Note 2 — Restatement of Previously Issued Financial Statements

The Company has restated its consolidated balance sheets as of December 31, 2013 and 2012 and its consolidated statements of operations, consolidated statements of comprehensive loss and consolidated statements of changes in equity for the years ended December 31, 2013 and 2012, along with certain related notes to such restated consolidated financial statements. In addition, the Company has restated its consolidated statement of cash flows for the year ended December 31, 2013. The financial statements, as disclosed in Note 1 — Organization, have also been recast in applying the carryover basis of accounting to include the effects of the Company’s merger with ARCT IV.

The Company determined that the restatement was necessary after an investigation was conducted by the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) with the assistance of independent counsel and forensic accountants. The Audit Committee initiated the investigation in response to concerns regarding accounting practices and other matters that were first reported to it on September 7, 2014. The restatement corrects errors that were identified as a result of the investigation, as well as certain other errors that were identified by the Company. In addition, the restatement reflects corrections of certain immaterial errors and certain previously identified errors that were identified by the Company in the normal course of business and were determined to be immaterial, both individually and in the aggregate, when the consolidated financial statements for the year ended December 31, 2013 were originally issued. In connection with the restatement, the Company has determined that it would be appropriate to correct such errors.

Error Corrections

Merger and Other Non-routine Transaction Related

In light of the findings of the investigation conducted by the Audit Committee, the Company performed an internal review of all acquisition, merger and other non-routine transaction related expenses. The work resulted in the identification of the following errors:

•

The Company improperly classified $75.7 million of expenses as “merger-related” for the year ended December 31, 2013. As restated, the amount has been reclassified from merger and other non-routine transaction related expenses to general and administrative expenses. The largest component of the misclassified amount was $59.6 million of equity-based compensation expense relating to the OPP (as defined in Note 18 — Equity-based Compensation (As Restated)).

•

The Company identified a net amount of $14.5 million of merger and other non-routine transaction related expenses that were incorrectly excluded in the year ended December 31, 2013. As such, the Company recorded additional merger and other non-routine transaction related expense for this amount.

•

The Company identified $13.0 million of management fees that were improperly classified as merger and other non-routine transaction related expenses. Such amounts have been properly classified as management fees to affiliates for the year ended December 31, 2013.

•

The Company identified $5.9 million of expenses that were improperly recorded as merger and other transaction related expenses that should have been capitalized as deferred financing costs and amortized accordingly. As such, an adjustment to properly record and amortize the deferred financing costs has been made for the year ended December 31, 2013. As a result of capitalizing these deferred financing costs, additional interest expense of $2.3 million was recorded for the year ended December 31, 2013. This resulted in a net adjustment of $3.6 million to deferred financing costs reported on the balance sheet.

•

Upon consummation of the ARCT III Merger (as defined in Note 3 — Mergers and Acquisitions (As Restated)), the OP entered into an agreement with an affiliate to acquire certain furniture, fixtures, equipment (“FF&E”) and other assets. The Company originally capitalized $4.1 million of FF&E costs and expensed $1.7 million of costs. The Company has concluded that there was no evidence of the receipt and it could not support the value of the FF&E. As such, the Company has expensed the amount originally capitalized and recognized the expense in merger and other non-routine transaction related expense for the year ended December 31, 2013. See Note 19 – Related Party Transactions and Arrangements (As Restated) for further discussion.

•

The Company has determined that it should have recorded a controlling interest transfer tax liability totaling $8.9 million upon consummation of the ARCT III Merger and CapLease Merger (each, as defined in Note 3 – Merger and Acquisitions (As Restated)). The accrual and corresponding merger and other non-routine transaction related expense are recorded for the year ended December 31, 2013.

The Company has updated the caption from “merger and other transaction related” to “merger and other non-routine transactions” to appropriately include non-recurring costs that may not have been incurred solely for a merger transaction. See Note 4 – Summary of Significant Accounting Policies (As Restated) for a further breakout of the merger costs and other non-routine transactions.

Operating Fees to Affiliate

The Company identified $1.2 million of expenses that were incorrectly recorded as operating fees to affiliate. Therefore, the Company decreased operating fees to affiliate by this amount for the year ended December 31, 2013 and recorded the adjustment to the proper balance sheet account.

