23,773		22,039		21,625		21,197		20,383
Below-market lease liabilities:
Total projected to be included in rental income	19,097		18,392		17,244		16,045		15,201

Nonmonetary Exchange

During the year ended December 31, 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 (loss) on disposition of real estate and real estate assets held for sale, 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.

As part of the Company’s quarterly impairment review procedures and considering the factors discussed regarding the Company’s policies on real estate impairment mentioned in Note 2 – Summary of Significant Accounting Policies, real estate assets and an investment in a property subject to a direct financing lease with carrying values totaling $161.9 million were deemed to be impaired and their carrying values were reduced to their estimated fair values of $111.4 million resulting in impairment charges of $50.5 million during the year ended December 31, 2017. The majority of the 2017 impairment charges relate to certain office, restaurant and other properties that, during 2017, management identified for potential sale or determined, based on discussions with the current tenants, will not be re-leased.

During the year ended December 31, 2016, a majority of the impairment charges related to properties identified by management 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 part of the Company’s quarterly impairment review procedures and considering the factors mentioned above, real estate assets with carrying values totaling $668.2 million were deemed to be impaired and their carrying values were reduced to their estimated fair values of $485.4 million, resulting in impairment charges of $182.8 million during the year ended December 31, 2016.

During the year ended December 31, 2015, real estate assets with carrying value totaling $340.1 million were deemed to be impaired and their carrying value was reduced to their estimated fair value of $248.3 million, resulting in impairment charges of $91.8 million.

Consolidated Joint Ventures

The Company had an interest in one joint venture that owned one property as of December 31, 2017 and had total assets of $33.7 million, of which $30.7 million were real estate investments, net of accumulated depreciation and amortization. As of December 31, 2016, the Company had interests in two joint ventures that owned two properties and had total assets of $57.0 million, of which $50.8 million were real estate investments, net of accumulated depreciation and amortization. As of December 31, 2017 and December 31, 2016, one property was secured by a mortgage note payable of $14.9 million and $11.6 million, respectively, 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 aggregate consolidated joint ventures’ loss was $0.2 million and $14,000 for the years ended December 31, 2017 and 2016, respectively. The Partners’ share of the aggregate consolidated joint ventures’ income was $1.3 million for the year ended December 31, 2015. One joint venture disposed of its property during the year ended December 31, 2017 and the Company disposed of its interest in three consolidated joint ventures during the year ended December 31, 2015, which included one consolidated joint venture, whose only assets were investments in three Unconsolidated Joint Ventures (as defined below).

Unconsolidated Joint Ventures

The Company’s investment in unconsolidated joint venture arrangements (the “Unconsolidated Joint Ventures”) consisted of interests in two joint ventures that each owned one property as of December 31, 2017 and December 31, 2016. As of December 31, 2017 and December 31, 2016, the Company owned aggregate equity investments of $39.5 million and $41.3 million, respectively, in the 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 December 31, 2017, the Company’s maximum exposure to risk was $39.5 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 December 31, 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.

During the years ended December 31, 2017, 2016 and 2015, the Company recognized $3.3 millions, $0.9 million and $2.3 million of net income, respectively, from the unconsolidated joint ventures.

The following is a summary of the Company’s percentage ownership and carrying amount related to each of the Unconsolidated Joint Ventures as of December 31, 2017 and December 31, 2016 (dollar amounts in thousands):



			Carrying Amount of Investment ⁽²⁾
Name of Joint Venture	Partner	Ownership % ⁽¹⁾	December 31, 2017		December 31, 2016
Cole/Mosaic JV South Elgin IL, LLC	Affiliate of Mosaic Properties and Development, LLC	50%	$	5,382	$	5,891
Cole/Faison JV Bethlehem GA, LLC	Faison-Winder Investors, LLC	90%	34,138		35,438
			$	39,520	$	41,329

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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 was greater than the underlying equity in net assets by $8.6 million and $6.4 million as of December 31, 2017. and December 31, 2016, respectively. 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 mergers. 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.