10-Q 1 arcp0630201310-qss.htm 10-Q ARCP 06.30.2013 10-Q SS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
 
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: 001-35263

AMERICAN REALTY CAPITAL PROPERTIES, INC.
(Exact name of registrant as specified in its charter) 
Maryland
 
45-2482685
(State or other  jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
405 Park Ave., 15th Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
(212) 415-6500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o

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

The number of outstanding shares of the registrant’s common stock on July 31, 2013 was 184,893,886 shares.







AMERICAN REALTY CAPITAL PROPERTIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FORM 10-Q
June 30, 2013

 
Page
 
 





PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN REALTY CAPITAL PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)

 
 
June 30, 2013
 
December 31, 2012
 
 
(Unaudited)
 

ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
504,562

 
$
249,541

Buildings, fixtures and improvements
 
2,043,270

 
1,336,726

Acquired intangible lease assets
 
318,488

 
212,223

Total real estate investments, at cost
 
2,866,320

 
1,798,490

Less: accumulated depreciation and amortization
 
(108,765
)
 
(56,110
)
Total real estate investments, net
 
2,757,555

 
1,742,380

Cash and cash equivalents
 
10,958

 
156,873

Investment in direct financing leases, net
 
67,518

 
—

Other investments, at fair value
 
9,920

 
41,654

Derivatives, at fair value
 
10,161

 
—

Restricted cash
 
1,576

 
1,108

Prepaid expenses and other assets
 
14,626

 
7,416

Deferred costs, net
 
38,443

 
15,356

Assets held for sale
 
6,028

 
665

Total assets
 
$
2,916,785

 
$
1,965,452

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Mortgage notes payable
 
$
269,918

 
$
265,118

Senior secured revolving credit facility
 
—

 
124,604

Senior corporate credit facility
 
600,000

 
—

Convertible obligation to Series C Convertible Preferred stockholders
 
445,000

 
—

Contingent value rights obligation to preferred and common investors, at fair value
 
31,134

 
—

Derivatives, at fair value
 
1,186

 
3,830

Accounts payable and accrued expenses
 
12,060

 
9,459

Deferred rent and other liabilities
 
5,274

 
4,336

Distributions payable
 
1

 
9,946

Total liabilities
 
1,364,573

 
417,293


 
 
 
 
Convertible preferred stock, $0.01 par value, 100,000,000 shares authorized, 828,472 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively
 
8

 
8

Common stock, $0.01 par value, 240,000,000 shares authorized, 184,893,886 and 179,167,112 issued and outstanding at June 30, 2013 and December 31, 2012, respectively
 
1,846

 
1,792

Additional paid-in capital
 
1,801,460

 
1,653,900

Accumulated other comprehensive income (loss)
 
8,919

 
(3,934
)
Accumulated deficit
 
(379,502
)
 
(120,072
)
Total stockholders’ equity
 
1,432,731

 
1,531,694

Non-controlling interests
 
119,481

 
16,465

Total equity
 
1,552,212

 
1,548,159

Total liabilities and equity
 
$
2,916,785

 
$
1,965,452

The accompanying notes are an integral part of these statements.

1

AMERICAN REALTY CAPITAL PROPERTIES, INC.
  
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for per share data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
43,130

 
$
11,329

 
$
81,379

 
$
17,412

Operating expense reimbursements
 
1,830

 
101

 
3,652

 
258

Total revenues
 
44,960

 
11,430

 
85,031

 
17,670

Operating expenses:
 
 
 
 
 
 
 
 
Acquisition related
 
15,144

 
7,814

 
20,726

 
12,599

Merger and other transaction related
 
4,680

 
20

 
142,449

 
20

Property operating
 
2,465

 
288

 
4,869

 
580

General and administrative
 
1,125

 
502

 
2,432

 
1,027

Equity-based compensation
 
3,454

 
178

 
4,330

 
324

Depreciation and amortization
 
27,806

 
6,994

 
52,829

 
10,529

Operating fees to affiliates
 
—

 
—

 
—

 
212

Total operating expenses
 
54,674

 
15,796

 
227,635

 
25,291

Operating loss
 
(9,714
)
 
(4,366
)
 
(142,604
)
 
(7,621
)
Other income (expenses):
 
 
 
 
 
 
 
 
Interest expense
 
(11,238
)
 
(2,686
)
 
(17,454
)
 
(4,142
)
Unrealized loss on contingent value rights
 
(31,134
)
 
—

 
(31,134
)
 
—

Income from investment securities
 
—

 
—

 
218

 
—

Gain on sale of investment securities
 
—

 
—

 
451

 
—

Unrealized loss on derivative instruments
 
(40
)
 
—

 
(45
)
 
—

Other income (expenses)
 
91

 
62

 
126

 
67

Total other expenses, net
 
(42,321
)
 
(2,624
)
 
(47,838
)
 
(4,075
)
Loss from continuing operations
 
(52,035
)
 
(6,990
)
 
(190,442
)
 
(11,696
)
Net loss from continuing operations attributable to non-controlling interests
 
322

 
72

 
756

 
72

Net loss from continuing operations attributable to stockholders
 
(51,713
)
 
(6,918
)
 
(189,686
)
 
(11,624
)
Discontinued operations:
 
 
 
 
 
 
 
 
Net income (loss) from operations of held for sale properties
 
36

 
(84
)
 
63

 
(97
)
Gain (loss) on held for sale properties
 
—

 
(82
)
 
14

 
(405
)
Net income (loss) from discontinued operations
 
36

 
(166
)
 
77

 
(502
)
Net income (loss) from discontinued operations attributable to non-controlling interests
 
(2
)
 
14

 
(4
)
 
28

Net income (loss) from discontinued operations attributable to stockholders
 
34

 
(152
)
 
73

 
(474
)
Net loss
 
(51,999
)
 
(7,156
)
 
(190,365
)
 
(12,198
)
Net loss attributable to non-controlling interests
 
320

 
86

 
752

 
100

Net loss attributable to stockholders
 
$
(51,679
)
 
$
(7,070
)
 
$
(189,613
)
 
$
(12,098
)
Other comprehensive gain (loss):
 
 
 
 
 
 
 
 
Designated derivatives, fair value adjustments
 
14,017

 
(2,236
)
 
12,840

 
(2,839
)
Unrealized gain (loss) on investment securities, net
 
(80
)
 
—

 
13

 
—

Comprehensive loss
 
$
(37,742
)
 
$
(9,306
)
 
$
(176,760
)
 
$
(14,937
)
Basic and diluted net loss per share from continuing operations attributable to common stockholders
 
$
(0.32
)
 
$
(0.10
)
 
$
(1.20
)
 
$
(0.25
)
Basic and diluted net loss per share attributable to common stockholders
 
$
(0.32
)
 
$
(0.10
)
 
$
(1.20
)
 
$
(0.26
)

The accompanying notes are an integral part of these statements.

2

AMERICAN REALTY CAPITAL PROPERTIES, INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except for share data)
(Unaudited)

 
 
Convertible Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of Shares
 
Par
Value
 
Number
of Shares
 
Par
Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total Stock-holders' Equity
 
Non-Controlling Interests
 
Total Equity
Balance December 31, 2012
 
828,472

 
$
8

 
179,167,112

 
$
1,792

 
$
1,653,900

 
$
(3,934
)
 
$
(120,072
)
 
$
1,531,694

 
$
16,465

 
$
1,548,159

Issuance of common stock
 


 


 
32,035,064

 
320

 
490,264

 
—

 
—

 
490,584

 
—

 
490,584

Conversion of OP Units to common stock
 
—

 
—

 
599,233

 
6

 
5,794

 
—

 
—

 
5,800

 
(5,800
)
 
—

Common stock issued through distribution reinvestment plan
 
—

 
—

 
489,000

 
5

 
4,890

 
—

 
—

 
4,895

 
—

 
4,895

Common stock repurchases
 
—

 
—

 
(27,739,523
)
 
(277
)
 
(350,119
)
 
—

 
—

 
(350,396
)
 
—

 
(350,396
)
Offering costs, commissions and dealer manager fees
 
—

 
—

 
—

 
—

 
(3,260
)
 
—

 
—

 
(3,260
)
 
—

 
(3,260
)
Equity-based compensation
 
—

 
—

 
343,000

 
—

 
—

 
—

 
—

 
—

 
3,682

 
3,682

Amortization of restricted shares
 
—

 
—

 
—

 
—

 
3,026

 
—

 
—

 
3,026

 
—

 
3,026

Consideration paid for assets of Manager in excess of carryover basis
 
—

 
—

 
—

 
—

 
(3,035
)
 
—

 
—

 
(3,035
)
 
—

 
(3,035
)
Distributions declared
 
—

 
—

 
—

 
—

 
—

 
—

 
(69,817
)
 
(69,817
)
 
—

 
(69,817
)
Issuance of operating partnership units
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
108,247

 
108,247

Contributions from non-controlling interest holders
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
750

 
750

Distributions to non-controlling interest holders
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,111
)
 
(3,111
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(189,613
)
 
(189,613
)
 
(752
)
 
(190,365
)
Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
12,853

 
—

 
12,853

 
—

 
12,853

Balance June 30, 2013
 
828,472

 
$
8

 
184,893,886

 
$
1,846

 
$
1,801,460

 
$
8,919

 
$
(379,502
)
 
$
1,432,731

 
$
119,481

 
$
1,552,212


The accompanying notes are an integral part of this statement.


3

AMERICAN REALTY CAPITAL PROPERTIES, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(190,365
)
 
$
(12,198
)
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

 
—

Depreciation
 
42,491

 
8,676

Amortization of intangible lease assets
 
10,511

 
1,910

Amortization of deferred costs
 
3,409

 
619

Amortization of above-market lease asset
 
126

 
—

Loss (gain) on held for sale properties
 
(14
)
 
405

Equity-based compensation
 
6,708

 
330

Unrealized loss on derivative instruments
 
45

 
—

Unrealized loss on contingent value rights obligations
 
31,134

 
—

Gain on sale of investments

 
(451
)
 
—

Changes in assets and liabilities:
 
 
 
 
Prepaid expenses and other assets
 
(6,754
)
 
(1,819
)
Accounts payable and accrued expenses
 
(351
)
 
1,721

Deferred rent and other liabilities
 
938

 
814

Net cash provided by operating activities
 
5,674

 
458

Cash flows from investing activities:
 
 
 
 
Investments in real estate and other assets
 
(1,073,050
)
 
(512,024
)
Investment in direct financing leases
 
(67,518
)
 
—

Capital expenditures
 
(30
)
 
—

Investments in other assets
 
(1,041
)
 
—

Deposits for real estate investments
 
(665
)
 
(600
)
Payments for purchases of other investments
 
(12,000
)
 
—

Proceeds from sale of investment securities
 
44,188

 
—

Net cash used in investing activities
 
(1,110,116
)
 
(512,624
)
Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
4,800

 
139,400

Proceeds from senior secured revolving credit facility
 
—

 
32,593

Payments on senior secured revolving credit facility
 
(124,604
)
 
(107
)
Proceeds from senior corporate credit facility
 
825,000

 
—

Payments on senior corporate credit facility
 
(225,000
)
 
—

Payments of deferred financing costs
 
(25,318
)
 
(9,334
)
Advance from affiliate bridge loan
 
—

 
796

Payment of affiliate bridge loan
 
—

 
(796
)
Common stock repurchases
 
(350,396
)
 
(116
)
Proceeds from issuances of preferred shares
 
—

 
6,000

Proceeds from issuance of convertible obligations to Series C Convertible Preferred stockholders
 
445,000

 
—

Proceeds from issuances of common stock
 
490,584

 
825,246

Payments of offering costs and fees related to stock issuances
 
(808
)
 
(96,209
)
Consideration paid for assets of Manager in excess of carryover basis
 
(3,035
)
 
—

Contributions from non-controlling interest holders
 
750

 
—

Distributions to non-controlling interest holders
 
(3,111
)
 
(179
)
Distributions paid
 
(74,867
)
 
(8,343
)
Advances from affiliates, net
 
—

 
(708
)
Premium payment on interest rate cap
 
—

 
(13
)
Restricted cash
 
(468
)
 
(1,547
)
Net cash provided by financing activities
 
958,527

 
886,683

Net change in cash and cash equivalents
 
(145,915
)
 
374,517

Cash and cash equivalents, beginning of period
 
156,873

 
19,331

Cash and cash equivalents, end of period
 
$
10,958

 
$
393,848

Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
10,995

 
$
2,895

Cash paid for income taxes
 
354

 
59

Non-cash investing and financing activities:
 
 
 
 
OP units issued to acquire real estate investment
 
—

 
6,352

Common stock issued through distribution reinvestment plan
 
4,895

 
4,257

Reclassification of deferred offering costs
 
—

 
5,875

The accompanying notes are an integral part of these statements.

4
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)


Note 1—  Organization
American Realty Capital Properties, Inc. (the “Company”), is a Maryland corporation incorporated on December 2, 2010 that qualified as a real estate investment trust for U.S. federal income tax purposes beginning in the taxable year ended December 31, 2011. On September 6, 2011, the Company completed its initial public offering (the “IPO”) and its shares of common stock began trading on the NASDAQ Capital Market under the symbol “ARCP” on September 7, 2011. On February 28, 2013, the Company's common stock was transferred to the NASDAQ Global Select Market (“NASDAQ”) in connection with the closing of the Company's acquisition of ARCT III (as defined below).
The Company acquires, owns and operates single-tenant, freestanding commercial real estate properties. The Company has acquired a combination of long-term and medium-term leases and intends to continue to acquire properties with approximately 70% long-term leases and 30% medium-term leases, with an average portfolio remaining lease term of approximately 10 to 12 years. The Company considers properties that are leased on a “medium-term” basis to mean properties originally leased long-term (ten years or longer) that currently have a primary remaining lease duration of generally three to eight years, on average. The Company expects this investment strategy to develop growth potential from below market leases. Additionally, the Company owns a portfolio that uniquely combines properties with stable income from high credit quality tenants, and properties that have substantial future growth potential.
The Company advanced its investment objectives by growing its net lease portfolio through key mergers and acquisitions. On February 28, 2013, the Company merged with American Realty Capital Trust III, Inc., a Maryland Corporation (“ARCT III”). On May 28, 2013, the Company entered into an agreement and plan of merger with CapLease, Inc. (NYSE: LSE). On June 27, 2013, the Company closed the acquisition of 447 properties from certain affiliates of GE Capital Corp. Additionally, on July 1, 2013, the Company entered into an agreement and plan of merger with American Reality Capital Trust IV, Inc. See Note 2 — Mergers and Acquisitions.
Substantially all of the Company's business is conducted through ARC Properties Operating Partnership, L.P., a Delaware limited partnership (the “OP”). The Company is the sole general partner and holder of 95.3% of the equity interest in the OP as of June 30, 2013. Certain affiliates of the Company and certain unaffiliated investors are limited partners and owners of 4.3% and 0.4%, respectively, of the equity interest in the OP. After holding units of limited partner interests in the OP (“OP Units”) for a period of one year, holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, as allowed by the limited partnership agreement of the OP. The remaining rights of the holders of OP Units are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP’s assets.
The Company has retained ARC Properties Advisors, LLC (the “Manager”), a wholly owned subsidiary of AR Capital, LLC, (the “Sponsor”), to manage its affairs on a day to day basis and, as a result, is generally externally managed. Prior to the ARCT III Merger (as defined below), the Company had no employees. In connection with the ARCT III Merger, the Company internalized certain functions performed for it by the Sponsor and its affiliates prior to the ARCT III Merger, including selected acquisition, accounting and portfolio management services and, as a result, the Company currently employs eight individuals performing such functions. ARCT III was previously externally managed by American Realty Capital Advisors III, LLC (the “ARCT III Advisor”). These affiliated parties, including the Manager, RCS Advisory Services, LLC, ARC Advisory Services, LLC, American National Stock Transfer, LLC, RCS Capital, the investment income and capital markets division of Realty Capital Securities, LLC, and Realty Capital Securities, LLC, in its capacity as dealer manager (“RCS” or the “Dealer Manager”), entities which are under common ownership with the Sponsor, have performed services for the Company and ARCT III, in exchange for which they have received compensation, fees and expense reimbursements, and will continue to receive compensation, fees and expense reimbursements for providing on-going investment oversight and management services to the Company.

5
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Note 2 — Mergers and Acquisitions
Completed Mergers and Significant Acquisitions
American Realty Capital Trust III Merger
On December 14, 2012, the Company entered into an Agreement and Plan of Merger (the “ARCT III Merger Agreement”) with ARCT III and certain subsidiaries of each company. The ARCT III Merger Agreement provided for the merger of ARCT III with and into a subsidiary of the Company (the “ARCT III Merger”). The ARCT III Merger was consummated on February 28, 2013.
Pursuant to the terms and subject to the conditions set forth in the ARCT III Merger Agreement, each outstanding share of common stock of ARCT III was converted into the right to receive (i) 0.95 of a share of the Company's common stock, (the “ARCT III Exchange Ratio”) or (ii) $12.00 in cash. In addition, each outstanding unit of equity ownership of the ARCT III OP was converted into the right to receive 0.95 of the same class of unit of equity ownership in the OP.
Upon the closing of the ARCT III Merger, on February 28, 2013, 29.2 million shares, or 16.5% of the then outstanding shares of ARCT III's common stock, were paid in cash at $12.00 per share, which is equivalent to 27.7 million shares of the Company's common stock based on the ARCT III Exchange Ratio. In addition, 148.1 million shares of ARCT III's common stock were converted to shares of the Company's common stock at the Exchange Ratio, resulting in an additional 140.7 million shares of the Company's common stock outstanding after the exchange.
Upon the consummation of the ARCT III Merger, American Realty Capital III Special Limited Partnership, LLC, the holder of the special limited partner interest in the ARCT III OP, was entitled to subordinated distributions of net sales proceeds from ARCT III OP which resulted in the issuance of units of limited partner interests in the ARCT III OP, when after applying the ARCT III Exchange Ratio, resulting in the issuance of an additional 7.3 million OP Units. The parties have agreed that such OP Units will be subject to a minimum one-year holding period from the date of issuance before being exchangeable into the Company's common stock.
Upon consummation of the ARCT III Merger, the vesting of the shares of the Company's and ARCT III's outstanding restricted stock was accelerated.
In connection with the ARCT III Merger, the Company also had entered into an agreement with the Sponsor and its affiliates to internalize certain functions performed by them prior to the ARCT III Merger, at no cost to the Company, including selected acquisition, accounting and portfolio management services (the “Internalization”). In connection with the Internalization, (i) the Company and its Sponsor terminated the acquisition and capital services agreement dated September 6, 2011, between the parties, which eliminated acquisition and financing fees payable by the Company and (ii) the Manager reduced asset management fees from an annualized 0.50% of the unadjusted book value of all of the Company's assets to (a) 0.50% for up to $3.0 billion of unadjusted book value of assets and (b) 0.40% of unadjusted book value of assets greater than $3.0 billion. In addition, the Company paid $4.1 million for certain furniture, fixtures, equipment, and $1.7 million for certain costs associated with the ARCT III Merger. The Company, the Sponsor and their affiliates are considered entities under common control, as such, the assets acquired from the Advisor were recorded by the Company at their carryover basis of $1.0 million.
Accounting Treatment of the ARCT III Merger
The Company and ARCT III, to the ARCT III Merger date, were considered to be entities under common control. Both entities' advisors were wholly owned subsidiaries of the Sponsor. The Sponsor and its related parties have significant ownership interests in the Company and had significant ownership of ARCT III through the ownership of shares of common stock and other equity interests. In addition, the advisors of both entities were contractually eligible to charge potential fees for their services to both of the companies including asset management fees, incentive fees and other fees and continue to charge fees to the Company. Due to the significance of these fees, the advisors and ultimately the Sponsor is determined to have a significant economic interest in both companies in addition to having the power to direct the activities of the companies through advisory/management agreements, which qualifies them as affiliated companies under common control in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The acquisition of an entity under common control is accounted for on the carryover basis of accounting whereby the assets and liabilities of the companies are recorded upon the merger on the same basis as they were carried by the companies on the ARCT III Merger date. In addition, U.S. GAAP requires the Company to present historical financial information as if the entities were combined for each period presented, therefore all financial statements including the notes thereto are presented combining ARCP and ARCT III historical financial information.