General and Administrative

The Company originally reported $35.0 million in equity-based compensation in its own line item, however it now reports such compensation as general and administrative expenses.

The Company identified $1.8 million in bonuses paid in 2014 that should have been, but were not, recorded as an accrued expense for the year ended December 31, 2013. As such, the Company has increased the 2013 bonus accrual and the corresponding general and administrative expense by this amount.

Impairment of Real Estate

The Company originally believed that the risk of impairment of its real estate and related assets was mitigated by the fact that substantially all of the Company’s real estate portfolio had been acquired in 2012 and 2013. As a result, the Company had failed to monitor events and changes in circumstances that could indicate that the carrying amount of its real estate and related assets may not be recoverable. The Company performed a detailed analysis of the portfolio in connection with the restatement and noted four properties with impairment indicators. The Company assessed the recoverability of the carrying amounts of such properties as of the date in which such indicators existed. Based on this assessment, the Company noted two properties with carrying amounts in excess of their expected undiscounted cash flows. As a result, the Company reduced the carrying amount of the real estate and related net assets to their estimated fair values by recognizing an impairment loss of $3.3 million for the year ended December 31, 2013.

Net Loss Attributable to Non-controlling Interests

The original calculation of the net loss attributable to non-controlling interest holders for the year ended December 31, 2013 and 2012 excluded expenses that were improperly recorded at the Company level. These expenses were incurred by the OP, and therefore should have been included in the Company’s determination of the net loss attributable to its non-controlling interest holders. In addition, the net loss attributable to the non-controlling interest holders has been adjusted to reflect the impact of the cumulative restatement adjustments discussed and presented herein. As a result, the 2013 and 2012 restated consolidated financial statements reflect an increase of $10.6 million and $0.3 million, respectively, for net loss attributable to non-controlling interest holders and corresponding decreases in net loss attributable to stockholders.

Goodwill

Subsequent to the CapLease Merger, the Company disposed of certain properties acquired in that transaction. The disposition of such properties resulted in a net loss on disposition; however, the Company accounted for such losses by adjusting its purchase price allocation to increase the amount of goodwill and decrease the associated real estate investments recorded in connection with the CapLease Merger by $12.0 million when it reissued its recasted financial statements to reflect the common control merger with ARCT IV. The Company has determined that there was not sufficient evidence to support adjusting its goodwill as a measurement period adjustment. As a result, the Company has reversed the measurement period adjustments that were made to goodwill and related assets and liabilities acquired in the CapLease Merger and recognized a net loss on the dispositions in 2014 when the dispositions occurred. In addition, the Company has recorded a decrease to goodwill of $0.6 million for the year ended December 31, 2013 to reflect valid measurement period adjustments that were identified subsequent to the initial purchase price allocation. Additionally, the Company has identified certain liabilities assumed and subsequent payments of such liabilities by the former manager from the CapLease Merger that were not recorded properly. To correct the accounting, the Company has increased goodwill by $3.0 million, decreased merger and non-routine transaction related expenses by $0.7 million and increased the equity contributions by $2.3 million.

Due to Affiliates

Amounts due to affiliates of the Company of $103.4 million, previously reported in accounts payable and accrued expenses, are now reported on a separate line item on the consolidated restated balance sheet.

Other Changes

Along with restating the consolidated financial statements to correct the errors discussed above, the Company recorded adjustments for certain previously identified immaterial accounting errors related to the year ended December 31, 2013 that arose in the normal course of business. In connection with the original financial statement issuance, the Company assessed the impact of these immaterial errors and concluded that they were not material, individually or in the aggregate, to the consolidated financial statements for the year ended December 31, 2013 and each reported fiscal quarter within the year. However, in conjunction with the restatement, the Company determined that it would be appropriate to correct such errors.

The Company also recorded certain reclassifications to conform the presentation of its consolidated statement of operations for the year ended December 31, 2013 to the current period classification and maintain comparability.

In addition to the restatement of the consolidated financial statements, the Company has also restated the following notes for the years ended December 31, 2012 and December 31, 2013 to reflect the error corrections noted above.

