Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2021

Summary of Significant Accounting Policies

Basis of Accounting

The consolidated financial statements of the Company presented herein include the accounts of the General Partner and its consolidated subsidiaries, including the OP. All intercompany transactions have been eliminated upon consolidation. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results for the entire year or any subsequent interim period.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020 of the Company, which are included in the Company’s Annual Report on Form 10-K filed on February 24, 2021. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and U.S. GAAP.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture. The portion of the consolidated joint venture not owned by the Company is presented as non-controlling interest in VEREIT’s and the OP’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. In addition, certain third parties were issued OP Units and Series F Preferred Units. Holders of OP Units are considered to be non-controlling interest holders in the OP and their ownership interest in the limited partner’s share is presented as non-controlling interests in VEREIT’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Equity is reallocated between controlling and noncontrolling interests in the OP upon a change in ownership. At the end of each annual reporting period, noncontrolling interests in the OP are adjusted to reflect their ownership percentage in the OP through a reallocation between controlling and noncontrolling interests in the OP, as applicable. As of each of September 30, 2021 and December 31, 2020, there were approximately 0.2 million Limited Partner OP Units issued and outstanding, respectively. As of December 31, 2020, there were 49,766 Limited Partner Series F Preferred Units issued and outstanding. In connection with the redemption of all shares of outstanding Series F Preferred Stock on August 15, 2021 discussed above, the OP redeemed all outstanding Series F Preferred Units.

For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following

characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. The Company consolidates entities that are not VIEs if it has a majority voting interest or other rights that result in effectively controlling the entity.

The Company then qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE, which is generally defined as the party who has a controlling financial interest in the VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE and the difference between consolidating the VIE and accounting for it using the equity method could be material to the Company’s consolidated financial statements. The Company continually evaluates the need to consolidate these VIEs based on standards set forth in U.S. GAAP.

Reverse Stock Split - Impact to Prior Period

The Company effected a one-for-five reverse stock split of Common Stock after markets closed on December 17, 2020, whereby every five shares of VEREIT's issued and outstanding shares of Common Stock, $0.01 par value per share, were converted into one share of Common Stock, $0.01 par value per share. A corresponding reverse split of the outstanding OP Units also took effect on December 17, 2020. Certain prior period amounts have been updated to reflect the reverse stock split including stock/unit and per share/unit amounts, additional paid-in capital, common stock and dividends on the consolidated statements of operations, consolidated balance sheets, consolidated statements of equity and notes to the financial statements. The reverse stock split did not affect the Company’s total stockholder’s equity, the common stock par value per share or the Company’s authorized shares of common stock. No fractional shares of common stock were issued as fractional shares were settled in cash.

Prior Period Correction

Subsequent to the issuance of the Company’s consolidated financial statements for the year ended December 31, 2020, the Company identified an overstatement in amounts recorded to depreciation expense. As a result, the Company revised the accompanying consolidated balance sheets as of December 31, 2020 to reduce accumulated depreciation and amortization and accumulated deficit and increase the General Partner's common equity by $30.6 million. The Company also revised the accompanying consolidated statements of operations to reduce depreciation and amortization by $0.9 million for the three months ended September 30, 2020 and by $2.8 million for the nine months ended September 30, 2020, which impacted total operating expenses, income before taxes, net income and net income attributable to the OP/General Partner. Basic and diluted net income per share attributable to common stockholders/unitholders (adjusted for the one-for-five stock split) for the three months ended September 30, 2020 changed from $0.40 to $0.41 and for the nine months ended September 30, 2020 remained constant at $0.95. The Company also revised the accompanying consolidated statements of changes in equity to reduce the accumulated deficit balances and increase the General Partner’s common equity at January 1, 2021 and 2020 by $30.6 million and $26.9 million, respectively. For the periods in which the Company revised net income, it made corresponding changes to net income in the accompanying consolidated statements of comprehensive income (loss), consolidated statements of changes in equity and consolidated statements of cash flows. There was no impact to net cash provided by operating activities in the accompanying consolidated statements of cash flows due to the revisions. The Company determined that the correction is not material to the previously issued consolidated financial statements.

Revenue Recognition

Rental Revenue

The Company continually reviews receivables related to rent, straight-line rent and property operating expense reimbursements and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The review includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term and the Company recognizes a general allowance on a portfolio-wide basis. For leases that are deemed not probable of collection, revenue is recorded as cash is received and the Company reduces rental revenue for any straight-line rent receivables. The Company recognizes all changes in the collectability assessment for an operating lease as an adjustment to rental revenue. During the three and nine months ended September 30, 2021, rental revenue

increased by $1.1 million and $1.9 million, respectively, as the Company deemed certain previously reserved receivables as collectible, which exceeded amounts deemed uncollectible during the three and nine months ended September 30, 2021.

