UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-Q





(Mark One)x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2011o

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





Commission file number 000-53960





COLE CREDIT PROPERTY TRUST III, INC.


(Exact name of registrant as specified in its charter)





Maryland

26-1846406(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)2555 East Camelback Road, Suite 400

Phoenix, Arizona, 85016

(Address of principal executive offices; zip code)

(602) 778-8700

(Registrant’s telephone number, 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.


Yes x No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes o No o





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





Large accelerated filer  o

Accelerated filer  oNon-accelerated filer (Do not check if smaller reporting company)  x

Smaller reporting company  o





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


Yes o No x





As of May 10, 2011, there were 289,437,272 shares of common stock, par value $0.01, of Cole Credit Property Trust III, Inc. outstanding.














COLE CREDIT PROPERTY TRUST III, INC.


INDEX





PART I — FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Unaudited Balance Sheets as of March 31, 2011 and December 31, 2010

4Condensed Consolidated Unaudited Statements of Operations for the three months ended March 31, 2011 and 2010

5Condensed Consolidated Unaudited Statement of Stockholders’ Equity for the three months ended March 31, 2011

6Condensed Consolidated Unaudited Statements of Cash Flows for the three months ended March 31, 2011 and 2010

7Notes to Condensed Consolidated Unaudited Financial Statements

8Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

22Item 3. Quantitative and Qualitative Disclosures About Market Risk

32Item 4. Controls and Procedures

32PART II — OTHER INFORMATIONItem 1. Legal Proceedings

33Item 1A. Risk Factors

33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

33Item 3. Defaults Upon Senior Securities

34Item 4. [Removed and Reserved]

34Item 5. Other Information

34Item 6. Exhibits

34Signatures

35


2


PART I


FINANCIAL INFORMATION





The accompanying condensed consolidated unaudited interim financial statements as of and during the three months ended March 31, 2011, have been prepared by Cole Credit Property Trust III, Inc. (the “Company,” “we,” “us” or “our”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) 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 consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  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 Quarterly Report on Form 10-Q.  The results of operations during the three months ended March 31, 2011 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.  Such adjustments are of a normal recurring nature.





Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false.  We caution readers not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q.  We make no representation or warranty (expressed or implied) about the accuracy of any such forward-looking statements contained in the Quarterly Report of Form 10-Q. Additionally, 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.  The forward-looking statements should be read in light of the risk factors identified in the Item 1A “Risk Factors” section of the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2010.


























3


COLE CREDIT PROPERTY TRUST III, INC.


CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS


(in thousands except share and per share amounts)





March 31, 2011

December 31, 2010ASSETSInvestment in real estate assets:Land

$
790,695

$
722,698Buildings and improvements, less accumulated depreciation of $42,561and $28,898, respectively


2,061,903


1,850,690Acquired intangible lease assets, less accumulated amortization of $27,207and $19,004, respectively


445,722


414,319Total investment in real estate assets, net


3,298,320


2,987,707Investment in mortgage notes receivable, net


64,178


63,933Total investment in real estate and mortgage assets, net


3,362,498


3,051,640Cash and cash equivalents


108,301


109,942Restricted cash


11,515


12,123Investment in unconsolidated joint venture


15,029


14,966Rents and tenant receivables, less allowance for doubtful accounts of$149 and $89, respectively


30,217


24,581Prepaid expenses and other assets


7,440


3,323Deferred financing costs, less accumulated amortization of $4,265and $2,918, respectively


29,851


27,083Total assets

$
3,564,851

$
3,243,658LIABILITIES AND STOCKHOLDERS’ EQUITYNotes payable and credit facilities

$
1,140,226

$
1,061,207Accounts payable and accrued expenses


13,035


15,744Escrowed investor proceeds


1,332


448Due to affiliates


1,655


804Acquired below market lease intangibles, less accumulated amortization of$4,292 and $3,066, respectively


68,090


66,815Distributions payable


15,053


14,448Deferred rent, derivative and other liabilities


18,709


21,142Total liabilities


1,258,100


1,180,608Commitments and contingenciesRedeemable common stock


81,667


65,898STOCKHOLDERS’ EQUITY:Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issuedand outstanding


—


—Common stock, $0.01 par value; 990,000,000 and 490,000,000 shares authorized,respectively, 278,052,647 and 248,070,364 shares issued and outstanding,respectively


2,781


2,481Capital in excess of par value


2,417,512


2,164,528Accumulated distributions in excess of earnings


(190,835)


(163,040)Accumulated other comprehensive loss


(5,027)


(7,188)Total stockholders’ equity


2,224,431


1,996,781Noncontrolling interests


653


371Total equity


2,225,084


1,997,152Total liabilities and equity

$
3,564,851

$
3,243,658





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


4


COLE CREDIT PROPERTY TRUST III, INC.


CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS


(in thousands except share and per share amounts)





Three Months Ended March 31,2011

2010Revenues:Rental and other property income

$
65,559

$
17,191Tenant reimbursement income


4,840


1,016Interest income on mortgage notes receivable


1,342


—Total revenue


71,741


18,207Expenses:General and administrative expenses


1,979


1,513Property operating expenses


5,213


1,134Property and asset management expenses


6,205


1,678Acquisition related expenses


8,593


6,845Depreciation


13,663


2,909Amortization


6,733


1,939Total operating expenses


42,386


16,018Operating income


29,355


2,189Other income (expense):Equity in income of unconsolidated joint venture


307


—Interest and other income


77


340Interest expense


(15,191)


(2,689)Total other expense


(14,807)


(2,349)Net income (loss)


14,548


(160)Net income allocated to noncontrolling interests


288


—Net income (loss) attributable to the Company

$
14,260

$
(160)Weighted average number of common shares outstanding:Basic and diluted


262,269,104


114,222,272Net income (loss) attributable to the Company per common share:Basic and diluted

$
0.05

$
(0.00)Distributions declared per common share:

$
0.16

$
0.17





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


5


COLE CREDIT PROPERTY TRUST III, INC.


CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS’ EQUITY


(in thousands, except share amounts)





Accumulated

AccumulatedCommon Stock

Capital in

Distributions

Other

Total

Non-Number of

Par

Excess of

in Excess of

Comprehensive

Stockholders'


controlling

TotalShares

Value

Par Value

Earnings

Loss

Equity


Interests

EquityBalance, January 1, 2011
248,070,364

$
2,481

$
2,164,528

$
(163,040)

$
(7,188)

$
1,996,781

$
371

$
1,997,152Issuance of common stock
30,775,201


308


305,714


—


—


306,022


—


306,022Distributions to noncontrollinginterests
—


—


—


—


—


—


(6)


(6)Distributions to stockholders
—


—


—


(42,055)


—


(42,055)


—


(42,055)Commissions on stock sales andrelated dealer manager fees
—


—


(25,039)


—


—


(25,039)


—


(25,039)Other offering costs
—


—


(4,246)


—


—


(4,246)


—


(4,246)Redemptions of common stock
(792,918)


(8)


(7,676)


—


—


(7,684)


—


(7,684)Redeemable common stock
—


—


(15,769)


—


—


(15,769)


—


(15,769)Comprehensive income:Allocation of net income
—


—


—


14,260


—


14,260


288


14,548Net unrealized gain on interestrate swaps
—


—


—


—


2,161


2,161


—


2,161Total comprehensive income















16,421


288


16,709Balance, March 31, 2011
278,052,647

$
2,781

$
2,417,512

$
(190,835)

$
(5,027)

$
2,224,431

$
653

$
2,225,084





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


6


COLE CREDIT PROPERTY TRUST III, INC.


CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS


(in thousands)





Three Months Ended March 31,2011

2010Cash flows from operating activities:Net income (loss)
$
14,548

$
(160)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation

13,663


2,909Amortization of intangible lease assets and below market lease intangibles, net

6,977


1,941Amortization of deferred financing costs

1,347


357Amortization of fair value adjustments of mortgage notes payable assumed

22


—Net accretion on mortgage notes receivable

(245)


—Allowance for doubtful accounts

63


11Equity in income of unconsolidated joint venture

(307)


—Distributions from unconsolidated joint venture

244


—Changes in assets and liabilities:Rents and tenant receivables

(5,699)


(1,927)Prepaid expenses and other assets

(134)


65Accounts payable and accrued expenses

(2,728)


917Deferred rent and other liabilities

(428)


2,174Due to affiliates

(87)


67Net cash provided by operating activities

27,236


6,354Cash flows from investing activities:Investment in real estate and related assets and other capital expenditures

(329,959)


(259,865)Payment of property escrow deposits

(2,838)


—Refund of property escrow deposits

500


—Change in restricted cash

608


(715)Net cash used in investing activities

(331,689)


(260,580)Cash flows from financing activities:Proceeds from issuance of common stock

282,569


333,731Offering costs on issuance of common stock

(28,347)


(32,820)Redemptions of common stock

(7,684)


(708)Distributions to investors

(17,997)


(7,161)Proceeds from notes payable

149,446


34,300Repayment of notes payable and credit facilities

(70,449)


(88)Payment of loan deposits

(2,754)


(846)Refund of loan deposits

1,265


686Escrowed investor proceeds liability

884


716Deferred financing costs paid

(4,115)


(3,209)Distributions to noncontrolling interests

(6)


—Net cash provided by financing activities

302,812


324,601Net (decrease) increase in cash and cash equivalents

(1,641)


70,375Cash and cash equivalents, beginning of period

109,942


278,717Cash and cash equivalents, end of period
$
108,301

$
349,092





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


7
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
 March 31, 2011





NOTE 1 — ORGANIZATION AND BUSINESS





Cole Credit Property Trust III, Inc. (the “Company”) is a Maryland corporation that was formed on January 22, 2008, which has elected to be taxed, and currently qualifies as a real estate investment trust (“REIT”) for federal income tax purposes.  Substantially all of the Company’s business is conducted through Cole REIT III Operating Partnership, LP (“CCPT III OP”), a Delaware limited partnership.  The Company is the sole general partner of, and owns a 99.99% partnership interest in, CCPT III OP.  Cole REIT Advisors III, LLC (“CR III Advisors”), the affiliate advisor to the Company, is the sole limited partner and owner of an insignificant noncontrolling partnership interest of less than 0.01% of CCPT III OP.