6
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Credit Facility
The Company and the OP are parties to a credit agreement, dated February 14, 2013, for a senior corporate credit facility (as amended, supplemented or otherwise modified from time to time, the (“Credit Facility”) with Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto. The Company and the OP succeeded to the Credit Facility upon the consummation of the ARCT III Merger.
Additionally, upon consummation of the ARCT III Merger, two senior secured revolving credit facilities of up to $150.0 million in the aggregate were paid in full and terminated.
See Note 5 — Credit Facility for further description of the Credit Facility and repayments and terminations of facilities upon the consummation of the ARCT III Merger.
GE Capital Portfolio Acquisition
On June 27, 2013, the Company, through its OP, acquired from certain affiliates of GE Capital Corp., the equity interests in the entities that own a real estate portfolio comprised of 447 properties, which include three other revenue generating assets (the “GE Capital Portfolio”) for consideration of $774.0 million exclusive of closing costs; no liabilities were assumed. The 447 properties are subject to 400 property operating leases, which will be accounted for on the straight-line rent basis of accounting, and 47 direct financing leases, which are accounted for as a receivable at a discount to the remaining lease payments and estimated residual values of the related properties. Income on the direct financing leases are recorded using the effective interest method. In addition, the Company has recorded the fair value of the expected residual value of the property for property under direct financing leases, which will be periodically reevaluated.
Pending Mergers
CapLease, Inc. Merger
On May 28, 2013, the Company entered into an Agreement and Plan of Merger (the “CapLease Merger Agreement”) with CapLease, Inc., a Maryland corporation (“CapLease”), and certain subsidiaries of each company. The CapLease Merger Agreement provides for the merger of CapLease with and into a subsidiary of the Company (the “CapLease Merger”).
Pursuant to the terms and subject to the conditions set forth in the CapLease Merger Agreement, at the effective time of the CapLease Merger, each outstanding share of common stock of CapLease, other than shares owned by the Company, CapLease or any of their respective wholly owned subsidiaries, will be converted into the right to receive $8.50 in cash without interest. Each outstanding share of preferred stock of CapLease, other than shares owned by the Company, CapLease or any of their respective wholly owned subsidiaries, will be converted into the right to receive an amount in cash, without interest, equal to the sum of $25.00 plus all accrued and unpaid dividends on such shares of preferred stock. In addition, in connection with the merger of CapLease, LP with and into the OP (the “CapLease Partnership Merger”), each outstanding unit of equity ownership of the CapLease's operating partnership other than units owned by CapLease or any wholly owned subsidiary of CapLease will be converted into the right to receive $8.50 in cash, without interest. 
Upon consummation of the CapLease Merger, the vesting of the shares of the CapLease's outstanding restricted stock will be accelerated and become fully vested, and restricted stock and any outstanding performance shares will be fully earned and have the right to receive $8.50 per share.
The CapLease Merger is expected to close in the third or fourth quarter of 2013. However, as of the filing of this Quarterly Report on Form 10-Q, the consummation of the CapLease Merger has not yet occurred and, although the Company believes that the completion of the CapLease Merger is probable, the closing of the CapLease Merger is subject to a vote by the CapLease common stockholders and other customary conditions, and therefore there can be no assurance that the CapLease Merger will be consummated. Accordingly, the Company cannot assure that the CapLease Merger will be completed based on the terms of the CapLease Merger Agreement or at all.
American Realty Capital Trust IV Merger
On July 1, 2013, the Company entered into an Agreement and Plan of Merger (the “ARCT IV Merger Agreement”) with American Realty Capital Trust IV, Inc., a Maryland corporation (“ARCT IV”), and certain subsidiaries of each company. The ARCT IV Merger Agreement provides for the merger of ARCT IV with and into a subsidiary of the Company (the “ARCT IV Merger”).

7
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Pursuant to the terms and subject to the conditions set forth in the ARCT IV Merger Agreement, at the effective time of the ARCT IV Merger, each outstanding share of common stock of ARCT IV will be converted into the right to receive (i) $30.00 in cash, but in no event will the aggregate consideration paid in cash be paid on more than 25% of the shares of ARCT IV's common stock issued and outstanding as of immediately prior to the closing of the ARCT IV Merger or, in the Company’s discretion, (ii) either (A) a number of shares of the Company common stock equal to the ARCT IV Exchange Ratio (as defined below) or (B) only if the Market Price (as defined below) is less than $14.94, 2.05 shares of the Company common stock and an amount in cash equal to the product obtained by multiplying the excess of the ARCT IV Exchange Ratio over 2.05 by the Market Price. “ARCT IV Exchange Ratio” means (1) if the volume weighted average closing sale price of a share of the Company common stock over the five (5) consecutive trading days on the NASDAQ Global Select Market ending on the trading day immediately prior to the closing date of the ARCT IV Merger, as reported in The Wall Street Journal (the “Market Price”), is equal to or greater than $14.94, then 2.05, and (2) if the Market Price is less than $14.94, then the quotient (rounded to the nearest one-hundredth) obtained by dividing $30.62 by the Market Price. If the aggregate elections for payment in cash exceed 25% of the number of shares of ARCT IV's common stock issued and outstanding as of immediately prior to the closing of the ARCT IV Merger, then the amount of cash consideration paid on cash elections will be reduced on a pro rata basis with the remaining consideration paid in Company common stock and cash, if applicable. In addition, each outstanding unit of equity ownership of the ARCT IV will be converted into the right to receive a number of OP Units equal to the ARCT IV Exchange Ratio. In addition, on the date of the ARCT IV Merger, all outstanding restricted common stock of ARCT IV date will become fully vested and exchanged for shares of Company common stock based on the ARCT IV Exchange Ratio.
In connection with the ARCT IV Merger, ARCT IV's external advisor has agreed to waive a portion of the real estate commissions contractually due to it from the Company upon the sale of properties in an amount equal to the lesser of (i) 2.0% of the sales price of the properties and (ii) one-half of the competitive real estate commissions if a third party broker is also involved. ARCT IV's external advisor and ARCT IV agreed that ARCT IV's external advisor will be entitled to a reduced real estate commission of $8.4 million.
The Company has also entered into an agreement to purchase certain assets from ARCT IV's external advisor and reimburse ARCT IV's external advisor for certain expenses related to the ARCT IV Merger totaling $5.8 million.
ARCT IV's external advisor will be entitled to subordinated distributions of net sales proceeds in an amount estimated to be approximately $65.2 million, assuming an implied price of ARCT IV's common stock of $30.47 per share in the ARCT IV Merger (which assumes that 75% of the ARCT IV's common stock is exchanged for shares of ARCP common stock, based on a per share price of $30.62 (representing the floor for stock consideration) and 25% of the ARCT IV's common stock is exchanged for cash). Such subordinated distributions of net sales proceeds will be payable in the form of equity units of ARCT IV that will automatically convert into OP Units upon consummation of the ARCT IV Merger and will be subject to a minimum one-year holding period from the date of issuance before being exchangeable into Company common stock. The actual amount of consideration to be paid for subordinated distributions of net sales proceeds will be based, in part, on the market price of Company common stock on the date of the ARCT IV Merger and will not be known until the ARCT IV Merger Agreement date.
Accounting Treatment for the ARCT IV Merger
The Company and ARCT IV are considered to be entities under common control. Both entities' advisors are wholly owned subsidiaries of the Sponsor. The Sponsor and its related parties have ownership interests in the Company and ARCT IV through the ownership of shares of common stock and other equity interests. In addition, the advisors of both entities are contractually eligible to charge potential fees for their services to both of the companies including asset management fees, incentive fees and other fees and will continue to charge fees to the Company following the ARCT IV Merger. Due to the significance of these fees, the advisors and ultimately the Sponsor is determined to have a significant economic interest in both companies in addition to having the power to direct the activities of the companies through advisory/management agreements, which qualifies them as affiliated companies under common control in accordance with U.S. GAAP. The acquisition of an entity under common control is accounted for on the carryover basis of accounting whereby the assets and liabilities of the companies are recorded upon the merger on the same basis as they were carried by the companies on the ARCT IV Merger date. In addition, U.S. GAAP requires the Company to present historical financial information as if the entities were combined for each period presented once the ARCT IV Merger is consummated.

8
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

The ARCT IV Merger is expected to close in the third or fourth quarter of 2013. However, as of the filing of this Quarterly Report on Form 10-Q, the consummation of the ARCT IV Merger has not yet occurred and, although the Company believes that the completion of the ARCT IV Merger is probable, the closing of the ARCT IV Merger is subject to a vote by the common stockholders of both ARCT IV and the Company and other customary conditions, and therefore there can be no assurance that the ARCT IV Merger will be consummated. Accordingly, the Company cannot assure that the ARCT IV Merger will be completed based on the terms of the ARCT IV Merger or at all.
Note 3 — Summary of Significant Accounting Policies
The consolidated financial statements of the Company included herein were prepared in conformity with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2012 of the Company, which are included on Form 8-K/A filed with the Securities and Exchange Commission (“SEC”) on May 8, 2013. There have been no significant changes to these policies during the six months ended June 30, 2013, other than the updates described below.
Reclassification
Certain reclassifications have been made to the previously issued historical financial statements of the Company to conform to this presentation.
Investment in Direct Financing Leases
The Company has acquired certain properties that are subject to leases that qualify as direct financing leases in accordance with U.S. GAAP due to the significance of the lease payments from the inception of the leases compared to the fair value of the property. Investments in direct financing leases represent the fair value of the remaining lease payments on the leases and the estimated fair value of any expected residual property value at the end of the lease term. The fair value of the remaining lease payments is estimated using a discounted cash flow based on interest rates that would represent the Company's incremental borrowing rate for similar types of debt. The expected residual property value at the end of the lease term is estimated using market data and assessments of the remaining useful lives of the properties at the end of the lease terms, among other factors. Income from direct financing leases is calculated using the effective interest method over the remaining term of the lease.
Convertible Obligation to Series C Convertible Preferred Stockholders
On June 7, 2013, the Company issued 28.4 million shares of Series C Convertible Preferred Stock (the “Series C Convertible Preferred Stock”) for gross proceeds of $445.0 million. Due to an unconditional obligation to either redeem or convert the Series C Convertible Preferred Stock into a variable number of shares of common stock predominantly based on a fixed monetary amount, the preferred securities are classified as an obligation under U.S. GAAP and are presented on the consolidated balance sheet as a liability. In addition, without the approval of the holders of the Company's common stock and Series C Convertible Preferred Stock, to amend the Company's articles supplementary designating the Series C Convertible Preferred Stock (the “Series C Articles Supplementary”) and to permit the issuance of additional shares of common stock, the sum of the number of shares issued pursuant to the June 7, 2013 private placement of common stock and the conversion of Series C Convertible Preferred Stock may not exceed 19.9% of the number of shares of Company common stock outstanding immediately prior to the closing of the June 7, 2013 private placement. As a result the Company is limited, after consideration of the previously issued 29.4 million shares of common stock in the June 7, 2013 private placement, to the issuance of an additional 3.3 million shares of its common stock, with the balance of the Series C Convertible Preferred Stock to be cancelled in exchange for cash in lieu of such common stock in an amount equal to the greater of the product of such number of excess shares into which the shares of Series C Convertible Preferred Stock would have been convertible and (i) 102% of the liquidation preference, which is $15.67, as may be adjusted from time to time (the “Conversion Price”), and (ii) the Conversion Price valued at the one-day volume-weighted average trading price (“VWAP”) of the common stock on the applicable date. Therefore upon conversion, absent a shareholder vote permitting the issuance of common stock for the conversion, a portion of the shares can be converted to common stock and the remaining shares will be cancelled for cash at a premium as specified in the Series C Articles Supplementary. The preferred shares liability is recorded at fair value at June 30, 2013, which is considered to approximate the gross proceeds received. The preferred shares liability will be carried at fair value and adjusted on a quarterly basis.

9
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Contingent Valuation Rights
In connection with the private placement transactions described above, on June 7, 2013, the Company issued to the common stock investors 29.4 million contingent value rights (“Common Stock CVR's”), and to the Series C Convertible Preferred Stock investors 28.4 million contingent value rights (“Preferred Stock CVR's”), which may entitle the holders of Common Stock CVR's to a cash payment of up to $1.50, equal to the difference of the $15.47 purchase price and the CVR Period VWAP, per Common Stock CVR and the holders of Preferred Stock CVR's to a cash payment of up to $2.00, equal to the difference between the Conversion Price of $15.67 and the CVR Period VWAP, per Preferred Stock CVR in the future depending on the future performance of the Company's common stock, subject to certain limits. Payments to the common and Series C Convertible Preferred contingent value rights holders will be based on a comparison of the issuance price of each class of security to the VWAP of the Company's common stock for 30 trading days beginning on thirtieth trading day after the issuance of the common stock on June 7, 2013 for the common stockholder, and for the Series C Convertible Preferred stockholders, the payment will be based on the VWAP of the Company's common stock for 30 trading days beginning on ninetieth trading day after the earliest to occur of: (i) the closing of the CapLease Merger; (ii) the trading day after (a) the date of an announcement that CapLease, Inc. has accepted a competing offer (which did not occur) or (b) the CapLease Merger is otherwise terminated; and (iii) December 31, 2013. Depending on the VWAP during the respective measurement periods described above, the amount to be paid out for the contingent value rights, if any, will not be known until the end of the measurement periods. The Company has recorded a liability for its obligations to settle the contingent value rights, at fair value. The Company has estimated the fair value of the contingent value rights at June 30, 2013, using the input of third-party valuation specialists and management's own judgment, based primarily on the volatility of the Company's historical stock prices, the effect of certain economic scenarios and the Company's stock price as of June 30, 2013. Changes in the fair value of the contingent valuation rights are recorded in the consolidated statement of operations and comprehensive loss as an unrealized gain or loss in the period incurred.
Contingent Rental Income
The Company owns certain properties that have associated leases that require the tenant to pay contingent rental income based on a percentage of the tenant's sales after the achievement of certain sales thresholds, which may be monthly, quarterly or annual targets. As a lessor, the Company defers the recognition of contingent rental income until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known.
Non-Controlling Interests
As described in Note 1— Organization, certain affiliates and non-affiliated third parties have been issued OP Units. Holders of OP Units are considered to be non-controlling interest holders in the OP and their ownership interest is reflected as an addition to equity on the consolidated balance sheet. In addition, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentage. Furthermore, upon conversion of OP Units to common stock, any gain or loss attributable to the OP Unit Holders is recorded as a component of equity.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued guidance regarding disclosures about offsetting assets and liabilities, which requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. The adoption of this guidance, which is related to disclosure only, did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Refer to Note 9 — Derivatives and Hedging Activities for the Company's disclosure of information about offsetting and related arrangements.
In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets for impairment. The amendments will allow an entity first to assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity will no longer be required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption was permitted. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

10
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

In February 2013, the FASB issued guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance is effective for annual and interim periods beginning after December 15, 2012 with early adoption permitted. The adoption of this guidance, which is related to disclosure only, did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Refer to Note 9 — Derivatives and Hedging Activities for the Company's disclosure of the information about the amounts reclassified out of accumulated other comprehensive income by component.
In February 2013, the FASB issued new accounting guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Note 4 — Real Estate Investments
The following table presents the allocation of the assets acquired during the periods presented (dollar amounts in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013(1)
 
2012
 
2013(1)
 
2012
Real estate investments, at cost:
 
 
 
 
 
 
 
 
Land
 
$
206,282

 
$
57,161

 
$
256,463

 
$
84,268

Buildings, fixtures and improvements
 
521,765

 
219,869

 
709,374

 
372,933

Total tangible assets
 
728,047

 
277,030

 
965,837

 
457,201

Acquired intangibles:
 
 
 
 
 
 
 
 
In-place leases
 
76,986

 
36,927

 
107,213

 
61,175

Total assets acquired, net
 
805,033

 
313,957

 
1,073,050

 
518,376

OP Units issued to acquire real estate investments
 
—

 
(6,352
)
 
—

 
(6,352
)
Cash paid for acquired real estate investments
 
$
805,033

 
$
307,605

 
$
1,073,050

 
$
512,024

Number of properties acquired
 
433

 
116

 
481

 
170

_______________________________________________
(1) Excludes 47 properties comprised of $67.5 million of net investments subject to direct financing leases.
Land, buildings, fixtures and improvements, in-place lease intangibles and investments in direct financing leases include $774.0 million, comprised of $193.1 million, $450.5 million, $62.9 million and $67.5 million, respectively, provisionally assigned to each class of asset, pending receipt of the final appraisals and other information being prepared by a third-party specialist. 
During the three months ended June 30, 2013, the Company classified a Shaw's Supermarket in Plymouth, MA, as a held for sale property. As of June 30, 2013, the Company owned two properties which were classified as held for sale, including one vacant property.
The following table presents unaudited pro forma information as if the acquisitions during the three and six months ended June 30, 2013 had been consummated on January 1, 2012. Additionally, the unaudited pro forma net loss attributable to stockholders was adjusted to exclude acquisition related expenses of $15.1 million and $7.8 million for the three months ended June 30, 2013 and 2012, respectively, and merger and other transaction expenses of $4.7 million for the three months ended June 30, 2013. The unaudited pro forma net loss attributable to stockholders was adjusted to exclude acquisition related expenses of $20.7 million and $12.6 million for the six months ended June 30, 2013 and 2012, respectively, and merger and other transaction expenses of $142.4 million for the six months ended June 30, 2013.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
 
2013
 
2012
 
2013
 
2012
Pro forma revenues
 
$
56,941

 
$
27,019

 
$
113,882

 
$
59,136

Pro forma net loss attributable to stockholders
 
$
(30,458
)
 
$
(2,393
)
 
$
(18,929
)
 
$
(2,782
)

11
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Future Lease Payments
The following table presents future minimum base rental cash payments due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items (amounts in thousands):
 
 
Future Minimum
Base Rent Payments
 
Future Minimum
Direct Financing Lease Payments(1)
July 1, 2013 - December 31, 2013
 
$
106,624

 
$
2,508

2014
 
210,551

 
5,105

2015
 
207,318

 
5,019

2016
 
202,300

 
4,971

2017
 
192,725

 
4,603

Thereafter
 
1,262,001

 
15,241

Total
 
$
2,181,519

 
$
37,447

_______________________________________________
(1) 47 properties are subject to direct financing leases and, therefore, for accounting purposes, revenue is recognized as direct financing lease income on the discounted cash flows of the lease payments. Amounts reflected are the cash rent on these respective properties.
Net Investment in Direct Financing Leases
The components of the Company's net investment in direct financing leases are as follows (in thousands):
 
 
June 30, 2013
Future minimum lease payments receivable
 
$
37,447

Unguaranteed residual value of property
 
48,751

Unearned income
 
(18,680
)
Net investment in direct financing leases
 
$
67,518

Tenant Concentration
The following table lists the tenants of the Company whose annualized rental income on a straight-line basis represented greater than 10% of consolidated annualized rental income on a straight-line basis as of June 30, 2013 and 2012. Annualized rental income for net leases is rental income on a straight-line basis as of June 30, 2013, which includes the effect of tenant concessions such as free rent, as applicable.
 
 
June 30,
Tenant
 
2013
 
2012
FedEx
 
*
 
19.9%
Citizens Bank
 
*
 
14.8%
Dollar General
 
*
 
14.4%
Walgreens
 
*
 
10.4%
_______________________________________________
* The tenants' annualized rental income was not greater than 10% of total consolidated annualized rental income for all portfolio properties as of the period specified.
No other tenant represents more than 10% of total consolidated annualized rental income for the periods presented.

