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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-51963
 COLE CREDIT PROPERTY TRUST II, INC.
 (Exact name of registrant as specified in its charter)
 Maryland
    
    20-1676382(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)2555 East Camelback Road, Suite 400
    
    (602)778-8700Phoenix, Arizona, 85016
    
    (Registrants telephone number, including area code)(Address of principal executive offices; zip code)
 Not Applicable  (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ (Do not check if smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



COLE CREDIT PROPERTY TRUST II, INC.
INDEX
 PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Unaudited Balance Sheets as of September 30, 2010 and December 31, 2009
    
    
    4Condensed Consolidated Unaudited Statements of Operations for the three and nine months ended September 30, 2010 and 2009
    
    
    5Condensed Consolidated Unaudited Statement of Stockholders Equity for the nine months ended September 30, 2010
    
    
    6Condensed Consolidated Unaudited Statements of Cash Flows for the nine months ended September 30, 2010 and 2009
    
    
    7Notes to Condensed Consolidated Unaudited Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. [Removed and Reserved]
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37Signatures
    
    
    38Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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PART I
 
 FINANCIAL INFORMATION
    3




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
 
 CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
  September 30, 2010
    
    
    December 31, 2009ASSETSInvestment in real estate assets:Land
    
    $
    823,272
    
    
    $
    808,109Buildings and improvements, less accumulated depreciation of $164,692 and $122,887, respectively
    
    
    1,929,608
    
    
    
    1,928,786Real estate assets under direct financing leases, less unearned income of $15,782 and $16,794, respectively
    
    
    37,163
    
    
    
    37,736Acquired intangible lease assets, less accumulated amortization of $89,824 and $67,253, respectively
    
    
    340,802
    
    
    
    357,008Total real estate assets, net
    
    
    3,130,845
    
    
    
    3,131,639Investment in mortgage notes receivable, less accumulated amortization of $1,897 and $1,385, respectively
    
    
    80,500
    
    
    
    82,500Total real estate and mortgage assets, net
    
    
    3,211,345
    
    
    
    3,214,139Cash and cash equivalents
    
    
    48,688
    
    
    
    28,417Restricted cash
    
    
    9,121
    
    
    
    9,536Marketable securities
    
    
    
    
    
    
    56,366Marketable securities pledged as collateral
    
    
    70,769
    
    
    
    Investment in unconsolidated joint ventures
    
    
    38,160
    
    
    
    40,206Rents and tenant receivables, less allowance for doubtful accounts of $820 and $1,648, respectively
    
    
    42,309
    
    
    
    33,544Prepaid expenses, derivative and other assets
    
    
    3,439
    
    
    
    4,253Deferred financing costs, less accumulated amortization of $14,469 and $11,713, respectively
    
    
    24,154
    
    
    
    26,643Total assets
    
    $
    3,447,985
    
    
    $
    3,413,104LIABILITIES AND STOCKHOLDERS EQUITYNotes payable and line of credit
    
    $
    1,635,456
    
    
    $
    1,607,473Repurchase agreement
    
    
    47,029
    
    
    
    Accounts payable and accrued expenses
    
    
    18,190
    
    
    
    20,023Due to affiliates
    
    
    295
    
    
    
    509Acquired below market lease intangibles, less accumulated amortization of $29,337 and $21,470, respectively
    
    
    143,049
    
    
    
    149,832Distributions payable
    
    
    10,706
    
    
    
    10,851Deferred rent, derivative and other liabilities
    
    
    13,180
    
    
    
    14,672Total liabilities
    
    
    1,867,905
    
    
    
    1,803,360Commitments and contingenciesRedeemable common stock
    
    
    10,499
    
    
    
    87,760STOCKHOLDERS EQUITY:Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 240,000,000 shares authorized, 208,693,596 and 204,662,620 shares issued
and outstanding, respectively
    
    
    2,087
    
    
    
    2,047Capital in excess of par value
    
    
    1,875,046
    
    
    
    1,762,904Accumulated distributions in excess of earnings
    
    
    (308,926
    )
    
    
    (233,480
    )Accumulated other comprehensive income (loss)
    
    
    1,374
    
    
    
    (9,487
    )Total stockholders equity
    
    
    1,569,581
    
    
    
    1,521,984Total liabilities and stockholders equity
    
    $
    3,447,985
    
    
    $
    3,413,104
   4




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COLE CREDIT PROPERTY TRUST II, INC.
 
 CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Rental and other property income
    
    $
    59,304
    
    
    $
    63,241
    
    
    $
    178,257
    
    
    $
    180,996Tenant reimbursement income
    
    
    3,590
    
    
    
    4,883
    
    
    
    10,716
    
    
    
    14,907Earned income from direct financing leases
    
    
    498
    
    
    
    500
    
    
    
    1,569
    
    
    
    1,412Interest income on mortgage notes receivable
    
    
    1,664
    
    
    
    1,719
    
    
    
    5,011
    
    
    
    5,162Interest income on marketable securities
    
    
    1,928
    
    
    
    1,844
    
    
    
    5,721
    
    
    
    5,382Total revenue
    
    
    66,984
    
    
    
    72,187
    
    
    
    201,274
    
    
    
    207,859Expenses:General and administrative expenses
    
    
    1,740
    
    
    
    1,767
    
    
    
    5,633
    
    
    
    5,262Property operating expenses
    
    
    5,233
    
    
    
    6,352
    
    
    
    15,497
    
    
    
    19,828Property and asset management expenses
    
    
    3,970
    
    
    
    3,804
    
    
    
    12,347
    
    
    
    10,625Acquisition related expenses
    
    
    1,226
    
    
    
    
    
    
    
    1,851
    
    
    
    3,241Depreciation
    
    
    14,131
    
    
    
    14,217
    
    
    
    42,175
    
    
    
    42,103Amortization
    
    
    6,599
    
    
    
    13,719
    
    
    
    21,655
    
    
    
    27,724Impairment of real estate assets
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    13,500Total operating expenses
    
    
    32,899
    
    
    
    39,859
    
    
    
    103,658
    
    
    
    122,283Operating income
    
    
    34,085
    
    
    
    32,328
    
    
    
    97,616
    
    
    
    85,576Other income (expense):Equity in income of unconsolidated joint ventures and interest and other income
    
    
    85
    
    
    
    69
    
    
    
    171
    
    
    
    544Interest expense
    
    
    (25,783
    )
    
    
    (25,488
    )
    
    
    (76,633
    )
    
    
    (73,278
    )Total other expense
    
    
    (25,698
    )
    
    
    (25,419
    )
    
    
    (76,462
    )
    
    
    (72,734
    )Net income
    
    $
    8,387
    
    
    $
    6,909
    
    
    $
    21,154
    
    
    $
    12,842Weighted average number of common shares outstanding:Basic
    
    
    207,962,270
    
    
    
    202,514,431
    
    
    
    206,654,619
    
    
    
    202,247,716Diluted
    
    
    207,962,270
    
    
    
    202,516,961
    
    
    
    206,655,254
    
    
    
    202,250,913Net income per common share:Basic and diluted
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.06Distributions declared per common share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.47
    
    
    $
    0.50
   5




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
 
 CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS EQUITY
  Accumulated
    
    
    AccumulatedCommon Stock
    
    
    Capital in
    
    
    Distributions in
    
    
    Other
    
    
    TotalNumber of
    
    
    
    
    
    
    Excess
    
    
    Excess of
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Par Value
    
    
    of Par Value
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance, January 1, 2010
    
    
    204,662,620
    
    
    $
    2,047
    
    
    $
    1,762,904
    
    
    $
    (233,480
    )
    
    $
    (9,487
    )
    
    $
    1,521,984Issuance of common stock
    
    
    5,174,843
    
    
    
    52
    
    
    
    46,214
    
    
    
    
    
    
    
    
    
    
    
    46,266Distributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96,600
    )
    
    
    
    
    
    
    (96,600
    )Other offering costs
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Redemptions of common stock
    
    
    (1,143,867
    )
    
    
    (12
    )
    
    
    (11,338
    )
    
    
    
    
    
    
    
    
    
    
    (11,350
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Redeemable common stock
    
    
    
    
    
    
    
    
    
    
    77,261
    
    
    
    
    
    
    
    
    
    
    
    77,261Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,154
    
    
    
    
    
    
    
    21,154Unrealized gain on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,503
    
    
    
    12,503Unrealized loss on interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,642
    )
    
    
    (1,642
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,015Balance, September 30, 2010
    
    
    208,693,596
    
    
    $
    2,087
    
    
    $
    1,875,046
    
    
    $
    (308,926
    )
    
