Note 2 — Restatement of Previously Issued Consolidated Financial Statements

The Company has restated its consolidated balance sheets as of September 30, 2013 and December 31, 2013 and its consolidated statements of operations and consolidated statements of comprehensive loss for the three and nine months ended September 30, 2013. In addition, the Company has restated its consolidated statements of changes in equity and consolidated statement of cash flows for the nine months ended September 30, 2013 along with certain restated notes to such consolidated financial statements. As disclosed in Note 3 — Mergers and Acquisitions, the financial statements have been recast in applying the carryover basis of accounting to include the effects of the Company’s merger with American Realty Capital Trust IV, Inc. (“ARCT IV”). As it pertains to Note 2 and the disclosures contained herein, the use of the reference to the “Company” means “ARCP” only when describing the restatement of the consolidated financial statements as of and for the period ended September 30, 2013.

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. The Company has determined that it would be appropriate to correct such errors.

Year ended December 31, 2013

Corrections to the Company’s financial statements for the year ended December 31, 2013 are detailed within Amendment No. 2 to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2013 filed with the U.S. Securities and Exchange Commission (“SEC”) (the “Amended 10-K”). The corrections relate primarily to bonus accruals, real estate impairments, goodwill, merger and acquisition costs, transfer tax accrual and non-controlling interests.

Nine months Ended September 30, 2013 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 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 operating fees to affiliates in the nine months ended September 30, 2013. No such expenses were identified in the three months ended September 30, 2013.

•

Upon consummation of the Company’s merger with American Realty Capital Trust III, Inc. (“ARCT III”) (Note 3 —Mergers and Acquisitions), 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 FF&E costs in the nine months ended September 30, 2013. 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 nine months ended September 30, 2013. See Note 20 — Related Party Transactions and Arrangements for further discussion. No such expenses were identified in the three months ended September 30, 2013.

•

The Company improperly classified $0.3 million and $6.1 million of expenses as “merger-related” for the three and nine months ending September 2013, respectively. As such, the amounts have been reclassified from merger and other non-routine transaction related expenses to general and administrative expenses.

•

The Company identified $1.2 million and $2.2 million of expenses that were improperly classified as merger and other transaction related expenses that should have been capitalized as deferred financing costs and amortized accordingly for the three and nine months ended September 30, 2013, respectively. As such, an adjustment to properly record and amortize the deferred financing costs has been made.

•

The Company has determined that it should have recorded a controlling interest tax liability totaling $1.1 million upon consummation of the mergers with ARCT III. The accrual and corresponding merger and other non-routine transaction related expense are recorded for the nine months ended September 30, 2013. No such expenses were identified in the three months ended September 30, 2013.

•

The Company identified net amounts of $167,000 and $254,000 of merger and other non-routine transaction related expenses that were recorded in the incorrect period. As such, the Company has decreased merger and other non-routine transaction related expenses by these amounts in the three and nine months ended September 30, 2013, respectively.

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 for a further breakout of the merger costs and other one-time costs.

Management Fees to Affiliate

The Company identified $0.5 million of operating fees to an affiliate that was improperly recorded in the nine months ended September 30, 2013. Therefore, the Company decreased operating fees to affiliate by this amount for the nine months ended September 30, 2013. No such expenses were identified in the three months ended September 30, 2013.

General and Administrative

The Company originally reported $7.2 million and $11.5 million during the three and nine months ended September 30, 2013, respectively, in equity-based compensation in its own line item, however it now reports such compensation as general and administrative expenses.

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 certain properties with impairment indicators. The Company assessed the recoverability of the carrying amounts as of the date in which the impairment indicators existed. Based on this assessment, the Company noted one property with a carrying amount in excess of the fair value of its expected undiscounted cash flows as of September 30, 2013. 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 $2.1 million for the three and nine months ended September 30, 2013.

Net Loss Attributable to Non-Controlling Interests

The original calculation of the net loss attributable to non-controlling interest holders for the three and nine months ended September 30, 2013 excluded expenses that were improperly recorded at the Company’s 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 restated consolidated financial statements reflect an increase of $2.9 million and $6.7 million for net loss attributable to non-controlling interest holders and corresponding decreases in net loss attributable to stockholders during the three and nine months ended September 30, 2013, respectively.