12
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Geographic Concentration
The following table lists the states where the Company has concentrations of properties where annual rental income for properties in that state, on a straight-line basis represented greater than 10% of consolidated annualized rental income on a straight-line basis as of June 30, 2013 and 2012:
 
 
June 30,
State
 
2013
 
2012
Missouri
 
*
 
10.7%
New York
 
*
 
10.5%
_______________________________________________
* The annualized rental income from the state was not greater than 10% of total consolidated annualized rental income for all portfolio properties as of the period specified.
Note 5 — Credit Facility
Credit Facility
The Company and the OP are parties to the Credit Facility with Wells Fargo, National Association, as administrative agent and other lenders party thereto. The Company and the OP succeeded to the Credit Facility upon the consummation of the ARCT III Merger.
At June 30, 2013, the Credit Facility has commitments of $1.45 billion. The Credit Facility has an accordion feature, which, if exercised in full, would allow the Company to increase borrowings under the Credit Facility to $2.5 billion, subject to additional lender commitments and borrowing base availability.
At June 30, 2013, the Credit Facility contains an $810.0 million term loan facility and a $640.0 million revolving credit facility. Loans under the Credit Facility are priced at the applicable rate (at the Company's election, either a floating interest rate based on one month LIBOR, determined on a daily basis) plus 1.60% to 2.20%, or a prime-based interest rate, based upon the Company’s current leverage. To the extent that the Company receives an investment grade credit rating as determined by a major credit rating agency, at the Company's election, advances under the Credit Facility will be priced at their applicable rate plus 0.90% to 1.75% and term loans will be priced at a floating interest rate of LIBOR plus 1.15% to 2.00%, based upon the Company’s then current investment grade credit rating. The Company may also make fixed rate borrowings under the Credit Facility.
As of August 6, 2013, additional commitments from lenders increased available borrowing under the Credit Facility to $1.7 billion, comprised of a $940.0 million term loan facility and a $760.0 million revolving credit facility.
The Credit Facility provides for monthly interest payments. In the event of a default, each lender has the right to terminate its obligations under the Credit Facility, and to accelerate the payment on any unpaid principal amount of all outstanding loans. The Company has guaranteed the obligations under the Credit Facility. The revolving credit facility will terminate on February 14, 2017, unless extended, to which the term loan facility will terminate on February 14, 2018. The Company may prepay borrowings under the Credit Facility and, to the extent that borrowings are unused under the revolving credit facility and the term loan facility, the Company incurs an unused fee of 0.15% to 0.25% per annum on the unused amount depending on the unused balance as a percentage of the total facility and the type of funding. The Credit Facility also requires the Company to maintain certain property available for collateral as a condition to funding.
As of June 30, 2013, there was $600.0 million outstanding on the Credit Facility, of which $85.0 million bore a floating interest rate of 1.95%, and $515.0 million was fixed at 2.80% through the use of derivative instruments, which are used to hedge against interest rate volatility. At June 30, 2013, there was up to $1.9 billion available to the Company for future borrowings, subject to borrowing availability.
The Credit Facility requires the maintenance of financial covenants, as well as restrictions on corporate guarantees, the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. At June 30, 2013, the Company was in compliance with the debt covenants under the Credit Facility.

13
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Repayment of Previous Credit Facilities
On February 28, 2013, the Company repaid all of the outstanding borrowings under its previous senior secured revolving credit facility in the amount of $124.6 million, and the credit agreement for such facility was terminated. The average interest rate on the borrowings during the period the balance was outstanding was 3.11%. On February 14, 2013, simultaneous with entering into the Credit Facility, the Company terminated its secured credit facility agreement, which had been unused.
Note 6 — Mortgage Notes Payable
The Company’s mortgage notes payable consist of the following as of June 30, 2013 and December 31, 2012 (dollar amounts in thousands):
 
 
Encumbered Properties
 
Outstanding Loan Amount
 
Weighted Average
Effective Interest Rate (1)
 
Weighted Average Maturity (2)
June 30, 2013
 
165

 
$
269,918

 
4.25
%
 
4.99
December 31, 2012
 
164

 
$
265,118

 
4.28
%
 
5.51
_______________________________________________
(1)
Mortgage notes payable have fixed rates or are fixed by way of interest rate swap arrangements. Effective interest rates range from 2.73% to 6.13% at June 30, 2013 and 3.32% to 6.13% at December 31, 2012.
(2)
Weighted average remaining years until maturity as of June 30, 2013 and December 31, 2012, respectively.
The following table summarizes the scheduled aggregate principal repayments subsequent to June 30, 2013 (amounts in thousands):
Year
 
Total
July 1, 2013 - December 31, 2013
 
$
74

2014
 
189

2015
 
13,767

2016
 
16,820

2017
 
169,768

Thereafter
 
69,300

Total
 
$
269,918

The Company’s mortgage loan agreements generally require the maintenance of financial covenants, as well as restrictions on corporate guarantees, and the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios). As of June 30, 2013, the Company was in compliance with the debt covenants under the mortgage loan agreements.
Note 7 — Other Investments
The following table details the unrealized gains and losses on investment securities as of June 30, 2013 and December 31, 2012 (amounts in thousands):
 
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Investments in real estate fund as of June 30, 2013
 
$
10,000

 
$
—

 
$
(80
)
 
$
9,920

Preferred securities as of December 31, 2012
 
$
41,747

 
$
223

 
$
(316
)
 
$
41,654

At June 30, 2013, the Company had investments in a real estate fund, which was invested primarily in equity securities of other publicly traded REITS.
At December 31, 2012, the Company had investments in redeemable preferred stock and senior notes, accounted for as debt securities, with a fair value of $41.7 million. These investment securities were sold during the six months ended June 30, 2013, resulting in a gain on sale of investments of $0.5 million.

14
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Investments are considered available-for-sale securities and therefore increases or decreases in the fair value of these investments are recorded in accumulated other comprehensive income as a component of equity on the consolidated balance sheets unless the securities are considered to be permanently impaired at which time the losses are reclassified to expense.
Note 8 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of June 30, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The Company’s interest rate cap derivative measured at fair value on a recurring basis as of June 30, 2013 was zero and was classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments, are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the counterparties.
The Company's investments in funds and preferred units trade in active markets or are comprised of securities that trade in active markets and therefore, due to the availability of quoted market prices in active markets are classified these investments as Level 2 in the fair value hierarchy.

15
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

The following table presents information about the Company’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, aggregated by the level in the fair value hierarchy within which those instruments fall (amounts in thousands):


Quoted Prices
in Active
Markets
Level 1

Significant Other
Observable
Inputs
Level 2

Significant
Unobservable
Inputs
Level 3

Total
June 30, 2013:








Fund investments

$
—


$
9,920


$
—


$
9,920

Interest rate swap assets

—


10,161


—


10,161

Interest rate swap liabilities

—


(1,186
)

—


(1,186
)
Convertible obligation to Series C Convertible Preferred stockholders

—


—


(445,000
)

(445,000
)
Contingent value rights obligation to preferred and common investors

—


—


(31,134
)

(31,134
)









December 31, 2012:








Preferred securities

$
41,654


$
—


$
—


$
41,654

Interest rate swaps

—


(3,830
)

—


(3,830
)
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 or Level 3 of the fair value hierarchy during the six months ended June 30, 2013.
The following is a reconciliation of the beginning and ending balance for the changes in instruments with level 3 inputs in the fair value hierarchy for the three and six months ended June 30, 2013:
 
 
Contingent value rights obligation to preferred and common investors
 
Convertible obligation to Series C Convertible Preferred stockholders
 
Total
Beginning balance
 
$
—

 
$
—

 
$
—

Fair value at issuance
 
—

 
(445,000
)
 
(445,000
)
Fair value adjustment
 
(31,134
)
 
—

 
(31,134
)
Ending balance
 
$
(31,134
)
 
$
(445,000
)
 
$
(476,134
)
The fair value of the contingent value rights obligations were estimated by a third party using a Monte Carlo simulation technique to estimate the future value of the Company's common stock price based partially upon observable inputs such as historical volatility and risk free interest rates. The fair value of the convertible obligation to the Series C Convertible Preferred stockholders was based primarily upon the results of the valuation of the contingent value rights estimate of the future value of the Company's common stock and managements intention of obtaining a shareholder vote permitting the conversion of the Series C Convertible Preferred Stock to shares of common stock.
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, due to affiliates and accounts payable approximate their carrying value on the accompanying consolidated balance sheets due to their short-term nature.

16
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

The fair values of the Company’s financial instruments that are not reported at fair value on the consolidated balance sheets are reported below (amounts in thousands):
 
 
 
 
Carrying Amount at
 
Fair Value at
 
Carrying Amount at
 
Fair Value at
 
 
Level
 
June 30, 2013
 
June 30, 2013
 
December 31, 2012
 
December 31, 2012
Mortgage notes payable
 
3
 
$
269,918

 
$
271,645

 
$
265,118

 
$
271,056

Senior secured revolving credit facility
 
3
 
—

 
—

 
124,604

 
124,604

Senior corporate credit facility
 
3
 
600,000

 
600,000

 
—

 
—

Total
 
 
 
$
869,918

 
$
871,645

 
$
389,722

 
$
395,660

The fair value of mortgage notes payable are obtained by calculating the present value at current market rates. The terms of the senior secured revolving credit facility, the terms of the senior corporate credit facility, and the Company's level ratio are considered commensurate with the market, as such the outstanding balance on the facility approximates fair value.

17
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Note 9 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.
Cash Flow Hedges of Interest Rate Risk
The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and collars as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2013, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next twelve months, the Company estimates that an additional $4.3 million will be reclassified from other comprehensive income as an increase to interest expense. During the three and six months ended June 30, 2013, the Company accelerated the reclassification of approximately $27,000 in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur.

18
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

As of June 30, 2013, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):
Interest Rate Derivative
 
Number of
Instruments
 
Notional Amount
Interest rate swaps
 
10
 
$
667,590

As of December 31, 2012, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):
Interest Rate Derivative
 
Number of
Instruments
 
Notional Amount
Interest rate swaps
 
7
 
$
152,590

Interest rate cap
 
1
 
50,000

Total
 
8
 
$
202,590

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2013 and December 31, 2012 (dollar amounts in thousands):
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
June 30, 2013
 
December 31, 2012
Interest rate products
 
Derivative assets, at fair value
 
$
10,161

 
$
—

Interest rate products
 
Derivative liabilities, at fair value
 
$
(1,186
)
 
$
(3,830
)
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and six months ended June 30, 2013 and 2012, respectively (amounts in thousands).
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships
 
2013
 
2012
 
2013
 
2012
Amount of gain (loss) recognized in accumulated other comprehensive income on interest rate derivatives (effective portion)
 
$
12,748

 
$
(2,485
)
 
$
10,889

 
$
(3,174
)
Amount of gain (loss) reclassified from accumulated other comprehensive income into income as interest expense (effective portion)
 
$
(1,269
)
 
$
(249
)
 
$
(1,951
)
 
$
(335
)
Amount of gain (loss) recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
 
$
(23
)
 
$
—

 
$
(23
)
 
$
—

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of June 30, 2013 and December 31, 2012. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.
Offsetting of Derivative Assets and Liabilities
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets Presented in the Consolidated Balance Sheet
 
Net Amounts of Liabilities Presented in the Consolidated Balance Sheet
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
June 30, 2013
 
$
10,161

 
$
(1,186
)
 
$
—

 
$
10,161

 
$
(1,186
)
 
$
—

 
$
—

 
$
8,975

December 31, 2012
 
$
—

 
$
(3,830
)
 
$
—

 
$
—

 
$
(3,830
)
 
$
—

 
$
—

 
$
(3,830
)
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

19
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

As of June 30, 2013, the fair value of the derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $1.3 million. As of June 30, 2013, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $1.3 million at June 30, 2013.
Reclassifications out of Accumulated Other Comprehensive Income (“AOCI”)
The following table details reclassification adjustments out of AOCI and the corresponding effect on net income for the three and six months ended June 30, 2013 and 2012 (amount in thousands):
AOCI Component
 
Amount Reclassified from AOCI
 
Affected Line Items in the Consolidated Statements of Operations and Comprehensive Loss
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
Unrealized loss on investment securities, net
 
$
—

 
$
—

 
$
93

 
$
—

 
Gain on sale of investment securities
Designated derivatives, fair value adjustment
 
(1,269
)
 
(249
)
 
(1,951
)
 
(335
)
 
Interest expense
Note 10 Convertible Preferred Stock
The Company has the following classes of convertible preferred stock outstanding at June 30, 2013:
Issue
 
Date Issued
 
Units
 
Gross Proceeds
(In thousands)
 
Liquidation Preference
 
Dividend/Interest Rate
 
 
 
 
 
Shares classified as Equity:
 
 
 
 
 
 
 
 
 
 
Series A Convertible Preferred Stock(1)
 
May 11, 2012
 
545,454

 
$
6,000

 
$
11.00

 
$
0.77

Series B Convertible Preferred Stock(2)
 
July 24, 2012
 
283,018

 
3,000

 
10.60

 
0.74


 
 
 
 
 
 
 
 
 
 
Shares classified as Liabilities:
 
 
 
 
 
 
 
 
 
 
Series C Convertible Preferred Stock (3)
 
June 7, 2013
 
28,398,213

 
$
445,000

 
$
15.67

 
5.81
%
_______________________________________________
(1)The Series A Convertible Preferred Stock may be redeemed at the option of the Company in whole or in part after the issuance date at $11.00 per share.
(2)The Series B Convertible Preferred Stock may be redeemed at the option of the Company in whole or in part after the issuance date at $10.60 per share.
(3)The Series C Convertible Preferred Stock is mandatorily redeemable or exchangeable for shares of common stock at the option of the Company within three business days following the earliest to occur of (A) the closing of the CapLease Merger (B) the first trading day following (a) an announcement that CapLease has accepted a competing offer (which did not occur within the time specified in the CapLease Merger Agreement) or (b) the CapLease Merger Agreement is otherwise terminated, and (C) December 31, 2013, the Company will have the option to: (I) convert all shares of Series C Convertible Preferred Stock into such number of shares of the Company’s common stock equal to the par value of the Series C Convertible Preferred Stock divided by the lowest of (i) a 2% discount to the VWAP of the Company’s common stock for the 10 prior trading days, (ii) a 2% discount to the closing price on such date and (iii) $15.67, as adjusted from time to time or (II) redeem all shares of the Company’s Series C Convertible Preferred Stock in cash at 120% of its par value. As of June 30, 2013, the Company is limited, without the approval of holders of the Company's common stock and Series C Convertible Preferred Stock to amend the Series C Articles Supplementary, to issuing no more than 3.3 million shares of common stock upon conversion of shares of Series C Convertible Preferred Stock due to limitations imposed by the articles supplementary for the Series C Convertible Preferred Stock. Therefore, upon the required conversion the Company will cancel any remaining Series C Convertible Preferred Stock in exchange for cash in lieu of common stock in an amount equal to the greater of the product of such number of excess shares into which the shares of Series C stock would have been convertible and (i) 120% of the liquidation preference, which is $15.67, as may be adjusted from time to time, and (ii) the Conversion Price valued at the one-day VWAP of the common stock on the applicable date.

20
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Note 11 — Common Stock
Increases in Authorized Common Stock
On July 2, 2013, the Company filed articles of amendment to its charter to increase the number of authorized shares of common stock to 750,000,000 shares.
Offerings
On August 1, 2012, the Company filed a $500 million universal shelf registration statement and a resale registration statement with the SEC. Each registration statement became effective on August 17, 2012. As of June 30, 2013, the Company had issued 2.1 million shares of common stock under the $500 million universal shelf registration statement. No preferred stock, debt or equity-linked security had been issued under this $500 million universal shelf registration statement. The resale registration statement, as amended, registers the resale of up to 1,882,248 shares of common stock issued in connection with any future conversion of certain currently outstanding restricted shares, convertible preferred stock or limited partnership interests in the OP.
On March 13, 2013, the Company filed a universal automatic shelf registration statement that was automatically declared effective and achieved well-known seasoned issuer (“WKSI”) status. The Company intends to maintain both the $500 million universal shelf registration statement and the WKSI universal automatic shelf registration statement.
In January 2013, the Company commenced its “at the market” equity offering program (“ATM”) in which it may from time to time offer and sell shares of its common stock having an aggregate offering proceeds of up to $60.0 million. The shares will be issued pursuant to the Company's $500.0 million universal shelf registration statement.
The following are the Company's equity offerings of common stock during the six months ended June 30, 2013 (dollar amounts in millions):
Type of offering
 
Closing Date
 
Number of Shares(1)
 
Gross Proceeds
Registered follow on offering
 
January 29, 2013
 
2,070,000

 
$
26.7

ATM
 
January 1 - June 30, 2013
 
553,300

 
8.9

Private placement offering
 
June 7, 2013
 
29,411,764

 
455.0

Total
 
 
 
32,035,064

 
$
490.6

_______________________________________________
(1) Excludes 140.7 million shares of common stock that were issued to the stockholders of ARCT III's common stock in conjunction with the ARCT III Merger.
Upon the closing of the ARCT III Merger, 29.2 million shares of the then outstanding shares of ARCT III's common stock were paid in cash at $12.00 per share, which equals 27.7 million shares of the Company's common stock after the application of the ARCT III Exchange Ratio. In addition, upon closing of the ARCT III Merger, 148.1 million shares of ARCT III's common stock were converted to shares of Company's common stock at the ARCT III Exchange Ratio, resulting in an additional 140.7 million shares of the Company's common stock outstanding after the exchange.

21
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Dividends
The Company's board of directors has authorized, and the Company began paying, dividends since October 2011 on the fifteenth day of each month to stockholders of record on the eight day of such month. During the six months ended June 30, 2013, the board of directors of the Company has authorized the following increases in the Company's dividend.
Dividend increase declaration date
 
Annualized dividend per share
 
Effective date
March 17, 2013
 
$0.91
 
June 8, 2013
May 28, 2013
 
$0.94
 
*
_______________________________________________
* The dividend increase is contingent upon, and effective with, the earlier of the close of the ARCT IV Merger or the close of the CapLease Merger.
The annualized dividend rate at June 30, 2013 was $0.910 per share.
Note 12— Share-Based Compensation
Equity Plan
The Company has adopted the American Realty Capital Properties, Inc. Equity Plan (the “Equity Plan”), which provides for the grant of stock options, restricted shares of common stock, restricted stock units, dividend equivalent rights and other equity-based awards to the Manager, non-executive directors, officers and other employees and independent contractors, including employees or directors of the Manager and its affiliates who are providing services to the Company.
The Company authorized and reserved a total number of shares equal to 10.0% of the total number of issued and outstanding shares of common stock (on a fully diluted basis assuming the redemption of all OP Units for shares of common stock) to be issued at any time under the Equity Plan for equity incentive awards excluding an initial grant of 167,400 shares to the Manager in connection with the IPO. All such awards of shares will vest ratably on a quarterly or annual basis over a three-year period beginning on the first anniversary of the date of grant and shall provide for “distribution equivalents” with respect to this restricted stock, whether or not vested, at the same time and in the same amounts as dividends are paid to the stockholders.
In February 2013, the Company granted 325,000 restricted shares of common stock to the Manager and certain employees. These shares did not vest upon the consummation of the ARCT III Merger but will vest ratably over a three-year period and shall provide for “distribution equivalents” with respect to this restricted stock, whether or not vested, at the same time and in the same amounts as dividends are paid to the stockholders.
Director Stock Plan
The Company has adopted the American Realty Capital Properties, Inc. Non-Executive Director Stock Plan (the “Director Stock Plan”), which provides for the grant of restricted shares of common stock to each of the Company's independent directors, each of whom is a non-executive director. Awards of restricted stock will vest ratably over a five-year period following the first anniversary of the date of grant in increments of 20.0% per annum, subject to the director’s continued service on the board of directors, and shall provide for “distribution equivalents” with respect to this restricted stock, whether or not vested, at the same time and in the same amounts as distributions are paid to the stockholders. At June 30, 2013, a total of 99,000 shares of common stock are reserved for issuance under the Director Stock Plan.
The fair value of restricted common stock awards under the Equity Plan and Director Stock Plan is determined on the grant date using the closing stock price on NASDAQ that day. The fair value of restricted common stock under the Equity Plan is updated at the end of each quarter based on quarter end closing stock price through the final vesting date.