    $
    1,374
    
    
    $
    1,569,581
   6




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
 
 CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
  Nine Months Ended September 30,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    21,154
    
    
    $
    12,842Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    42,175
    
    
    
    42,103Amortization of intangible lease assets and below market lease intangibles, net
    
    
    15,282
    
    
    
    17,292Amortization of deferred financing costs
    
    
    5,050
    
    
    
    4,306Amortization of premiums on mortgage notes receivable
    
    
    512
    
    
    
    502Amortization of discount on marketable securities
    
    
    (1,900
    )
    
    
    (1,621
    )Amortization of fair value adjustments of mortgage notes assumed
    
    
    1,370
    
    
    
    976Bad debt (recovery) expense
    
    
    (106
    )
    
    
    2,030Stock compensation expense
    
    
    7
    
    
    
    9Impairment of real estate assets
    
    
    4,500
    
    
    
    13,500Equity in income of unconsolidated joint ventures
    
    
    (74
    )
    
    
    (585
    )Distributions of earnings from unconsolidated joint ventures
    
    
    2,120
    
    
    
    2,071Property easement loss
    
    
    
    
    
    
    150Changes in assets and liabilities:Rents and tenant receivables
    
    
    (8,659
    )
    
    
    (9,968
    )Prepaid expenses and other assets
    
    
    673
    
    
    
    994Accounts payable and accrued expenses
    
    
    (504
    )
    
    
    1,743Due to affiliates, deferred rent and other liabilities
    
    
    (3,207
    )
    
    
    (815
    )Net cash provided by operating activities
    
    
    78,393
    
    
    
    85,529Cash flows from investing activities:Investment in real estate and related assets
    
    
    (62,877
    )
    
    
    (12,945
    )Capitalized expenditures
    
    
    (6,976
    )
    
    
    (2,119
    )Investment in marketable securities
    
    
    
    
    
    
    (10,495
    )Investment in unconsolidated joint ventures
    
    
    
    
    
    
    (17,324
    )Principal repayments from mortgage notes receivable and real estate assets under direct financing leases
    
    
    2,061
    
    
    
    1,349Proceeds from easement of assets
    
    
    5
    
    
    
    11Change in restricted cash
    
    
    415
    
    
    
    1,352Net cash used in investing activities
    
    
    (67,372
    )
    
    
    (40,171
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    
    
    
    
    46Offering costs on issuance of common stock
    
    
    (2
    )
    
    
    (580
    )Redemptions of common stock
    
    
    (11,350
    )
    
    
    (45,640
    )Distributions to investors
    
    
    (50,479
    )
    
    
    (48,275
    )Proceeds from notes payable and line of credit
    
    
    256,000
    
    
    
    75,243Repayment of notes payable and line of credit
    
    
    (229,387
    )
    
    
    (104,444
    )Proceeds from repurchase agreement
    
    
    47,029
    
    
    
    Refund of loan deposits
    
    
    2,145
    
    
    
    150Payment of loan deposits
    
    
    (2,145
    )
    
    
    (210
    )Escrowed investor proceeds liability
    
    
    
    
    
    
    (18
    )Deferred financing costs paid
    
    
    (2,561
    )
    
    
    (3,084
    )Net cash provided by (used in) financing activities
    
    
    9,250
    
    
    
    (126,812
    )Net increase (decrease) in cash and cash equivalents
    
    
    20,271
    
    
    
    (81,454
    )Cash and cash equivalents, beginning of period
    
    
    28,417
    
    
    
    106,485Cash and cash equivalents, end of period
    
    $
    48,688
    
    
    $
    25,031
   7




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COLE CREDIT PROPERTY TRUST II, INC.
 
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
 September 30, 2010
 NOTE 1  ORGANIZATION AND BUSINESS
    NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation and Basis of Presentation
   Consolidation
   8




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COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 Valuation of Real Estate and Related Assets
    Restricted Cash and Escrows
  Concentration of Credit Risk
  Investment in Unconsolidated Joint Ventures
   9




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 Investments  Equity Method and Joint Ventures
 Redeemable Common Stock
   Distributions Payable and Distribution Policy
    Repurchase Agreement
   10




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 NOTE 3  FAIR VALUE MEASUREMENTS
 Fair Value Measurements and Disclosures
      Re-measured
    
    
    Fair Value Measurements of Reporting Date UsingDescription:
    
    Balance
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total LossesInvestment in real
estate assets
    
    $
    3,523
    
    
    $
    
    
    