As of March 31, 2011, the Company owned 470 properties, comprising 19.9 million rentable square feet of single and multi-tenant retail and commercial space located in 41 states. As of March 31, 2011, the rentable space at these properties was 99.4% leased.  As of March 31, 2011, the Company also owned two mortgage notes receivable secured by two office buildings, each of which is subject to a net lease.  In addition, through three joint venture arrangements, as of March 31, 2011, the Company had interests in eight properties comprising 973,000 gross rentable square feet of commercial space.





On October 1, 2008, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933, as amended, the Company commenced its initial public offering on a “best efforts” basis of up to 230.0 million shares of its common stock at a price of $10.00 per share and up to 20.0 million additional shares pursuant to a distribution reinvestment plan (the “DRIP”), under which its stockholders could elect to have distributions reinvested in additional shares at the higher of $9.50 per share or 95% of the estimated value of a share of the Company’s common stock (the “Initial Offering”).





On January 6, 2009, the Company satisfied the conditions of its escrow agreement, issued approximately 262,000 shares under the Initial Offering and commenced its principal operations.  The Company terminated the Initial Offering on October 1, 2010.  At the completion of the Initial Offering, a total of approximately 217.5 million shares of common stock had been issued, including approximately 211.6 million shares issued in the primary offering and approximately 5.9 million shares issued pursuant to the Company’s DRIP.  The remaining 32.5 million unsold shares in the Initial Offering were deregistered.




On September 22, 2010, the registration statement for a follow-on offering of 275.0 million shares of the Company’s common stock was declared effective by the SEC (the “Follow-on Offering,” and collectively with the Initial Offering, the “Offerings”). Of the shares registered in the Follow-on Offering, the Company is offering up to 250.0 million shares in a primary offering at a price of $10.00 per share and up to 25.0 million shares under an amended and restated DRIP, under which its stockholders may elect to have distributions reinvested in additional shares at a price of $9.50 per share during the Follow-on Offering and until such time as the Company’s board of directors has determined a reasonable estimate of the value of the shares of common stock, at which time the shares of common stock will be offered under the DRIP at a purchase price equal to the most recently disclosed per share value. The Company commenced sales of its common stock pursuant to the Follow-on Offering after the termination of the Initial Offering on October 1, 2010.As of March 31, 2011, the Company had issued approximately 62.6 million shares of its common stock in the Follow-on Offering, including approximately 57.8 million shares issued in the primary offering and approximately 4.8 million shares issued pursuant to the Company’s DRIP. The Company had aggregate gross proceeds from the Offerings of $2.8 billion (including shares issued pursuant to the Company’s DRIP) as of March 31, 2011, before share redemptions of $19.6 million and offering costs, selling commissions, and dealer management fees of $269.5 million.


NOTE2 —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 SEC, including the instructions to Form 10-Q and Article 10 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 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 Quarterly Report on 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, 2010, and related notes thereto set forth in the Company’s Annual Report on Form 10-K.


8
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011




The Company evaluates the need to consolidate joint ventures based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”).   In determining whether the Company has a controlling interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of March 31, 2011, the Company consolidated the accounts of two joint ventures (the “Consolidated Joint Ventures”).





The condensed consolidated unaudited financial statements include the accounts of the Company, its wholly-owned subsidiaries and the Consolidated Joint Ventures, in which the Company has controlling financial interests. The portion of the Consolidated Joint Ventures not owned by the Company is presented as noncontrolling interests as of and during the period consolidated. All intercompany accounts and transactions have been eliminated in consolidation.





Investment in and Valuation of Real Estate and Related Assets





Real estate assets are stated at cost, less accumulated depreciation and amortization.  Amounts capitalized to real estate assets consist of construction and any tenant improvements, major improvements and betterments that extend the useful life of the related asset and leasing costs.  All repairs and maintenance are expensed as incurred.





Assets, other than land, are depreciated or amortized on a straight-line basis. The estimated useful lives of our assets by class are generally as follows:





Building

40 yearsTenant improvements

Lesser of useful life or lease termIntangible lease assets

Lesser of useful life or lease term





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. Impairment indicators that the Company considers include, but are not limited to, bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted operating cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted operating cash flows do not exceed the carrying value, the Company will adjust the real estate and related intangible assets and liabilities to their fair value and recognize an impairment loss. No impairment losses or related write-offs were recorded during the three months ended March 31, 2011 and 2010.





Projections of expected future cash flows require the Company to use estimates such as future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, terminal capitalization and discount rates, the number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment.  The use of alternative assumptions in the future cash flow analysis could result in a different assessment of the property’s future cash flow and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the carrying value of the real estate and related intangible assets.





When a real estate asset is identified as held for sale, the Company will cease depreciation of the asset and estimate the sales price, net of selling costs.  If, in the Company’s opinion, the net sales price of the asset is less than the net book value of the asset, an adjustment to the carrying value would be recorded to reflect the estimated fair value of the property, net of selling costs. There were no assets identified as held for sale as of March 31, 2011 or December 31, 2010.





9
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011





Allocation of Purchase Price of Real Estate and Related Assets





Upon the acquisition of real properties, the Company allocates the purchase price of such properties to acquired tangible assets, consisting of land, buildings and improvements, and identified intangible assets and liabilities, consisting of the value of above market and below market leases and the value of in-place leases, based in each case on their fair values.  Acquisition related expenses are expensed as incurred.  The Company utilizes independent appraisals to assist in the determination of the fair values of the tangible assets of an acquired property (which includes land and building).  The Company obtains an independent appraisal for each real property acquisition.  The information in the appraisal, along with any additional information available to the Company’s management, is used by its management in estimating the amount of the purchase price that is allocated to land.  Other information in the appraisal, such as building value and market rents, may be used by the Company’s management in estimating the allocation of purchase price to the building and to intangible lease assets and liabilities.  The appraisal firm has no involvement in management’s allocation decisions other than providing this market information.





The fair values of above market and below market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease including any bargain renewal periods, with respect to a below market lease.  The above market and below market lease values are capitalized as intangible lease assets or liabilities.  Above market lease values are amortized as an adjustment of rental income over the remaining terms of the respective leases.  Below market leases are amortized as an adjustment of rental income over the remaining terms of the respective leases, including any bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market and below market in-place lease values relating to that lease would be recorded as an adjustment to rental income.





The fair values of in-place leases include direct costs associated with obtaining a new tenant and opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease.  Direct costs associated with obtaining a new tenant include commissions and other direct costs and are estimated in part by utilizing information obtained from independent appraisals and management’s consideration of current market costs to execute a similar lease.  The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease.  These intangibles are capitalized as intangible lease assets and are amortized to expense over the remaining term of the respective leases.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.





The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables.  The use of alternative estimates would result in a different assessment of the Company’s purchase price allocations, which could impact the amount of its reported net income (loss).





The Company estimates the fair value of assumed mortgage notes payable based upon indications of current market pricing for similar types of debt with similar maturities.  Assumed mortgage notes payable are initially recorded at their estimated fair value as of the assumption date, and the difference between such estimated fair value and the mortgage note’s outstanding principal balance is amortized to interest expense over the term of the mortgage note payable.





Restricted Cash and Escrows





Included in restricted cash was $534,000 and $2.1 million held by lenders in a lockbox account, as of March 31, 2011 and December 31, 2010, respectively. As part of certain debt agreements, rents from certain encumbered properties are deposited directly into a lockbox account, from which the monthly debt service payment is disbursed to the lender and the excess is disbursed to the Company. Also included in restricted cash was $9.7 million and $9.6 million as of March 31, 2011 and December 31, 2010, respectively, held by lenders in escrow accounts for tenant and capital improvements, leasing commissions, repairs and maintenance and other lender reserves for certain properties, in accordance with the respective lender’s loan agreement. In addition, the Company had escrowed investor proceeds for which shares of common stock had not been issued of $1.3 million and $448,000 in restricted cash as of March 31, 2011 and December 31, 2010, respectively.


10
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011




Investment in Unconsolidated Joint Venture





Investment in unconsolidated joint venture as of March 31, 2011 consists of the Company’s interest in a joint venture that owns six multi-tenant properties (the “Unconsolidated Joint Venture”).  Consolidation of this investment is not required as the entity does not qualify as a variable interest entity and does not meet the control requirements for consolidation, as defined in ASC 810.Both the Company and the joint venture partner must approve significant decisions about the entity’s activities.  As of March 31, 2011, the Unconsolidated Joint Venture held total assets of $47.6 million and a non-recourse mortgage note payable of $25.7 million.





The Company accounts for the Unconsolidated Joint Venture using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”).  The equity method of accounting requires this investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the joint venture’s earnings and distributions.  The Company evaluates the carrying amount of the investment for impairment in accordance with ASC 323.  The Unconsolidated Joint Venture is reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until the carrying value is fully recovered. The evaluation of an investment in a joint venture for potential impairment can require our management to exercise significant judgments.  No impairment losses were recorded related to the Unconsolidated Joint Venture for the three months ended March 31, 2011.  During the three months ended March 31, 2010, the Company did not have any interests in joint ventures.





Concentration of Credit Risk





As of March 31, 2011, the Company had cash on deposit, including restricted cash, in eight financial institutions, six of which had deposits in excess of current federally insured levels totaling $107.0 million; however the Company has not experienced any losses in such accounts. The Company limits investment of cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk on cash.





As of March 31, 2011, no single tenant accounted for greater than 10% of the Company’s 2011 gross annualized rental revenues.  As of March 31, 2011, tenants in the drugstore industry comprised 14% of 2011 gross annualized rental revenues and tenants in the grocery and specialty retail industries each comprised 12% of 2011 gross annualized rental revenues.  Additionally, the Company has certain geographic concentrations in our property holdings.  In particular, as of March 31, 2011, 98 of the Company’s properties were located in Texas, accounting for 22% of 2011 gross annualized rental revenues.