22
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

ARCT III Restricted Share Plan
ARCT III had an employee and director incentive restricted share plan (the “RSP”), which provided for the automatic grant of 3,000 restricted shares of common stock to each of its independent directors, without any further action by ARCT III’s board of directors or its stockholders, on the date of initial election to the board of directors and on the date of each annual stockholder’s meeting thereafter. Restricted stock issued to independent directors vested over a five-year period following the first anniversary of the date of grant in increments of 20.0% per annum. The RSP provided ARCT III with the ability to grant awards of restricted shares to its directors, officers and employees (if ARCT III ever had employees), employees of ARCT III's Advisor and its affiliates, employees of entities that provided services to ARCT III, directors of the ARCT III Advisor or of entities that provided services to ARCT III, certain consultants to ARCT III and the ARCT III Advisor and its affiliates or to entities that provided services to ARCT III.
Immediately prior to the effective time of the ARCT III Merger, each then-outstanding share of ARCT III restricted stock fully vested. All shares of ARCT III common stock then-outstanding as a result of the full vesting of shares of ARCT III restricted stock, and the satisfaction of any applicable withholding taxes, had the right to receive a number of shares of the Company's common stock based on the ARCT III Exchange Ratio.
The following tables detail the restricted shares activity within the Equity Plan, Director Stock Plan and RSP during the three and six months ended June 30, 2013:
Restricted Share Awards
 
 
Equity Plan
 
RSP & Director Stock Plan
 
 
Number of
Restricted Common Shares
 
Weighted-Average Issue Price
 
Number of
Restricted Common Shares
 
Weighted-Average Issue Price
Awarded December 31, 2012
 
259,909

 
$
11.84

 
30,300

 
$
10.68

Granted
 
325,000

 
13.88

 
18,000

 
14.58

Forfeited
 
—

 
—

 
—

 
—

Awarded June 30, 2013
 
584,909

 
$
12.95

 
48,300

 
$
12.13

Unvested Restricted Shares
 
 
Equity Share Plan
 
RSP & Director Stock Plan
 
 
Number of
Restricted Common Shares
 
Weighted-Average Issue Price
 
Number of
Restricted Common Shares
 
Weighted-Average Issue Price
Unvested, December 31, 2012
 
186,403

 
$
11.62

 
27,930

 
$
10.58

Granted
 
325,000

 
13.83

 
18,000

 
14.58

Vested
 
(186,403
)
 
(11.62
)
 
(27,930
)
 
(10.58
)
Forfeited
 
—

 
—

 
—

 
—

Unvested, June 30, 2013
 
325,000

 
$
13.83

 
18,000

 
$
14.58

In connection with the ARCT III Merger, each share of the Company's and ARCT III's restricted stock outstanding as of immediately prior to the effective date of the ARCT III Merger became fully vested.
For the three months ended June 30, 2013 and 2012, compensation expense for restricted shares was $0.2 million, respectively. For the six months ended June 30, 2013 and 2012, compensation expense for restricted shares was $0.6 million and $0.4 million, respectively. Compensation expense for the accelerated vesting of restricted shares in conjunction with the ARCT III Merger restricted shares of $2.2 million during the three and six months ended June 30, 2013 was recorded as Merger costs.
In July 2013, the Company granted 300,000 restricted shares of common stock to the Manager and certain employees at a grant date price of $14.80 per share. These shares will vest ratably over a three-year period and shall provide for “distribution equivalents” with respect to these restricted shares, whether or not vested, at the same time and in the same amounts as dividends are paid to the stockholders.

23
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Multi-Year Performance Plan
Upon consummation of the ARCT III Merger, the Company entered into the 2013 Advisor Multi-Year Outperformance Agreement (the “OPP”) with the Manager, whereby the Manager will be able to potentially earn compensation upon the attainment of stockholder value creation targets.
Under the OPP, the manager was granted 8,241,101 long term incentive plan units (“LTIP Units”) of the OP, which will be earned or forfeited based on the Company's total return to stockholders (including both share price appreciation and common stock distributions) (“Total Return”), for the three year period consisting of:
•
Absolute Component: 4.0% of any excess Total Return attained above an absolute hurdle of 7.0% for each annual measurement period, non-compounded, 14.0% for the interim measurement period and 21.0% for the full performance period; and
•
Relative Component: 4.0% of any excess Total Return attained above the Total Return for the performance period of a peer group comprised of the following companies: CapLease, Inc.; EPR Properties; Getty Realty Corporation; Lexington Realty Trust; National Retail Properties, Inc.; and Realty Income Corporation.
The award will be funded (“OPP Pool”) up to a maximum award opportunity equal to 5% of the Company's equity market capitalization at the ARCT III Merger date of $2.1 billion (the “OPP Cap”). Awards under the OPP are dependent on achieving an annual hurdle that commenced December 11, 2012, an interim (two-year) hurdle and then the aforementioned three-year hurdle ending on December 31, 2015.
In order to further ensure that the interests of the Manager are aligned with the Company's investors, the Relative Component is subject to a ratable sliding scale factor as follows:
•
100.0% will be earned if the Company attains a median Total Return of at least 6.0% for each annual measurement period, non-compounded, at least 12% for the interim measurement period, and at least 18.0% for the full performance period;
•
50.0% will be earned if the Company attains a median Total Return of at least 0.0% for each measurement period;
•
0.0% will be earned if the Company attains a median Total Return of less than 0.0% for each measurement period; and
•
A percentage from 50.0% to 100.0% calculated by linear interpolation will be earned if the Company's median Total Return is between 0.0% and the percentage set for each measurement period.
For each year during the performance period a portion of the OPP Cap equal to a maximum of up to 1.25% of the Company's equity market capitalization of $2.1 billion will be “locked-in” based upon the attainment of the performance hurdles set forth above for each annual measurement period. In addition, a portion of the OPP Cap equal to a maximum of up to 3.0% of the Company's equity market capitalization will be “locked-in” based upon the attainment of the performance hurdles set forth above for the interim measurement period, which if achieved, will supersede and negate any prior “locked-in” portion based upon annual performance through December 31, 2013 and 2014 (i.e., a maximum award opportunity equal to a maximum of up to 3.0% of the Company's equity market capitalization may be “locked-in” through December 31, 2014).
Following the performance period, the Absolute Component and the Relative Component will be calculated separately and then added together to determine the aggregate award earned under the OPP, which will be the lesser of the sum of the two components and the OPP Cap. The OPP Pool will be used to determine the number of LTIP units that vest. Any unvested LTIP units will be immediately forfeited on December 31, 2015. At June 30, 2013, 100% of the pool has been allocated.
The Manager will be entitled to convert 33.3% of the LTIP units earned into OP Units on each of December 31, 2015, 2016 and 2017 and within 30 days following such date. In addition, the OPP provides for accelerated earning and vesting of LTIP Units and redemption of vested LTIP Units for cash if the Manager is terminated or if the Company experiences a change in control. The Manager will be entitled to receive a tax gross-up in the event that any amounts paid to it under the OPP constitute “parachute payments” as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”).
The fair value of the LTIP Units granted are being amortized over the performance period. During the three and six months ended June 30, 2013, the Company has recorded expense of $3.1 million and $3.7 million, respectively, for the OPP.

24
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Note 13 — Commitments and Contingencies
Contractual Lease Obligations
The following table reflects the minimum base rental cash payments due from the Company over the next five years and thereafter for ground lease arrangements (amounts in thousands):
 
 
Future Minimum
Base Rent Payments
July 1, 2013 - December 31, 2013
 
$
174

2014
 
348

2015
 
349

2016
 
349

2017
 
353

Thereafter
 
2,477

Total
 
$
4,050

Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. There are no material legal proceedings pending or known to be contemplated against the Company, except as follows:
Since the announcement of the CapLease Merger Agreement on May 28, 2013, the following lawsuits have been filed:
CapLease, its directors, and its affiliates, CapLease's operating partnership and the general partner of the operating partnership, as well as the Company, the OP and a CapLease Merger related subsidiary, have been named as defendants in a putative class action lawsuit in connection with the proposed merger, styled Mizani v. CapLease, Inc., No. 651986/2013, in the Supreme Court of the State of New York, New York County. The complaint alleges, among other things, that the CapLease Merger Agreement was the product of breaches of fiduciary duty by CapLease’s directors because the CapLease Merger does not provide for full and fair value for the CapLease’s stockholders, the CapLease Merger was not the result of a competitive bidding process, the CapLease Merger Agreement contains coercive deal protection measures, and the CapLease Merger Agreement and the CapLease Merger were approved as a result of improper self-dealing by certain defendants who would receive certain alleged employment compensation benefits and continued employment pursuant to the CapLease Merger Agreement. The complaint also alleges that CapLease, the Company, the OP and a CapLease Merger related subsidiary, aided and abetted the directors’ alleged breaches of fiduciary duty. The plaintiff seeks, among other things, to enjoin completion of the CapLease Merger. The Company believes that the allegations of the complaint are without merit and that it has substantial meritorious defenses to the claims set forth in the complaint.
Separately, CapLease, its directors and its affiliates, the CapLease's operating partnership and the general partner of the CapLease's operating partnership, as well as the Company, the OP and a CapLease Merger related subsidiary, have been named as defendants in a putative class action and derivative lawsuit in connection with the proposed merger, styled Tarver v. CapLease, Inc., No. 24C13004176, in the Circuit Court of the State of Maryland, Baltimore City. The complaint alleges, among other things, that the CapLease Merger Agreement was the product of breaches of fiduciary duty by CapLease’s directors because the CapLease Merger does not provide for full and fair value for the CapLease’s stockholders, the CapLease Merger Agreement contains coercive deal protection measures, the CapLease Merger was not the result of a competitive bidding process, and the CapLease Merger Agreement and the CapLease Merger were approved as a result of improper self-dealing. The complaint also alleges that CapLease, CapLease's operating partnership, the general partner of the CapLease's operating partnership, the Company, the OP and a CapLease Merger related subsidiary aided and abetted the directors’ alleged breaches of fiduciary duty. The plaintiff seeks, among other things, to enjoin completion of the CapLease Merger. The Company believes that the allegations of the complaint are without merit and that it has substantial meritorious defenses to the claims set forth in the complaint.

25
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Separately, CapLease, its directors and its affiliates, the CapLease's operating partnership and the general partner of the CapLease's operating partnership, as well as the Company, the OP and a CapLease Merger related subsidiary, have been named as defendants in a putative class action and derivative lawsuit in connection with the proposed CapLease Merger, styled Carach v. CapLease, Inc., No. 651986/2013, in the Supreme Court of the State of New York, New York County. The complaint alleges, among other things, that the CapLease Merger Agreement was the product of breaches of fiduciary duty by the CapLease’s directors because the CapLease Merger does not provide for full and fair value for the CapLease’s stockholders, the CapLease directors failed to take steps to maximize the value of CapLease or properly value CapLease, failed to protect against various alleged conflicts of interest, and failed to fully disclose material information concerning the process that led to the CapLease Merger. The complaint also alleges that CapLease's operating partnership, the general partner of CapLease's operating partnership, the Company, the OP and a CapLease Merger related subsidiary aided and abetted the CapLease directors’ alleged breaches of fiduciary duty. The plaintiff seeks, among other things, to enjoin completion of the CapLease Merger. The Company believes that the allegations of the complaint are without merit and that it has substantial meritorious defenses to the claims set forth in the complaint.
Since the announcement of the ARCT III Merger Agreement on December 17, 2012, Randell Quaal filed a putative class action lawsuit filed on January 19, 2013 against the Company, the OP, ARCT III, ARCT III OP, the members of the board of directors of ARCT III and certain subsidiaries of the Company in the Supreme Court of the State of New York. The lawsuit alleges, among other things, that the board of ARCT III breached its fiduciary duties in connection with the transactions contemplated under the ARCT III Merger Agreement. In February 2013, the parties agreed to a memorandum of understanding regarding settlement of all claims asserted on behalf of the alleged class of ARCT III stockholders. In connection with the settlement contemplated by that memorandum of understanding, the class action and all claims asserted therein will be dismissed, subject to court approval. The proposed settlement terms required ARCT III to make certain additional disclosures related to the ARCT III Merger, which were included in a Current Report on Form 8-K filed by ARCT III with the SEC on February 21, 2013. The memorandum of understanding also added that the parties will enter into a stipulation of settlement, which will be subject to customary conditions, including confirmatory discovery and court approval following notice to ARCT III’s stockholders. If the parties enter into a stipulation of settlement, a hearing will be scheduled at which the court will consider the fairness, reasonableness and adequacy of the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of settlement, that the court will approve any proposed settlement, or that any eventual settlement will be under the same terms as those contemplated by the memorandum of understanding, therefore any losses that may be incurred to settle this matter are not determinable.
The Company maintains directors and officers liability insurance which the Company believes should provide coverage to the Company and its officers and directors for most or all of any costs, settlements or judgments resulting from the lawsuits.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition, in each case, that it believes will have a material adverse effect on the results of operations.
Note 14 — Related Party Transactions and Arrangements
Ownership by Affiliates
Certain affiliates of the Company have ownership in the Company through ownership of shares of the Company's common stock, shares of unvested restricted common stock or OP units. As of June 30, 2013 and December 31, 2012, 4.82% and 1.39%, respectively, of the total equity units issued by the Company were owned by affiliates.
The Company has issued restricted stock to the Manager and non-executive directors in conjunction with a share-based compensation plan. See Note 12— Share-Based Compensation .
Fees Paid in Connection with Common Stock Offerings
RCS received selling commissions of 6% of the gross offering proceeds from the sale of the Company’s common stock in the IPO. In addition, RCS received dealer manager fees of 2% of the gross offering proceeds before reallowance to participating broker-dealers in the IPO. RCS was permitted to re-allow all or a portion of its dealer manager fee to participating broker-dealers.

26
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

In addition, RCS, served as the dealer manager of the ARCT III IPO. RCS received fees and compensation in connection with the sale of ARCT III’s common stock in the ARCT III IPO. RCS received a selling commission of up to 7% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers in the ARCT III IPO. In addition, RCS received up to 3% of the gross proceeds from the sale of common stock, before reallowance to participating broker-dealers, as a dealer-manager fee in the ARCT III IPO. RCS was permitted to reallow its dealer-manager fee to such participating broker-dealers, based on such factors as the volume of shares sold by respective participating broker-dealers and marketing support incurred as compared to those of other participating broker-dealers.
The following table details the results of such activities related to RCS, which are recorded as offering costs on the consolidated statement of changes in equity (amounts in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Payable as of
 
 
2013
 
2012
 
2013
 
2012
 
June 30, 2013
 
December 31, 2012
Total commissions and fees paid to RCS
 
$
—

 
$
57,914

 
$
—

 
$
79,791

 
$
—

 
$
—

The Company reimbursed the Manager, the ARCT III Advisor and RCS for services relating to the IPO, the Company's follow-on offerings, the ARCT III IPO, and other significant transactions such as the ARCT III Merger, for which the Manager provided assistance. The following table details the results of such activities related to offering and other significant transactions costs reimbursed to the Manager, the ARCT III Advisor and RCS (amounts in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Payable as of
 
 
2013
 
2012
 
2013
 
2012
 
June 30, 2013
 
December 31, 2012
Offering expense and other significant transactions reimbursements
 
$
499

 
$
12,869

 
$
1,114

 
$
20,231

 
$
100

 
$
—

Fees Paid in Connection with the Operations of the Company
Each of the Company and ARCT III paid the Manager and the ARCT III Advisor, as applicable, an acquisition fee equal to 1.0% of the contract purchase price (including assumed indebtedness) of each property the Company or ARCT III, as applicable, acquired. The acquisition fee was payable in cash at the closing of each acquisition. In conjunction with the ARCT III Merger, it was agreed that these fees would no longer be paid to either party. Acquisition fees are recorded in Acquisition related costs in the consolidated statements of operations and comprehensive loss.
Each of the Company and ARCT III paid the Manager and the ARCT III Advisor, as applicable, a financing fee equal to 0.75% of the amount available under any secured mortgage financing or refinancing that the Company or ARCT III, as applicable, obtained and used for the acquisition of properties that was arranged by the Manager or ARCT III Advisor, as applicable. The financing coordination fee was payable in cash at the closing of each financing. In conjunction with the ARCT III Merger, it was agreed that these fees would no longer be paid to either party.
The Company paid the Manager an annual base management fee equal to 0.50% per annum of the average unadjusted book value of the Company's real estate assets, calculated and payable monthly in advance. The Company's Manager waived such portion of its management fee in excess of certain net income thresholds related to our operations. The management fee is payable in cash. In conjunction with the ARCT III Merger, the base management fee was reduced to 0.40% per annum for the unadjusted book value of assets over $3.0 billion. Management fees, if accrued are recorded in Operating fees to affiliates in the consolidated statements of operations and comprehensive loss.
Until July 1, 2012, ARCT III paid the ARCT III Advisor an asset management fee of 0.75% per annum of the cost of its assets (cost includes the purchase price, acquisition expenses, capital expenditures and other customarily capitalized costs, but excludes acquisition fees) plus costs and expenses incurred by the ARCT III Advisor in providing asset management services; provided, however, that the asset management fee was reduced by any amounts payable to ARCT III's property manager as an oversight fee, such that the aggregate of the asset management fee and the oversight fee did not exceed 0.75% per annum of the cost of ARCT III's assets plus costs and expenses incurred by the ARCT III Advisor in providing asset management services.
Prior to July 1, 2012, this fee was payable in monthly installments at the discretion of ARCT III's board of directors in cash, common stock or restricted stock grants, or any combination thereof. Asset management fees, if accrued are recorded in Operating fees to affiliates in the consolidated statements of operations and comprehensive loss. The Company also pays fees for transfer agent services to an affiliate, American National Stock Transfer, LLC.

27
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Effective July 1, 2012, the payment of asset management fees in monthly installments in cash, shares or restricted stock grants, or any combination thereof to the ARCT III Advisor was eliminated. Instead, ARCT III issued (subject to periodic approval by its board of directors) to the ARCT III Advisor performance-based restricted partnership units of the ARCT III OP designated as “Class B units,” which were intended to be profits interests and to vest, and no longer be subject to forfeiture, at such time as: (x) the value of the ARCT III OP’s assets plus all distributions made equal or exceeded the total amount of capital contributed by investors plus a 6.0% cumulative, pre-tax, non-compounded annual return thereon (the “economic hurdle”); and among other potential events, a liquidity event accrued.
The ARCT III Advisor received distributions on unvested Class B units equal to the distribution rate received on ARCT III common stock. Such distributions on issued Class B units were included as general and administrative expense in the consolidated statement of operations until the performance condition is considered probable to occur. 145,022 Class B units were approved by ARCT III's board of directors as of December 31, 2012. During January and February 2013, ARCT III's board of directors approved, and ARCT III issued, 603,599 Class B units to the ARCT III Advisor for its asset management services provided. As of December 31, 2012, ARCT III did not consider achievement of the performance condition to be probable as the shareholder vote for the ARCT III Merger, which would allow vesting of these Class B Units, was not completed. The performance condition related to these Class B units was satisfied upon the completion of the ARCT III Merger and expense of $9.9 million was recorded at that time. The Class B units then converted to ARCT III OP units which converted to 711,190 OP Units after the application of the ARCT III Exchange Ratio. These expenses were recorded in ARCT III Merger and other transaction related in the consolidated statements of operations and comprehensive loss.
The Company may be required to pay the Manager a quarterly incentive fee, calculated based on 20 percent of the excess Company annualized core earnings (as defined in the management agreement with the Manager) over the weighted average number of shares multiplied by the weighted average price per share of common stock. One half of each quarterly installment of the incentive fee will be payable in shares of common stock. The remainder of the incentive fee will be payable in cash. No such incentive fees have been incurred or paid to the Manager since inception.
ARCT III paid an affiliate of the Sponsor, unless it contracted with a third party, a property management fee of up to 2% of gross revenues from ARCT III's stand-alone single-tenant net leased properties and 4% of gross revenues from its multi-tenant properties, plus, in each case, market-based leasing commissions applicable to the geographic location of the property. ARCT III also reimbursed the affiliate for property level expenses. If ARCT III contracted directly with third parties for such services, it paid them customary market fees and paid the affiliated property manager, an oversight fee of up to 1.0% of the gross revenues of the property managed. Property management fees are recorded in Operating fees to affiliates in the consolidated statements of operations and comprehensive loss.
In order to facilitate the smooth transition of property management services following the consummation of the ARCT III Merger, the Company, the OP and the Sponsor agreed that the Property Management and Leasing Agreement will be extended for a 60 day period following the consummation of the ARCT III Merger for which the Company paid the Sponsor $2.3 million. These fees were recorded in merger and transaction related in the consolidated statements of operations and comprehensive loss.
The Company is required to reimburse the Manager for all out-of-pocket costs actually incurred by the Manager, including without limitation, legal fees and expenses, due diligence fees and expenses, other third party fees and expenses, costs of appraisals, travel expenses, nonrefundable option payments and deposits on properties not acquired, accounting fees and expenses, title insurance premiums and other closing costs, personnel costs and miscellaneous expenses relating to the selection, acquisition and due diligence of properties. The Company's reimbursement obligation is not subject to any dollar limitation. Expenses will be reimbursed in cash on a monthly basis following the end of each month. However, the Company will not reimburse the Manager for the salaries and other compensation of its personnel. Reimbursements are recorded based on the related activity to which the expense relates.

