UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-Q



x
        
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2008


Or



o
        
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _________ to _________




Commission file number 000-51962

COLE CREDIT PROPERTY TRUST, INC.

(Exact name of registrant as specified in its charter)



Maryland
        
        20-0939158(State or other jurisdiction of
incorporation or organization)
        
        (I.R.S. Employer
Identification No.)2555 East Camelback Road, Suite400
        
        (602)778-8700Phoenix, Arizona 85016
        
        (Registrants telephone number,(Address and zip code of principal executive offices)
        
        including area code)




Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YesxNoo



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero
        Accelerated filero
        Non-accelerated filero
        Smaller reporting companyx




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YesoNox



As of November 12, 2008, there were 10,090,951 shares of common stock, par value $0.01, of Cole Credit Property Trust, Inc. outstanding.





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COLE CREDIT PROPERTY TRUST, INC.

INDEX



PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Unaudited Balance Sheets as of September 30, 2008 and     December 31, 2007
        
        
        4Condensed Consolidated Unaudited Statements of Operations for the three and nine months ended September 30, 2008 and 2007
        
        
        5Condensed Consolidated Unaudited Statement of Stockholders Equity for the nine months ended September 30, 2008
        
        
        6Condensed Consolidated Unaudited Statements of Cash Flows for the nine months ended     September 30, 2008 and 2007
        
        
        7Notes to Condensed Consolidated Unaudited Financial Statements
        
        
        8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
        
        
        13Item 3. Quantitative and Qualitative Disclosures About Market Risk
        
        
        20Item 4T. Controls and Procedures
        
        
        20PART II  OTHER INFORMATIONItem 1. Legal Proceedings
        
        
        21Item 1A. Risk Factors
        
        
        21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
        
        
        21Item 3. Defaults Upon Senior Securities
        
        
        21Item 4. Submission of Matters to a Vote of Security Holders
        
        
        21Item 5. Other Information
        
        
        21Item 6. Exhibits
        
        
        21Signatures
        
        
        22






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PART I

FINANCIAL INFORMATION



The accompanying condensed consolidated unaudited interim financial statements as of and for the three and nine months ended September 30, 2008 have been prepared by Cole Credit Property Trust, Inc. (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements and should be read in conjunction with the audited financial statements and related notes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2007.  The financial statements herein should also be read in conjunction with the notes to the financial statements and Managements Discussion and Analysis
of Financial Condition and Results of Operations contained in this report.  The results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the operating results expected for the full year.  The information furnished in our accompanying condensed consolidated unaudited balance sheets and condensed consolidated unaudited statements of operations, stockholders equity, and cash flows reflects all adjustments that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements.







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COLE CREDIT PROPERTY TRUST, INC.

CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS

(Dollar amounts in thousands, except share and per share amounts)





September 30,2008
        
        December 31,2007ASSETSInvestment in real estate assets:Land
        
        $
        55,321
        
        $
        55,321Buildings and improvements, less accumulated depreciation of $12,667 and $9,904, respectively
        
        
        110,859
        
        
        113,602Acquired intangible lease assets, less accumulated amortization of $6,765 and $5,322, respectively
        
        
        21,573
        
        
        23,016Total investment in real estate assets
        
        
        187,753
        
        
        191,939Cash and cash equivalents
        
        
        587
        
        
        913Rents and tenant receivables, less allowance for doubtful accounts of $178 and $42, respectively
        
        
        1,934
        
        
        1,623Prepaid expenses and other assets
        
        
        112
        
        
        66Deferred financing costs, less accumulated amortization of $1,316 and $1,020, respectively
        
        
        1,254
        
        
        1,502Total assets
        
        $
        191,640
        
        $
        196,043LIABILITIES AND STOCKHOLDERS EQUITYMortgage notes payable
        
        $
        117,977
        
        $
        117,977Accounts payable and accrued expenses
        
        
        754
        
        
        737Acquired below market lease intangibles, less accumulated amortization of $763 and $610, respectively
        
        
        1,476
        
        
        1,629Distributions payable
        
        
        589
        
        
        589Deferred rent and other liabilities
        
        
        243
        
        
        130Total liabilities
        
        
        121,039
        
        
        121,062STOCKHOLDERS EQUITY:Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding
        
        
        
        
        
        Common stock, $0.01 par value; 90,000,000 shares authorized, 10,090,951 shares issued and outstanding
        
        
        101
        
        
        101Capital in excess of par value
        
        
        90,424
        
        
        90,424Accumulated distributions in excess of earnings
        
        
        (19,924
        )
        
        (15,544
        )Total stockholders equity
        
        
        70,601
        
        
        74,981Total liabilities and stockholders equity
        
        $
        191,640
        
        $
        196,043




The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.



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COLE CREDIT PROPERTY TRUST, INC.