    $
    
    
    
    $
    3,523
    
    
    $
    4,500
    Cash and cash equivalents, restricted cash, rents and tenant receivables and accounts payable
and accrued expenses
 Mortgage notes receivable
 Notes payable, line of credit and repurchase agreement
  11




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COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 Marketable securities
 Derivative Instruments
   Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantBalance as of
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsSeptember 30, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Marketable securities
    
    $
    70,769
    
    
    $
    
    
    
    $
    
    
    
    $
    70,769Liabilities:Interest rate swaps
    
    $
    (4,445
    )
    
    $
    
    
    
    $
    (4,445
    )
    
    $
    Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantBalance as of
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDecember 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Marketable securities
    
    $
    56,366
    
    
    $
    
    
    
    $
    
    
    
    $
    56,366Interest rate cap agreements (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    141
    
    
    
    
    
    
    
    141
    
    
    
    Total Assets
    
    $
    56,507
    
    
    $
    
    
    
    $
    141
    
    
    $
    56,366Liabilities:Interest rate swaps
    
    $
    2,944
    
    
    $
    
    
    
    $
    2,944
    
    
    $
    
 
 (1)
    
    The fair value of the interest rate cap agreements was less than $1,000 as of December 31, 2009.  12




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
  Net realized/
    
    
    
    
    
    
    Purchases,unrealized gains
    
    
    Net
    
    
    issuances,
    
    
    Transfers inBalance as of
    
    
    (losses) included in
    
    
    unrealized
    
    
    settlements and
    
    
    and out of
    
    
    Balance as ofJanuary 1, 2010
    
    
    earnings
    
    
    gain
    
    
    amortization
    
    
    Level 3
    
    
    September 30, 2010Marketable securities
    
    $
    56,366
    
    
    $
    
    
    
    $
    12,503
    
    
    $
    1,900
    
    
    $
    
    
    
    $
    70,769
 NOTE 4  INVESTMENT IN DIRECT FINANCING LEASES
  September 30, 2010
    
    
    December 31, 2009Minimum lease payments receivable
    
    $
    25,091
    
    
    $
    26,676Estimated residual value of leased assets
    
    
    27,854
    
    
    
    27,854Unearned income
    
    
    (15,782
    )
    
    
    (16,794
    )Total
    
    $
    37,163
    
    
    $
    37,736
 NOTE 5  REAL ESTATE ACQUISITIONS
 2010 Property Acquisitions
         13




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 2009 Property Acquisitions
     Earnout Agreements
  NOTE 6  INVESTMENT IN MORTGAGE NOTES RECEIVABLE
   14




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COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 NOTE 7  MARKETABLE SECURITIES
  Amortized
    
    
    UnrealizedCost Basis
    
    
    Gain (Loss)
    
    
    TotalMarketable securities as of December 31, 2009
    
    $
    63,050
    
    
    $
    (6,684
    )
    
    $
    56,366Increase in fair value of marketable securities
    
    
    
    
    
    
    12,503
    
    
    
    12,503Accretion of discounts on marketable securities
    
    
    1,900
    
    
    
    
    
    
    
    1,900Marketable securities as of September 30, 2010
    
    $
    64,950
    
    
    $
    5,819
    
    
    $
    70,769
    Holding Period of Gross Unrealized Gains (Losses) of Marketable SecuritiesLess than 12 months
    
    
    12 Months or More
    
    
    TotalDescription of
    
    
    
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    UnrealizedSecurities
    
    Fair Value
    
    
    Losses
    
    
    Gains
    
    
    Value
    
    
    Losses
    
    
    Gains
    
    
    Value
    
    
    Losses
    
    
    GainsCMBS
    
    $
    7,075
    
    
    $
    
    
    
    $
    1,419
    
    
    $
    63,694
    
    
    $
    (7,194
    )
    
    $
    11,594
    
    
    $
    70,769
    
    
    $
    (7,194
    )
    
    $
    13,013
  Available-for-saleAmortized Cost
    
    
    Estimated Fair ValueDue within one year
    
    $
    
    
    
    $
    Due after one year through five years
    
    
    16,241
    
    
    
    18,744Due after five years through ten years
    
    
    48,709
    
    
    
    52,025Due after ten years
    
    
    
    
    
    
    $
    64,950
    
    
    $
    70,769
   15




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 NOTE 8  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  Fair Value of AssetDerivatives not designated
    