Due to Affiliates

Amounts due to affiliates of the Company of $6.1 million, previously reported in accounts payable and accrued expenses, are now reported on a separate line item on the consolidated restated balance sheet as of September 30, 2013.

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 three and nine months ended September 30, 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 unaudited financial statements for the nine months ended September 30, 2013. 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 restated consolidated statement of operations for the three and nine months ended September 30, 2013 to the current period classification and maintain comparability.

September 30, 2013 Restated Consolidated Balance Sheet


	September 30, 2013
	As Previously Reported ⁽¹⁾			ARCT IV Recast ⁽²⁾			Reclassifications			Restatement Adjustments			As Restated
ASSETS
Real estate investments, at cost:
Land	$	521,139		$	494,330		$	—		$	(1,581	)	$	1,013,888
Buildings, fixtures and improvements		2,121,178			1,429,122			—			(1,028	)		3,549,272
Acquired intangible lease assets		328,733			221,663			347			(85	)		550,658

Total real estate investments, at cost		2,971,050			2,145,115			347			(2,694	)		5,113,818
Less: accumulated depreciation and amortization		(148,162	)		(30,941	)		(143	)		230			(179,016	)

Total real estate investments, net		2,822,888			2,114,174			204			(2,464	)		4,934,802
Cash and cash equivalents		150,481			37,745			—			—			188,226
Investment in direct financing leases, net		57,449			17,954			—			—			75,403
Investment securities, at fair value		9,480			—			—			—			9,480
Derivative assets, at fair value		7,088			28			(7,116	)		—			—
Restricted cash		1,680			—			—			—			1,680
Prepaid expenses and other assets		48,165			15,111			(63,276	)		—			—
Receivable for Issuances of common stock		—			14,311			(14,311	)		—			—
Deferred costs, net		47,754			—			(47,754	)		—			—
Assets held for sale		6,028			—			—			(14	)		6,014
Deferred costs and other assets, net		—			—			132,253			598			132,851

Total assets	$	3,151,013		$	2,199,323		$	—		$	(1,880	)	$	5,348,456


LIABILITIES AND EQUITY
Mortgage notes payable		269,891			2,124			—			—			272,015
Convertible debt		300,975			—			—			—			300,975
Senior corporate credit facility		600,000			710,000			—			—			1,310,000
Convertible obligation to Series C Convertible Preferred stockholders, at fair value		449,827			—			—			—			449,827
Contingent value rights obligation to preferred and common investors, at fair value		49,314			—			—			—			49,314
Below-market lease liabilities, net		4,200			—			—			(620	)		3,580
Derivative liabilities, at fair value		—			—			—			—			—
Accounts payable and accrued expenses		14,740			662,432			(897	)		(5,303	)		670,972
Deferred rent and other liabilities		9,189			2,901			897			—			12,987
Distributions payable		72			9,810			—			436			10,318
Due to affiliates		—			—			—			6,107			6,107

Total liabilities		1,698,208			1,387,267			—			620			3,086,095


Convertible preferred stock, $0.01 par value, 100,000,000 shares authorized, 42,215,346 shares issued and outstanding at September 30, 2013		—			422			—			—			422
Common stock, $0.01 par value, 750,000,000 shares authorized and 222,351,780 issued and outstanding at September 30, 2013		1,848			375			—			—			2,223
Additional paid-in capital		1,803,315			904,640			—			3,035			2,710,990
Accumulated other comprehensive income		4,857			28			—			—			4,885
Accumulated deficit		(480,817	)		(121,392	)		—			2,416			(599,793	)

Total stockholders’ equity		1,329,203			784,073			—			5,451			2,118,727
Non-controlling interests		123,602			27,983			—			(7,951	)		143,634

Total equity		1,452,805			812,056			—			(2,500	)		2,262,361

Total liabilities and equity	$	3,151,013		$	2,199,323		$	—		$	(1,880	)	$	5,348,456

(1)	Certain line items have been consolidated from the original presentation in the Quarterly Report on Form 10-Q filing for the three and nine month period ended September 30, 2013.