Redeemable Common Stock





The Company’s share redemption program provides that the Company will not redeem in excess of 5% of the weighted average number of shares outstanding during the trailing twelve-month period prior to the redemption date (the “Trailing Twelve-month Cap”); provided, however, that while shares subject to a redemption requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be redeemed, such shares will not be subject to theTrailing Twelve-month Cap. In addition, all redemptions, including those upon death or qualifying disability, are limited to those that can be funded with cumulative net proceeds from the Company’s DRIP. As of March 31, 2011 and December 31, 2010, the Company had issued approximately 10.7 million and approximately 8.2 million shares of common stock under the Company’s DRIP, respectively, for cumulative proceeds of $101.3 million and $77.8 million, respectively, which are recorded as redeemable common stock, net of redemptions, in the respective condensed consolidated unaudited balance sheets. As of March 31, 2011 and December 31, 2010, the Company had redeemed approximately 2.0 million and approximately 1.2 million shares of common stock, respectively, for an aggregate price of $19.6 million and $11.9 million, respectively.





In addition to the caps discussed above, the redemptions are limited quarterly to 1.25% of the weighted average number of shares outstanding during the trailing twelve-month period. In addition, the funding for redemptions each quarter generally will be limited to the net proceeds the Company receives from the sale of shares in the respective quarter under the Company’s DRIP.  The amended share redemption program further provides that while shares subject to a redemption requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be redeemed, such shares will not be subject to the quarterly caps. The Company’s board of directors may waive these quarterly caps in its sole discretion, subject to the Trailing Twelve-month Cap.





NOTE 3 — FAIR VALUE MEASUREMENTS





ASC 820 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.


11
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011


Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:




Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.





Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).





Level 3 – Unobservable inputs, only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.





The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:





Cash and cash equivalents, restricted cash, rents and tenant receivables, prepaid expenses and mortgage loan deposits and accounts payable and accrued expenses – The Company considers the carrying values of these financial instruments, assets and liabilities to approximate fair value because of the short period of time between origination of the instruments and their expected realization.





Mortgage notes receivable – The fair value is estimated by discounting the expected cash flows on the notes at current rates at which management believes similar loans would be made. The estimated fair value of these notes was $65.6 million and $64.0 million as of March 31, 2011 and December 31, 2010, respectively, as compared to the carrying values of $64.2 million and $63.9 million as of March 31, 2011 and December 31, 2010, respectively.





Notes payable and credit facilities – The fair value is estimated using a discounted cash flow technique based on estimated borrowing rates available to the Company as of March 31, 2011 and December 31, 2010. The estimated fair value of the notes payable and credit facilities was $1.1 billion and $1.0 billion as of March 31, 2011 and December 31, 2010, respectively, as compared to the carrying value of $1.1 billion as of both March 31, 2011 and December 31, 2010.





Derivative Instruments – The Company’s derivative instruments represent interest rate swaps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. The Company includes the impact of credit valuation adjustments on derivative instruments measured at fair value.





Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, on disposition of the financial instruments.





In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010 (in thousands):





Quoted Prices in



SignificantActive Markets for

Significant Other

UnobservableBalance as of

Identical Assets

Observable Inputs

InputsMarch 31, 2011

(Level 1)

(Level 2)

(Level 3)Assets:Interest rate swap

$
297

$
—

$
297

$
—Liabilities:Interest rate swaps

$
(5,324)

$
—

$
(5,324)

$
—




12
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011





Quoted Prices in



SignificantActive Markets for

Significant Other

UnobservableBalance as of

Identical Assets

Observable Inputs

InputsDecember 31, 2010

(Level 1)

(Level 2)

(Level 3)Assets:Interest rate swap

$
141

$
—

$
141

$
—Liabilities:Interest rate swaps

$
(7,329)

$
—

$
(7,329)

$
—





NOTE 4 — REAL ESTATE ACQUISITIONS





2011 Property Acquisitions





During the three months ended March 31, 2011, the Company acquired a 100% interest in 23 commercial properties for an aggregate purchase price of $329.9 million (the “2011 Acquisitions”).  The Company purchased the 2011 Acquisitions with net proceeds from the Offerings and through the issuance of mortgage notes. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed.  The following table summarizes the purchase price allocation (in thousands):







March 31, 2011Land

$
67,997Building and improvements


224,853Acquired in-place leases


25,079Acquired above-market leases


14,482Acquired below-market leases


(2,500)Total purchase price

$
329,911





The Company recorded revenue of $2.1 million and a net loss of $6.9 million for the three months ended March 31, 2011 related to the 2011 Acquisitions. In addition, the Company expensed $8.6 million of acquisition costs for the three months ended March 31, 2011.





The following information summarizes selected financial information of the Company, as if all of the 2011 Acquisitions were completed on January 1, 2010 for each period presented below.  The table below presents the Company’s estimated revenue and net income (loss), on a pro forma basis, for the three months ended March 31, 2011 and 2010 (in thousands):





March 31, 2011

March 31, 2010Pro forma basis:Revenue

$
75,846

$
24,307Net income (loss) attributable to the Company

$
27,478

$
(3,685)





The unaudited pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of each year, nor does it purport to represent the results of future operations.





13
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011


2010 Property Acquisitions





During the three months ended March 31, 2010, the Company acquired a 100% interest in 57 commercial properties, for an aggregate purchase price of $259.9 million (the “2010 Acquisitions”). The Company purchased the 2010 Acquisitions with net proceeds of the Initial Offering and through the issuance of mortgage notes. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed.  The following table summarizes the purchase price allocation (in thousands):





March 31, 2010Land

$
57,901Building and improvements


172,937Acquired in-place leases


31,683Acquired above-market leases


3,224Acquired below-market leases


(5,880)Total purchase price

$
259,865





The Company recorded revenue of $3.2 million and net loss of $4.5 million for the three months ended March 31, 2010 related to the 2010 Acquisitions. In addition, the Company expensed $6.8 million of acquisition costs for the three months ended March 31, 2010.





NOTE 5 — INVESTMENT IN MORTGAGE NOTES RECEIVABLE





As of March 31, 2011, the Company owned two mortgage notes receivable, each of which is secured by an office building.  As of March 31, 2011, the mortgage notes balance of $64.2 million consisted of the face amount of the mortgage notes of $74.0 million, a $12.0 million discount, $1.3 million of acquisition costs and net accumulated accretion of discounts and amortization of acquisition costs of $887,000.  As of December 31, 2010, the mortgage notes balance of $63.9 million consisted of the face amount of the mortgage notes of $74.0 million, a $12.0 million discount, $1.3 million of acquisition costs and net accumulated accretion of discounts and amortization of acquisition costs of $642,000.  The discount is accreted and acquisition costs are amortized over the terms of each respective mortgage note using the effective interest rate method. The mortgage notes have a fixed interest rate of 5.93% per annum and mature on October 1, 2018.  Interest only payments are due each month until September 1, 2011, and interest and principal payments are due each month from October 1, 2011 until October 1, 2018.  There were no amounts past due as of March 31, 2011.





The Company evaluates the collectability of both interest and principal on each mortgage note receivable to determine whether it is collectible, primarily through the evaluation of credit quality indicators, such as underlying collateral and payment history.  No impairment losses or allowances were recorded related to mortgage notes receivable for the three months ended March 31, 2011.  During the three months ended March 31, 2010, the Company did not own any mortgage notes receivable.





NOTE 6 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES





In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risks. The following table summarizes the notional amount and fair value of the Company’s derivative instruments (in thousands):


14
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011





Fair Value of Asset (Liability)Balance Sheet

Notional

Interest

Effective

Maturity

March 31,

December 31,Location

Amount

Rate

Date

Date

2011

2010Derivatives designated as hedging instrumentsDeferred rent, derivativeInterest Rate Swaps (1)

and other liabilities

$
19,500

5.95%

9/8/2009

8/29/2012

$
(437)

$
(505)Deferred rent, derivativeInterest Rate Swap

and other liabilities


17,500

5.75%

12/18/2009

1/1/2017


(498)


(716)Deferred rent, derivativeInterest Rate Swap

and other liabilities


156,000

3.99%

7/30/2010

8/5/2015


(2,920)


(4,155)Prepaid expenses and otherInterest Rate Swap

assets


15,000

4.31%

7/30/2010

7/15/2017


297


141Deferred rent, derivativeInterest Rate Swap

and other liabilities


105,000

4.72%

8/25/2010

9/5/2015


(653)


(1,440)Deferred rent, derivativeInterest Rate Swaps (2)

and other liabilities


23,200

6.83%

12/16/2010

7/6/2016


(297)


(513)Deferred rent, derivativeInterest Rate Swap

and other liabilities


7,800

5.73%

3/4/2011

4/1/2021


(193)


—Deferred rent, derivativeInterest Rate Swaps (3)

and other liabilities


30,000

6.06%

3/30/2011

3/30/2016


(326)


—$
374,000







$
(5,027)

$
(7,188)(1)   On September 8, 2009, the Company executed 15 swap agreements with identical terms and with an aggregate notional amountof $20.0 million.(2)   On December 16, 2010, the Company executed 17 swap agreements with identical terms and with an aggregate notional amountof $23.2 million.(3)   On March 30, 2011, the Company executed 23 swap agreements with identical terms and with an aggregate notional amountof $30.0 million.





Additional disclosures related to the fair value of the Company’s derivative instruments are included in Note 3 above. The notional amount under the agreements is an indication of the extent of the Company’s involvement in each instrument at the time, but does not represent exposure to credit, interest rate or market risks.





Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument.  The Company designated the interest rate swaps as cash flow hedges, to hedge the variability of the anticipated cash flows on its variable rate notes payable.  The change in fair value of the effective portion of the derivative instrument that is designated as a hedge is recorded as other comprehensive income or loss.





15
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011


The following table summarizes the gains and losses on the Company’s derivative instruments and hedging activities (in thousands):




Amount of Income (Loss) Recognized inOther Comprehensive Income (Loss) on DerivativesThree Months Ended March 31,Derivatives in Cash Flow Hedging Relationships



2011

2010Interest Rate Swaps (1)


$
2,161

$
(334)


(1)   There were no portions of the change in the fair value of the interest rate swap agreements that were considered ineffectiveduring the three months ended March 31, 2011 and 2010.  No previously effective portion of gains or losses that were recordedin accumulated other comprehensive loss during the term of the hedging relationship was reclassified into earnings during thethree months ended March 31, 2011 and 2010.