28
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

The following table details amounts incurred by the Company or ARCT III and contractually due to the Sponsor, ARCT III Advisor or the Manager and forgiven in connection with the operations related services described above (amounts in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Payable as of
 
 
2013
 
2012
 
2013
 
2012
 
June 30, 2013
 
December 31, 2012
 
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
 
One-time fees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees (1)
 
$
510

 
$
—

 
$
3,138

 
$
—

 
$
3,104

 
$
—

 
$
5,183

 
$
—

 
$
—

 
$
364

Financing fees and related cost reimbursements
 
—

 
—

 
601

 
—

 
7,500

 
—

 
1,259

 
—

 
—

 
—

Other expense reimbursements
 
6,545

 
—

 
2,396

 
—

 
8,317

 
—

 
3,913

 
—

 
—

 
18

On-going fees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Base management fees (2)
 
2,000

 
2,000

 
966

 
966

 
4,654

 
2,370

 
1,447

 
1,235

 
—

 
—

Transfer agent fees
 
77

 
—

 
—

 
—

 
190

 
—

 
—

 
—

 
23

 
—

Property management and leasing fees (2)
 
—

 
—

 
148

 
148

 
799

 
799

 
211

 
211

 
—

 
—

Total operational fees and reimbursements
 
$
9,132

 
$
2,000

 
$
7,249

 
$
1,114

 
$
24,564

 
$
3,169

 
$
12,013

 
$
1,446

 
$
23

 
$
382

_______________________________________________
(1) In conjunction with the ARCT III Merger, the payment of acquisition fees was terminated, however for properties that were in ARCP's or ARCT III's pipeline at the ARCT III Merger date, the fees were paid as the Manager had sourced and negotiated the purchase price prior to the ARCT III Merger.
(2) Amounts incurred and paid were recognized in merger and other transaction related costs during the six months ended June 30, 2013.
Under an administrative support agreement between the Company and the Sponsor, the Sponsor was to pay or reimburse the Company for its general administrative expenses, including, without limitation, legal fees, audit fees, board of directors fees, insurance, marketing and investor relation fees, until September 6, 2012, which was one year after the closing of the IPO, to the extent the amount of certain net earnings from operations thresholds, as specified in the agreement, were less than the amount of the distributions declared by the Company during this one-year period. To the extent these amounts were paid by the Sponsor, they would not be subject to reimbursement by the Company. These costs are presented net in the accompanying consolidated statements of operations and comprehensive loss.
The ARCT III Advisor provided expense support to ARCT III from time to time to assist ARCT III with operating cash flow, distributions or other operational purposes.
The following table details general and administrative expenses absorbed by the Sponsor and the ARCT III Advisor and paid to the Company or ARCT III during the three and six months ended June 30, 2013 (amounts in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Receivable as of
 
 
2013
 
2012
 
2013
 
2012
 
June 30, 2013
 
December 31, 2012
General and administrative expenses absorbed
 
$
—

 
$
80

 
$
—

 
$
164

 
$
—

 
$
—

Fees Paid in Connection with the ARCT III Merger
ARCT III entered into an agreement with an affiliate, ARC Advisory Services, LLC, to provide legal support services up to the date that ARCT III entered into the ARCT III Merger Agreement and until the ARCT III Merger was consummated for $0.5 million. This amount was fully accrued as of December 31, 2012 and was paid in February 2013 in conjunction with the consummation of the ARCT III Merger.
ARCT III entered into an agreement with an affiliate, ARC Advisory Services, LLC, to provide support services including legal, accounting, marketing, human resources and information technology, among other services, until the earlier of the ARCT III Merger closing date or one year for $0.2 million pursuant to this contract. This amount was fully accrued as of December 31, 2012 and was paid in February 2013 in conjunction with the consummation of the ARCT III Merger.

29
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

ARCT III entered into an agreement with affiliates RCS and ARC Advisory Services, LLC, to provide financial advisory and information agent services related to the proxy solicitation seeking approval of the ARCT III Merger by ARCT III's stockholders for $0.6 million. Services provided include facilitation of the preparation, distribution and accumulation and tabulation of proxy materials, stockholder, analyst and financial advisor communications and consultation on materials and communications made to the public and regulatory agencies regarding the ARCT III Merger. The company recorded $0.5 million for the six months ended June 30, 2013 in addition to the $0.1 million that was accrued in the prior year and paid the full $0.6 million in conjunction with the consummation of the ARCT III Merger.
The Company entered into an Asset Purchase and Sale Agreement with the Sponsor pursuant to which, concurrently with the closing of the ARCT III Merger and in connection with the internalization by the Company of certain property level management and accounting activities, the Sponsor sold to the OP certain furniture, fixtures, equipment and other assets used by the Sponsor in connection with managing the property level business and operations and accounting functions of the Company and the OP, and included at the cost of such assets, for an aggregate price of $5.8 million, which includes the reimbursement of certain costs and expenses incurred by the Sponsor in connection with the ARCT III Merger.
On February 28, 2013, the OP entered into a Contribution and Exchange Agreement (the “Contribution and Exchange Agreement”) with the ARCT III OP and American Realty Capital III Special Limited Partnership, LLC, the holder of the special limited partner interest in the ARCT III OP (the “Special Limited Partner”). The Special Limited Partner was entitled to receive certain distributions from the ARCT III OP, including the subordinated distribution of net sales proceeds resulting from an “investment liquidity event” (as defined in the agreement of limited partnership of the ARCT III OP). The ARCT III Merger constituted an “investment liquidity event,” as a result of which the Special Limited Partner, in connection with management's successful attainment of the 6.0% performance hurdle and the return to ARCT III's stockholders of approximately $557.3 million in addition to their initial investment, was entitled to receive a subordinated distribution of net sales proceeds from the ARCT III OP equal to approximately $98.4 million. Pursuant to the Contribution and Exchange Agreement, the Special Limited Partner contributed its interest in the ARCT III OP, inclusive of the subordinated distribution proceeds received, to the ARCT III OP in exchange for 7.6 million ARCT III OP Units. Upon consummation of the ARCT III Merger, these ARCT III OP Units were immediately converted to 7.3 million OP Units after application of the ARCT III Exchange Ratio. In conjunction with the ARCT III Merger Agreement, the Special Limited Partner agreed to a minimum one year holding period for these OP units before converting them to shares of Company common stock.
Fees paid in connection with the ARCT III Merger were recorded in merger and transaction related in the consolidated statements of operations and comprehensive loss. Additionally, the Company acquired fixed assets with a carryover basis of $1.0 million from the Advisor; the consideration paid to the Advisor in excess of the carryover basis was $3.0 million.
Investment by Affiliate
In connection with the ARCT III Merger, the Special Limited Partner invested $0.8 million in exchange for 56,797 OP Units after the effect of the ARCT III Exchange Ratio.
Investment in Affiliate
During the three months ended June 30, 2013, the Company invested $10.0 million in an affiliated real estate fund, American Real Estate Income Fund, which invests primarily in equity securities of other publicly traded REITS. The fair value of the investment at June 30, 2013 was $9.9 million.
Note 15 — Economic Dependency
Under various agreements, the Company has engaged or may engage the Manager and its affiliates to provide certain services that are essential to the Company, including asset management services and supervision of the management and leasing of properties owned by the Company, the sale of shares of the Company’s common stock, as well as other administrative responsibilities for the Company including information technology, legal services and investor relations.
As a result of these relationships, the Company is dependent upon the Manager, the Sponsor and their affiliates. In the event that these companies were unable to provide the Company with the respective services, the Company would be required to find alternative providers of these services. As a result of the ARCT III Merger, the Company internalized certain accounting and property acquisition services previously performed by the Manager and its affiliates. The Company may from time to time engage the Manager for legal, information technology or other support services for which it will pay a fee.

30
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Note 16 — Net Loss Per Share 
The following is a summary of the basic and diluted net loss per share computation for the three and six months ended June 30, 2013 and 2012 (amounts in thousands, expect for shares and per share data):  
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Net loss from continuing operations attributable to stockholders
 
$
(51,713
)
 
$
(6,918
)
 
$
(189,686
)
 
$
(11,624
)
Less: dividends declared on preferred shares
 
(158
)
 
(70
)
 
(315
)
 
(70
)
Net loss from continuing operations attributable to common stockholders
 
(51,871
)
 
(6,988
)
 
(190,001
)
 
(11,694
)
Net income (loss) from discontinued operations attributable to common stockholders
 
34

 
(152
)
 
73

 
(474
)
Net loss attributable to common stockholders
 
$
(51,837
)
 
$
(7,140
)
 
$
(189,928
)
 
$
(12,168
)
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding (1)
 
162,368,538

 
68,312,582

 
157,904,082

 
45,961,046

Basic and diluted net loss per share from continuing operations attributable to common stockholders
 
$
(0.32
)
 
$
(0.10
)
 
$
(1.20
)
 
$
(0.25
)
Basic and diluted net loss per share from discontinued operations attributable to common stockholders
 
$
—

 
$
—

 
$
—

 
$
(0.01
)
Basic and diluted net loss per share attributable to common stockholders
 
$
(0.32
)
 
$
(0.10
)
 
$
(1.20
)
 
$
(0.26
)
_______________________________________________
(1) Weighted average shares for the six months ended June 30, 2013 are adjusted on a pro forma basis as if the purchase of 27.7 million shares of ARCT III common stock for cash, purchased in conjunction with the ARCT III Merger, had been completed at the beginning of the period. Weighted average shares for the six months ended June 30, 2013, excluding this pro forma adjustment, were 166,694,122 and net loss per share was $1.14 per share, basic and diluted.
As of June 30, 2013, the Company had 9,051,661 OP Units outstanding, which are convertible to an equal number of shares of the Company's common stock, 343,000 shares of unvested restricted stock outstanding, 545,454 shares of the Company's Series A Convertible Preferred Stock outstanding, 283,018 shares of the Company's Series B Convertible Preferred Stock outstanding, and 28,398,213 shares of the Company's Series C Convertible Preferred Stock outstanding, which were excluded from the calculation of diluted net loss per share as the effect would have been antidilutive.
Note 17 — Discontinued Operations and Properties Held for Sale
The Company separately classifies properties held for sale in the accompanying consolidated balance sheets and operating results for those properties as discontinued operations in the accompanying consolidated statements of operations and comprehensive loss. In the normal course of business, changes in the market or changes in credit risk of certain tenants, among other factors, may compel the Company to decide to classify a property as held for sale or reclassify a property that is designated as held for sale back to held for investment. In these situations, the property is transferred to held for sale or back to held for investment at the lesser of fair value or depreciated cost. As of June 30, 2013 and December 31, 2012, the Company held two properties (one vacant and one occupied) and one vacant property, respectively, classified as held for sale on the accompanying respective consolidated balance sheets. The occupied property classified as held for sale generated approximately $0.5 million of cash flow from rental income for the twelve months ended June 30, 2013.
Disposition of Asset Held for Sale
On March 5, 2013, the Company executed a purchase and sale agreement to sell a Citizens Bank branch in Worth, IL classified as held for sale as of June 30, 2013. The sale price of the asset is $0.7 million in cash, which approximates the carrying value of the property.
On July 17, 2013, the Company executed a letter of intent to sell a Shaw's Supermarket in Plymouth, MA classified as held for sale as of June 30, 2013. The sale price of the asset is $6.3 million in cash, which is $0.9 million greater than the carrying value of the property.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

Note 18 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except for the following:
Convertible Senior Note Offering
On July 29, 2013, the Company issued $300.0 million of 3.00% Convertible Senior Notes (“Notes”) due 2018 in an underwritten public offering. The Notes will mature on August 1, 2018. The Notes may be converted into cash, common stock or a combination thereof in limited circumstances prior to February 1, 2018 and may be converted into such consideration at any time on or after February 1, 2018. Additionally, the underwriters were granted a 30-day option to purchase up to an additional $30.0 million of Notes to cover over allotments. The over-allotment was exercised in part and the Company issued an additional $10.0 million of Notes pursuant to such over-allotment option on August 1, 2013. The Company intends to use the net proceeds of the offering (a) to repay outstanding indebtedness under its existing senior secured revolving credit facility (which will increase the availability of funds under such credit facility) and (b) for other general corporate purposes which includes investing in properties in accordance with its investment objectives.
Completion of Acquisition of Assets
The following table presents certain information about the properties that the Company acquired from July 1, 2013 to August 2, 2013 (dollar amounts in thousands):
 
 
No. of Buildings
 
Square Feet
 
Base Purchase Price (1)
Total Portfolio – June 30, 2013 (2)
 
1,181

 
19,404,596

 
$
2,939,004

Acquisitions
 
26

 
218,590

 
25,317

Total portfolio – August 2, 2013 (2)
 
1,207

 
19,623,186

 
$
2,964,321

____________________________
(1)Contract purchase price, excluding acquisition and transaction related costs.
(2)
Total portfolio excludes one vacant property contributed in September 2011 which was classified as held for sale at June 30, 2013.

Pending Portfolio Acquisitions
The Company has entered into various definitive agreements for portfolio purchases, one of which is to acquire 121 properties for an aggregate purchase price of approximately $604.1 million, exclusive of closing costs. The portfolio is entirely free standing single tenant net leased properties aggregating 6.2 million square feet, 100% leased to 16 tenants, 35.4% of which are investment grade rated, with average remaining lease terms of 13.8 years . The properties are geographically diverse, located in 30 states.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying financial statements of American Realty Capital Properties, Inc. (the “Company”) and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to American Realty Capital Properties, Inc., a Maryland corporation, and, as required by context, including its operating partnership and its subsidiaries. American Realty Capital Properties, Inc. is externally managed by ARC Properties Advisors, LLC (the “Manager”), a Delaware limited liability company, a wholly owned subsidiary of AR Capital, LLC (the “Sponsor”).
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. We have attempted to identify these forward-looking statements by using words such as “may,” “will,” “expects,” “anticipates,” “believes,” “intends,” “should,” “estimates,” “could” or similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, those discussed below. We do not undertake publicly to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required to satisfy our obligations under federal securities law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•
We and our Manager have a limited operating history and our Manager has limited experience operating a public company. This inexperience makes our future performance difficult to predict.
•
All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in our Manager, the affiliated dealer manager of our initial public offering (our “IPO”), Realty Capital Securities, LLC (“RCS” or the “affiliated Dealer Manager”) and other American Realty Capital-affiliated entities. As a result, our executive officers, our Manager and its affiliates face conflicts of interest, including significant conflicts created by our Manager's compensation arrangements with us and other investors advised by American Realty Capital affiliates and conflicts in allocating time among these investors and us. These conflicts could result in unanticipated actions.
•
Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital-advised programs or investors, our Manager and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.
•
The competition for the type of properties we desire to acquire may cause our dividends and the long-term returns of our investors to be lower than they otherwise would be.
•
We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all, which could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for dividends to our stockholders, per share trading price of our common stock and our ability to satisfy our debt service obligations.
•
We depend on tenants for our revenue, and, accordingly, our revenue is dependent upon the success and economic viability of our tenants.
•
Failure by any major tenant with leases in multiple locations to make rental payments to us, because of a deterioration of its financial condition or otherwise, or the termination or non-renewal of a lease by a major tenant, would have a material adverse effect on us.
•
We are subject to tenant industry concentrations that make us more susceptible to adverse events with respect to certain industries.
•
Increases in interest rates could increase the amount of our debt payments and limit our ability to pay dividends to our stockholders.
•
We may be unable to make scheduled payments on our debt obligations.

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•
We may not generate cash flows sufficient to pay our dividends to stockholders, and as such we may be forced to borrow at higher rates or depend on our Manager to waive reimbursement of certain expenses and fees to fund our operations.
•
We may be unable to pay or maintain cash dividends or increase dividends over time.
•
We are obligated to pay substantial fees to our Manager.
•
We may not be able to realize fully, or at all, the anticipated benefits of the ARCT III Merger, which was consummated on February 28, 2013, and may encounter substantial difficulties and expenses in integrating ARCT III's properties and systems into our operations and systems, resulting in disruption to our ongoing business and the business of the combined company;
•
We may not be able to consummate the CapLease Merger, or the ARCT IV Merger;
•
We may be unable to integrate into our existing portfolio the portfolio of 447 properties we purchased from certain affiliates of GE Capital Corp., or the GE Capital Portfolio, on June 27, 2013, which could negatively impact our future business and financial results;
•
We may fail to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes (“REIT”).
•
We may be deemed to be an investment company under the Investment Company Act of 1940, as amended, (the “Investment Company Act”) and thus subject to regulation under the Investment Company Act.
All forward-looking statements should be read in light of the risks identified in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Overview
We were incorporated on December 2, 2010, as a Maryland corporation that qualified as a real estate investment trust for U.S. federal income tax purposes beginning in the year ended December 31, 2011. On September 6, 2011, we completed our IPO and our shares of common stock began trading on the NASDAQ Capital Market under the symbol “ARCP” on September 7, 2011. On February 28, 2013, our common stock was transferred to the NASDAQ Global Select Market (“NASDAQ”).
We acquire, own and operate single-tenant, freestanding commercial real estate properties. We have acquired a combination of long-term and medium-term leases and intend to continue to acquire properties with approximately 70% long-term leases and 30% medium-term leases, with an average remaining lease term of approximately 10 to 12 years. We consider properties that are leased on a “medium-term” basis to mean properties originally leased long-term (ten years or longer) that currently have a primary remaining lease duration of generally three to eight years, on average. We expect this investment strategy to develop growth potential from below market leases. Additionally, we own a portfolio that uniquely combines properties with stable income from high credit quality tenants, and properties that have substantial future growth potential.
We advanced our investment objectives by growing our net lease portfolio through key mergers and acquisitions. On February 28, 2013, we merged with American Realty Capital Trust III, Inc. (“ARCT III”). On May 28, 2013, we entered into an agreement and plan of merger with CapLease. On June 27, 2013, we closed the acquisition of 447 properties from certain affiliates of GE Capital Corp. Additionally, on July 1, 2013, we entered into an agreement and plan of merger with American Realty Capital Trust IV, Inc. (“ARCT IV”).
Substantially all of our business is conducted through our ARC Properties Operating Partnership, L.P. (the “OP”), a Delaware limited partnership. We are the sole general partner and holder of 95.3% of the equity interest in the OP as of June 30, 2013. Certain affiliates of ours and certain unaffiliated investors are limited partners and owners of 4.3% and 0.4%, respectively, of the equity interest in our OP. After holding units of limited partner interests in our OP for a period of one year, holders of OP Units have the right to convert limited partner interest in the OP (“OP Units”) for the cash value of a corresponding number of shares of our common stock or, at the option of our OP, a corresponding number of shares of our common stock, as allowed by the limited partnership agreement of our OP. The remaining rights of the holders of OP Units are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of our OP’s assets.