    Balance Sheet
    
    Notional
    
    
    Interest
    
    
    Effective
    
    
    Maturity
    
    
    September 30,
    
    
    December 31,as hedging instruments
    
    Location
    
    Amount
    
    
    Rate
    
    
    Date
    
    
    Date
    
    
    2010 (1)
    
    
    2009 (2)Interest Rate Cap
    
    Prepaid expenses, derivative and other assets
    
    $
    36,000
    
    
    
    7.0
    %
    
    
    8/5/2008
    
    
    
    8/5/2010
    
    
    $
    
    
    
    $
    Interest Rate Cap
    
    Prepaid expenses, derivative and other assets
    
    
    34,000
    
    
    
    7.0
    %
    
    
    10/1/2008
    
    
    
    9/1/2010
    
    
    
    
    
    
    
    $
    70,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    The interest rate caps matured during the three months ended September 30, 2010.(2)
    
    The fair value of the rate caps was less than $1,000. Fair Value of (Liability) AssetDerivatives designated as
    
    Balance Sheet
    
    Notional
    
    
    Interest
    
    
    Effective
    
    
    Maturity
    
    
    September 30,
    
    
    December 31,hedging instruments
    
    Location
    
    Amount
    
    
    Rate
    
    
    Date
    
    
    Date
    
    
    2010
    
    
    2009Interest Rate Swap
    
    Deferred rent, derivative and other liabilities
    
    $
    32,000
    
    
    
    6.2
    %
    
    
    11/4/2008
    
    
    
    10/31/2012
    
    
    $
    (2,094
    )
    
    $
    (1,663
    )Interest Rate Swap
    
    Deferred rent, derivative and other liabilities
    
    
    38,250
    
    
    
    5.6
    %
    
    
    12/10/2008
    
    
    
    9/26/2011
    
    
    
    (622
    )
    
    
    (778
    )Interest Rate Swap
    
    Deferred rent, derivative and other liabilities
    
    
    15,043
    
    
    
    6.2
    %
    
    
    6/12/2009
    
    
    
    6/11/2012
    
    
    
    (592
    )
    
    
    (503
    )Interest Rate Swap (1)
    
    Deferred rent, derivative and other liabilities
    
    
    30,000
    
    
    
    6.0
    %
    
    
    11/24/2009
    
    
    
    10/16/2012
    
    
    
    (699
    )
    
    
    41Interest Rate Swap (1)
    
    Deferred rent, derivative and other liabilities
    
    
    7,200
    
    
    
    5.8
    %
    
    
    2/20/2009
    
    
    
    3/1/2016
    
    
    
    (438
    )
    
    
    100$
    122,493
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,445
    )
    
    $
    (2,803
    )
 
 (1)
    
    As of December 31, 2009, the fair value of the interest rate swap
agreement was in a financial asset position and is included in the
accompanying December 31, 2009 condensed consolidated unaudited
balance sheet in prepaid expenses, derivative and other assets.   16




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
  Amount of Gain Recognized in Interest ExpenseDerivatives not designated
    
    Location of Gain Recognized in
    
    
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,as hedging instruments
    
    Income on Derivative
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Interest Rate Caps
    
    Interest Expense
    
    $
    
    
    
    $
    12
    
    
    $
    
    
    
    $
    14
 Amount of (Loss) Recognized in Other Comprehensive Loss on DerivativeThree Months Ended September 30,
    
    
    Nine Months Ended September 30,Derivatives in Cash Flow Hedging Relationships
    
    2010
    
    
    2009
    
    
    2010
    
    

    2009Interest Rate Swaps (1)
    
    $
    (467
    )
    
    $
    (665
    )
    
    $
    (1,642
    )
    
    $
    (454
    )
 
 (1)
    
    There were no portions relating to the change in the fair value of the interest rate swap agreements that were considered ineffective during the nine
months ended September 30, 2010 and 2009. No previously effective portion of gains or losses that were recorded in accumulated other comprehensive
income during the term of the hedging relationship was reclassified into earnings during the three and nine months ended September 30, 2010 and 2009.  NOTE 9  NOTES PAYABLE, LINE OF CREDIT AND REPURCHASE AGREEMENT
  Notes Payable
    17




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 Line of Credit
   Repurchase Agreement
   NOTE 10  SUPPLEMENTAL CASH FLOW DISCLOSURES
  Nine months ended September 30,2010
    