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

Restated Statement of Operations (for the three months ended September 30, 2013)


	Three Months Ended
	September 30, 2013
	As Previously Reported ⁽¹⁾			ARCT IV Recast ⁽²⁾			Reclassifications			Restatement Adjustments			As Restated
Revenues:
Rental income	$	56,681		$	33,054		$	(6	)	$	—		$	89,729
Direct financing lease income		977			224			—			—			1,201
Operating expense reimbursements		3,226			1,093			6			—			4,325

Total revenues		60,884			34,371			—			—			95,255

Operating expenses:
Acquisition related		1,235			25,713			—			—			26,948
Merger and other non-routine transactions		3,791			2,122			—			(1,612	)		4,301
Property operating		4,103			1,341			—			(14	)		5,430
Management fees to affiliate		—			—			—			—			—
General and administrative		1,586			822			—			7,458			9,866
Equity-based compensation		7,180			—			—			(7,180	)		—
Depreciation and amortization		39,382			23,030			—			(276	)		62,136
Operating fees to affiliate		—			—			—			—			—
Impairment of real estate		—			—			—			2,074			2,074

Total operating expenses		57,277			53,028			—			450			110,755

Operating income		3,607			(18,657	)		—			(450	)		(15,500	)

Other (expense) income:
Interest expense		(24,135	)		(3,054	)		—			—			(27,189	)
Loss on contingent value rights		(38,542	)		—			38,542						—
Income from investment securities		—			—			—			—			—
Gain (loss) on sale of investment securities		—			(2,246	)		—			—			(2,246	)
Loss on derivative instruments		(99	)		—			(38,542	)					(38,651	)
Other income, net		45			44			—			47			136

Total other expenses, net		(62,731	)		(5,256	)		—			37			(67,950	)

Loss from continuing operations		(59,124	)		(23,913	)		—			(413	)		(83,450	)
Net (gain) loss from continuing operations attributable to non-controlling interests		(30	)		260			—			2,923			3,153

Net loss from continuing operations attributable to stockholders		(59,154	)		(23,653	)		—			2,514			(80,293	)

Discontinued operations:
Net income (loss) from operations of held for sale properties		96			—			—			—			96
(Loss) gain on held for sale properties		—			—			—			—			—

Net income (loss) from discontinued operations		96			—						—			96
Net (loss) income from discontinued operations attributable to non-controlling interests		(5	)		—			—			5			—

Net income (loss) from discontinued operations attributable to stockholders		91			—			—			5			96

Net loss		(59,028	)		(23,913	)		—			(413	)		(83,354	)
Net (income) loss attributable to non-controlling interests		(35	)		260			—			2,928			3,153

Net loss attributable to stockholders	$	(59,063	)	$	(23,653	)	$	—		$	2,515		$	(80,201	)


Basic and diluted net loss per share from continuing operations attributable to common stockholders	$	(0.32	)	$	—		$	—		$	—		$	(0.36	)

Basic and diluted net loss per share attributable to common stockholders	$	(0.32	)	$	—		$	—		$	—		$	(0.36	)

Restated Statement of Operations (for the nine months ended September 30, 2013)


	Nine Months Ended
	September 30, 2013
	As Previously Reported ⁽¹⁾			ARCT IV Recast ⁽²⁾			Reclassifications			Restatement Adjustments			As Restated
Revenues:
Rental income	$	138,060		$	45,102		$	89		$	—		$	183,251
Direct financing lease income		977			224			—			—			1,201
Operating expense reimbursements		6,878			1,727			(89	)		—			8,516

Total revenues		145,915			47,053			—			—			192,968

Operating expenses:
Acquisition related		21,961			52,603			—			(23	)		74,541
Merger and other non-routine transactions		146,240			3,835			—			(16,341	)		133,734
Property operating		8,972			2,107			—			(14	)		11,065
Management fees to affiliate		—			—			—			12,493			12,493
General and administrative		4,018			2,214			34			17,655			23,921
Equity-based compensation		11,510			—			—			(11,510	)		—
Depreciation and amortization		92,211			30,620			(34	)		(313	)		122,484
Operating fees to affiliate		—			—			—			—			—
Impairment of real estate		—			—			—			2,074			2,074

Total operating expenses		284,912			91,379			—			4,021			380,312

Operating income		(138,997	)		(44,326	)		—			(4,021	)		(187,344	)