The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could also be declared in default on its derivative obligations resulting in an acceleration of payment.





In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with credit-worthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the respective credit quality of the Company and the counterparty.  As of March 31, 2011 and December 31, 2010, respectively, there were no termination events or events of default related to the interest rate swaps.





NOTE 7 — NOTES PAYABLE AND CREDIT FACILITIES





As of March 31, 2011, the Company and Consolidated Joint Ventures had $1.1 billion of debt outstanding, consisting of $1.1 billion with fixed interest rates (the “Fixed Rate Debt”), which includes $374.0 million of variable rate debt swapped to fixed rates, and $16.9 million of variable rate debt (the “Variable Rate Debt”). The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the total debt outstanding was $2.5 billion as of March 31, 2011.





The Fixed Rate Debt has a weighted average interest rate of 5.29%, with interest rates ranging from 3.99% to 6.83% per annum.  The Variable Rate Debt has variable interest rates ranging from LIBOR plus 275 basis points to 350 basis points per annum, with certain debt containing LIBOR rate floors. The debt outstanding matures on various dates from May 2011 through April 2021, with a weighted average years to maturity of 6.8 years. Each of the mortgage notes payable is secured by the respective properties on which the debt was placed.





During the three months ended March 31, 2011, the Company entered into mortgage notes payable totaling $122.4 million, with fixed interest rates, which includes $37.8 million of variable rate debt swapped to fixed rates, ranging from 4.50% to 6.06% per annum through the maturity dates, ranging from March 2016 to April 2021.  In addition, the Company entered into variable rate debt of $12.5 million with a variable interest rate of LIBOR plus 275 basis points per annum, maturing in March 2016.  During the three months ended March 31, 2011, $1.0 million was drawn on a consolidated joint venture’s variable construction loan facility, and a consolidated joint venture incurred fixed rate debt of $13.5 million with a fixed interest rate of 5.17% per annum, maturing in March 2016.





As of March 31, 2011, the Company had $124.7 million available under two credit facilities (the “Credit Facilities”) based on the respective underlying collateral pools and no amounts outstanding under the Credit Facilities. During the three months ended March 31, 2011, the Company repaid $70.0 million under the Credit Facilities and increased the borrowing base of one of the Credit Facilities by $28.2 million, The aggregate balance of  gross real estate assets, net of gross intangible lease liabilities, securing the Credit Facilities was $256.4 million as of March 31, 2011.





The Credit Facilities and certain loan agreements contain customary affirmative, negative and financial covenants, including requirements for minimum net worth, debt service coverage ratios and leverage ratios.  The Company believes it was in compliance with the covenants of the Credit Facilities and such mortgage notes payable as of March 31, 2011.




16
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011


NOTE 8 — SUPPLEMENTAL CASH FLOW DISCLOSURES





Supplemental cash flow disclosures for the three months ended March 31, 2011 and 2010 are as follows (in thousands):





Three Months Ended March 31,2011

2010Supplemental Disclosures of Non-Cash Investing and Financing Activities:Distributions declared and unpaid

$
15,053

$
7,216Accrued capital expenditures

$
19

$
—Common stock issued through distribution reinvestment plan

$
23,453

$
9,974Net unrealized gain (loss) on interest rate swaps

$
2,161

$
(334)Accrued other offering costs

$
1,120

$
419Supplemental Cash Flow Disclosures:Interest paid

$
12,821

$
1,921





NOTE 9 — COMMITMENTS AND CONTINGENCIES





Litigation





In the ordinary course of business, the Company may become subject to litigation or claims. The Company is not aware of any material pending legal proceedings of which the outcome is reasonably likely to have a material adverse effect on its results of operations or financial condition and liquidity.





Purchase Commitments





During the three months ended March 31, 2011, the Company entered into agreements of purchase and sale, with unaffiliated third-party sellers, to purchase a 100% interest in 30 retail properties, subject to meeting certain criteria, for an aggregate purchase price of $134.5 million, exclusive of closing costs.  As of March 31, 2011, the Company had $2.8 million of property escrow deposits held by escrow agents in connection with these future property acquisitions, of which $623,000 will be forfeited if the transactions are not completed. As of May 10, 2011, the Company had purchased 26 of these properties for $121.9 million, exclusive of closing costs, and no escrow deposits were forfeited.





In addition, as of March 31, 2011, the Company was obligated to purchase a single tenant retail property from a consolidated joint venture, upon certain criteria being met, for a purchase price of $5.9 million. Subsequent to March 31, 2011, the criteria was met and the Company completed the purchase of the property.





Environmental Matters





In connection with the ownership and operation of real estate, the Company potentially may be liable for costs and damages related to environmental matters. The Company owns certain properties that are subject to environmental remediation. In each case, the seller of the property, the tenant of the property and/or another third party has been identified as the responsible party for environmental remediation costs related to the property. Additionally, in connection with the purchase of certain of the properties, the respective sellers and/or tenants have indemnified the Company against future remediation costs. The Company also carries environmental liability insurance on our properties which provides limited coverage for remediation liability and pollution liability for third-party bodily injury and property damage claims. The Company does not believe that the environmental matters identified at such properties will have a material adverse effect on its condensed consolidated unaudited financial statements, nor is it aware of any environmental matters at other properties which it believes will have a material adverse effect on its condensed consolidated unaudited financial statements.




17
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011


NOTE 10 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS





The Company has incurred, and will continue to incur, commissions, fees and expenses payable to its advisor and certain affiliates in connection with the Offerings and the acquisition, management and sale of the assets of the Company.





Offerings





In connection with the Offerings, Cole Capital Corporation (“Cole Capital”), the Company’s affiliated dealer manager, received and expects to continue to receive, a selling commission of up to 7.0% of gross offering proceeds, before reallowance of commissions earned by participating broker-dealers. Cole Capital intends to reallow 100% of selling commissions earned to participating broker-dealers. In addition, Cole Capital received, and will continue to receive, 2.0% of gross offering proceeds, before reallowance to participating broker-dealers, as a dealer manager fee in connection with the Offerings. Cole Capital, in its sole discretion, may reallow all or a portion of its dealer manager fee to such participating broker-dealers as a marketing and due diligence expense reimbursement, based on factors such as the volume of shares sold by such participating broker-dealers and the amount of marketing support provided by such participating broker-dealers. No selling commissions or dealer manager fees are paid to Cole Capital or other broker-dealers with respect to shares sold under the Company’s DRIP.





All other organization and offering expenses associated with the sale of the Company’s common stock (excluding selling commissions and the dealer manager fee) are paid for by CR III Advisors or its affiliates and are reimbursed by the Company up to 1.5% of aggregate gross offering proceeds. A portion of the other organization and offering expenses may be underwriting compensation. As of March 31, 2011, CR III Advisors had paid organization and offering costs of $3.0 million in connection with the Follow-on Offering. These costs were not included in the financial statements of the Company because such costs were not a liability of the Company as they exceeded 1.5% of gross proceeds from the Follow-on Offering.





The Company recorded commissions, fees and expense reimbursements as shown in the table below for services provided by CR III Advisors and its affiliates related to the services described above during the periods indicated (in thousands).





Three Months Ended March 31,2011

2010Offering:Selling commissions






$
19,399

$
22,823Selling commissions reallowed by Cole Capital






$
19,399

$
22,823Dealer manager fee






$
5,640

$
6,685Dealer manager fee reallowed by Cole Capital






$
2,875

$
3,328Other organization and offering expenses






$
4,245

$
3,241





Acquisitions and Operations





CR III Advisors or its affiliates also receive acquisition and advisory fees of up to 2.0% of the contract purchase price of each asset for the acquisition, development or construction of properties and will be reimbursed for acquisition expenses incurred in the process of acquiring properties, so long as the total acquisition fees and expenses relating to the transaction does not exceed 6.0% of the contract purchase price. The Company expects acquisition expenses to be 0.5% of the purchase price of each property.





The Company paid, and expects to continue to pay, CR III Advisors a monthly asset management fee of 0.0417%, which is one-twelfth of 0.5%, of the Company’s average invested assets for that month (the “Asset Management Fee”). The Company will reimburse costs and expenses incurred by Cole Realty Advisors in providing asset management services.





The Company paid, and expects to continue to pay, Cole Realty Advisors, Inc. (“Cole Realty Advisors”), its affiliated property manager, fees for the management and leasing of the Company’s properties. Property management fees are up to 2.0% of gross revenue for single-tenant properties and 4.0% of gross revenue for multi-tenant properties and leasing commissions will be at prevailing market rates; provided however, that the aggregate of all property management and leasing fees paid to affiliates plus all payments to third parties will not exceed the amount that other nonaffiliated management and leasing companies generally charge for similar services in the same geographic location. Cole Realty Advisors may subcontract its duties for a fee that may be less than the fee provided for in the property management agreement. The Company reimburses Cole Realty Advisors’ costs of managing and leasing the properties.


18
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011




The Company reimburses CR III Advisors for all expenses it paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse CR III Advisors for any amount by which its operating expenses (including the Asset Management Fee) at the end of the four preceding fiscal quarters exceeds the greater of (i) 2% of average invested assets, or (ii) 25% of net income other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period, unless the Company’s independent directors find that a higher level of expense is justified for that year based on unusual and non-recurring factors. The Company will not reimburse CR III Advisors for personnel costs in connection with services for which CR III Advisors receives acquisition fees and real estate commissions.





If CR III Advisors, or its affiliates, provides substantial services, as determined by the independent directors, 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 CR III Advisors or its affiliates a financing coordination fee equal to 1% of the amount available and/or outstanding under such financing; provided however, that CR III Advisors or its affiliates 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 CR III Advisors or its affiliates received such a fee. Financing coordination fees payable from loan proceeds from permanent financing will be paid to CR III Advisors or its affiliates as the Company acquires and/or assumes such permanent financing. With respect to any revolving line of credit, no financing coordination fees will be paid on loan proceeds from any line of credit unless all net offering proceeds received as of the date proceeds from the line of credit are drawn for the purpose of acquiring properties have been invested. In addition, with respect to any revolving line of credit, CR III Advisors or its affiliates will receive financing coordination fees only in connection with amounts being drawn for the first time and not upon any re-drawing of amounts that had been repaid by the Company.