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS

(Dollar amounts in thousands, except share and per share amounts)





Three Months Ended September 30,
        
        Nine Months Ended September 30,2008
        
        2007
        
        2008
        
        2007Revenues:Rental and other income
        
        $
        3,984
        
        $
        4,006
        
        $
        11,954
        
        $
        11,859Tenant reimbursement income
        
        
        84
        
        
        65
        
        
        251
        
        
        173Total revenue
        
        
        4,068
        
        
        4,071
        
        
        12,205
        
        
        12,032Expenses:General and administrative
        
        
        183
        
        
        128
        
        
        484
        
        
        350Property operating expenses
        
        
        274
        
        
        107
        
        
        515
        
        
        273Property and asset management fees
        
        
        238
        
        
        238
        
        
        724
        
        
        720Depreciation
        
        
        921
        
        
        938
        
        
        2,763
        
        
        2,750Amortization
        
        
        450
        
        
        470
        
        
        1,351
        
        
        1,359Total operating expenses
        
        
        2,066
        
        
        1,881
        
        
        5,837
        
        
        5,452Operating income
        
        
        2,002
        
        
        2,190
        
        
        6,368
        
        
        6,580Other income (expense):Interest income
        
        
        4
        
        
        19
        
        
        19
        
        
        74Interest expense
        
        
        (1,837
        )
        
        (1,807
        )
        
        (5,470
        )
        
        (5,383
        )Total other expense
        
        
        (1,833
        )
        
        (1,788
        )
        
        (5,451
        )
        
        (5,309
        )Net income
        
        $
        169
        
        $
        402
        
        $
        917
        
        $
        1,271Weighted average number of common shares outstanding:Basic and diluted
        
        
        10,090,951
        
        
        10,090,951
        
        
        10,090,951
        
        
        10,092,316Net income per common share:Basic and diluted
        
        $
        0.02
        
        $
        0.04
        
        $
        0.09
        
        $
        0.13




The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.























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COLE CREDIT PROPERTY TRUST, INC.

CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS EQUITY

(Dollar amounts in thousands, except share and per share amounts)





Common Stock
        
        Capital in Excess in Par Value
        
        Accumulated Distributions in Excess of Earnings
        
        Total Stockholders EquityNumber of Shares
        
        Par ValueBalance, December 31, 2007
        
        10,090,951
        
        $
        101
        
        $
        90,424
        
        $
        (15,544
        )
        $
        74,981Distributions
        
        
        
        
        
        
        
        
        
        
        (5,297
        )
        
        (5,297
        )Net income
        
        
        
        
        
        
        
        
        
        
        917
        
        
        917Balance, September 30, 2008
        
        10,090,951
        
        $
        101
        
        $
        90,424
        
        $
        (19,924
        )
        $
        70,601




The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.





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COLE CREDIT PROPERTY TRUST, INC.

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)





Nine Months Ended September 30,2008
        
        
        
        2007Cash flows from operating activities:Net income
        
        $
        917
        
        
        $
        1,271Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
        
        
        2,763
        
        
        
        2,750Amortization
        
        
        1,586
        
        
        
        1,589Changes in assets and liabilities:Rents and tenant receivables, net of allowance
        
        
        (311
        )
        
        
        (215
        )Prepaid expenses and other assets
        
        
        (46
        )
        
        
        (10
        )Accounts payable and accrued expenses
        
        
        17
        
        
        
        (130
        )Deferred rent and other liabilities
        
        
        113
        
        
        
        (56
        )Net cash provided by operating activities
        
        
        5,039
        
        
        
        5,199Cash flows from investing activities:Investments in real estate and related assets
        
        
        (20
        )
        
        
        (2,842
        )Acquired intangible lease assets
        
        
        
        
        
        
        (320
        )Acquired below market lease intangibles
        
        
        
        
        
        
        14Net cash used in investing activities
        
        
        (20
        )
        
        
        (3,148
        )Cash flows from financing activities:Common stock redemptions
        
        
        
        
        
        
        (47
        )Proceeds from mortgage notes payable
        
        
        
        
        
        
        1,678Distributions to investors
        
        
        (5,297
        )
        
        
        (5,308
        )Deferred financing costs paid
        
        
        (48
        )
        
        
        (75
        )Net cash used in financing activities
        
        
        (5,345
        )
        
        
        (3,752
        )Net decrease in cash and cash equivalents
        
        
        (326
        )
        
        
        (1,701
        )Cash and cash equivalents, beginning of period
        
        
        913
        
        
        
        2,686Cash and cash equivalents, end of period
        
        $
        587
        
        
        $
        985Supplemental Disclosures of Non-Cash Investing and Financing Activities:Dividends declared and unpaid
        
        $
        589
        
        
        $
        589Supplemental Cash Flow Disclosures:Interest paid
        
        $
        5,193
        
        
        $
        5,114






The accompanying notes are an integral part of these condensed consolidatedunaudited financial statements.