•

Note 3 – Mergers and Acquisitions

•

Note 4 – Summary of Significant Accounting Policies

•

Note 5 – Real Estate Investments

•

Note 6 – CapLease Acquisition

•

Note 8 – Prepaid Expenses and Other Assets

•

Note 10 – Fair Value of Financial Instruments

•

Note 14 – Accounts Payable and Accrued Expenses

•

Note 17 – Preferred and Common Stock

•

Note 18 – Equity-based Compensation

•

Note 19 – Related Party Transactions and Arrangements

•

Note 21 – Net Loss Per Share

•

Note 23 – Quarterly Results (Unaudited)

•

Note 24 – Subsequent Events

The following tables present the combined impact of all changes, as described above, to the applicable line items in the consolidated financial statements to the Company’s previously reported consolidated financial statements for the years ended December 31, 2012 and 2013 (in thousands, except share amounts):

2012 Restated Consolidated Balance Sheet (Adjusted Line Items)


	December 31, 2012
	As Previously Reported ⁽¹⁾			Restatement Adjustments			As Restated
Accumulated deficit	$	(124,570	)	$	284		$	(124,286	)

Total stockholders’ equity	$	1,652,295		$	284		$	1,652,579
Non-controlling interests		16,465			(284	)		16,181

Total equity	$	1,668,760		$	—		$	1,668,760

(1)	These financial figures have been recast in applying the carryover basis of accounting to include the effects of the merger with ARCT IV.

2012 Restated Consolidated Statement of Operations (Adjusted Line Items)


	Year Ended December 31, 2012
	As Previously Reported ⁽¹⁾			Restatement Adjustments		As Restated
Loss from continuing operations	$	(41,492	)	$	—	$	(41,492	)
Net loss from continuing operations attributable to non-controlling interests		255			276		531

Net loss from continuing operations attributable to stockholders	$	(41,237	)	$	276	$	(40,961	)


Net loss from discontinued operations	$	(745	)	$	—	$	(745	)
Net loss from discontinued operations attributable to non-controlling interest		46			8		54

Net loss from discontinued operations attributable to stockholders	$	(699	)	$	8	$	(691	)


Net loss	$	(42,237	)	$	—	$	(42,237	)
Net loss attributable to non-controlling interests		301			284		585

Net loss attributable to stockholders	$	(41,936	)	$	284	$	(41,652	)

(1)	These financial figures have been recast in applying the carryover basis of accounting to include the effects of the merger with ARCT IV.

2013 Restated Consolidated Balance Sheet


	December 31, 2013
	As Previously Reported ⁽¹⁾			Reclassifications			Restatement Adjustments			As Restated
ASSETS
Real estate investments, at cost:
Land	$	1,379,453		$	—		$	855		$	1,380,308
Buildings, fixtures and improvements		5,291,031			—			6,369			5,297,400
Land and construction in progress		21,839			—			—			21,839
Acquired intangible lease assets		758,376			382			837			759,595

Total real estate investments, at cost		7,450,699			382			8,061			7,459,142
Less: accumulated depreciation and amortization		(267,352	)		(155	)		229			(267,278	)

Total real estate investments, net		7,183,347			227			8,290			7,191,864
Cash and cash equivalents		52,725			—			—			52,725
Investment in direct financing leases, net		66,112			—			—			66,112
Investment securities, at fair value		62,067			—			—			62,067
Loans held for investment, net		26,279			—			—			26,279
Derivative assets, at fair value		9,189			—			—			9,189
Restricted cash		35,921			—			—			35,921
Prepaid expenses and other assets ⁽²⁾		187,930			—			(1,204	)		186,726
Goodwill		102,419			—			(9,630	)		92,789
Deferred costs, net		81,311			(227	)		3,662			84,746
Assets held for sale		679			—			(14	)		665