The Company recorded fees and expense reimbursements as shown in the table below for services provided by CR III Advisors and its affiliates related to the services described above during the periods indicated (in thousands).





Three Months Ended March 31,2011

2010Acquisitions and Operations:Acquisition fees and expenses






$
7,042

$
5,476Asset management fees and expenses






$
4,028

$
1,089Property management and leasing fees and expenses






$
1,949

$
555Operating expenses






$
563

$
536Financing coordination fees






$
1,481

$
343





Liquidation/Listing





If CR III Advisors or its affiliates provides a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of one or more properties, the Company will pay CR III Advisors or its affiliates up to one-half of the brokerage commission paid, but in no event to exceed an amount equal to 3% of the sales price of each property sold. In no event will the combined real estate commission paid to CR III Advisors, its affiliates and unaffiliated third parties exceed 6% of the contract sales price. In addition, after investors have received a return of their net capital contributions and an 8% cumulative, non-compounded annual return, then CR III Advisors is entitled to receive 15% of the remaining net sale proceeds.





Upon listing of the Company’s common stock on a national securities exchange, a fee equal to 15% 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 8% cumulative, non-compounded annual return to investors will be paid to CR III Advisors (the “Subordinated Incentive Listing Fee”).




19
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011


Upon termination of the advisory agreement with CR III Advisors, other than termination by the Company because of a material breach of the advisory agreement by CR III Advisors, a performance fee of 15% of the amount, if any, by which the appraised asset value at the time of such termination plus total distributions paid to stockholders through the termination date exceeds the aggregate capital contribution contributed by investors less distributions from sale proceeds plus payment to investors of an 8% annual, cumulative, non-compounded return on capital. No subordinated performance fee will be paid to the extent that the Company has already paid or become obligated to pay CR III Advisors a subordinated participation in net sale proceeds or the Subordinated Incentive Listing Fee.





During the three months ended March 31, 2011, and 2010, no commissions or fees were incurred for services provided by CR III Advisors and its affiliates related to the services described above.





Other





As of March 31, 2011 and December 31, 2010, $1.7 million and $804,000, respectively, had been incurred primarily for other organization and offering, operating and acquisition expenses, by CR III Advisors and its affiliates, but had not yet been reimbursed by the Company and were included in due to affiliates on the condensed consolidated unaudited financial statements.





NOTE 11 — ECONOMIC DEPENDENCY





Under various agreements, the Company has engaged or will engage CR III 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 CR III Advisors and its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.





NOTE 12 –NEW ACCOUNTING PRONOUNCEMENT





In December 2010, FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, ("ASU 2010-29"), which clarifies the manner in which pro forma disclosures are calculated and provides additional disclosure requirements regarding material nonrecurring adjustments recorded as a result of a business combination. ASU 2010-20 was effective for the Company beginning on January 1, 2011. The adoption of ASU 2010-29 has not had a material impact on the Company’s consolidated financial statements.





NOTE 13 — SUBSEQUENT EVENTS





Status of the Offerings





As of May 10, 2011, the Company had received $747.8 million in gross offering proceeds through the issuance of approximately 75.2 million shares of its common stock in the Follow-on Offering (including shares issued pursuant to the Company’s DRIP).  As of May 10, 2011, approximately 180.5 million shares remained available for sale to the public in the Follow-on Offering, exclusive of shares available under the Company’s DRIP. Combined with the Initial Offering, the Company had received a total of $2.9 billion in gross offering proceeds as of May 10, 2011.





Subsequent to March 31, 2011, the Company redeemed approximately 1.2 million shares for $11.8 million.


20
 COLE CREDIT PROPERTY TRUST III, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 March 31, 2011




Real Estate Acquisitions
 
 Subsequent to March 31, 2011, the Company acquired a 100% interest in 38 commercial real estate properties for an aggregate purchase price of $182.4 million. The acquisitions were funded with net proceeds of the Offerings. The Company has not completed its initial purchase price allocations with respect to these properties and therefore cannot provide the disclosures included in Note 4 for these properties. Acquisition related expenses totaling $4.2 million were expensed as incurred. In addition, through a new joint venture arrangement (the “Marana Joint Venture”), the Company acquired an interest in a land parcel under development for a purchase price of $1.0 million.
 Notes Payable and Credit Facilities





Subsequent to March 31, 2011, the Company incurred fixed rate debt totaling $173.5 million with fixed interest rates ranging from 5.53% to 5.92% per annum, and maturity dates in May 2021. The fixed rate loans are secured by 52 commercial properties with an aggregate purchase price of $306.2 million. In addition, the Company incurred variable rate debt of $79.0 million with a variable interest rate of LIBOR plus 300 basis points per annum, maturing in April 2016. The variable rate loan is secured by one commercial property with a purchase price of $170.0 million. Subsequent to March 31, 2011, no amounts had been drawn or repaid under the Credit Facilities. Also, one of the Consolidated Joint Ventures fully repaid the $4.4 million outstanding under the variable construction loan facility.





In addition, the Marana Joint Venture entered into a construction loan facility, which will be used to fund the development of a single tenant retail store and will be drawn upon as construction costs are incurred.  The aggregate commitment, if fully funded, will be $5.2 million. The construction loan facility has a variable interest rate of LIBOR plus 300 basis points, not to be less than 4.50%, and matures in October 2012. Subsequent to March 31, 2011, no amount had been drawn on the construction loan facility.
























21


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 and the notes thereto, included in this Quarterly Report on Form 10-Q.  The following discussion should 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, 2010.  The terms “we,” “us,” “our” and the “Company” refer to Cole Credit Property Trust III, Inc. and unless defined herein, capitalized terms used herein shall have the same meetings as set forth in our condensed consolidated unaudited financial statements and the notes thereto.







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.  A full discussion of our Risk Factors may be found under Item 1A “Risk Factors” in our Annual Report on Form 10-K as of and for the year ended December 31, 2010.





Forward-looking statements that were true at the time 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 view 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, rent relief, inability to obtain new tenants upon the expiration or termination of existing leases, and the potential need to fund tenant improvements or other capital expenditures out of operating cash flows.  The forward-looking statements should be read in light of the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010.





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 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.





Overview





We were formed on January 22, 2008 to acquire and operate a diverse portfolio of core commercial real estate investments primarily consisting of necessity retail properties located throughout the United States, including U.S. protectorates.  We commenced our principal operations on January 6, 2009.  Prior to such date, we were considered a development stage company.  We acquired our first real estate property on January 6, 2009.  We commenced sales under our Follow-on Offering after the termination of the Initial Offering on October 1, 2010. We have no paid employees and are externally advised and managed by our advisor.  We elected to be taxed, and currently qualify, as a real estate investment trust for federal income tax purposes.





22


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 and other property income accounted for 91% and 94% of total revenue during the three months ended March 31, 2011 and 2010, respectively. As 99.4% of our rentable square feet was under lease as of March 31, 2011, with an average remaining lease term of 15.3 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors.  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 March 31, 2011, the debt leverage ratio of our consolidated real estate assets, which is the ratio of debt to total gross real estate and related assets net of gross intangible lease liabilities, was 34%. As we acquire additional commercial real estate, we will be subject to changes in real estate prices and changes in interest rates on any 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, or through loan assumption, so that our operating yield is determinable at the time we enter into a purchase agreement, by contracting with developers for future delivery of properties, or by entering into sale-leaseback transactions. We manage our interest rate risk by monitoring the interest rate environment in connection with future property acquisitions or upcoming debt maturities to determine the appropriate financing or refinancing terms, which may include fixed rate loans, variable rate loans or interest rate hedges.  If we are unable to acquire suitable properties or obtain suitable financing for future acquisitions or refinancing, our results of operations may be adversely affected.





Recent Market Conditions





Beginning in late 2007, domestic and international financial markets experienced significant disruptions that were brought about in large part by challenges in the world-wide banking system.  These disruptions severely impacted the availability of credit and have contributed to rising costs associated with obtaining credit.  Recently, the volume of mortgage lending for commercial real estate has increased and lending terms have improved; however, such lending activity is significantly less than previous levels.  Although lending market conditions have improved, we have experienced, and may continue to experience, more stringent lending criteria, which may affect our ability to finance certain property acquisitions or refinance our debt at maturity. Additionally, for properties for which we are able to obtain financing, the interest rates and other terms on such loans may be unacceptable.  We have managed, and expect to continue to manage, the current mortgage lending environment by considering alternative lending sources, including the securitization of debt, utilizing fixed rate loans, borrowing on the Credit Facilities, short-term variable rate loans, assuming existing mortgage loans in connection with property acquisitions, or entering into interest rate lock or swap agreements, or any combination of the foregoing.  We have acquired, and expect to continue to acquire, our properties for cash without financing.  If we are unable to obtain suitable financing for future acquisitions or we are unable to identify suitable properties at appropriate prices in the current credit environment, we may have a larger amount of uninvested cash, which may adversely affect our results of operations.  We will continue to evaluate alternatives in the current market, including purchasing or originating debt backed by real estate, which could produce attractive yields in the current market environment.





The economic downturn has led to high unemployment rates and a decline in consumer spending.  These economic trends have adversely impacted the retail and real estate markets, causing higher tenant vacancies, declining rental rates and declining property values. Recently, the economy has improved and continues to show signs of recovery.  Additionally, the real estate markets have recently observed an improvement in occupancy rates; however, occupancy and rental rates continue to be below those previously experienced before the economic downturn.  As of March 31, 2011, 99.4% of our rentable square feet was under lease.  However, if the current economic uncertainty persists, we may experience significant vacancies or be required to reduce rental rates on occupied space.  If we do experience significant vacancies, our advisor will actively seek to lease our vacant space; however, such space may be leased at lower rental rates and for shorter lease terms than previously experienced.  In addition, as many retailers and other tenants have been delaying or eliminating their store expansion plans, the amount of time required to re-lease a property may increase as a result.





23


Results of Operations





Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate investments. The following table shows the property statistics of our real estate assets as of March 31, 2011 and 2010.