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COLE CREDIT PROPERTY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

September 30, 2008



Note 1  Organization



Cole Credit Property Trust, Inc. (the Company) is a Maryland corporation formed on March 29, 2004 that is organized and operates as a real estate investment trust (REIT) for federal income tax purposes. Substantially all of the Companys business is conducted through Cole Operating Partnership I, LP (Cole OP I), a Delaware limited partnership. The Company is the sole general partner of and owns an approximately 99.99% partnership interest in Cole OP I. Cole REIT Advisors, LLC (Cole Advisors), the affiliate advisor to the Company, is the sole limited partner and owner of approximately 0.01% (minority interest) of the partnership interests of Cole OP I.



As of September 30, 2008, the Company owned 42 properties comprising approximately 1.0 million square feet of single-tenant, retail space located in 19 states.  As of September 30, 2008, 100% of these properties were fully leased.



The Companys stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if the board of directors determines that listing would be in the best interest of its stockholders.  The Company does not intend to list its shares at this time.  The Company does not anticipate that there would be any market for its common stock until its shares are listed for trading.  In the event it does not obtain listing prior to February 1, 2016, its charter requires that it either: (1) seek stockholder approval of an extension or amendment of this listing deadline; or (2) seek stockholder approval to adopt a plan of liquidation of the corporation.



Note 2  Summary of Significant Accounting Policies



Principles of Consolidation and Basis of Presentation



The condensed consolidated unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including the instructions to Form 10-Q and Article 8 of Regulation S-X, and do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary to present a fair presentation of the results for such periods.  Results for these interim periods are not necessarily indicative of full year results.  The information included in this Form 10-Q should be read in conjunction with the Companys audited consolidated financial statements as of and for the year ended December 31, 2007, and related notes thereto
included in the Companys Annual Report on Form 10-K.



The accompanying condensed consolidated unaudited financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation.



Redemptions of Common Stock



The Company will determine at the beginning of each fiscal year the maximum amount of shares that it may redeem during that year.  The Company may use up to 1.0% of its annual cash flow to meet these redemption needs, including cash proceeds generated from new offerings, operating cash flow not intended for dividends, borrowings, and capital transactions such as asset sales or refinancings.  The shares the Company redeems under its share redemption program will be cancelled and return to the status of authorized but unissued shares.  The Company does not intend to resell such shares to the public unless they are first registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and under appropriate state securities laws or otherwise sold in compliance with such laws.  As of September 30, 2008, the Company had redeemed 7,300 shares at an average of
$9.35 per share pursuant to its share redemption program.



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COLE CREDIT PROPERTY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)

September 30, 2008



Reportable Segments



The Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for reporting financial and descriptive information about an enterprises reportable segments. The Companys operating segments consist of commercial properties, which include activities related to investing in real estate including retail, office, and distribution properties.  Although the Companys commercial properties are geographically diversified throughout the United States, the chief operating decision maker evaluates operating performance on an overall portfolio level and these properties have similar economic characteristics, thus the Companys properties have been
aggregated into one reportable segment.



Investment in Real Estate Assets



The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets may not be recoverable.  When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating 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 and related intangible assets to their fair value and recognize an impairment loss.  The Company has one property under an operating lease with previously identified
impairment indicators.  The undiscounted future operating cash flow scenarios expected from the use of the property and related intangible assets and its eventual disposition continued to exceed the carrying value of the assets as of September 30, 2008.  No impairment losses were recorded for the three and nine months ended September 30, 2008 and 2007.



Note 3  Notes Payable



At September 30, 2008, the Company had 38 mortgage notes payable totaling approximately $118.0 million, with fixed interest rates ranging from 4.62% to 6.68% and a weighted average interest rate of approximately 5.76%.  The mortgage notes mature on various dates from November 2009 through September 2017, with a weighted average remaining term of approximately 4.6 years.  Each of the mortgage notes are secured by the respective property.  The mortgage notes are generally non-recourse to the Company and Cole OP I, but both are liable for customary non-recourse carve-outs.



As of September 30, 2008, the Company had no amounts outstanding under a $1.5 million revolving line of credit.  The revolving line of credit bears interest at a variable rate equal to the one-month LIBOR plus 175 basis points and matures in March 2011.  The revolving line of credit is secured by one property.























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COLE CREDIT PROPERTY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)

September 30, 2008





Note 4  Commitments and Contingencies



Litigation



In the ordinary course of business, the Company may become subject to litigation or claims.  There are no material legal proceedings, pending or known to be contemplated against us.



Environmental Matters



In connection with the ownership and operation of real estate, the Company may be potentially liable for costs and damages related to environmental matters.  The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and the Company is not aware of any other environmental condition that it believes will have a material adverse effect on its consolidated results of operations.