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We have retained the Manager to manage our affairs on a day to day basis and, as a result, we are generally externally managed. Prior to the ARCT III Merger (as defined below), we had no employees. In connection with the ARCT III Merger, we internalized certain functions performed for us by the Sponsor and its affiliates prior to the ARCT III Merger, including selected acquisition, accounting and portfolio management services and, as a result, we currently employ eight individuals performing such functions. ARCT III was previously externally managed by American Realty Capital Advisors III, LLC (the “ARCT III Advisor”). These affiliated parties, including the Manager, the Sponsor, RS Capital Corporation and RCS, which performed services for us and ARCT III, have received compensation, fees and expense reimbursements, and will continue to receive compensation, fees and expense reimbursements for providing on-going investment oversight and management services to us.
As of June 30, 2013, excluding one vacant property classified as held for sale, we owned 1,181 properties consisting of 19.4 million square feet, 100% leased with a weighted average remaining lease term of 9.9 years. In constructing our portfolio, we are committed to diversification (industry, tenant and geography). As of June 30, 2013, rental revenues derived from investment grade tenants and tenants affiliated with investment grade entities as determined by a major rating agency approximated 69.3% (we have attributed the rating of each parent company to its wholly owned subsidiary for purposes of this disclosure). Our strategy encompasses receiving the majority of our revenue from investment grade tenants as we further acquire properties and enter into (or assume) lease arrangements.
Completed Mergers and Major Acquisitions
American Realty Capital Trust III Merger
On December 14, 2012, we entered into an Agreement and Plan of Merger with ARCT III (the “ARCT III Merger Agreement”) and certain subsidiaries of each company. The ARCT III Merger Agreement provided for the merger of ARCT III (the "ARCT Merger") with and into a subsidiary of ours. The ARCT III Merger was consummated on February 28, 2013.
Pursuant to the terms and subject to the conditions set forth in the ARCT III Merger Agreement, each outstanding share of common stock of ARCT III was converted into the right to receive (i) 0.95 of a share of our common stock, or (ii) $12.00 in cash. In addition, each outstanding unit of equity ownership of the ARCT III OP was converted into the right to receive 0.95 of the same class of unit of equity ownership in our OP.
Upon the closing of the ARCT III Merger, on February 28, 2013, 29.2 million shares, or 16.5% of the then outstanding shares of ARCT III's common stock were paid in cash at $12.00 per share, which is equivalent to 27.7 million shares of our common stock based on the ARCT III Exchange Ratio. In addition, 148.1 million shares of ARCT III's common stock were converted to shares of our common stock at the Exchange Ratio, resulting in an additional 140.7 million shares of our common stock outstanding after the exchange.
Upon the consummation of the ARCT III Merger, American Realty Capital III Special Limited Partnership, LLC, the holder of the special limited partner interest in the ARCT III OP, was entitled to subordinated distributions of net sales proceeds from ARCT III OP which resulted in the issuance of units of limited partner interests in the ARCT III OP, when after applying the Exchange Ratio, resulted in the issuance of an additional 7.3 million OP Units. The parties have agreed that such OP Units will be subject to a minimum one-year holding period before being exchangeable into our common stock.
Upon consummation of the ARCT III Merger, the vesting of the shares of our outstanding restricted stock and ARCT III's outstanding restricted stock was accelerated.
In connection with the ARCT III Merger, we also had entered into an agreement with the Sponsor and its affiliates to internalize certain functions performed by them prior to the ARCT III Merger, at no cost to us, including selected acquisition, accounting and portfolio management services. In connection with the Internalization, (i) we and our Sponsor terminated the acquisition and capital services agreement dated September 6, 2011, between the two parties, which eliminated acquisition and financing fees payable by us and (ii) the Manager reduced asset management fees from an annualized 0.50% of the unadjusted book value of all of our assets to 0.50% for up to $3.0 billion of unadjusted book value of assets and 0.40% of unadjusted book value of assets greater than $3.0 billion. In addition, we paid $4.1 million for certain furniture, fixtures, equipment, and $1.7 million for other assets and certain costs associated with the ARCT III Merger. We and our Advisor are considered entities under common control, as such, the assets acquired from our Advisor were recorded by us on a carryover basis.

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Accounting Treatment of the ARCT III Merger
We and ARCT III were considered to be entities under common control. Both entities' advisors were wholly owned subsidiaries of the Sponsor. The Sponsor and its related parties had significant ownership interests in us and ARCT III through the ownership of shares of common stock and other equity interests. In addition, the advisors of both entities were contractually eligible to charge significant fees for their services to both of the companies including asset management fees, incentive fees and other fees and continue to charge us fees. Due to the significance of these fees, the advisors and ultimately the Sponsor is determined to have a significant economic interest in both companies in addition to having the power to direct the activities of the companies through advisory/management agreements, which qualifies them as affiliated companies under common control in accordance with U.S. GAAP. The acquisition of an entity under common control is accounted for on the carryover basis of accounting whereby the assets and liabilities of the companies are recorded upon the merger on the same basis as they were carried by the companies on the Merger date.
Credit Facility
We and the OP are parties to a credit agreement, dated February 14, 2013, for a senior corporate credit facility (as amended, supplemented or otherwise modified from time to time, the (“Credit Facility”), with Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto. We and the OP succeeded to the Credit Facility upon the consummation of the ARCT III Merger.
Additionally, upon consummation of the ARCT III Merger, two senior secured revolving credit facilities of up to $150.0 million were paid in full and terminated.
See Note 5 — Credit Facility in the consolidated financial statements for further description of the Credit Facility and repayments and terminations of facilities upon the consummation of the ARCT III Merger.
GE Capital Portfolio Acquisition
On June 27, 2013, we, through our operating partnership, acquired the equity interests in the entities that own a real estate portfolio comprised of 447 properties, which include three other revenue generating assets (the “GE Capital Portfolio”) for consideration of $774.0 million exclusive of closing costs. The 447 properties are subject to 400 property operating leases, which will be accounted for on the straight-line rent basis of accounting and 47 direct financing leases, which are accounted for as a receivable at a discount to the remaining lease payments and estimated residual values of the related properties. Income on these leases is recorded on using the effective interest method. In addition, we have recorded the fair value of the expected residual value of the property for property under direct financing leases, which will be periodically reevaluated.
Pending Mergers
CapLease, Inc. Merger
On May 28, 2013, we entered into an Agreement and Plan of Merger (the “CapLease Merger Agreement”) with CapLease, Inc., a Maryland corporation (“CapLease”), and certain subsidiaries of each company. The CapLease Merger Agreement provided for the merger of CapLease with and into a subsidiary of ours (the “CapLease Merger”).
Pursuant to the terms and subject to the conditions set forth in the CapLease Merger Agreement, at the effective time of the CapLease Merger each outstanding share of common stock of CapLease, other than shares owned by ARCP, CapLease or any of their respective wholly owned subsidiaries, will be converted into the right to receive $8.50 in cash without interest. Each outstanding share of preferred stock of CapLease, other than shares owned by ARCP, CapLease or any of their respective wholly owned subsidiaries, will be converted into the right to receive an amount in cash, without interest, equal to the sum of $25.00 plus all accrued and unpaid dividends on such shares of preferred stock. In addition, in connection with the CapLease Partnership Merger, each outstanding unit of equity ownership of the CapLease's operating partnership other than units owned by CapLease or any wholly owned subsidiary of CapLease will be converted into the right to receive $8.50 in cash, without interest. 
Upon consummation of the CapLease Merger, the vesting of the shares of the CapLease's outstanding restricted stock will be accelerated and become fully vested, and restricted stock and any outstanding performance shares will be fully earned and have the right to receive $8.50 per share.
The CapLease Merger is expected to close in the third or fourth quarter of 2013. However, as of the date of this report, the consummation of the CapLease Merger has not yet occurred and, although we believe that the completion of the CapLease Merger is probable, the closing of the CapLease Merger is subject to a vote by the CapLease common stockholders and other customary conditions, and therefore there can be no assurance that the CapLease Merger will be consummated. Accordingly, we cannot assure that the CapLease Merger will be completed based on the terms of the CapLease Merger Agreement or at all.

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American Realty Capital Trust IV Merger
On July 1, 2013, we entered into an Agreement and Plan of Merger (the “ARCT IV Merger Agreement”) with American Realty Capital Trust IV, Inc., a Maryland corporation (“ARCT IV”), and certain subsidiaries of each company. The ARCT IV Merger Agreement provided for the merger of ARCT IV with and into a subsidiary of the Company (the “ARCT IV Merger”).
Pursuant to the terms and subject to the conditions set forth in the ARCT IV Merger Agreement, at the effective time of the ARCT IV Merger each outstanding share of common stock of ARCT IV will be converted into the right to receive (i) $30.00 in cash, but in no event will the aggregate consideration paid in cash be paid on more than 25% of the shares of ARCT IV's issued and outstanding as of immediately prior to the closing of the ARCT IV Merger or, in our discretion, (ii) either (A) a number of shares of the ARCP common stock equal to the Exchange Ratio (as defined below) or (B) only if the Market Price (as defined below) is less than $14.94, 2.05 shares of the ARCP common stock and an amount in cash equal to the product obtained by multiplying the excess of the Exchange Ratio over 2.05 by the Market Price. “ARCT IV Exchange Ratio” means (1) if the volume weighted average closing sale price of a share of the ARCP common stock over the five (5) consecutive trading days on the NASDAQ Global Select Market ending on the trading day immediately prior to the closing date of the ARCT IV Merger, as reported in The Wall Street Journal (the “Market Price”), is equal to or greater than $14.94, then 2.05, and (2) if the Market Price is less than $14.94, then the quotient (rounded to the nearest one-hundredth) obtained by dividing $30.62 by the Market Price. If the aggregate elections for payment in cash exceed 25% of the number of shares of ARCT IV's common stock issued and outstanding as of immediately prior to the closing of the ARCT IV Merger, then the amount of cash consideration paid on cash elections will be reduced on a pro rata basis with the remaining consideration paid in ARCP common stock and cash, if applicable. In addition, each outstanding unit of equity ownership of the ARCT IV will be converted into the right to receive a number of OP Units equal to the ARCT IV Exchange Ratio. In addition, on the date of the ARCT IV Merger, all outstanding restricted common stock of ARCT IV date will become fully vested and exchanged for shares of ARCT common stock based on the exchange ratio above.
In connection with the ARCT IV Merger ARCT IV's external advisor has agreed to waive a portion of the real estate commissions contractually due and will collect property disposition fees upon the sale of properties in an amount equal to the lesser of (i) 2.0% of the sales price of the properties and (ii) one-half of the competitive real estate commissions if a third party broker is also involved. ARCT IV's external advisor will be entitled to a reduced real estate commission of $8.4 million.
We have entered into an agreement to purchase certain assets of ARCT IV's external advisor and reimburse the external advisor for certain expenses related to the ARCT IV Merger totaling $5.8 million.
ARCT IV's external advisor will be entitled to subordinated distributions of net sales proceeds in an amount estimated to be equal to approximately $65.2 million, assuming an implied price of ARCT IV's common stock of $30.47 per share in the ARCT IV Merger (which assumes that 75% of the ARCT IV's common stock is exchanged for shares of ARCP common stock, based on a per share price of $30.62 (representing the floor for stock consideration) and 25% of the ARCT IV's common stock is exchanged for cash). Such subordinated distributions of net sales proceeds will be payable in the form of equity units of ARCT IV that will automatically convert into our OP Units upon consummation of the ARCT IV Merger and will be subject to a minimum one-year holding period before being exchangeable into ARCP common stock. The actual amount of consideration to be paid for subordinated distributions, net of sales proceeds, will be based, in part, on the market price of ARCP's common stock on the date of the ARCT IV Merger and will not be known until the ARCT IV Merger date.
Accounting Treatment of the ARCT IV Merger
We and ARCT IV, are considered to be entities under common control. Both entities' advisors are wholly owned subsidiaries of the Sponsor. The Sponsor and its related parties have ownership interests in us and have ownership of ARCT IV through the ownership of shares of common stock and other equity interests. In addition, the advisors of both entities are contractually eligible to charge potential fees for their services to both of the companies including asset management fees, incentive fees and other fees and continue to charge fees to us. Due to the significance of these fees, the advisors and ultimately the Sponsor are determined to have a significant economic interest in both companies in addition to having the power to direct the activities of the companies through advisory/management agreements, which qualifies them as affiliated companies under common control in accordance with U.S. GAAP. The acquisition of an entity under common control is accounted for on the carryover basis of accounting whereby the assets and liabilities of the companies are recorded upon the merger on the same basis as they were carried by the companies on the ARCT IV Merger date. In addition, U.S. GAAP requires that we present historical financial information as if the entities were combined for each period presented once the ARCT IV Merger is consummated.
The ARCT IV Merger is expected to close in the third or fourth quarter of 2013. However, as of the date of this report, the consummation of the ARCT IV Merger has not yet occurred and, although we believe that the completion of the ARCT IV Merger is probable, the closing of the ARCT IV Merger is subject to a vote by both of the company's common stockholders and other customary conditions, and therefore there can be no assurance that the ARCT IV Merger will be consummated. Accordingly, we cannot assure that the ARCT IV Merger will be completed based on the terms of the ARCT IV Merger Agreement or at all.

37

Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates include:
Revenue Recognition
Upon the acquisition of real estate, certain properties will have leases where minimum rent payments increase during the term of the lease. We will record rental revenue for the full term of each lease on a straight-line basis. When we acquire a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Cost recoveries from tenants are included in tenant reimbursement income in the period the related costs are incurred, as applicable.
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. We defer the revenue related to lease payments received from tenants in advance of their due dates.
We continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we will record an increase in the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statements of operations and comprehensive loss. As of June 30, 2013 and December 31, 2012, we determined that there was no allowance for uncollectible accounts necessary.
Real Estate Investments
We record acquired real estate at cost and makes assessments as to the useful lives of depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. Depreciation is computed using a straight-line method over the estimated useful life of 40 years for buildings, five to 15 years for building fixtures and improvements and the remaining lease term for acquired intangible lease assets.
Allocation of Purchase Price of Acquired Assets
We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings, equipment and tenant improvements on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships.
Amounts allocated to land, buildings, equipment and fixtures are based on cost segregation studies performed by independent third-parties or on our analysis of comparable properties in its portfolio. Depreciation is computed using the straight-line method over the estimated lives of forty years for buildings, five to ten years for building equipment and fixtures, and the shorter of the useful life or the remaining lease term for tenant improvements.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by us in our analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period, which typically ranges from six to 18 months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.

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Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease. The capitalized below-market lease values will be amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, we initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
The aggregate value of intangible assets related to customer relationships is measured based on our evaluation of the specific characteristics of each tenant's lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from 2 to 20 years. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of its pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Derivative Instruments
We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and qualifies for hedge accounting treatment. If we elect not to apply hedge accounting treatment, any changes in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the consolidated statement of operations. If the derivative is designated and qualifies for hedge accounting treatment the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are described in Note 3 to our consolidated financial statements.

39

Results of Operations
Our portfolio of real estate investments (excluding one vacant property), which were all 100% leased, is comprised of the following 1,181 properties as of June 30, 2013 (dollar amounts in thousands):
Portfolio
 
Number of Properties
 
Square Feet
 
Remaining Lease Term (1)(6)
 
Base Purchase Price (2)
 
Capitalization Rate (3)
 
Annualized Rental Income/NOI (4)
 
Annualized Rental Income/NOI per Square Foot
Portfolio as of December 31, 2012
653

 
15,421,465

 
11.4

 
$
1,798,435

 
7.97
%
 
$
143,397

 
$
9.30

Acquisitions for the three months ended March 31, 2013:
 
 
 
 
 
 
 
 
 
 
Academy Sports
 
1

 
62,033

 
16.9

 
7,785

 
7.81
%
 
608

 
9.80

Advance Auto
 
6

 
41,695

 
8.1

 
6,003

 
7.73
%
 
464

 
11.13

AMCOR
 
1

 
221,035

 
10.3

 
17,540

 
8.44
%
 
1,480

 
6.70

Ameriprise
 
1

 
145,003

 
11.8

 
17,233

 
7.36
%
 
1,269

 
8.75

BJ's Warehouse
 
1

 
108,532

 
10.6

 
10,772

 
8.20
%
 
883

 
8.14

Bojangles
 
1

 
3,792

 
13.3

 
1,951

 
6.87
%
 
134

 
35.34

Citizens Bank
 
1

 
3,478

 
9.3

 
1,134

 
7.41
%
 
84

 
24.15

CVS
 
5

 
54,767

 
7.0

 
13,726

 
8.76
%
 
1,202

 
21.95

DaVita Dialysis
 
1

 
4,275

 
15.0

 
1,553

 
8.89
%
 
138

 
32.28

Dollar General
 
6

 
54,651

 
15.0

 
6,684

 
7.72
%
 
516

 
9.44

Family Dollar
 
4

 
34,680

 
9.1

 
4,415

 
9.04
%
 
399

 
11.51

FedEx
 
3

 
82,633

 
7.9

 
12,746

 
8.53
%
 
1,087

 
13.15

Fresenius
 
2

 
19,100

 
5.8

 
2,670

 
9.89
%
 
264

 
13.82

Kaiser Foundation
 
1

 
100,352

 
9.9

 
62,501

 
6.77
%
 
4,233

 
42.18

Kohl's
 
1

 
88,408

 
10.8

 
12,441

 
6.90
%
 
858

 
9.71

Kum & Go
 
1

 
4,958

 
20.0

 
2,901

 
7.82
%
 
227

 
45.78

Mattress Firm
 
1

 
3,971

 
10.8

 
1,872

 
8.44
%
 
158

 
39.79

Pilot Flying
 
1

 
17,480

 
5.7

 
10,350

 
9.37
%
 
970

 
55.49

Qdoba
 
2

 
5,000

 
10.0

 
2,454

 
8.52
%
 
209

 
41.80

TD Bank
 
1

 
143,030

 
11.8

 
31,000

 
8.87
%
 
2,750

 
19.23

Walgreens
 
7

 
100,869

 
11.4

 
34,565

 
7.64
%
 
2,640

 
26.17

Total acquisitions for the three months ended March 31, 2013
 
48

 
1,299,742

 
10.6

 
262,296

 
7.84
%
 
20,573

 
15.83

Acquisitions for the three months ended June 30, 2013:
 
 
 
 
 
 
 
 
 
 
3432, LLC
 
1

 
4,283

 
14.2

 
949

 
9.38
%
 
89

 
20.78

ADF Companies Group
 
1

 
2,626

 
2.0

 
911

 
7.24
%
 
66

 
25.13

Advance Auto
 
9

 
61,536

 
7.0

 
9,845

 
8.15
%
 
802

 
13.03

Advanced Dental Implant and Denture Center, LLC
1

 
2,775

 
11.0

 
342

 
11.70
%
 
40

 
14.41

AFC Enterprises
 
1

 
1,564

 
0.7

 
481

 
6.24
%
 
30

 
19.18

Ale House Management
 
3

 
18,807

 
4.8

 
12,790

 
4.97
%
 
636

 
33.82

AM-PM Enterprises III, Inc.
 
1

 
3,530

 
19.1

 
593

 
7.08
%
 
42

 
11.90

Ann Ching Chen
 
1

 
6,948

 
1.3

 
792

 
11.62
%
 
92

 
13.24

Arbed Tosa 100
 
1

 
5,712

 
11.9

 
1,585

 
10.85
%
 
172

 
30.11

Arby's Restaurant Group, Inc.
 