March 31, 2011

March 31, 2010Number of commercial properties(1)


470


190Approximate rentable square feet (2)


19.9 million

6.2 millionPercentage of rentable square feet leased


99.4%


99.9%(1) Excludes properties owned through joint venture arrangements.(2) Including square feet of the buildings on land that is subject to ground leases.





The following table summarizes our real estate investment activity during the three months ended March 31, 2011 and 2010:







Three Months Ended March 31,2011

2010Commercial properties acquired


23


57Approximate purchase price of acquired properties

$
329.9 million

$
259.9 millionApproximate rentable square feet (1)


2.4 million


1.4 million(1) Including square feet of the buildings on land that is subject to ground leases.





As shown in the tables above, we owned 470 commercial properties as of March 31, 2011, compared to 190 commercial properties as of March 31, 2010.  In addition, we had two mortgage notes receivable and, through three joint venture arrangements, had interests in eight properties comprising 973,000 gross rentable square feet of commercial space and as of March 31, 2011.  Accordingly, our results of operations for the three months ended March 31, 2011, as compared to the three months ended March 31, 2010, reflect significant increases in most categories.





Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010





Revenue.Revenue increased $53.5 million to $71.7 million for the three months ended March 31, 2011, compared to $18.2 million for the three months ended March 31, 2010.  Our revenue consisted primarily of rental and other property income from net leased commercial properties, which accounted for 91% and 94% of total revenues during the three months ended March 31, 2011 and 2010, respectively.





Rental and other property income increased $48.4 million to $65.6 million for the three months ended March 31, 2011, compared to $17.2 million for the three months ended March 31, 2010.  The increase was primarily due to the acquisition of 280 rental income-producing properties subsequent to March 31, 2010. We also pay certain operating expenses subject to reimbursement by the tenant, which resulted in $4.8 million of tenant reimbursement income during the three months ended March 31, 2011, compared to $1.0 million during the three months ended March 31, 2010. In addition, we recorded interest income on mortgage notes receivable of $1.3 million during the three months ended March 31, 2011. During the three months ended March 31, 2010, we did not own any mortgage notes receivable.





General and Administrative Expenses.  General and administrative expenses increased $466,000 to $2.0 million for the three months ended March 31, 2011, compared to $1.5 million for the three months ended March 31, 2010.  The increase was primarily due to increased accounting fees and trustee fees as a result of acquiring 280 new rental income-producing properties subsequent to March 31, 2010. The primary general and administrative expense items were operating expenses reimbursable to our advisor, accounting fees, trustee fees, state franchise and income taxes and unused credit facility fees.




24


Property Operating Expenses.Property operating expenses increased $4.1 million to $5.2 million for the three months ended March 31, 2011, compared to $1.1 million for the three months ended March 31, 2010. The increase was primarily due to increased property taxes, repairs and maintenance and insurance expenses relating to the acquisition of 280 rental income-producing properties subsequent to March 31, 2010.  The primary property operating expense items are property taxes, repairs and maintenance and insurance.





Property and Asset Management Expenses. Pursuant to the advisory agreement with our advisor, we are required to pay to our advisor a monthly asset management fee equal to one-twelfthof 0.50% of the average invested assets.  Additionally, we may be required to reimburse expenses incurred by our advisor in providing asset management services, subject to limitations as set forth in the advisory agreement. Pursuant to the property management agreement with our affiliated property manager, we are required to pay to our property manager a property management fee in an amount up to 2% of gross revenues from each of our single tenant properties and up to 4% of gross revenues from each of our multi-tenant properties. We may also be required to reimburse our property manager expenses it incurred relating to managing or leasing the properties, subject to limitations as set forth in the advisory agreement.





Property and asset management expenses increased $4.5 million to $6.2 million for the three months ended March 31, 2011, compared to $1.7 million for the three months ended March 31, 2010.  Property management fees increased $1.3 million to $1.6 million for the three months ended March 31, 2011 from $367,000 for the three months ended March 31, 2010.  The increase in property management fees was primarily due to an increase in rental and other property income to $65.6 million for the three months ended March 31, 2011, from $17.2 million for the three months ended March 31, 2010, related to revenues from the 280 properties acquired subsequent to March 31, 2010.





Asset management fees increased $2.9 million to $3.9 million for the three months ended March 31, 2011, from $1.0 million for the three months ended March 31, 2010.  The increase in asset management fees was primarily due to an increase in the average invested assets to $3.2 billion for the three months ended March 31, 2011 from $833.7 million for the three months ended March 31, 2010.





In addition, during the three months ended March 31, 2011, we recorded $621,000 related to reimbursement of expenses incurred by our advisor in performing property and asset management services, compared to $331,000 for the three months ended March 31, 2010.  The increase was primarily due to expenses incurred by our advisor related to management of 280 new rental income-producing properties acquired subsequent to March 31, 2010.





Acquisition Related Expenses.  Acquisition related expenses increased $1.8 million to $8.6 million for the three months ended March 31, 2011, compared to $6.8 million for the three months ended March 31, 2010. The increase is due to the recording of acquisition related expenses incurred in connection with the purchase of 23 commercial properties, for an aggregate purchase price of $329.9 million, during the three months ended March 31, 2011, compared to 57 commercial properties, for an aggregate purchase price of $259.9 million, during the three months ended March 31, 2010. Pursuant to the advisory agreement with our advisor, we pay an acquisition fee to our advisor of 2% of the contract purchase price of each property or asset acquired. We may also be required to reimburse our advisor for acquisition expenses incurred in the process of acquiring property or in the origination or acquisition of a loan other than for personnel costs for which our advisor receives acquisition fees. During the three months ended March 31, 2011 and 2010, we recorded $441,000 and $432,000, respectively, of such acquisition expenses paid by our advisor.





Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $15.4 million to $20.4 million for the three months ended March 31, 2011, compared to $4.8 million for the three months ended March 31, 2010.  The increase was primarily due to an increase in the average gross aggregate book value of properties to $3.2 billion for the three months ended March 31, 2011 from $833.7 million for the three months ended March 31, 2010.





Equity in Income of Unconsolidated Joint Venture.  We recorded income of $307,000 for the three months ended March 31, 2011 which represented our share of the Unconsolidated Joint Venture’s net income. During the three months ended March 31, 2010, we did not have any interests in joint ventures.





Interest and Other Income.  Interest and other income decreased $263,000 to $77,000 for the three months ended March 31, 2011, compared to $340,000 for the three months ended March 31, 2010.   The decrease was primarily due to lower average uninvested cash of $109.1 million during the three months ended March 31, 2011, as compared to $313.9 million during the three months ended March 31, 2010 as a result of acquiring 280 new rental income-producing properties subsequent to March 31, 2010.




25


Interest Expense.Interest expense increased $12.5 million to $15.2 million for the three months ended March 31, 2011, compared to $2.7 million during the three months ended March 31, 2010.  The increase was primarily due to an increase in the average aggregate amount of notes payable outstanding to $1.1 billion during the three months ended March 31, 2011 from $146.4 million for the three months ended March 31, 2010.





Funds From Operations and Modified Funds From Operations





Funds From Operations (“FFO”) is a non-GAAP financial performance measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and widely recognized by investors and analysts as one measure of operating performance of a real estate company.  The FFO calculation excludes items such as real estate depreciation and amortization, and gains and losses on the sale of real estate assets.  Depreciation and amortization as applied 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, it is management’s view, and we believe the view of many industry investors and analysts, that the presentation of operating results for real estate companies by using the cost accounting method alone is insufficient.  In addition, FFO excludes gains and losses from the sale of real estate, which we believe provides management and investors with a helpful additional measure of the performance of our real estate portfolio, as it allows for comparisons, year to year, that reflect the impact on operations from trends in items such as occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs.





In addition to FFO, we use Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental financial performance measure to evaluate the operating performance of our real estate portfolio.  MFFO, as defined by our company, excludes from FFO acquisition related costs and real estate impairment charges, which are required to be expensed in accordance with GAAP.  In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses.  Management believes that excluding acquisition costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time, including after the company ceases to acquire properties on a frequent and regular basis.  MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.





Additionally, impairment charges are items that management does not include in its evaluation of the operating performance of its real estate investments, as management believes that the impact of these items will be reflected over time through changes in rental income or other related costs.  As many other non-traded REITs exclude impairments in reporting their MFFO, we believe that our calculation and reporting of MFFO will assist investors and analysts in comparing our performance versus other non-traded REITs.





For all of these reasons, we believe FFO and MFFO, in addition to net income and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of our real estate portfolio over time. However, not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. FFO and MFFO should not be considered as alternatives to net income or to cash flows from operating activities, and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs.





MFFO may provide investors with a useful indication of our future performance, particularly after our acquisition stage, and of the sustainability of our current distribution policy.  However, because MFFO excludes acquisition expenses, which are an important component in an analysis of the historical performance of a property, MFFO should not be construed as a historic performance measure.  Neither the SEC, NAREIT, nor any other regulatory body has evaluated the acceptability of the exclusions contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP financial performance measure.





Our calculation of FFO and MFFO, and reconciliation to net income (loss), which is the most directly comparable GAAP financial measure, is presented in the table below for the three months ended March 31, 2011 and 2010 (in thousands).  FFO and MFFO are influenced by the timing of acquisitions and the operating performance of our real estate investments.


26





Three Months Ended March 31,2011

2010NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

$
14,260

$
(160)Depreciation of real estate assets


13,663


2,909Amortization of lease related costs


6,733


1,939Depreciation and amortization of real estate assets inunconsolidated joint venture


338


—Funds from operations (FFO)


34,994


4,688Acquisition related expenses


8,593


6,845Modified funds from operations (MFFO)

$
43,587

$
11,533





Set forth below is additional information 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 $5.0 million and $1.1 million during the three months ended March 31, 2011 and 2010, respectively. In addition, related to the Unconsolidated Joint Venture, straight-line revenue of $4,000 for the three months ended March 31, 2011 is included in equity in income of unconsolidated joint venture on the consolidated statement of operations.  During the three months ended March 31, 2010, we did not have any interests in joint ventures.•
Amortization of deferred financing costs and amortization of fair value adjustments of mortgage notes assumed totaled $1.4 million and $357,000 during the three months ended March 31, 2011 and 2010, respectively. In addition, related to the Unconsolidated Joint Venture, amortization of deferred financing costs of $11,000 for the three months ended March 31, 2011 is included in equity in income of unconsolidated joint venture on the consolidated statement of operations.  During the three months ended March 31, 2010, we did not have any interests in joint ventures.