Total assets	$	7,807,979		$	—		$	1,104		$	7,809,083


LIABILITIES AND EQUITY
Mortgage notes payable, net	$	1,301,114		$	—		$	—		$	1,301,114
Convertible debt, net		972,490			—			—			972,490
Senior corporate credit facilities		1,819,800			—			—			1,819,800
Secured credit facility		150,000			—			—			150,000
Other debt		104,804			—			—			104,804
Below-market lease liabilities, net		77,789			—			(620	)		77,169
Derivative liabilities, at fair value		18,455			—			—			18,455
Accounts payable and accrued expenses		808,900			—			(78,329	)		730,571
Deferred rent and other liabilities		21,816			—			—			21,816
Distributions payable		10,278			—			625			10,903
Due to affiliates ⁽³⁾		—			—			103,434			103,434

Total liabilities		5,285,446			—			25,110			5,310,556


Series D Preferred Stock, $0.01 par value, 21,735,008 shares authorized (part of 100,000,000 aggregate preferred shares authorized) and 21,735,008 shares issued and outstanding at December 31, 2013		269,299			—			—			269,299

Preferred stock (excluding Series D Preferred Stock), $0.01 par value, 100,000,000 shares authorized and 42,199,547 shares issued and outstanding at December 31, 2013		422			—			—			422
Common stock, $0.01 par value, 1,500,000,000 shares authorized and 239,234,725 issued and outstanding at December 31, 2013		2,392			—			—			2,392
Additional paid-in capital		2,939,287			—			1,620			2,940,907
Accumulated other comprehensive income (loss)		7,666			—			—			7,666
Accumulated deficit		(864,516	)		—			(13,441	)		(877,957	)

Total stockholders’ equity		2,085,251			—			(11,821	)		2,073,430
Non-controlling interests		167,983			—			(12,185	)		155,798

Total equity		2,253,234			—			(24,006	)		2,229,228

Total liabilities and equity	$	7,807,979		$	—		$	1,104		$	7,809,083

(1)	These financial statements have been recast in applying the carryover basis of accounting to include the effects of the merger with ARCT IV.

(2)

Certain line item captions have been updated since the recasted filing, which applied the carryover basis of accounting to include the effects of the merger with ARCT IV. This line item caption has been updated to prepaid expenses and other assets, net in the accompanying consolidated balance sheets.

(3)	This line item caption has been added and is included in the accompanying consolidated balance sheets.

2013 Restated Statement of Operations


	Year Ended December 31, 2013
	As Previously Reported ⁽¹⁾			Reclassifications			Restatement Adjustments			As Restated
Revenues:
Rental income	$	309,839		$	669		$	—		$	310,508
Direct financing lease income		2,244			—			—			2,244
Operating expense reimbursements		17,795			(669	)		(555	)		16,571

Total revenues		329,878			—			(555	)		329,323

Operating expenses:
Acquisition related		76,136			—			(23	)		76,113
Merger and other transaction related ⁽²⁾		278,319			—			(67,776	)		210,543
Property operating		23,616			—			—			23,616
Operating fees to affiliate ⁽³⁾		5,654			—			11,808			17,462
General and administrative		10,645			46			112,481			123,172
Equity-based compensation ⁽⁴⁾		34,962			—			(34,962	)		—
Depreciation and amortization		211,372			(46	)		(350	)		210,976
Impairment of real estate ⁽⁵⁾		—			—			3,346			3,346

Total operating expenses		640,704			—			24,524			665,228

Operating loss		(310,826	)		—			(25,079	)		(335,905	)

Other (expense) income:
Interest expense		(102,305	)		(977	)		(2,266	)		(105,548	)
Other income, net		2,847			977			—			3,824
Loss on derivative instruments, net		(67,946	)		—			—			(67,946	)
Loss on sale of investments in affiliates		(411	)		—			—			(411	)
Loss on sale of investments		(1,795	)		—			—			(1,795	)

Total other expenses, net		(169,610	)		—			(2,266	)		(171,876	)

Loss from continuing operations		(480,436	)		—			(27,345	)		(507,781	)
Net loss from continuing operations attributable to non-controlling interests		5,715			—			10,600			16,315

Net loss from continuing operations attributable to stockholders		(474,721	)		—			(16,745	)		(491,466	)


Discontinued operations:
Loss from operations of held for sale properties		(34	)		—			—			(34	)
Gain (loss) on held for sale properties ⁽⁶⁾		14			—			(14	)		—

Net loss from discontinued operations		(20	)		—			(14	)		(34	)
Net loss from discontinued operations attributable to non-controlling interest		1			—			—			1