    
    2009Supplemental Disclosures of Non-Cash Investing and Financing Activities:Dividends declared and unpaid
    
    $
    10,706
    
    
    $
    10,427Fair value of mortgage notes assumed in real estate acquisitions at date of assumption
    
    $
    
    
    
    $
    87,821Common stock issued through DRIP
    
    $
    46,266
    
    
    $
    55,017Net unrealized gain on marketable securities
    
    $
    12,503
    
    
    $
    23,631Net unrealized loss on interest rate swaps
    
    $
    (1,642
    )
    
    $
    (454
    )Change in earnout liability
    
    $
    983
    
    
    $
    1,482Change in accrued capital expenditures
    
    $
    (346
    )
    
    $
    Supplemental Cash Flow Disclosures:Interest paid
    
    $
    70,374
    
    
    $
    67,414
   18




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 NOTE 11  COMMITMENTS AND CONTINGENCIES
 Litigation
  Environmental Matters
  NOTE 12  RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
  Offering
  Acquisitions and Operations
     19




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Acquisitions and Operations:Acquisition fees and expenses
    
    $
    867
    
    
    $
    
    
    
    $
    1,327
    
    
    $
    3,935Asset management fees and expenses
    
    $
    2,090
    
    
    $
    2,023
    
    
    $
    6,341
    
    
    $
    6,145Property management and leasing fees and expenses
    
    $
    1,806
    
    
    $
    1,508
    
    
    $
    5,839
    
    
    $
    3,600Operating expenses
    
    $
    288
    
    
    $
    458
    
    
    $
    1,134
    
    
    $
    458Financing coordination fees
    
    $
    610
    
    
    $
    
    
    
    $
    1,020
    
    
    $
    1,796
 Liquidation/Listing
      20




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 Other
  NOTE 13  ECONOMIC DEPENDENCY
  NOTE 14  NEW ACCOUNTING PRONOUNCEMENTS
 Fair Value
Measurements and Disclosures (Topic 820)
 NOTE 15  INDEPENDENT DIRECTORS STOCK OPTION PLAN
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Stock-based compensation expense
    
    $
    
    
    
    $
    5,000
    
    
    $
    7,000
    
    
    $
    9,000Shares granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Share exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Shares forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares vested
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000
  21




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##### Table of Contents



COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  (Continued)
September 30, 2010
 NOTE 16  SUBSEQUENT EVENTS
 Sale of Shares of Common Stock
  Redemption of Shares of Common Stock
   22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Forward-Looking Statements
 Form 10-K
   Overview
   23




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##### Table of Contents



Recent Market Conditions
    24




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##### Table of Contents



Results of Operations
  Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
 Revenue.
     General and Administrative Expenses.
 Property Operating Expenses.
  25




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##### Table of Contents



Property and Asset Management Expenses.
   Acquisition Related Expenses.
 Depreciation and Amortization Expenses.
 Equity in income of Unconsolidated Joint Ventures and Interest and Other income.
 Interest Expense.
 Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
 Revenue.
  26




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##### Table of Contents



General and Administrative Expenses.
 Property Operating Expenses.
 Property and Asset Management Expenses.
    27




---



##### Table of Contents



Acquisition Related Expenses.
 Depreciation and Amortization Expenses.
 Impairment of Real Estate Assets.
 Equity in Income of Unconsolidated Joint Ventures and interest and other income.
 Interest Expense.
 Funds From Operation and Modified Funds From Operations
    28




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009NET INCOME
    
    $
    8,387
    
    
    $
    6,909
    
    
    $
    21,154
    
    
    $
    12,842Depreciation of real estate assets
    
    
    14,131
    
    
    
    14,217
    
    
    
    42,175
    
    
    
    42,103Amortization of lease related costs
    
    
    6,599
    
    
    
    13,719
    
    
    
    21,655
    
    
    
    27,724Depreciation and amortization of
real estate assets in
unconsolidated joint ventures
    
    
    823
    
    
    
    830
    
    
    
    2,470
    
    
    
    1,863Funds from Operations (FFO)
    
    
    29,940
    
    
    
    35,675
    
    
    
    87,454
    
    
    
    84,532Acquisition related expenses
    
    
    1,226
    
    
    
    
    
    
    
    1,851
    
    
    
    3,241Impairment on real estate assets
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    13,500Loss on sale of easement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150Modified Funds from Operation (MFFO)
    
    $
    31,166
    
    
    $
    35,675
    
    
    $
    93,805
    
    
    $
    101,423
  
    
    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 $2.9 million and $8.3 million during
the three and nine months ended September 30, 2010, respectively, and
$2.4 million and $7.6 million during the three and nine months ended
September 30, 2009,respectively. In addition, related to our
unconsolidated joint ventures, straight-line revenue of $18,000 and
$42,000 for the three and nine months ended September 30, 2010,
respectively, and $28,000 and $95,000 during the three and nine months
ended September 30, 2009, respectively, is included in equity in
income of unconsolidated joint ventures.
    