Distributions





In November 2010, the Company’s board of directors authorized a daily distribution, based on 365 days in the calendar year, of $0.001781016 per share (which equates to 6.50% on an annualized basis calculated at the current rate, assuming a $10.00 per share purchase price) for stockholders of record as of the close of business on each day of the period, commencing on January 1, 2011 and ending on March 31, 2011. In March 2011, the Company’s board of directors authorized a daily distribution, based on 365 days in the calendar year, of $0.001781016 per share (which equates to 6.50% on an annualized basis calculated at the current rate, assuming a $10.00 per share purchase price) for stockholders of record as of the close of business on each day of the period, commencing on April 1, 2011 and ending on June 30, 2011.





During the three months ended March 31, 2011 and 2010, respectively, we paid distributions of $41.5 million and $17.1 million, including $23.5 million and $10.0 million, respectively, through the issuance of shares pursuant to our DRIP. The distributions paid during the three months ended March 31, 2011 were funded by net cash provided by operating activities of $27.2 million, proceeds from the issuance of common stock of $8.6 million, and borrowings of $5.7 million. The distributions paid during the three months ended March 31, 2010 were funded by net cash provided by operating activities of $6.4 million, proceeds from the issuance of common stock of $6.8 million, and borrowings of $3.9 million.  Net cash provided by operating activities for the three months ended March 31, 2011 and 2010, reflects a reduction for  real estate acquisition related expenses incurred and expensed of $8.6 million and $6.8 million, respectively, in accordance with ASC 805, Business Combinations.  As set forth in the “Estimated Use of Proceeds” section of the prospectuses for the Offerings, we treat our real estate acquisition expenses as funded by proceeds from the offering of our shares. Therefore, for consistency, proceeds from the issuance of common stock for the three months ended March 31, 2011 and 2010, respectively, have been reported as a source of distributions to the extent that acquisition expenses have reduced net cash flows from operating activities.


27
  Share Redemptions





Our share redemption program provides that we will not redeem in excess of 5% of the weighted average number of shares outstanding during the trailing twelve-month period prior to the redemption date; provided, however, that while shares subject to a redemption requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be redeemed, such shares will not be subject to theTrailing Twelve-month Cap.  In addition, all redemptions, including those upon death or qualifying disability, are limited to those that can be funded with cumulative net proceeds from our DRIP.  During the three months ended March 31, 2011, we received valid redemption requests relating to approximately 793,000 shares, which we redeemed in full for $7.7 million (an average of $9.69 per share).  A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program set forth in the prospectus relating to the Follow-on Offering.  We have funded and intend to continue funding share redemptions with proceeds of our DRIP.  Subsequent to March 31, 2011, we redeemed approximately 1.2 million shares for a total of $11.8 million, or an average price per share of $9.66.





In addition to the caps discussed above, the redemptions are limited quarterly to 1.25% of the weighted average number of shares outstanding during the trailing twelve-month period.  In addition, the funding for redemptions each quarter generally will be limited to the net proceeds we receive from the sale of shares in the respective quarter under our DRIP.  The amended share redemption program further provides that while shares subject to redemption requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be redeemed, such shares will not be subject to the quarterly caps. Our board of directors may waive these quarterly caps in its sole discretion, subject to the Trailing Twelve-month Cap.





Liquidity and Capital Resources





General





Our principal demands for funds are for real estate and real estate-related investments and the payment of acquisition related expenses, operating expenses, distributions and redemptions to stockholders and principal and interest on current and any future outstanding indebtedness. Generally, cash needs for items other than acquisitions and acquisition related expenses will be generated from operations and our current investments. The sources of our operating cash flows are primarily driven by the rental income received from leased properties and interest earned on our mortgage notes receivable and cash balances. We expect to continue to raise capital through our Follow-on Offering and to utilize such funds and proceeds from secured or unsecured financing to complete future property acquisitions. As of March 31, 2011, we had raised $2.8 billion in the Offerings, net of redemptions and inclusive of amounts raised under our DRIP. The Initial Offering terminated on October 1, 2010, and the Follow-on Offering commenced after such termination.





As of March 31, 2011, we had cash and cash equivalents of $108.3 million. Additionally, as of March 31, 2011, we had unencumbered properties with a gross book value of $828.4 million that may be used as collateral to secure additional financing in future periods.





Short-term Liquidity and Capital Resources





On a short-term basis, our principal demands for funds will be for operating expenses, distributions and redemptions to stockholders and interest and principal on current and any future indebtedness.  In addition, as of March 31, 2011, we had entered into agreements of purchase and sale to acquire 30 retail properties for an aggregate purchase price of $134.5 million, as discussed in Note 9 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q. We expect to meet our short-term liquidity requirements through cash provided by property operations and proceeds from the Follow-on Offering.  Operating cash flows are expected to increase as additional properties are added to our portfolio.  The offering and organization costs associated with the Offerings are initially paid by our advisor, which will be reimbursed for such costs up to 1.5% of the aggregate gross capital raised by us in the Offerings.  As of March 31, 2011, we recorded $31.6 million of such offering and organization costs.


28




Long-term Liquidity and Capital Resources





On a long-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related investments and the payment of acquisition related expenses, operating expenses, distributions and redemptions to stockholders and interest and principal on any future indebtedness.  Generally, we expect to meet cash needs for items other than acquisitions and acquisition related expenses and debt maturities from our cash flow from operations, and we expect to meet cash needs for acquisitions and debt maturities from the net proceeds of the Follow-on Offering and from secured or unsecured borrowings on our unencumbered properties, refinancing of current debt and borrowings on our Credit Facilities. We expect that substantially all 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, including the proceeds of the Follow-on Offering, cash advanced to us by our advisor, borrowing on the Credit Facilities and/or future borrowings on our unencumbered assets. During the three months ended March 31, 2011, we funded distributions to our stockholders with cash flows from operations, offering proceeds and debt financings as discussed above in the section captioned “Distributions.” The Credit Facilities and certain notes payable contain customary affirmative, negative and financial covenants, including requirements for minimum net worth, debt service coverage ratios, and leverage ratios. These covenants may limit our ability to incur additional debt and make borrowings on the Credit Facilities.





As of March 31, 2011, we had received and accepted subscriptions for approximately 280.1 million shares of common stock in the Offerings for gross proceeds of $2.8 billion.  As of March 31, 2011, we had redeemed a total of approximately 2.0 million shares of common stock for a cost of $19.6 million, or an average price per share of $9.69.





As of March 31, 2011, we and the Consolidated Joint Ventures had $1.1 billion of debt outstanding. See Note 7 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for certain terms of the debt outstanding. Additionally, the ratio of debt to total gross real estate assets net of gross intangible lease liabilities, as of March 31, 2011, was 34% and the weighted average years to maturity was 6.8 years.





Our contractual obligations as of March 31, 2011, were as follows (in thousands):





Payments due by period (1) (2) (3)Less Than 1







More Than 5Total

Year

1-3 Years

4-5 Years

Years(5)Principal payments - fixed rate debt(4)

$
1,123,996

$
3,323

$
58,719

$
422,959

$
638,995Interest payments - fixed rate debt


411,670


59,569


170,910


82,474


98,717Principal payments - variable rate debt


16,928


4,428


500


12,000


—Interest payments - variable rate debt


1,905


408


1,137


360


—Total

$
1,554,499

$
67,728

$
231,266

$
517,793

$
737,712(1)
The table above does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because suchamounts are not fixed and determinable.(2)
As of March 31, 2011, we had $374.0 million of variable rate debt fixed through the use of interest rate swaps. We used thefixed rates under the swap agreement to calculate the debt payment obligations in future periods. As of March 31, 2011, wedid not have any variable rate debt outstanding for which the interest rate had not been fixed through the use of interest rate swaps.(3)
The table above does not include loan amounts associated with the Unconsolidated Joint Venture of $26.0 million which maturesin July 2020, as this loan is non-recourse to us.(4)
Principal payment amounts reflect actual payments based on the face amount of notes payable secured by our wholly-ownedproperties.  As of March 31, 2011, the fair value adjustment, net of amortization, of mortgage notes assumed was $698,000.(5)
Assumes the Company accepts the interest rates that one lender may reset on September 1, 2013 and February 1, 2015,respectively, related to mortgage notes payable of $30.0 million and $32.0 million, respectively.





Our charter prohibits us from incurring debt that would cause our borrowings to exceed the greater of 75% of our gross assets, valued at the greater of the aggregate cost (before depreciation and other non-cash reserves) or fair value of all assets owned by us, unless approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report.


29




During the three months ended March 31, 2011, we entered into agreements of purchase and sale, with unaffiliated third-party sellers, to purchase a 100% interest in 30 retail properties, subject to meeting certain criteria, for an aggregate purchase price of $134.5 million, exclusive of closing costs.  As of March 31, 2011, we had $2.8 million of property escrow deposits held by escrow agents in connection with these future property acquisitions, of which $623,000 will be forfeited if the transactions are not completed. As of May 10, 2011, we had purchased 26 of these properties for $121.9 million, exclusive of closing costs, and no escrow deposits were forfeited.





In addition, as of March 31, 2011, we were obligated to purchase a single tenant retail property from a consolidated joint venture, upon certain criteria being met, for a purchase price of $5.9 million. Subsequent to March 31, 2011, the criteria was met and we completed the purchase of the property.





Cash Flow Analysis





Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010





Operating Activities.During the three months ended March 31, 2011, net cash provided by operating activities increased $20.8 million to $27.2 million, compared to $6.4 for the three months ended March 31, 2010. The change was primarily due to a increase in net income of $14.7 million and an increase in depreciation and amortization expenses totaling $15.9 million, partially offset by a decrease in the change in rents and tenant receivables of $3.8 million, a decrease in the change in accounts payable and accrued expenses of $3.6 million and other liabilities of $2.6 million for the three months ended March 31, 2011.  See “— Results of Operations” for a more complete discussion of the factors impacting our operating performance.