Net loss from discontinued operations attributable to stockholders		(19	)		—			(14	)		(33	)


Net loss		(480,456	)		—			(27,359	)		(507,815	)
Net loss attributable to non-controlling interests		5,716			—			10,600			16,316

Net loss attributable to stockholders	$	(474,740	)	$	—		$	(16,759	)	$	(491,499	)


Basic and diluted net loss per share from continuing operations attributable to common stockholders	$	(2.33	)	$	—		$	(0.08	)	$	(2.41	)
Basic and diluted net loss per share from discontinued operations attributable to common shareholders	$	—		$	—		$	—		$	—
Basic and diluted net loss per share attributable to common stockholders	$	(2.33	)	$	—		$	(0.08	)	$	(2.41	)

(1)	These financial statements have been recast in applying the carryover basis of accounting to include the effects of the merger with ARCT IV.

(2)	This line item caption has been updated to merger and other non-routine transactions in the accompanying consolidated statements of operations.

(3)	This line item caption has been updated to management fees to affiliates in the accompanying consolidated statements of operations.

(4)	As disclosed above, this line item has been reclassified into general and administrative in the accompanying consolidated statements of operations.

(5)	As disclosed above, this line item has been added and is included in the accompanying consolidated statements of operations.

(6)	This line item caption has been updated to loss on held for sale properties in the accompanying consolidated statements of operations.

2013 Restated Statement of Comprehensive Loss ⁽¹⁾


	Year Ended December 31, 2013
	As Previously Reported ⁽²⁾			Restatement Adjustments			As Restated
Net loss ⁽³⁾	$	(480,456	)	$	(27,359	)	$	(507,815	)

Other comprehensive income (loss):
Designated derivatives, fair value adjustments		11,480			1			11,481
Change in unrealized gain/loss on investment securities ⁽⁴⁾		119			—			119

Total other comprehensive income (loss) ⁽⁵⁾		11,599			1			11,600

Total comprehensive loss ⁽⁶⁾		(468,857	)		(27,358	)		(496,215	)
Comprehensive loss attributable to non-controlling interests		5,716			10,600			16,316

Total comprehensive loss attributable to stockholders	$	(463,141	)	$	(16,758	)	$	(479,899	)

(1)	The statement of comprehensive loss was originally included within the consolidated statement of operations in the recasted filing, which applied the carryover basis of accounting to include the effects of the merger with ARCT IV; it is now presented as a standalone financial statement.

(2)	These financial statements have been recast in applying the carryover basis of accounting to include the effects of the merger with ARCT IV.

(3)	The statement of comprehensive loss previously began with net loss attributable to common stockholders . The statement has been updated to begin with net loss to properly show the total comprehensive loss.

(4)	This line item has been updated to unrealized gain (loss) on investment securities in the accompanying statements of comprehensive loss.

(5)	The total other comprehensive income (loss) line item has been added and included in the accompanying statements of comprehensive loss.

(6)	This line item caption has been updated to total comprehensive loss in the accompanying statements of comprehensive loss.

2013 Restated Statement of Cash Flows


	December 31, 2013
	As Previously Reported ⁽¹⁾			Reclassifications			Restatement Adjustments			As Restated
Cash flows from operating activities:
Net loss	$	(480,456	)	$	—		$	(27,359	)	$	(507,815	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Issuance of OP Units for ARCT III Merger		108,247			—			(476	)		107,771
Depreciation ⁽²⁾		162,027			74,364			1,916			238,307
Amortization of intangible lease assets ⁽²⁾		49,345			(49,345	)		—			—
Amortization of deferred costs ⁽²⁾		26,895			(26,895	)		—			—
Amortization of above- and below-market lease asset ⁽²⁾		(176	)		176			—			—
Amortization of discounts and premiums ⁽²⁾		(1,700	)		1,700			—			—
Loss on held for sale properties ⁽³⁾		(14	)		—			14			—
Impairment of real estate ⁽⁴⁾		—			—			3,346			3,346
Equity-based compensation		43,565			—			56,696			100,261
Unrealized gain on derivative instruments		(1,739	)		—			—			(1,739	)
Loss on sale of investments, net		2,206			—			—			2,206
Loss in extinguishment of Series C Stock		13,749			—			—			13,749
Changes in assets and liabilities:
Investment in direct financing leases		2,505			—			—			2,505
Prepaid expenses and other assets		(20,406	)		—			555			(19,851	)
Accounts payable and accrued expenses		100,166			—			(79,377	)		20,789
Deferred rent and other liabilities		8,555			—			—			8,555
Due to affiliates ⁽⁵⁾		—			—			43,834			43,834