    Amortization of deferred financing costs and amortization of fair
value adjustments of mortgage notes assumed totaled $2.0 million and
$6.4 million during the three and nine months ended September 30,
2010, respectively, and $2.0 million and $5.3 million during the three
and nine months ended September 30, 2009, respectively. In addition,
related to our unconsolidated joint ventures, amortization of deferred
financing costs and amortization of fair value adjustments of mortgage
notes assumed totaled $262,000 and $771,000, which is included in
equity in income of unconsolidated joint ventures for the three and
nine months ended September 30, 2010, respectively and $249,000 and
$512,000 during the three and nine months ended September 30, 2009,
respectively.
 Distributions
   29




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##### Table of Contents



Nine Months Ended September 30,2010
    
    
    2009Distributions paid in cash
    
    $
    50,479
    
    
    $
    48,275Distributions reinvested through our DRIP
    
    
    46,266
    
    
    
    55,017Total distributions paid
    
    $
    96,745
    
    
    $
    103,292
   Nine Months Ended September 30,2010
    
    
    2009Net cash provided by operating activities
    
    $
    78,393
    
    
    $
    85,529Acquisition costs paid by proceeds from the Offerings
    
    
    1,851
    
    
    
    3,241Adjusted cash flows from operations
    
    $
    80,244
    
    
    $
    88,770
  Nine Months Ended September 30,2010
    
    
    2009Adjusted cash flows from operations
    
    $
    80,244
    
    
    
    83
    %
    
    $
    88,770
    
    
    
    86
    %Prior period excess cash flow from operations
    
    
    
    
    
    
    
    
    
    
    6,845
    
    
    
    7
    %Proceeds from Credit Facility
    
    
    16,501
    
    
    
    17
    %
    
    
    7,677
    
    
    
    7
    %Total distributions
    
    $
    96,745
    
    
    
    100
    %
    
    $
    103,292
    
    
    
    100
    %
 Share Redemptions
   30




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##### Table of Contents



Liquidity and Capital Resources
 General
   Short-term Liquidity and Capital Resources
  Long-term Liquidity and Capital Resources
   31




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##### Table of Contents



Payments due by period (1) (2)Less Than 1
    
    
    
    
    
    
    
    
    
    
    More Than 5Total
    
    
    Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    YearsPrincipal payments  fixed rate debt (3)
    
    $
    1,564,828
    
    
    $
    117,272
    
    
    $
    151,018
    
    
    $
    392,380
    
    
    $
    904,158Interest payments  fixed rate debt (4)
    
    
    516,079
    
    
    
    90,903
    
    
    
    241,567
    
    
    
    135,447
    
    
    
    48,162Principal payments  variable rate debt (3)
    
    
    38,250
    
    
    
    38,250
    
    
    
    
    
    
    
    
    
    
    
    Interest payments  variable rate debt (5)
    
    
    870
    
    
    
    870
    
    
    
    
    
    
    
    
    
    
    
    Principal payments  repurchase agreement (6)
    
    
    47,029
    
    
    
    47,029
    
    
    
    
    
    
    
    
    
    
    
    Interest payments  repurchase agreement
    
    
    167
    
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    Principal payments  Credit Facility (7)
    
    
    45,000
    
    
    
    45,000
    
    
    
    
    
    
    
    
    
    
    
    Interest payments  Credit Facility (8)
    
    
    1,033
    
    
    
    1,033
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,213,256
    
    
    $
    340,524
    
    
    $
    392,585
    
    
    $
    527,827
    
    
    $
    952,320
 
 (1)
    
    The table does not include amounts due to our advisor or its affiliates
pursuant to our advisory agreement because such amounts are not fixed and
determinable.(2)
    
    Principal pay-down amounts are included in payments due by period.(3)
    