Note 5  Related-Party Transactions and Arrangements



Certain affiliates of the Company received fees and compensation in connection with the Offering, and receive fees and compensation in connection with the acquisition, management and sale of the assets of the Company.



If Cole Advisors provides substantial services, as determined by the Company, in connection with the origination or refinancing of any debt financing obtained by the Company that is used to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay Cole Advisors a financing coordination fee equal to 1% of the amount available under such financing; provided, however, that Cole Advisors shall not be entitled to a financing coordination fee in connection with the refinancing of any loan secured by any particular property that was previously subject to a refinancing in which Cole Advisors received such a fee.  Financing coordination fees payable from loan proceeds from permanent financing will be paid to Cole Advisors as the Company acquires such permanent financing.  However, no
fees were permitted to be paid on loan proceeds from any line of credit until such time as all net offering proceeds had been invested by the Company.  During the three and nine months ended September 30, 2008, the Company paid Cole Advisors $0 and approximately $15,000 for finance coordination fees, respectively.  During the three and nine months ended September 30, 2007, the Company paid Cole Advisors approximately $17,000 for finance coordination fees.



The Company pays, and expects to continue to pay, Cole Realty Advisors, Inc. (Cole Realty), its affiliated property manager, fees for the management and leasing of the Companys properties.  Such fees are equal to 3% of gross revenues, plus leasing commissions at prevailing market rates, not to exceed the greater of $4.50 per square foot or 7.5% of the total lease obligation.  During the three and nine months ended September 30, 2008, the Company paid Cole Realty approximately $114,000 and approximately $351,000 for property management fees, respectively.  During the three and nine months ended September 30, 2007, the Company paid Cole Realty approximately $114,000 and approximately $351,000 for property management fees, respectively.



















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COLE CREDIT PROPERTY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)

September 30, 2008





The Company pays Cole Realty acquisition and advisory fees of up to 3% of the contract purchase price of each property.  During the three and nine months ended September 30, 2008, the Company did not pay any acquisition fees to Cole Realty.  During the three and nine months ended September 30, 2007, the Company paid Cole Realty approximately $61,000 for acquisition fees.



The Company pays Cole Advisors an annualized asset management fee of up to 0.75% of the aggregate asset value of the Companys assets.  During each of the three and nine months ended September 30, 2008, pursuant to a waiver of part of the fee, the Company paid Cole Advisors an asset management fee of 0.25% of the aggregate asset value of the Companys assets.  The Company is not obligated to pay any additional amounts for such periods.  However, Cole Advisors may elect to increase its asset management fees in future periods up to the 0.75% fee.  During the three and nine months ended September 30, 2008, the Company paid Cole Advisors approximately $124,000 and approximately $373,000 for asset management fees, respectively.  During the three and nine months ended September 30, 2007, the Company paid Cole Advisors approximately $124,000 and approximately $369,000 for asset management
fees, respectively.



If Cole Advisors, or its affiliates, provides a substantial amount of services, as determined by the Company, in connection with the sale of one or more properties, the Company will pay Cole Advisors an amount equal to 3% of the contract price of each asset sold.  In no event will the combined disposition fee paid to Cole Advisors, its affiliates and unaffiliated third parties exceed the reasonable, customary and competitive amount for such services.  In addition, after investors have received a return of their net capital contributions and a 7.5% annual cumulative, non-compounded return, then Cole Advisors is entitled to receive 20% of the remaining net sale proceeds.  During the three and nine months ended September 30, 2008 and 2007, the Company did not pay any fees or amounts to Cole Advisors relating to the sale of properties.



In the event the Companys common stock is listed in the future on a national securities exchange, a subordinated incentive listing fee equal to 20% of the amount by which the market value of the Companys outstanding stock plus all distributions paid by the Company prior to listing exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate an 7.5% annual cumulative, non-compounded return to investors will be paid to Cole Advisors.



The Company may reimburse Cole Advisors for expenses it incurs in connection with its provision of administrative services, including related personnel costs.  The Company does not reimburse for personnel costs in connection with services for which Cole Advisors receives acquisition fees or disposition fees.  During the three and nine months ended September 30, 2008 and 2007, the Company did not reimburse Cole Advisors for any such costs.



Note 6  Economic Dependency



Under various agreements, the Company has engaged or will engage Cole Advisors and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Companys common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations.  As a result of these relationships, the Company is dependent upon Cole Advisors and its affiliates.  In the event that these companies were unable to provide the Company with the respective services, the Company would be required to find alternative providers of these services.

















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COLE CREDIT PROPERTY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)

September 30, 2008





Note 7  New Accounting Pronouncements



In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (SFAS No. 157).  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  During February 2008, the FASB issued a Staff Position that will (i) partially defer the effective date of SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities and (ii) remove certain leasing transactions from the scope of SFAS No. 157.  The Company has determined that SFAS
No. 157 did not apply as it relates to the financial assets and liabilities included in the consolidated financial statements.  The Company has determined that SFAS No. 157 had no impact on its consolidated financial statements.