Investing Activities.Net cash used in investing activities increased $71.1 million to $331.7 million for the three months ended March 31, 2011 compared to $260.6 million for the three months ended March 31, 2010.  The increase was primarily due to the acquisition of 23 properties for an aggregate purchase price of $329.9 million during the three months ended March 31, 2011, compared to the acquisition of 57 properties for an aggregate purchase price of $259.9 million during the three months ended March 31, 2010.





Financing Activities.Net cash provided by financing activities decreased $21.8 million to $302.8 million for the three months ended March 31, 2011, compared to $324.6 million for the three months ended March 31, 2010.  The change was primarily due to a decrease in proceeds from the issuance of common stock of $51.2 million, an increase in repayment of notes payable of $70.4 million and an increase in distributions to investors of $10.8 million, offset by an increase in the proceeds from mortgage notes payable of $115.1 million.





Election as a REIT





We are taxed as a REIT under the Internal Revenue Code of 1986, as amended.  To maintain our qualification as a REIT, we must meet, and continue to meet, certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping.   As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed with regard to the dividends paid deduction excluding net capital gains).





If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates.  We will not be able to deduct distributions paid to our stockholders in any year in which we fail to qualify as a REIT.  We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific 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 maintain our qualification 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 condensed consolidated unaudited financial statements.


30




Inflation





We are exposed to inflation risk as income from long-term leases will be the primary source of our cash flows from operations.  There are provisions in many of our tenant leases that will protect us from, and mitigate the risk of, the impact of inflation.  These provisions 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 adequately offset the effects of 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 and Related Assets;•
Allocation of Purchase Price of Real Estate and Related Assets;•
Revenue Recognition;•
Investment in Unconsolidated Joint Venture;•
Investment in Mortgage Notes Receivable;•
Income Taxes; and•
Derivative Instruments and Hedging Activities.





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, 2010, and our critical accounting policies have not changed during the three months ended March 31, 2011. 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, 2010, and related notes thereto.





Commitments and Contingencies





We may be subject to certain contingencies and commitments with regard to certain transactions.  Refer to Note 9 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanations.





Related-Party Transactions and Agreements





We have entered into agreements with CR III Advisors and its affiliates, whereby we have paid and may continue to pay certain fees to, or reimburse certain expenses of, CR III Advisors or its affiliates such as acquisition and advisory fees and expenses, financing coordination fees, organization and offering costs, sales commissions, dealer manager fees, asset and property management fees and expenses, leasing fees and reimbursement of certain operating costs.  See Note 10 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for a discussion of the various related-party transactions, agreements and fees.





Subsequent Events





Certain events occurred subsequent to March 31, 2011.  Refer to Note 13 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanation.  Such events are:





•
Status of the Offerings;•
Real estate acquisitions; and•
Notes payable and credit facilities





New Accounting Pronouncements





There are no accounting pronouncements that have been issued but not yet adopted by us that will have a material impact on our consolidated financial statements.


31




Off Balance Sheet Arrangements





As of March 31, 2011 and December 31, 2010, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.





Item 3. Quantitative and Qualitative Disclosures About Market Risk




As of March 31, 2011, we and a consolidated joint venture had $16.9 million of variable rate debt and therefore we are exposed to interest rate changes in LIBOR.  As of March 31, 2011, a change of 50 basis points in interest rates would result in a change in interest expense of $85,000 per annum, assuming all of our derivatives remain effective hedges. In the future we may obtain additional variable rate debt financing to fund certain property acquisitions, and may be further exposed to interest rate changes.  Our objectives in managing interest rate risks will be to limit the impact of interest rate changes on operations and cash flows, and to lower overall borrowing costs.  To achieve these objectives, we will borrow primarily at interest rates with the lowest margins available and, in some cases, with the ability to convert variable interest rates to fixed rates.  We have entered, and expect to continue to enter, into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk on a given variable rate financial instrument.  We will not enter into derivative or interest rate transactions for speculative purposes. We may also enter into rate lock arrangements to lock interest rates on future borrowings.





As of March 31, 2011, we had 60 interest rate swap agreements outstanding, which mature on various dates from August 2012 through April 2021, with an aggregate notional amount under the swap agreements of $374.0 million and an aggregate net fair value of $(5.0) million.  The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads.  As of March 31, 2011, an increase of 50 basis points in interest rates would result in a increase to the fair value of these interest rate swaps of $9.7 million.





We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.





Item 4. Controls and Procedures




Evaluation of Disclosure Controls and Procedures





As required by Rules 13a-15(b) and 15d-15(b) of 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 Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of March 31, 2011, were effective in all material respects to ensure that information required to be disclosed by us in this Quarterly Report on Form 10-Q 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.





Changes in Internal Control Over Financial Reporting





No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) in connection with the foregoing evaluations that occurred during the three months ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


32


PART II


OTHER INFORMATION





Item 1. Legal Proceedings





In the ordinary course of business, we may become subject to litigation or claims.  We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business.





Item 1A. Risk Factors





There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010.





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





As of March 31, 2011, we had issued approximately 280.1 million shares in the Offerings for gross proceeds of $2.8 billion, out of which we paid $238.6 million in selling commissions and dealer manager fees and $30.8 million in organization and offering costs to our advisor or its affiliates.  With the net offering proceeds, we and the Consolidated Joint Ventures acquired $3.3 billion in real estate and related assets and an interest in the Unconsolidated Joint Venture of $16.1 million and paid costs of $85.8 million in acquisition related expenses.  As of May 10, 2011, we have sold approximately 292.7 million shares in the Offerings for gross offering proceeds of $2.9 billion.





Our board of directors has adopted a share redemption program that enables our stockholders who hold their shares for more than one year to sell their shares to us in limited circumstances. The purchase price we will pay for redeemed shares is set forth in the prospectuses for our Offerings of common stock, as supplemented from time to time.  Our board of directors reserves the right in its sole discretion at any time, and from time to time, to waive the one-year holding period in the event of death, bankruptcy or other exigent circumstances or terminate, suspend or amend the share redemption program.  Under the terms of the share redemption program, share redemptions are subject to the Trailing Twelve-month Cap; provided, however shares subject to redemption requests upon death of a stockholder will not be subject to the Trailing Twelve-month Cap.  In addition, all redemptions, including those upon death or qualifying disability, are limited to those that can be funded with the cumulative net proceeds from our DRIP. In addition to these caps, the redemptions are limited quarterly to 1.25% of the weighted average number of shares outstanding during the trailing twelve-month period. In addition, the funding for redemptions each quarter generally will be limited to the net proceeds we receive from the sale of shares in the respective quarter under the DRIP.  The amended share redemption program further provides that while shares subject to a redemption requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be redeemed, such shares will not be subject to the quarterly caps. Our board of directors may waive these quarterly caps in its sole discretion, subject to the Trailing Twelve-month Cap.





The provisions of the share redemption program in no way limit our ability to repurchase shares from stockholders by any other legally available means for any reason that our board of directors, in its discretion, deems to be in our best interest.  During the three months ended March 31, 2011, we redeemed shares as follows:





Total Number of Shares

Maximum Number ofTotal Number




Purchased as Part

Shares that May Yet Beof Shares


Average Price

of Publicly Announced

Purchased Under theRedeemed


Paid per Share

Plans or Programs

Plans or ProgramsJanuary 2011

—

$
—

—

(1)February 2011

792,918

$
9.69

792,918

(1)March 2011

—

$
—

—

(1)Total

792,918




792,918

(1)(1) A description of the maximum number of shares that may be purchased under our redemption program is includedin the narrative preceding this table.




33


Item 3. Defaults Upon Senior Securities





No events occurred during the three months ended March 31, 2011 that would require a response to this item.





Item 4. [Removed and Reserved]





Item 5. Other Information





No events occurred during the three months ended March 31, 2011 that would require a response to this item.





Item 6. Exhibits





The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.


34


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 III, Inc.

(Registrant)By:
/s/ Simon J. MisselbrookName:
Simon J. MisselbrookTitle:
Vice President of Accounting

(Principal Accounting Officer)







Date: May 10, 2011





35




EXHIBIT INDEX
 
 The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the three months ended March 31, 2011 (and are numbered in accordance with Item 601 of Regulation S-K).


Exhibit  No.

Description3.1

Third Articles of Amendment and Restatement of Cole Credit Property Trust III, Inc. (Incorporated byreference to Exhibit 3.1 to the Company’s pre-effective amendment to Form S-11 (File No. 333-149290),filed on September 29, 2008).3.2

Amended and Restated Bylaws of Cole Credit Property Trust III, Inc. (Incorporated by reference toExhibit 3.2 to the Company’s pre-effective amendment to Form S-11 (File No. 333-149290), filed onMay 7, 2008).3.3

Articles of Amendment (Incorporated by reference to the Company’s Current Report on Form 8-K(File No. 333-149290) filed on April 9, 2010).4.1

Form of Subscription Agreement and Subscription Agreement Signature Page (Incorporated by reference toExhibit 4.1 to the Company’s post-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011).4.2

Form of Additional Investment Subscription Agreement (Incorporated by reference to Exhibit 4.2 to theCompany’s post-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011).4.3

Form of Alternative Subscription Agreement (Incorporated by reference to Exhibit 4.3 to the Company’spost-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011).4.4

Form of Alternative Additional Investment Subscription Agreement (Incorporated by reference to Exhibit 4.4 tothe Company’s post-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011).4.5

Form of Alternative Subscription Agreement (Incorporated by reference to Exhibit 4.5 to the Company’spost-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011).4.6

Form of Alternative Additional Investment Subscription Agreement (Incorporated by reference to Exhibit 4.6 tothe Company’s post-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011).31.1*

Certification of the Chief Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14 (a) or15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*

Certification of the Chief Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14 (a) or15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1**

Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* Filed herewith** In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed "filed" for purposes of Section 18 of theExchange Act or otherwise subject to the liabilities of that section.  Such certifications will not be deemed incorporated byreference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that theregistrant specifically incorporates it by reference.