35

 
104,229

 
5.1

 
51,614

 
7.27
%
 
3,753

 
36.01

Auto Zone
 
1

 
6,782

 
15.5

 
2,000

 
7.60
%
 
152

 
22.41

Baxters Steakhouse
 
1

 
5,186

 
3.0

 
419

 
10.02
%
 
42

 
8.10

Bee Mac Enterprises
 
2

 
4,232

 
4.6

 
2,188

 
6.86
%
 
150

 
35.44

Bighorn Associates
 
1

 
3,600

 
3.5

 
1,211

 
9.99
%
 
121

 
33.61

Black Angus Steakhouse, LLC
 
1

 
6,552

 
5.9

 
3,434

 
8.59
%
 
295

 
45.02

Bloomin Apple
 
1

 
4,234

 
5.5

 
2,815

 
7.10
%
 
200

 
47.24

Boston Market Corporation
 
4

 
13,713

 
5.4

 
6,418

 
5.75
%
 
369

 
26.91

Brinker International
 
2

 
10,640

 
3.5

 
5,178

 
7.49
%
 
388

 
36.47

Bruegger's Enterprises
 
2

 
5,265

 
6.0

 
1,418

 
7.97
%
 
113

 
21.46


40

Portfolio
 
Number of Properties
 
Square Feet
 
Remaining Lease Term (1)(6)
 
Base Purchase Price (2)
 
Capitalization Rate (3)
 
Annualized Rental Income/NOI (4)
 
Annualized Rental Income/NOI per Square Foot
Buca
 
2

 
14,885

 
5.0

 
3,307

 
11.61
%
 
384

 
25.80

Bullard Restaurants
 
1

 
2,693

 
4.4

 
1,715

 
6.30
%
 
108

 
40.10

Bullitt Ventures, Inc.
 
1

 
5,325

 
10.2

 
1,023

 
8.31
%
 
85

 
15.96

Burger King
 
1

 
2,800

 
11.2

 
997

 
8.53
%
 
85

 
30.36

Burgerbusters, LLC
 
6

 
12,903

 
5.7

 
9,563

 
6.04
%
 
578

 
44.80

Caribou Coffee
 
1

 
1,625

 
1.9

 
1,186

 
7.67
%
 
91

 
56.00

Carlos O'Kelly's
 
9

 
47,349

 
4.5

 
16,213

 
8.64
%
 
1,401

 
29.59

Carrols
 
18

 
61,000

 
7.6

 
32,878

 
6.03
%
 
1,982

 
32.49

Charlestons
 
1

 
6,874

 
1.7

 
3,448

 
3.54
%
 
122

 
17.75

Checkers Drive-In Restaurants
12

 
9,540

 
12.0

 
19,033

 
5.98
%
 
1,139

 
119.39

Cherryden
 
1

 
7,213

 
6.7

 
3,081

 
7.24
%
 
223

 
30.92

Chi-Co., Inc.
 
1

 
2,751

 
4.5

 
965

 
7.67
%
 
74

 
26.90

Citizens Bank
 
2

 
7,800

 
9.5

 
2,960

 
8.75
%
 
259

 
33.21

CKE Restaurants
 
7

 
24,841

 
6.9

 
8,672

 
6.55
%
 
568

 
22.87

Corral Group
 
1

 
2,968

 
8.0

 
985

 
6.40
%
 
63

 
21.23

CVS
 
1

 
10,880

 
11.6

 
3,797

 
7.24
%
 
275

 
25.28

Darrin Cobb
 
1

 
5,180

 
8.4

 
852

 
8.10
%
 
69

 
13.32

Davco Restaurants
 
1

 
3,471

 
12.5

 
1,843

 
7.22
%
 
133

 
38.32

Den Columbia
 
1

 
2,730

 
3.6

 
1,736

 
7.72
%
 
134

 
49.08

Denny's Corporation
 
7

 
30,193

 
3.6

 
9,826

 
7.08
%
 
696

 
23.05

Den-Tex Centra
 
4

 
21,098

 
6.9

 
6,441

 
7.84
%
 
505

 
23.94

DineEquity Inc.
 
38

 
183,400

 
6.6

 
75,816

 
7.12
%
 
5,397

 
29.43

Dunkin' Brands
 
1

 
2,880

 
11.2

 
1,185

 
7.76
%
 
92

 
31.94

Dynamic Management LLC
 
1

 
3,263

 
5.2

 
784

 
7.78
%
 
61

 
18.69

Einstein/Noah Bagel
 
1

 
3,875

 
8.8

 
1,016

 
7.58
%
 
77

 
19.87

Enterprises, LLC
 
1

 
2,759

 
9.7

 
174

 
25.86
%
 
45

 
16.31

Fal Co L.L.C
 
3

 
6,240

 
9.2

 
562

 
8.36
%
 
47

 
7.53

Family Dollar
 
5

 
45,860

 
7.9

 
6,805

 
9.46
%
 
644

 
14.04

FedEx
 
1

 
17,517

 
4.6

 
1,388

 
9.15
%
 
127

 
7.25

Frandeli Group
 
11

 
237,898

 
3.6

 
21,257

 
6.91
%
 
1,469

 
6.17

Fresenius
 
4

 
39,321

 
11.8

 
8,283

 
8.04
%
 
666

 
16.94

Fresh Creations, LLC
 
2

 
11,315

 
9.9

 
1,835

 
12.64
%
 
232

 
20.50

Garden Fresh Restaurant
 
1

 
7,411

 
10.8

 
2,652

 
6.79
%
 
180

 
24.29

GBM, LLC
 
2

 
5,700

 
6.1

 
1,781

 
6.68
%
 
119

 
20.88

GDK Development
 
1

 
3,682

 
3.3

 
1,387

 
4.04
%
 
56

 
15.21

Geko
 
1

 
5,012

 
16.8

 
1,212

 
8.83
%
 
107

 
21.35

Georgetowne Affiliates
 
1

 
3,102

 
7.1

 
1,149

 
5.92
%
 
68

 
21.92

Globamax Restaurants
 
1

 
3,600

 
13.4

 
785

 
9.04
%
 
71

 
19.72

GMRI, Inc.
 
2

 
12,190

 
2.8

 
5,199

 
7.35
%
 
382

 
31.34

Golden Corral
 
18

 
175,150

 
1.6

 
52,152

 
6.12
%
 
3,191

 
18.22

Grandys
 
5

 
20,584

 
3.5

 
3,473

 
9.07
%
 
315

 
15.30

H & K Partners
 
1

 
2,000

 
13.9

 
1,353

 
7.32
%
 
99

 
49.50

HB Boys
 
1

 
2,437

 
23.9

 
1,426

 
7.64
%
 
109

 
44.73

Heartland
 
2

 
6,139

 
2.8

 
3,656

 
7.74
%
 
283

 
46.10

Hometown Folks
 
2

 
6,252

 
19.2

 
4,995

 
4.08
%
 
204

 
32.63

Houlihan's Restaurant Group
 
1

 
10,089

 
3.9

 
3,215

 
8.49
%
 
273

 
27.06

Hy-Vee
 
1

 
40,461

 
10.5

 
4,721

 
6.91
%
 
326

 
8.06

Interfoods of America
 
3

 
6,440

 
4.7

 
2,960

 
7.84
%
 
232

 
36.02

J.C. Corral, Inc.
 
1

 
9,952

 
6.1

 
2,962

 
5.47
%
 
162

 
16.28

Jack In The Box, Inc.
 
45

 
120,417

 
3.6

 
89,622

 
5.80
%
 
5,202

 
43.20


41

Portfolio
 
Number of Properties
 
Square Feet
 
Remaining Lease Term (1)(6)
 
Base Purchase Price (2)
 
Capitalization Rate (3)
 
Annualized Rental Income/NOI (4)
 
Annualized Rental Income/NOI per Square Foot
JCS Holdings, Inc.
 
3

 
16,718

 
6.1

 
6,637

 
7.55
%
 
501

 
29.97

John C. Brown
 
1

 
6,002

 
—

 
445

 
9.44
%
 
42

 
7.00

Ker Management Services, LLC
2

 
14,105

 
9.3

 
2,429

 
9.72
%
 
236

 
16.73

Key Bank
 
1

 
3,575

 
9.51

 
1,307

 
7.50
%
 
98

 
27.41

K-MAC Holdings Corp
 
1

 
2,121

 
1.1

 
1,729

 
6.65
%
 
115

 
54.22

Koning Restaurants International
2

 
5,860

 
7.3

 
1,636

 
6.48
%
 
106

 
18.09

Krystal
 
4

 
8,926

 
4.9

 
5,823

 
7.37
%
 
429

 
48.06

Leeann Chin
 
3

 
9,051

 
7.9

 
3,570

 
7.37
%
 
263

 
29.06

Little General Store, Inc.
 
1

 
1,940

 
9.4

 
1,470

 
3.33
%
 
49

 
25.26

Logan's Roadhouse
 
6

 
48,406

 
13.4

 
31,922

 
5.70
%
 
1,821

 
37.62

Meritage Group
 
1

 
2,606

 
2.7

 
1,636

 
6.48
%
 
106

 
40.68

Metro Corral Partners
 
1

 
12,260

 
10.9

 
5,371

 
7.32
%
 
393

 
32.06

Michael Callahan
 
1

 
3,206

 
1.2

 
1,376

 
6.10
%
 
84

 
26.20

Michigan Mult-King
 
1

 
2,036

 
2.8

 
991

 
8.88
%
 
88

 
43.22

Midwest BBQ Ventures, LLC
 
1

 
5,803

 
—

 
1,167

 
17.31
%
 
202

 
34.81

Mountain Range Restaurants
 
1

 
5,985

 
6.6

 
1,425

 
6.39
%
 
91

 
15.20

MrEats Corral, LLC
 
1

 
9,952

 
0.8

 
4,421

 
5.00
%
 
221

 
22.21

NBI Food Services
 
1

 
2,900

 
11.9

 
1,693

 
5.73
%
 
97

 
33.45

NEA-BBQ, LLC
 
3

 
16,920

 
4.9

 
5,368

 
7.75
%
 
416

 
24.59

North Country Management
 
1

 
3,400

 
5.5

 
1,302

 
5.30
%
 
69

 
20.29

Ohio Valley Bistros
 
1

 
8,242

 
5.0

 
4,788

 
6.95
%
 
333

 
40.40

Ok Apple, Inc.
 
1

 
4,761

 
11.0

 
3,034

 
7.35
%
 
223

 
46.84

Pacific Bells
 
3

 
6,594

 
10.7

 
5,541

 
7.65
%
 
424

 
64.30

Pennant Foods Corp.
 
10

 
29,417

 
4.6

 
13,043

 
7.11
%
 
928

 
31.55

Platinum Corral, LLC
 
2

 
22,382

 
2.1

 
6,538

 
6.59
%
 
431

 
19.26

Prometheus Partners
 
11

 
27,601

 
8.4

 
18,470

 
7.27
%
 
1,342

 
48.62

Quality Dining
 
4

 
19,573

 
6.6

 
4,880

 
7.64
%
 
373

 
19.06

Razzoos
 
1

 
6,607

 
2.7

 
2,490

 
8.07
%
 
201

 
30.42

Real Mex Restaurants
 
2

 
15,563

 
9.5

 
5,754

 
7.25
%
 
417

 
26.79

Restaurant Management Co.
 
6

 
14,536

 
3.2

 
3,897

 
7.36
%
 
287

 
19.74

Roger K Osborne
 
1

 
2,850

 
7.1

 
1,726

 
5.50
%
 
95

 
33.33

Royal Capital
 
5

 
27,418

 
9.6

 
6,374

 
10.46
%
 
667

 
24.33

Rubio's Restaurants
 
1

 
2,379

 
1.2

 
1,241

 
9.67
%
 
120

 
50.44

Ruby Tuesday, Inc.
 
6

 
30,851

 
5.6

 
11,385

 
7.37
%
 
839

 
27.20

Run Restaurants
 
1

 
6,356

 
11.7

 
2,097

 
7.77
%
 
163

 
25.65

Saulat Enterprises
 
10

 
36,844

 
6.0

 
6,595

 
6.82
%
 
450

 
12.21

Shoney's
 
6

 
31,939

 
9.6

 
4,403

 
8.52
%
 
375

 
11.74

Shoot the Moon
 
1

 
5,208

 
3.5

 
1,291

 
9.91
%
 
128

 
24.58

Shorest, LLC
 
5

 
26,512

 
10.2

 
4,383

 
10.47
%
 
459

 
17.31

Sonfish
 
2

 
6,737

 
10.4

 
1,543

 
13.22
%
 
204

 
30.28

Southeast New Mexico Foods
 
2

 
4,346

 
19.2

 
1,885

 
6.47
%
 
122

 
28.07

Southern Boys Restaurant Group
 
2

 
10,283

 
2.3

 
2,058

 
8.31
%
 
171

 
16.63

Southern Rock Restaurants, LLC
 
1

 
3,389

 
4.6

 
1,126

 
5.86
%
 
66

 
19.47

Southern Star Management Group
 
1

 
2,763

 
5.3

 
737

 
8.14
%
 
60

 
21.72

Subhash Gupta
 
1

 
2,591

 
3.8

 
1,339

 
4.93
%
 
66

 
25.47

Subway Restaurants
 
1

 
2,485

 
9.4

 
556

 
6.29
%
 
35

 
14.08

Tacala
 
2

 
4,220

 
5.8

 
3,400

 
5.85
%
 
199

 
47.16

Talbots
 
1

 
313,000

 
19.9

 
37,500

 
10.14
%
 
3,803

 
12.15

Tally Ho Partners
 
1

 
2,608

 
6.9

 
1,716

 
3.55
%
 
61

 
23.39

TCF National Bank
 
1

 
5,654

 
17.1

 
1,414

 
7.28
%
 
103

 
18.22


42

Portfolio
 
Number of Properties
 
Square Feet
 
Remaining Lease Term (1)(6)
 
Base Purchase Price (2)
 
Capitalization Rate (3)
 
Annualized Rental Income/NOI (4)
 
Annualized Rental Income/NOI per Square Foot
Texas Roadhouse, Inc.
 
9

 
59,852

 
2.5

 
24,118

 
6.78
%
 
1,635

 
27.32

The Bailey Company
 
1

 
3,477

 
3.2

 
1,784

 
7.34
%
 
131

 
37.68

Top Line Restaurants
 
1

 
7,025

 
16.4

 
1,641

 
7.62
%
 
125

 
17.79

Tractor Supply
 
1

 
19,080

 
14.3

 
2,078

 
8.33
%
 
173

 
9.07

Tripoli
 
1

 
4,558

 
2.7

 
2,597

 
6.31
%
 
164

 
35.98

Twin Dragon LLC
 
1

 
6,400

 
3.5

 
1,126

 
9.41
%
 
106

 
16.56

United States Beef
 
5

 
14,725

 
5.4

 
4,748

 
6.72
%
 
319

 
21.66

Valenti Management
 
1

 
2,535

 
8.3

 
1,745

 
8.48
%
 
148

 
58.38

Vitamin Shoppe
 
1

 
3,500

 
9.4

 
2,100

 
7.90
%
 
166

 
47.43

Vsgh Partners
 
2

 
4,802

 
0.5

 
1,344

 
4.69
%
 
63

 
13.12

Walgreens
 
5

 
71,820

 
12.5

 
21,517

 
7.91
%
 
1,702

 
23.70

Wendab Associates
 
4

 
11,831

 
12.7

 
7,336

 
8.15
%
 
598

 
50.55

Wendy's Company
 
1

 
3,199

 
8.5

 
1,789

 
6.04
%
 
108

 
33.76

Woodland Group
 
9

 
43,623

 
5.2

 
17,751

 
7.39
%
 
1,311

 
30.05

Yum! Brands
 
1

 
2,900

 
6.8

 
2,124

 
5.27
%
 
112

 
38.62

Z & H Foods, Inc.
 
3

 
5,295

 
1.6

 
1,943

 
7.05
%
 
137

 
25.87

Zee&Son, LLC
 
1

 
2,007

 
19.2

 
301

 
8.97
%
 
27

 
13.45

Total acquisitions for the three months ended June 30, 2013
 
480

 
2,683,389

 
7.3

 
878,273

 
7.10
%
 
62,359

 
23.24

Total acquisitions for the six months ended June 30, 2013
 
528

 
3,983,131

 
8.1

 
1,140,569

 
7.27
%
 
82,932

 
20.82

Portfolio as of June 30, 2013(5)
 
1,181

 
19,404,596

 
9.9

 
$
2,939,004

 
7.70
%
 
$
226,329

 
$
11.66

______________________________________________
(1) Remaining lease term as of June 30, 2013, in years. If the portfolio has multiple locations with varying lease expirations, remaining lease term is calculated on a weighted-average basis. Total remaining lease term is a weighted-average of the remaining lease term of the total portfolio.
(2) Contract purchase price, excluding acquisition and transaction-related costs. Acquisition and transaction-related costs include legal and other closing costs on property.
(3) Annualized rental income or annualized net operating income (“NOI”) on a straight-line basis, divided by base purchase price. Total capitalization rate is an average of the capitalization rate of the total portfolio.
(4) Annualized rental income/NOI for net leases is rental income on a straight-line basis as of June 30, 2013, which includes the effect of tenant concessions such as free rent, as applicable. For modified gross leased properties NOI is rental income on a straight-line basis as of June 30, 2013, which includes the effect of tenant concessions such as free rent, as applicable, plus operating expense reimbursement revenue less property operating expenses. 47 properties are subject to direct financing leases and therefore for accounting purposes, revenue is recognized as direct financing lease income on the discounted cash flows of the lease payments. Amount reflected is the annualized cash rents on these properties.
(5) Total portfolio excludes one vacant property contributed in September 2011, which is classified as held for sale as of June 30, 2013.
Comparison of the Three Months Ended June 30, 2013 to Three Months Ended June 30, 2012
Rental Income
Rental income increased $31.8 million to $43.1 million for the three months ended June 30, 2013 compared to $11.3 million for the three months ended June 30, 2012. Rental income was driven by our acquisition of 882 properties subsequent to June 30, 2012 for an aggregate purchase price of $2.2 billion. The annualized rental income per square foot of the properties at June 30, 2013 was $11.66 with a weighted average remaining lease term of 9.9 years.
Our properties are primarily leased from 5 to 25 years to investment grade tenants, as determined by major credit rating agencies. All properties were 100% leased in both periods, with the exception of one and two vacant properties classified as held for sale at June 30, 2013 and 2012, respectively. During the three months ended June 30, 2013 and 2012, we experienced no property vacancies, tenant turnover, lease renegotiation or significant capital expenditures. Cash same store rents on the 183 properties held for the full period in both of the three months ended June 30, 2013 and 2012 increased $0.1 million, or 0.7%, to $8.2 million compared to $8.1 million for the three months ended June 30, 2013 and 2012, respectively. Annualized average rental income per square foot was $3.07 at June 30, 2013 compared to $3.04 at June 30, 2012.