On October 10, 2008, the FASB voted to issue Staff Position (FSP) FAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active(FSP FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active. The Company has determined that FSP FAS 157-3 had no impact on its consolidated financial statements.



In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3), which amends the factors that entities should consider in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset under Statement 142, Goodwill and Other Intangible Assets.  FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  The Company believes FSP FAS 142-3 will have no material impact on its consolidated financial statements.



In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162).  SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP.  SFAS No. 162 is effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.  The Company does not expect the application of SFAS No. 162 to result in a change to the Companys current practices.



12



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto, and the other unaudited financial data included elsewhere in this Form 10-Q.  The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2007.  The terms we, us, our, and the Company refer to Cole Credit Property Trust, Inc.



Forward-Looking Statements



Except for historical information, this section contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including discussion and analysis of our financial condition and our subsidiaries, our anticipated capital expenditures, amounts of anticipated cash distributions to our stockholders in the future and other matters.  These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry.  Words such as may, will, anticipates, expects, intends, plans, believes, seeks, estimates, would, could, should or comparable words, variations and similar expressions are
intended to identify forward-looking statements.  All statements not based on historical fact are forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied in the forward-looking statements.



Forward-looking statements that were true at the time they were made may ultimately prove to be incorrect or false.  Investors are cautioned not to place undue reliance on forward-looking statements, which reflect our managements views only as of the date of this Quarterly Report on Form 10-Q.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  Factors that could cause actual results to differ materially from any forward-looking statements made in this Quarterly Report on Form 10-Q include, among others, changes in general economic conditions, changes in real estate conditions, construction costs that may exceed estimates, construction delays, increases in interest rates, lease-up risks, inability to obtain new tenants upon the expiration of existing
leases, and the potential need to fund tenant improvements or other capital expenditures out of operating cash flows.



Managements discussion and analysis of financial condition and results of operations are based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates.  These estimates are based on managements historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.



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Overview



Our operating results and cash flows are primarily influenced by rental income from our commercial properties and interest expense on our property acquisition indebtedness.  Rental income accounted for approximately 98% of total revenue during the three and nine months ended September 30, 2008.  As 100% of our properties are under lease, with an average remaining lease term of approximately 11.3 years, we believe our exposure to short-term changes in commercial rental rates on our portfolio is substantially mitigated. Our advisor regularly monitors the creditworthiness of our tenants by reviewing the tenants financial results, credit rating agency reports (if any) on the tenant or guarantor, the operating history of the property with such tenant, the tenants market share and track record within its industry segment, the general health and outlook of the tenants industry
segment, and other information for changes and possible trends. If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenants financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property, or identifying a possible replacement tenant should the current tenant fail to perform on the lease.



As of September 30, 2008, the debt leverage ratio of our portfolio, which is the ratio of mortgage notes payable to total gross real estate assets, of our portfolio was approximately 57%.  All of our outstanding debt is subject to fixed interest rates, ranging from 4.62% to 6.68%, with a weighted average interest rate of approximately 5.76% and a weighted average remaining term of approximately 4.6 years.  As we have no outstanding variable rate debt, our exposure to short-term changes in interest rates is limited.  Additionally, as we have fully invested the proceeds from our private placement of common stock in commercial real estate and we do not expect to dispose of any of our properties in the near future, our results of operations are not exposed to short-term changes in real estate prices, nor are we exposed to short-term changes in interest rates on future
acquisitions.Should we sell any of our properties and choose to reinvest the sales proceeds in commercial real estate, we will be subject to changes in real estate prices and changes in interest rates on new indebtedness used to acquire the properties. We may manage our risk of changes in real estate prices on future property acquisitions by entering into purchase agreements and loan commitments simultaneously so that our operating yield is generally determinable at the time we purchase the property, by contracting with developers for future delivery of properties, or by entering into sale-leaseback transactions.



The current mortgage lending and interest rate environment for real estate in general is uncertain.  We currently have no plans for future property acquisitions.  If we were to acquire additional investment properties in the future we may experience more stringent lending criteria, which may affect our ability to finance certain property acquisitions.



Results of Operations



Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007



Revenue. Revenue was unchanged at approximately $4.1 million for the three months ended September 30, 2008 and 2007.  Our revenue primarily consists of rental income from net leased commercial properties, which accounted for approximately 98% of total revenue during the three months ended September 30, 2008 and 2007.