Rental revenue also includes lease termination income collected from tenants to allow for the tenant to vacate their space prior to their scheduled termination dates, as well as amortization of above and below-market leases.

Merger, litigation and non-routine costs, net

The Company incurred costs for legal, investment banking and other services associated with the Merger, as well as legal fees and settlements associated with litigations and investigations resulting from the Audit Committee Investigation (defined below) and other corporate matters which are considered non-routine.

Merger, litigation and non-routine costs, net include the following costs and recoveries (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Merger, litigation and non-routine costs, net:





Merger costs	$	9,616	$	—	$	22,289	$	—
Legal fees and settlements (1) (2)	(171)		105		174		(6,106)
Insurance recoveries	—		—		(6,345)		(2,471)

Total	$	9,445	$	105	$	16,118	$	(8,577)

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(1)Includes all fees and litigation settlements associated with various corporate matters and litigations and investigations prompted by the results of the 2014 investigation conducted by the audit committee (the “Audit Committee”) of the Company’s Board of Directors (the “Audit Committee Investigation”), net of accrual reversals.

(2)Negative balances are the result of estimated costs accrued in prior periods that exceeded actual expenses incurred.

Equity-based Compensation

The Company had a 2011 equity-based incentive award plan (the “2011 Equity Plan”) for non-executive directors, officers, other employees and advisors or consultants who provided services to the Company, as applicable, and a non-executive director restricted share plan, which were accounted for under U.S. GAAP for share-based payments. On June 3, 2021, the Company’s stockholders, upon the recommendation of the Board, approved the VEREIT, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), which replaced the Company’s 2011 Equity Plan and the non-executive director restricted share plan. All officers, employees, non-employee directors and consultants of the Company and its subsidiaries are eligible to receive awards under the 2021 Plan, which is accounted for under U.S. GAAP for share-based payments. The expense for equity-based incentive awards is recognized over the vesting period or when the requirements for exercise of the award have been met.

As of June 3, 2021, the General Partner had cumulatively awarded under its 2011 Equity Plan approximately 4.0 million shares of Common Stock, which was comprised of 0.8 million restricted share awards (“Restricted Shares”), net of the forfeiture of 0.7 million Restricted Shares through that date, 1.9 million restricted stock units (“Restricted Stock Units”), net of the forfeiture/cancellation of 0.4 million Restricted Stock Units through that date, 0.2 million deferred stock units (“Deferred Stock Units”), and 1.1 million stock options (“Stock Options”), net of forfeiture/cancellation of 0.1 million Stock Options through that date. As of June 3, 2021, the General Partner had cumulatively awarded a total of 9,000 shares under the non-executive director restricted share plan. As of September 30, 2021, the General Partner had cumulatively awarded 1,173 Deferred Stock Units under its 2021 Plan.

As of September 30, 2021, approximately 9.1 million shares, including 0.3 million shares of Common Stock subject to awards granted under the 2011 Plan that may become available for issuance or reissuance, as applicable, under the 2021 Plan if such awards are forfeited, canceled or otherwise terminated (other than by exercise), were available for issuance under the 2021 Plan.

The following is a summary of equity-based compensation expense for the three and nine months ended September 30, 2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Time-Based Restricted Stock Units (1)	$	1,537	$	1,412	$	4,480	$	4,195
Long-Term Incentive-Based Restricted Stock Units	1,455		1,416		4,009		3,916
Deferred Stock Units	27		53		1,138		1,071
Stock Options	169		330		590		955
Total	$	3,188	$	3,211	$	10,217	$	10,137

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(1)Includes stock compensation expense attributable to awards for which the requisite service period begins prior to the assumed future grant date.

As of September 30, 2021, total unrecognized compensation expense related to these awards was approximately $21.2 million, with an aggregate weighted-average remaining term of 2.3 years.

Recent Accounting Pronouncements

Reference Rate Reform

During the first quarter of 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Inter-Bank Offer Rate (“LIBOR”)-indexed cash flows to assume that the index applicable to future hedged transactions matched the index on the corresponding derivatives. During the fourth quarter of 2020, the Company terminated its interest rate swap agreements with an aggregate $900.0 million notional amount and terminated its forward starting interest rate swaps with a total notional amount of $400.0 million, both of which were designated as cash flow hedges, in connection with the early repayment of borrowings under the Credit Facility Term Loan (as defined in Note 6 – Debt), as discussed in Note 7 – Derivatives and Hedging Activities. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.