    Principal payment amounts reflect actual payments based on the face amount of
notes payable. As of September 30, 2010, the fair value adjustment, net of
amortization, of mortgage notes assumed was $12.6 million.(4)
    
    As of September 30, 2010, we had $122.5 million of variable rate debt fixed
through the use of interest rate swaps. We used the fixed rates under the swap
agreement to calculate the debt payment obligations in future periods.(5)
    
    Rates ranging from 2.26% to 3.51% were used to calculate the variable rate
debt payment obligations in future periods. These were the rates in effect as
of September 30, 2010.(6)
    
    The Company may elect to renew the terms under the Repurchase Agreement for
periods ranging from 30 days to 90 days until the CMBS bonds, which are held
as collateral, mature.(7)
    
    The Credit Facility includes an option to extend the maturity date to May 2012.(8)
    
    Based on interest rates in effect as of September 30, 2010.   32




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##### Table of Contents



Cash Flow Analysis
 Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
 Operating Activities.
 Investing Activities.
 Financing Activities.
 Election as a REIT
   Inflation
   33




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##### Table of Contents



Critical Accounting Policies and Estimates
  
    
    Investment in and Valuation of Real Estate and Related Assets;
    
    Allocation of Purchase Price of Real Estate and Related Assets;
    
    Investment in Direct Financing Leases;
    
    Investment in Mortgage Notes Receivable;
    
    Investment in Marketable Securities;
    
    Investment in Unconsolidated Joint Ventures;
    
    Revenue Recognition;
    
    Income Taxes; and
    
    Derivative Instruments and Hedging Activities.
  Commitments and Contingencies
  Related-Party Transactions and Agreements
  Subsequent Events
  
    
    Sale of shares of common stock and
    
    Redemption of shares of common stock.
 New Accounting Pronouncements
  Off Balance Sheet Arrangements
   34




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
     
 Item 4. Controls and Procedures
    35




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##### Table of Contents



PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     Total Number of Shares
    
    
    Maximum Number ofPurchased as Part of
    
    
    Shares that May YetTotal Number of
    
    
    Average Price
    
    
    Publicly Announced
    
    
    Be Purchased UnderShares Purchased
    
    
    Paid per Share
    
    
    Plans or Programs
    
    
    the Plans or ProgramsJuly 2010
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    (1
    )August 2010
    
    
    554,892
    
    
    
    9.96
    
    
    
    554,892
    
    
    
    (1
    )September 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Total
    
    
    554,892
    
    
    
    
    
    
    
    554,892
    
    
    
    (1
    )
 (1)
    
    A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table.  36




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. [Removed and Reserved]
 
 Item 5. Other Information
  
 Item 6. Exhibits
   37




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##### Table of Contents



SIGNATURES
  Cole Credit Property Trust II, Inc.(Registrant)By:
    /s/ Simon J. MisselbrookSimon J. MisselbrookVice President of Accounting
(Principal Accounting Officer)   38




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##### Table of Contents



EXHIBIT INDEX
  Exhibit No.
    
    Description3.1
    
    
    Fifth Articles of Amendment and Restatement, as corrected.
(Incorporated by reference to Exhibit 3.1 of the Companys
Form 10-K (File No. 333-121094), filed on March 23, 2006).3.2
    
    
    Amended and Restated Bylaws. (Incorporated by reference to
Exhibit 99.1 to the Companys Form 8-K (File No. 333-121094),
filed on September 6, 2005).3.3
    
    
    Articles of Amendment to Fifth Articles of Amendment and
Restatement. (Incorporated by reference to Exhibit 3.3 to the
Companys Form S-11 (File No. 333-138444), filed on November
6, 2006).10.1
    
    
    Second Amendment to the Amended and Restated Advisory
Agreement by and between the Company and Cole Advisors II
(Incorporated by reference to Exhibit 10.1 to the Companys
Form 10-Q (File No. 000-51963), filed on August 12, 2010).31.1
    
    
    Certification of the Chief Executive Officer of the Company
pursuant to Securities Exchange Act Rule 13a-14(a) or
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).31.2
    
    
    Certification of the Chief Financial Officer of the Company
pursuant to Securities Exchange Act Rule 13a-14(a) or
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).32.1
    *
    
    Certification of the Chief Executive Officer and Chief
Financial Officer of the Company pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (furnished herewith).
 *
    
    In accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed filed for
purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.
Such certifications will not be deemed incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.  39