General and Administrative Expenses.General and administrative expenses increased approximately $55,000, or approximately 43%, to approximately $183,000 for the three months ended September 30, 2008, compared to approximately $128,000 for the three months ended September 30, 2007.  The increase was primarily due to higher state taxes and transfer agent fees during the three months ended September 30, 2008, as compared to the three months ended September 30, 2007.  The increase in transfer agent fees was primarily due to utilizing a new unrelated third party registrar and transfer agent during the three months ended September 30, 2008.  The primary general and administrative expense items are legal and accounting fees, transfer agent fees, organizational costs, state franchise and income taxes and other licenses and fees.















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Property Operating Expenses.Property operating expenses increased approximately $167,000, or approximately 156%, to approximately $274,000 for the three months ended September 30, 2008, compared to approximately $107,000 during the three months ended September 30, 2007.  The increase was primarily due to an increase in bad debt expense related to one operating property, as well as an increase in property tax expense.  The primary property operating expense items are repairs and maintenance, property taxes, bad debt and insurance.



Property and Asset Management Fees.Property and asset management fees were unchanged at approximately $238,000 during the three months ended September 30, 2008 and 2007.



Depreciation and Amortization Expenses.Depreciation and amortization expenses were unchanged at approximately $1.4 million for the three months ended September 30, 2008 and 2007.



Interest Income.Interest income decreased approximately $15,000, or approximately 79%, to approximately $4,000 for the three months ended September 30, 2008, compared to approximately $19,000 during the three months ended September 30, 2007.  The decrease was primarily due to a lower average cash balance during the three months ended September 30, 2008, as compared to the three months ended September 30, 2007, due to the purchase of one additional investment property on August 9, 2007, which decreased our amount of uninvested cash.



Interest Expense.Interest expense was unchanged at approximately $1.8 million for the three months ended September 30, 2008 and 2007.



Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007



Revenue. Revenue increased approximately $172,000, or approximately 1%, to approximately $12.2 million for the nine months ended September 30, 2008, compared to approximately $12.0 million for the nine months ended September 30, 2007.  The increase was primarily due to the purchase of one additional investment property on August 9, 2007, for which rental income was earned during the entire nine months ended September 30, 2008, versus only two months during the nine months ended September 30, 2007.  Our revenue primarily consists of rental income from net leased commercial properties, which accounted for approximately 98% and approximately 99% of total revenue during the nine months ended September 30, 2008 and 2007, respectively.



General and Administrative Expenses.General and administrative expenses increased approximately $134,000, or approximately 38%, to approximately $484,000 for the nine months ended September 30, 2008, compared to approximately $350,000 for the nine months ended September 30, 2007.  The increase was primarily due to higher state taxes, transfer agent fees, and legal fees related to ongoing financial reporting requirements during the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007.  The transfer agent fee increase was primarily due to utilizing a new unrelated third party registrar and transfer agent during the nine months ended September 30, 2008.  The primary general and administrative expense items are legal and accounting fees, transfer agent fees, organizational costs, state franchise and income taxes and other
licenses and fees.



Property Operating Expenses.Property operating expenses increased approximately $242,000, or approximately 89%, to approximately $515,000 for the nine months ended September 30, 2008, compared to approximately $273,000 during the nine months ended September 30, 2007.  The increase was primarily due to an increase in bad debt expense related to one operating property, as well as an increase in property tax expense, driven by the purchase of one additional investment property on August 9, 2007 and increases in certain other properties.  The primary property operating expense items are repairs and maintenance, property taxes, bad debt and insurance.

















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Property and Asset Management Fees.Property and asset management fees increased approximately $4,000, or approximately 1%, to approximately $724,000 for the nine months ended September 30, 2008, compared to approximately $720,000 during the nine months ended September 30, 2007.  The increase was primarily due to the purchase of one additional investment property on August 9, 2007 for which property and asset management fees were incurred during the entire nine months ended September 30, 2008, versus only two months during the nine months ended September 30, 2007.



Depreciation and Amortization Expenses.Depreciation and amortization expenses remained constant at approximately $4.1 million for the nine months ended September 30, 2008 and 2007.



Interest Income.Interest income decreased approximately $55,000, or approximately 74%, to approximately $19,000 for the nine months ended September 30, 2008, compared to approximately $74,000 during the nine months ended September 30, 2007.  The decrease was primarily due to a lower average cash balance during the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007, due to the purchase of one additional investment property on August 9, 2007, which decreased our amount of uninvested cash.



Interest Expense.Interest expense increased approximately $87,000, or approximately 2%, to approximately $5.5 million for the nine months ended September 30, 2008, compared to approximately $5.4 million during the nine months ended September 30, 2007.  The increase was primarily due to one additional outstanding mortgage note of approximately $1.7 million added relating to the additional investment property purchased on August 9, 2007, for which interest expense was incurred during the entire nine months ended September 30, 2008, versus only two months during the nine months ended September 30, 2007.