Net cash provided by operating activities		12,769			—			(851	)		11,918

Cash flows from investing activities:
Investments in real estate and other assets		(3,520,412	)		—			—			(3,520,412	)
Acquisition of a real estate business, net of cash acquired of $41,779		(878,898	)		—			—			(878,898	)
Investment in direct financing leases		(68,617	)		—			—			(68,617	)
Capital expenditures		(9,755	)		—			—			(9,755	)
Principal repayments received from borrowers		442			—			—			442
Purchase of assets from Manager ⁽⁶⁾		(1,584	)		—			1,041			(543	)
Deposits for real estate investments		(101,887	)		—			—			(101,887	)
Purchases of investment securities		(81,590	)		—			—			(81,590	)
Proceeds from sale of investment securities		119,542			—			—			119,542

Net cash used in investing activities		(4,542,759	)		—			1,041			(4,541,718	)

Cash flows from financing activities:
Proceeds from mortgage notes payable		6,924			—			—			6,924
Payments on mortgage notes payable		(5,711	)		—			—			(5,711	)
Payments on other debt		(9,368	)		—			—			(9,368	)
Payments on senior secured revolving credit facility		(124,604	)		—			—			(124,604	)
Proceeds from senior corporate credit facility		1,889,800			—			—			1,889,800
Payments on senior corporate credit facility		(830,000	)		—			—			(830,000	)
Proceeds from secured credit facility		789,000			—			—			789,000

The 2013 restated consolidated statement of cash flows continues onto the next page.


	December 31, 2013
	As Previously Reported ⁽¹⁾			Reclassifications		Restatement Adjustments			As Restated
Payments of deferred financing costs	$	(95,268	)	$	—	$	(5,928	)	$	(101,196	)
Proceeds from issuance of convertible debt		967,786			—		—			967,786
Common stock repurchases		(359,193	)		—		—			(359,193	)
Proceeds from issuance of Series C Stock		445,000			—		—			445,000
Cash payment on settlement of Series C Stock		(441,353	)		—		—			(441,353	)
Proceeds from issuance of Series D Preferred Stock		287,991			—		—			287,991
Proceeds from issuance of common stock		2,158,486			—		—			2,158,486
Payments of offering costs and fees related to stock issuances		(165,327	)		—		—			(165,327	)
Consideration to Former Manager for internalization		(5,738	)		—		5,738			—
Contributions from non-controlling interest holders		30,861			—		—			30,861
Distributions to non-controlling interest holders		(8,219	)		—		—			(8,219	)
Distributions paid		(234,897	)		—		—			(234,897	)
Advances from affiliates, net		(376	)		—		—			(376	)
Change in restricted cash		(5,654	)		—		—			(5,654	)

Net cash provided by financing activities		4,290,140			—		(190	)		4,289,950

Net change in cash and cash equivalents		(239,850	)		—		—			(239,850	)
Cash and cash equivalents, beginning of period		292,575			—		—			292,575

Cash and cash equivalents, end of period	$	52,725		$	—	$	—		$	52,725

(1)	These financial statements have been recast in applying the carryover basis of accounting to include the effects of the merger with ARCT IV.

(2)	These five depreciation and amortization line items have been consolidated into one line item named depreciation and amortization in the accompanying consolidated statements of cash flows.

(3)	This line item caption has been updated to loss on held for sale properties in the accompanying consolidated statements of cash flows.

(4)	As disclosed above, this line item has been added and is included in the accompanying consolidated statements of cash flows.

(5)	This line item caption has been added and is included in the accompanying consolidated statements of cash flows.

(6)	This line item caption has been updated to investments in other assets in the accompanying consolidated statements of cash flows.