Other (expense) income:
Interest expense		(41,589	)		(3,240	)		—			(585	)		(45,414	)
Loss on contingent value rights		(69,676	)		—			69,676			—			—
Income from investment securities		218			1,798			(2,016	)		—			—
Gain (loss) on sale of investment securities		451			(2,246	)		—			—			(1,795	)
Loss on derivative instruments		(144	)		—			(69,676	)		(10	)		(69,830	)
Other income, net		171			463			2,016			8			2,658

Total other expenses, net		(110,569	)		(3,225	)		—			(587	)		(114,381	)

Loss from continuing operations		(249,566	)		(47,551	)		—			(4,608	)		(301,725	)
Net (gain) loss from continuing operations attributable to non-controlling interests		726			415			—			6,741			7,882

Net loss from continuing operations attributable to stockholders		(248,840	)		(47,136	)		—			2,133			(293,843	)

Discontinued operations:
Net income (loss) from operations of held for sale properties		159			—			—			—			159
(Loss) gain on held for sale properties		14			—			—			(14	)		—

Net income (loss) from discontinued operations		173			—			—			(14	)		159
Net (loss) income from discontinued operations attributable to non-controlling interests		(9	)		—			—			9			—

Net income (loss) from discontinued operations attributable to stockholders		164			—			—			(5	)		159

Net loss		(249,393	)		(47,551	)		—			(4,622	)		(301,566	)
Net (income) loss attributable to non-controlling interests		717			415			—			6,750			7,882

Net loss attributable to stockholders	$	(248,676	)	$	(47,136	)	$	—		$	2,128		$	(293,684	)


Basic and diluted net loss per share from continuing operations attributable to common stockholders	$	(1.49	)	$	—		$	—		$	—		$	(1.50	)
Basic and diluted net loss per share attributable to common stockholders	$	(1.49	)	$	—		$	—		$	—		$	(1.50	)

(1)	Certain line items have been consolidated from the original presentation in the Quarterly Report on Form 10-Q filing for the three and nine month period ended September 30, 2013.

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

2013 Restated Statement of Comprehensive Loss (for the three months ended September 30, 2013) ⁽¹⁾


	Three Months Ended September 30, 2013
	As Previously Reported ⁽²⁾			ARCT IV Recast ⁽³⁾			Restatement Adjustments			As Restated
Net loss	$	(59,028	)	$	(23,913	)	$	(413	)	$	(83,354	)

Other comprehensive loss:
Designated derivatives, fair value adjustments		(3,622	)		(13	)		—			(3,635	)

Change in unrealized gain/loss on investment securities		(440	)		—			1,378			938

Total other comprehensive loss		(4,062	)		(13	)		1,378			(2,697	)

Total comprehensive loss		(63,090	)		(23,926	)		965			(86,051	)
Net (income) loss attributable to non-controlling interests		(30	)		260			2,923			3,153

Total comprehensive loss attributable to the Company	$	(63,120	)	$	(23,666	)	$	3,888		$	(82,898	)

2013 Restated Statement of Comprehensive Loss (for the nine months ended September 30, 2013) ⁽¹⁾


	Nine Months Ended September 30, 2013
	As Previously Reported ⁽²⁾			ARCT IV Recast ⁽³⁾			Restatement Adjustments			As Restated
Net loss	$	(249,393	)	$	(47,551	)	$	(4,622	)	$	(301,566	)

Other comprehensive income:
Designated derivatives, fair value adjustments		9,218			28			—			9,246
Change in unrealized gain/loss on investment securities		(427	)		—			—			(427	)

Total other comprehensive income		8,791			28			—			8,819

Total comprehensive loss		(240,602	)		(47,523	)		(4,622	)		(292,747	)
Net loss attributable to non-controlling interests		717			415			6,750			7,882

Total comprehensive loss attributable to the Company	$	(239,885	)	$	(47,108	)	$	2,128		$	(284,865	)

(1)	The statement of comprehensive loss was originally included within the consolidated statement of operations in the recasted filing; it is now presented as a standalone financial statement.

(2)	Certain line items have been consolidated from the original presentation in the Quarterly Report on Form 10-Q filing for the three and nine month period ended September 30, 2013.