Funds From Operations



We believe that funds from operations (FFO) is a beneficial indicator of the performance of a REIT.  Because FFO calculations exclude such factors as depreciation and amortization of real estate assets and gains or losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs.  Our management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use
historical cost accounting to be insufficient by themselves.  As a result, we believe that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.  Other REITs may not define FFO in accordance with the current National Association of Real Estate Investment Trusts (NAREIT) definition or may interpret the current NAREIT definition differently than we do.



FFO is a non-GAAP financial measure and does not represent net income as defined by GAAP.  Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO includes adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization.  Accordingly, FFO should not be considered as an alternative to net income as an indicator of our operating performance.





















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Our calculation of FFO is presented in the following table for the periods ended as indicated (dollar amounts in thousands):



Three Months Ended September 30
        
        Nine Months Ended September 30,2008
        
        2007
        
        2008
        
        2007Net income
        
        $
        169
        
        $
        402
        
        $
        917
        
        $
        1,271Add:Depreciation of real estate assets
        
        
        921
        
        
        938
        
        
        2,763
        
        
        2,750Amortization of lease related costs
        
        
        450
        
        
        470
        
        
        1,351
        
        
        1,359FFO
        
        $
        1,540
        
        $
        1,810
        
        $
        5,031
        
        $
        5,380




Set forth below is additional information (often considered in conjunction with FFO) that may be helpful in assessing our operating results:




        In order to recognize revenues on a straight-line basis over the terms of the respective leases, we recognized additional revenue by straight-lining rental revenue of approximately $171,000 and approximately $521,000 during the three and nine months ended September 30, 2008, respectively and approximately $118,000 and approximately $348,000 during the three and nine months ended September 30, 2007, respectively.
        Amortization of deferred financing costs totaled approximately $100,000 and approximately $296,000 during the three and nine months ended September 30, 2008, respectively and approximately $80,000 and approximately $288,000 during the three and nine months ended September 30, 2007, respectively.




Liquidity and Capital Resources



We expect to meet our short-term liquidity requirements through net cash provided by property operations.  We currently do not have any outstanding variable rate debt.  Therefore, we are not subject to direct risk relating to rising interest rates.  As of September 30, 2008, we had approximately $1.5 million of available borrowings under our revolving line of credit.



We expect to meet our long-term liquidity requirements through proceeds from secured or unsecured financings from banks and other lenders, the selective and strategic sale of properties and net cash flows from operations.  We expect that our primary uses of capital will be for the payment of operating expenses, including interest expense on any outstanding indebtedness, for the payment of tenant improvements and repairs and maintenance, for the possible reinvestment of proceeds from the strategic sale of properties in replacement properties, and for the payment of distributions to our stockholders.



We expect that substantially all net cash generated from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid at the properties; however, we may use other sources to fund distributions as necessary.  To the extent that cash flows from operations are lower then our current expectations due to lower returns on the properties, distributions paid to our stockholders may be lower.  We expect that substantially all net cash resulting from debt financing will be used to fund certain capital expenditures, repayments of outstanding debt, possible replacement properties, or distributions to our stockholders.  We did not have any material commitments for capital expenditures as of September 30, 2008.





















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As of September 30, 2008, we had cash and cash equivalents of approximately $587,000, which we expect to be used primarily to pay operating expenses and stockholder distributions.



As of September 30, 2008, we had approximately $118.0 million of debt outstanding, all of which was pursuant to fixed rate term mortgage loans, with a weighted average interest rate of approximately 5.76%.  Additionally, the debt leverage ratio, which is the ratio of mortgage notes payable to total gross real estate assets, was approximately 57%, with a weighted average remaining term to maturity of approximately 4.6 years.



Our contractual obligations as of September 30, 2008, are as follows (dollar amounts in thousands):



Payments due by periodTotal
        
        
        Less Than 1 Year
        
        
        1-3 Years
        
        
        4-5 Years
        
        
        More Than 5 YearsPrincipal payments  fixed rate debt
        
        $
        117,977
        
        $
        -
        
        $
        58,443
        
        $
        -
        
        $
        59,534Interest payments  fixed rate debt
        
        
        32,788
        
        
        6,799
        
        
        13,467
        
        
        7,214
        
        
        5,308Total
        
        $
        150,765
        
        $
        6,799
        
        $
        71,910
        
        $
        7,214
        
        $
        64,842




Cash Flow Analysis



Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007



Operating Activities.Net cash provided by operating activities decreased approximately $160,000 or approximately 3%, to approximately $5.0 million for the nine months ended September 30, 2008, compared to approximately $5.2 million for the nine months ended September 30, 2007.  The decrease was primarily due to a decrease in net income, which was offset by an increase in deferred rents received and other liabilities and tenant receivables.



Investing Activities.Net cash used in investing activities decreased approximately $3.1 million, or approximately 99%, to approximately $20,000 for the nine months ended September 30, 2008, compared to approximately $3.1 million for the nine months ended September 30, 2007.  The decrease was primarily due to no properties being purchased during the nine months ended September 30, 2008, as compared to one property purchased during the nine months ended September 30, 2007.



Financing Activities.Net cash used in financing activities increased approximately $1.6 million, or approximately 42%, to approximately $5.3 million for the nine months ended September 30, 2008, compared to approximately $3.8 million for the nine months ended September 30, 2007.  The increase was primarily due a decrease in mortgage notes payable proceeds as there were no mortgage notes issued during the nine months ended September 30, 2008, as compared to one mortgage note issued during the nine months ended September 30, 2007.



Election as a REIT



We are taxed as a REIT under the Internal Revenue Code of 1986, as amended.  To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to stockholders.  As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders.  If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income for four years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions.  Such an event could materially adversely affect our net income and net cash available for distribution to stockholders.  However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT
for federal income tax purposes.  No provision for federal income taxes has been made in our accompanying condensed consolidated unaudited financial statements.  We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying financial statements.











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Inflation



We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations.  There are provisions in the majority of our tenant leases that protect us from, and mitigate the risk of, the impact of inflation.  Many of our tenant leases include rent steps and clauses enabling us to receive payment of additional rent calculated as a percentage of the tenants gross sales above pre-determined thresholds.  In addition, most of our leases require the tenant to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs related to the property.  However, due to the long-term nature of the leases, the leases may not reset frequently enough to fully cover inflation.



Critical Accounting Policies and Estimates



Our accounting policies have been established to conform to GAAP.  The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions.  These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods.  If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements.  Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies
in similar businesses.  We consider our critical accounting policies to be the following:




        
        Investment in and Valuation of Real Estate Assets;
        
        Allocation of Purchase Price of Acquired Assets;
        
        Revenue Recognition; and
        
        Income Taxes.




A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year ended December 31, 2007.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2007, and related notes thereto.



Commitments and Contingencies



We are subject to certain contingencies and commitments with regard to certain transactions. Refer to Note 4 to our condensed consolidated unaudited financial statements accompanying this Quarterly Report on Form 10-Q for further explanations.



Related-Party Transactions and Agreements



We have entered into agreements with Cole Advisors and its affiliates, whereby we pay or have paid certain fees or reimbursements to our advisor or its affiliates such as acquisition fees and expenses, organization and offering costs, sales commissions, dealer manager fees, asset and property management fees and reimbursement of operating costs.  See Note 5 to our condensed consolidated unaudited financial statements included in this report for a discussion of the various related-party transactions, agreements and fees.



New Accounting Pronouncements



Refer to Note 7 to our condensed consolidated unaudited financial statements included in this report for further explanation of applicable new accounting pronouncements.











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Item 3. Quantitative and Qualitative Disclosures About Market Risk



Not required for smaller reporting companies.



Item 4T. Controls and Procedures



In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of  September 30, 2008, were effective for the purpose of ensuring that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act, and is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.



No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



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PART II

OTHER INFORMATION



Item 1. Legal Proceedings



We are not a party to, and none of our properties are subject to, any material pending legal proceedings.



Item 1A. Risk Factors



Not required for smaller reporting companies.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



We did not sell any unregistered securities during the three months ended September 30, 2008.  No shares were redeemed during the three months ended September 30, 2008.



Item 3. Defaults Upon Senior Securities



No events occurred during the three months ended September 30, 2008 that would require a response to this item.



Item 4. Submission of Matters to a Vote of Security Holders



No events occurred during the three months ended September 30, 2008 that would require a response to this item.



Item 5. Other Information



No events occurred during the three months ended September 30, 2008 that would require a response to this item.



Item 6. Exhibits



The exhibits listed on the Exhibit Index (following the signatures section of this report) are filed herewith, or incorporated herein by reference.



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Cole Credit Property Trust, Inc.
(Registrant)By:
        
        /s/ Christopher H. ColeChristopher H. ColeChief Executive Officer, and President (Principal Executive Officer)By:
        
        /s/ D. Kirk McAllaster, Jr.D. Kirk McAllaster, Jr.Executive Vice President, and  Chief Financial Officer (Principal Financial Officer and Accounting Officer)




Date: November 12, 2008





































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EXHIBIT INDEX



The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the three months ended September 30, 2008 (and are numbered in accordance with Item 601 of Regulation S-B).



Exhibit No.
        Description3.1
        Articles of Incorporation.  (Incorporated by reference to the Companys Registration Statement on Form 10-SB filed on May 1, 2006).3.2
        Amended and Restated Bylaws.  (Incorporated by reference to the Companys Registration Statement on Form 10-SB filed on May 1, 2006).31.1
        Certification of the Chief Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).31.2
        Certification of the Chief Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.1*
        Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).




* In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.





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