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

Restated Statement of Cash Flows for the Nine Months Ended September 30, 2013


	Nine Months Ended September 30, 2013
	As Previously Reported ⁽¹⁾			ARCT IV Recast⁽²⁾			Restatement Adjustments			As Restated
Cash flows from operating activities:
Net loss	$	(249,393	)		(47,551	)	$	(4,622	)	$	(301,566	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Issuance of operating partnership units for ARCT III Merger and other transaction related expenses		108,247			—			(476	)		107,771
Depreciation		99,832			31,501			272			131,605
(Gain) loss on held for sale properties		(14	)		—			14			—
Impairment of real estate		—			—			2,074			2,074
Equity-based compensation		13,895			18			68			13,981
Loss on derivative instruments		144			—			—			144
Unrealized loss on investments		14			—			—			14
Unrealized loss on contingent value rights obligations, net of settlement payments		49,314			—			—			49,314
Convertible obligations to Series C Convertible Preferred stockholders, fair value adjustment		4,827			—			—			4,827
(Gain) loss on sale of investments		(451	)		2,246			—			1,795
Changes in assets and liabilities:
Investment in direct financing leases		102			46			—			148
Prepaid expenses and other assets		(12,081	)		(8,432	)		—			(20,513	)
Accounts payable and accrued expenses		4,464			11,251			(5,280	)		10,435

Deferred rent and other liabilities		3,068			2,843			—			5,911
Due from Affiliates		—			(4,105	)		—			(4,105	)
Due to Affiliates		—			—			6,107			6,107

Net cash provided by (used in) operating activities		21,968			(12,183	)		(1,843	)		7,942

Cash flows from investing activities:
Investments in real estate and other assets		(1,173,497	)		(2,068,337	)		—			(3,241,834	)
Investment in direct financing leases		(57,551	)		(18,000	)		—			(75,551	)
Capital expenditures		(113	)		—			—			(113	)
Purchase of assets from Manager		(1,041	)		—			1,041			—
Deposits for real estate investments		(28,836	)		(2,279	)		—			(31,115	)
Purchases of investment securities		(12,004	)		(69,460	)		—			(81,464	)
Proceeds from sale of investment securities		44,188			67,214			—			111,402

Net cash used in investing activities		(1,228,854	)		(2,090,862	)		1,041			(3,318,675	)

Cash flows from financing activities:
Proceeds from mortgage notes payable		4,773			2,124			—			6,897
Proceeds from senior corporate credit facility		860,000			710,000			—			1,570,000
Payments on senior corporate credit facility		(384,604	)		—			—			(384,604	)
Proceeds from corporate bonds		(38,221	)		(15,176	)		—			(53,397	)
Proceeds from issuance of convertible debt		310,000			—			—			310,000

Common stock repurchases		(357,916	)		(177	)		—			(358,093	)
Proceeds from issuance of convertible obligations to Series C Convertible Preferred stockholders		445,000			—			—			445,000
Proceeds from issuance of common stock, net		486,536			1,320,729			(68	)		1,807,197

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


	Nine Months Ended September 30, 2013
	As Previously Reported ⁽¹⁾			ARCT IV Recast ⁽²⁾			Restatement Adjustments			As Restated
Payments of deferred financing costs	$	—		$	—		$	(2,165	)	$	(2,165	)
Consideration paid for assets of Manager in excess of carryover basis		(3,035	)		—			3,035			—
Contributions from non-controlling interest holders		750			29,008			—			29,758
Distributions to non-controlling interest holders		(5,170	)		(445	)		—			(5,615	)
Distributions paid		(117,047	)		(40,599	)		—			(157,646	)
Advances from affiliates, net		—			(376	)		—			(376	)
Restricted cash		(572	)		—			—			(572	)

Net cash provided by financing activities		1,200,494			2,005,088			802			3,206,384

Net change in cash and cash equivalents		(6,392	)		(97,957	)		—			(104,350	)
Cash and cash equivalents, beginning of period		156,873			135,702			—			292,575

Cash and cash equivalents, end of period	$	150,481		$	37,745		$	—		$	188,226

(1)	Certain line items have been consolidated from the original presentation in the Quarterly Report on Form 10-Q filing for the nine month period ended September 30, 2013.

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