43

Operating Expense Reimbursements
Operating expense reimbursements increased by approximately $1.7 million to $1.8 million for the three months ended June 30, 2013 compared to $0.1 million for the three months ended June 30, 2012. Operating expense reimbursements represent reimbursements for taxes, property maintenance and other charges contractually due from the tenant per their respective leases. Operating expense reimbursements were driven by our acquisition of 882 properties since June 30, 2012.
Acquisition Related Costs
Acquisition related costs increased by approximately $7.3 million to $15.1 million for the three months ended June 30, 2013 compared to $7.8 million for the three months ended June 30, 2012. Acquisition and related costs represent the costs related to the acquisition of properties. Acquisition costs mainly consisted of legal costs, deed transfer costs and other costs related to real estate purchase transactions. Certain acquisition costs are based on a percentage of the base purchase price of acquired real estate investment, as such, the increase in acquisition related costs was primarily a result of real estate investments with a purchase price of $878.5 million in the three months ended June 30, 2013 compared to $307.6 million in the three months ended June 30, 2012. Increases primarily related to the acquisition of the 447 property GE Capital Portfolio.
Merger and Other Transaction Related Costs
During the three months ended June 30, 2013, costs related to the pending ARCT IV Merger, as well as other transaction costs were $4.7 million.
Property Expenses
Property expenses increased by approximately $2.2 million to $2.5 million for the three months ended June 30, 2013 compared to $0.3 million for the three months ended June 30, 2012. These costs relate to expenses associated with maintaining certain properties, including real estate taxes, ground lease rent, insurance and repairs and maintenance expenses. The increase in property expenses are mainly due to our acquisition of properties with modified gross leases subsequent to June 30, 2012, and an increased number of properties for which the Company pays expenses, which are reimbursed by the tenant.
General and Administrative Expenses
General and administrative expenses increased by $0.6 million to $1.1 million for the three months ended June 30, 2013 compared to $0.5 million for the three months ended June 30, 2012. General and administrative expenses primarily included board member compensation, professional fees such as legal fees, accountant fees and financial printer services fees, and insurance expense.
Equity-Based Compensation Expenses
Equity-based compensation expenses increased by approximately $3.2 million to $3.5 million for the three months ended June 30, 2013 compared to $0.2 million for the three months ended June 30, 2012. Equity-based compensation expenses primarily included expense for the OPP, which was entered into upon consummation of the ARCT III Merger, as well as the amortization of restricted stock.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $20.8 million to $27.8 million for the three months ended June 30, 2013 compared to $7.0 million for the three months ended June 30, 2012. The increase in depreciation and amortization expense was driven by our acquisition of 882 properties since June 30, 2012 for an aggregate purchase price of $2.2 billion.
Asset Management and Incentive Fees to Affiliates
Prior to the consummation of the ARCT III Merger, we paid the Manager an annual base management fee equal to 0.50% per annum of the average unadjusted book value of our real estate assets, calculated and payable monthly in advance. Subsequent to the consummation of the ARCT III Merger, we are contractually obligated to pay the Manager an annual base management fee equal to 0.50% per annum for up to $3.0 billion of unadjusted book value of assets and 0.40% of unadjusted book value of assets greater than $3.0 billion. For the three months ended June 30, 2013 and 2012, the Manager waived base management fees earned of $2.0 million and $1.0 million, respectively.
We may be required to pay the Manager a quarterly incentive fee, equal to the difference between (1) the product of (a) 20% and (b) the excess our annualized core earnings (as defined in the management agreement with the Manager) over the product of (i) the weighted average number of shares multiplied by the weighted average issuance price per share of common stock (ii) 8% and (2) the sum of any incentive compensation paid to the manager with respect to the first three calendar quarters of the previous 12-month period. One half of each quarterly installment of the incentive fee will be payable in shares of common stock. The remainder of the incentive fee will be payable in cash. No incentive fees were earned for the three months ended June 30, 2013 and 2012, respectively.

44

Interest Expense
Interest expense increased by approximately $8.5 million to $11.2 million for the three months ended June 30, 2013 compared to $2.7 million for the three months ended June 30, 2012. The increase in interest expense was due to increases in debt balances used to fund portfolio acquisitions, partially offset by a decrease in the average annualized interest rate on borrowings. The average debt balances for the three months ended June 30, 2013 and 2012 were $1.0 billion and $201.4 million, respectively. The average annualized interest rate on all debt, including the effect of derivative instruments used to hedge the effects of interest rate volatility but excluding amortization of deferred financing costs and non-usage fees, for the three months ended June 30, 2013 and 2012 was 3.48% and 4.19%, respectively.
Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the level of proceeds raised in offerings, the cost of borrowings, and the opportunity to acquire real estate assets which meet our investment objectives.
Loss on Contingent Value Rights
Loss on contingent value rights was $31.1 million for the three months ended June 30, 2013. The loss pertains to the fair value of our obligation to pay certain holders of Common Stock CVR's and Preferred Stock CVR's for the difference between the value of our shares on certain measurement dates and the value of the shares at the time of issuance as set forth in the respective contingent value rights agreements. We did not have any contingent value rights obligations during the three months ended June 30, 2012.
Loss on Derivative Instruments
There was no gain or loss on the fair value of derivative instruments for the three months ended June 30, 2012, compared to a loss of $40,000 for the three months ended June 30, 2013 that resulted from marking our derivative instruments to fair value. The loss was primarily a result of a higher notional balance of derivatives held in the three months ended June 30, 2013 compared to the three months ended June 30, 2012.
Gain (Loss) on Properties Held for Sale
Net loss from discontinued operations decreased by approximately $0.2 million to a gain of $0.04 million for the three months ended June 30, 2013 compared to $0.2 million for the three months ended June 30, 2012. As of the three months ended June 30, 2013 and 2012, we held two properties (one vacant and one occupied) and two vacant properties, respectively, classified as held for sale on the balance sheets and reported in discontinued operations on the statements of operations and comprehensive loss. The net losses from discontinued operations during the three months ended June 30, 2012 were primarily due to impairments on the held for sale properties representing the difference between the carrying value and estimated proceeds from the sale of the properties less estimated selling costs.
Comparison of the Six Months Ended June 30, 2013 to Six Months Ended June 30, 2012
Rental Income
Rental income increased $64.0 million to $81.4 million for the six months ended June 30, 2013 compared to $17.4 million for the six months ended June 30, 2012. Rental income was driven by our acquisition of 882 properties subsequent to June 30, 2012 for an aggregate purchase price of $2.2 billion. The annualized rental income per square foot of the properties at June 30, 2013 was $11.66 with a weighted average remaining lease term of 9.9 years.
Our properties are primarily leased from 5 to 25 years to investment grade tenants, as determined by major credit rating agencies. All properties were 100% leased in both periods, with the exception of one and two vacant properties classified as held for sale at June 30, 2013 and 2012, respectively. During the six months ended June 30, 2013 and 2012, we experienced no property vacancies, tenant turnover, lease renegotiation or capital expenditures. Cash same store rents on the 129 properties held for the full period in each of the six months ended June 30, 2013 and 2012 increased $0.1 million, or 1.5%, to $8.7 million compared to $8.6 million for the six months ended June 30, 2013 and 2012, respectively. Annualized average rental income per square foot was $6.20 at June 30, 2013 compared to $6.11 at June 30, 2012.
Operating Expense Reimbursements
Operating expense reimbursements increased by approximately $3.4 million to $3.7 million for the six months ended June 30, 2013 compared to $0.3 million for the six months ended June 30, 2012. Operating expense reimbursements represent reimbursements for taxes, property maintenance and other charges contractually due from the tenant per their respective leases. Operating expense reimbursements were driven by our acquisition of 882 properties since June 30, 2012.

45

Acquisition Related Costs
Acquisition related costs increased by approximately $8.1 million to $20.7 million for the six months ended June 30, 2013 compared to $12.6 million for the six months ended June 30, 2012. Acquisition and related costs represent the costs related to the acquisition of properties. Acquisition costs mainly consisted of legal costs, deed transfer costs and other costs related to real estate purchase transactions. Certain acquisition costs are based on a percentage of the base purchase price of acquired real estate investment, as such, the increase in acquisition related costs was primarily a result of real estate investments with a purchase price of $1.1 billion in the six months ended June 30, 2013 compared to $518.4 million in the six months ended June 30, 2012. In conjunction with the ARCT III Merger, it was agreed that our Manager would no longer charge acquisition fees.
Merger and Other Transaction Related Costs
During the six months ended June 30, 2013, costs related to the Merger with ARCT III, which was consummated in February 2013, costs related to the pending ARCT IV Merger, as well as other transaction costs were $142.4 million. Upon the consummation of the ARCT III Merger an affiliate of ARCT III received a subordinated incentive distribution upon the attainment of certain performance hurdles. For the six months ended June 30, 2013, $98.4 million was recorded for this fee. We issued 7.3 million of OP Units to the affiliate as compensation for this fee. In addition, these costs consisted of professional fees, printing fees, proxy services and other costs associated with entering into and completing the ARCT III Merger.
Property Expenses
Property expenses increased by approximately $4.3 million to $4.9 million for the six months ended June 30, 2013 compared to $0.6 million for the six months ended June 30, 2012. These costs relate to expenses associated with maintaining certain properties, including real estate taxes, ground lease rent, insurance and repairs and maintenance expenses. The increase in property expenses are mainly due to our acquisition of properties with modified gross leases subsequent to June 30, 2012, and an increased number of properties for which the Company pays expenses, which are reimbursed by the tenant.
General and Administrative Expenses
General and administrative expenses increased by $1.4 million to $2.4 million for the six months ended June 30, 2013 compared to $1.0 million for the six months ended June 30, 2012. General and administrative expenses primarily included board member compensation, professional fees such as legal fees, accountant fees and financial printer services fees, and insurance expense.
Equity-Based Compensation Expenses
Equity-based compensation expenses increased by approximately $4.0 million to $4.3 million for the six months ended June 30, 2013 compared to $0.3 million for the six months ended June 30, 2012. Equity-based compensation expenses primarily included expense for the OPP, which was entered into upon consummation of the ARCT III Merger, as well as the amortization of restricted stock.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $42.3 million to $52.8 million for the six months ended June 30, 2013 compared to $10.5 million for the six months ended June 30, 2012. The increase in depreciation and amortization expense was driven by our acquisition of 882 properties since June 30, 2012 for an aggregate purchase price of $2.2 billion.
Asset Management and Incentive Fees to Affiliates
Prior to the consummation of the ARCT III Merger, we paid the Manager an annual base management fee equal to 0.50% per annum of the average unadjusted book value of our real estate assets, calculated and payable monthly in advance, provided that the full amount of the distributions we have declared for the six immediately preceding months is equal to or greater than certain net income thresholds related to our operations. Subsequent to the consummation of the ARCT III Merger, we will pay the Manager an annual base management fee equal to 0.50% per annum for up to $3.0 billion of unadjusted book value of assets and 0.40% of unadjusted book value of assets greater than $3.0 billion. For the six months ended June 30, 2013 and 2012, the Manager waived base management fees earned of $2.4 million and $1.2 million, respectively.
We may be required to pay the Manager a quarterly incentive fee, equal to the difference between (1) the product of (a) 20% and (b) the excess our annualized core earnings (as defined in the management agreement with the Manager) over the product of (i) the weighted average number of shares multiplied by the weighted average issuance price per share of common stock (ii) 8% and (2) the sum of any incentive compensation paid to the manager with respect to the first three calendar quarters of the previous 12-month period. One half of each quarterly installment of the incentive fee will be payable in shares of common stock. The remainder of the incentive fee will be payable in cash. No incentive fees were earned for the three months ended June 30, 2013 and 2012, respectively.

46

Interest Expense
Interest expense increased by approximately $13.3 million to $17.5 million for the six months ended June 30, 2013 compared to $4.1 million for the six months ended June 30, 2012. The increase in interest expense was due to increases in debt balances used to fund portfolio acquisitions, partially offset by a decrease in the average annualized interest rate on borrowings. The average debt balances for the six months ended June 30, 2013 and 2012 were $797.2 million and $175.6 million, respectively. The average annualized interest rate on all debt, including the effect of derivative instruments used to hedge the effects of interest rate volatility but excluding amortization of deferred financing costs and non-usage fees, for the six months ended June 30, 2013 and 2012 was 3.51% and 4.04%, respectively.
Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the level of proceeds raised in offerings, the cost of borrowings, and the opportunity to acquire real estate assets which meet our investment objectives.
Income from Investment Securities
There was no income from investment securities for the six months ended June 30, 2012, compared to income of $0.2 million for the six months ended June 30, 2013 that resulted from investment income earned by our preferred debt and equity securities.
Gain on Sale of Investment Securities
There was no gain or loss on the sale of investment securities for the six months ended June 30, 2012, compared to a gain of $0.5 million for the six months ended June 30, 2013 that resulted from selling the preferred debt and equity securities that we held.
Loss on Contingent Value Rights
Loss on contingent value rights was $31.1 million for the six months ended June 30, 2013. The loss pertains to the fair value of our obligation to pay certain preferred and common shareholders for the difference between the value of our shares on certain measurement dates and the value of the shares at the time of issuance as set forth by the contingent value rights agreement. We did not have any contingent value rights obligations during the six months ended June 30, 2012.
Loss on Derivative Instruments
There was no gain or loss on the fair value of derivative instruments for the six months ended June 30, 2012, compared to a loss of $45,000 for the six months ended June 30, 2013 that resulted from marking our derivative instruments to fair value.
Gain (Loss) on Properties Held for Sale
Net loss from discontinued operations decreased by approximately $0.6 million to net gain of $0.1 million for the six months ended June 30, 2013 compared to net loss of $0.5 million for the six months ended June 30, 2012. As of the six months ended June 30, 2013 and 2012, we held two properties (one vacant and one occupied) and two vacant properties, respectively, classified as held for sale on the balance sheet and reported in discontinued operations on the statements of operations. The net losses from discontinued operations during the six months ended June 30, 2012 were primarily due to impairments on the held for sale properties representing the difference between the carrying value and estimated proceeds from the sale of the properties less estimated selling costs.
Cash Flows for the Six Months Ended June 30, 2013
During the six months ended June 30, 2013, net cash provided by operating activities was $5.7 million. The level of cash flows used in or provided by operating activities is affected by acquisition and transaction costs, the timing of interest payments, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the six months ended June 30, 2013 was mainly due to adjusted net income of $11.9 million (net loss of $190.4 million adjusted for non-cash items including the issuance of operating partnership units, depreciation and amortization, amortization of deferred financing costs, gain on held for sale properties, equity-based compensation, loss on derivative instruments, loss on contingent value right obligations and gain on sale on investments summing to $202.2 million, in the aggregate), and an increase in deferred rent and other liabilities of $0.9 million. Theses inflows were partially offset by a decrease in prepaid and other assets of $6.8 million, and a decrease in accounts payable and accrued expenses of $0.4 million.
Net cash used in investing activities for the six months ended June 30, 2013 of $1.1 billion, primarily related to the acquisition of 528 properties with an aggregate purchase price of $1.1 billion, investments in direct financing leases of $67.5 million, investments in other assets and deposits for real estate investments of $1.7 million, and the purchase of investment securities of $12.0 million, partially offset by the proceeds from the sales of investment securities of $44.2 million.

47

Net cash provided by financing activities of $958.5 million during the six months ended June 30, 2013 related to proceeds net of repayments from our senior corporate credit facility of $600.0 million, $489.8 million of proceeds net of offering-related costs from the issuance of common stock, proceeds from issuance of convertible obligations to Series C Convertible Preferred stockholders of $445.0 million, proceeds from mortgage notes payable of $4.8 million and $0.8 million from contributions from non-controlling interest holders. These inflows were partially offset by common stock repurchases of $350.4 million, payments on our senior secured revolving credit facility of $124.6 million, $25.3 million deferred financing cost payments, distributions paid of $74.9 million, distributions to non-controlling interest holders of $3.1 million, consideration paid for assets of Manager in excess of carryover basis of $3.0 million, and a reduction in restricted cash of $0.5 million.
Cash Flows for the Six Months Ended June 30, 2012
During the six months ended June 30, 2012, net cash provided by operating activities was $0.5 million. The level of cash flows used in or provided by operating activities is affected by acquisition and transaction costs, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the six months ended June 30, 2012 was mainly due to adjusted net loss of $0.3 million (net loss of $12.2 million adjusted for non-cash items including depreciation and amortization, amortization of deferred financing costs, equity-based compensation, and loss on held for sale properties, summing to $11.9 million, in the aggregate), a decrease of $1.7 million in accounts payable and accrued expenses, an increase in deferred rent and other liabilities of $0.8 million, partially offset by a decrease in prepaid expenses of $1.8 million.
Net cash used in investing activities for the six months ended June 30, 2012 of $512.6 million related to properties acquired and deposits for real estate investments made during the year.
Net cash provided by financing activities of $886.7 million during the six months ended June 30, 2012 related to proceeds net of offering-related costs from the issuance of common and preferred stock of $735.0 million, $139.4 million of proceeds from mortgage notes payable and $32.5 million of proceeds, net of repayments, from our senior secured revolving credit facility. These inflows were partially offset by distributions paid of $8.3 million, payments of deferred financing costs of $9.3 million, a reduction in restricted cash of $1.5 million, advances to affiliates of $0.7 million, and common stock repurchases of $0.1 million.
Liquidity and Capital Resources
In the normal course of business, our principal demands for funds will continue to be for property acquisitions, either directly or through investment interests, for the payment of operating expenses, distributions to our investors, and for the payment of principal and interest on our outstanding indebtedness. We expect to meet our future short-term operating liquidity requirements through net cash provided by our current property operations. Management expects that our properties will generate sufficient cash flow to cover all operating expenses and the payment of a monthly distribution. The majority of our net leases contain contractual rent escalations during the primary term of the lease. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from offerings, including our ATM program, proceeds from the sale of properties and undistributed funds from operations. With the stabilization of the investment portfolio, we expect to significantly increase the amount of cash flow generated from operating activities in future periods. Such increased cash flow will positively impact the amount of funds available for dividends.
Sources of Funds
Funds from Operations and Adjusted Funds from Operations
 Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), an industry trade group, has promulgated a measure known as funds from operations (“FFO”), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income or loss as determined under U.S. GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the “White Paper“). The White Paper defines FFO as net income or loss computed in accordance with U.S. GAAP, excluding gains or losses from sales of property but including asset impairment writedowns, plus depreciation and amortization, after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.

48

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of U.S. GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in U.S. GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. We also add back to net income deriving FFO certain costs associated with mergers and other transactions as these expenses and transactions do not reflect our operations in the current period. However, FFO and adjusted funds from operations (“AFFO”), as described below, should not be construed to be more relevant or accurate than the current U.S. GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under U.S. GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and AFFO measures and the adjustments to U.S. GAAP in calculating FFO and AFFO.
We consider FFO and FFO, as adjusted to exclude acquisition-related fees and expenses, or AFFO, useful indicators of the performance of a REIT. Because FFO calculations exclude such factors as depreciation and amortization of real estate assets and gains or losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs in our peer group. Accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves.
Additionally, we believe that AFFO, by excluding acquisition-related fees and expenses, provides information consistent with management's analysis of the operating performance of the properties. By providing AFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies, including exchange-traded and non-traded REITs.
As a result, we believe that the use of FFO and AFFO, together with the required U.S. GAAP presentations, provide a more complete understanding of our performance relative to our peers and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.
FFO and AFFO are non-GAAP financial measures and do not represent net income as defined by U.S. GAAP. FFO and AFFO do not represent cash flows from operations as defined by U.S. GAAP, are not indicative of cash available to fund all cash flow needs and liquidity, including our ability to pay distributions and should not be considered as alternatives to net income, as determined in accordance with U.S. GAAP, for purposes of evaluating our operating performance. Other REITs may not define FFO in accordance with the current NAREIT definition (as we do) or may interpret the current NAREIT definition differently than we do and/or calculate AFFO differently than we do. Consequently, our presentation of FFO and AFFO may not be comparable to other similarly titled measures presented by other REITs.

49

The below table reflects the items deducted or added to net loss in our calculation of FFO and AFFO for the three months ended June 30, 2013 and 2012 (amounts in thousands). Amounts are presented net of any non-controlling interest effect where applicable.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Net loss attributable to stockholders (in accordance with U.S. GAAP)
 
$
(51,679
)
 
$
(7,070
)
 
$
(189,613
)
 
$
(12,098
)
Merger and other transaction costs
 
4,680

 
20

 
142,449

 
20

Loss on contingent valuation rights
 
31,134

 
—

 
31,134

 
—

(Gain) loss on held for sale properties
 
—

 
82

 
(14
)
 
405

Gain on sale of investment securities
 
—

 
—

 
(451
)
 
—

Loss on derivative instruments
 
40

 
—

 
45

 
—

Interest on convertible obligation to preferred investors
 
1,630

 
—

 
1,630

 
—

Depreciation and amortization
 
27,806

 
6,994

 
52,829

 
10,529

FFO
 
13,611

 
26

 
38,009

 
(1,144
)
 
 
 
 
 
 
 
 
 
Acquisition and transaction related costs
 
15,144

 
7,814

 
20,726

 
12,599

Amortization of above-market lease
 
63

 
—

 
126

 
—

Amortization of deferred financing costs
 
2,166

 
385

 
3,274

 
596

Straight-line rent
 
(1,605
)
 
(352
)
 
(2,975
)
 
(565
)
Non-cash equity compensation expense
 
3,454

 
178

 
4,330

 
324

AFFO
 
$
32,833

 
$
8,051

 
$
63,490

 
$
11,810

Capital Markets
The following are our equity offerings and awards of common stock during the six months ended June 30, 2013 (dollar amounts in millions):
Type of offering
 
Closing Date
 
Number of Shares
 
Gross Proceeds
Registered follow on offering
 
January 29, 2013
 
2,070,000

 
$
26.7

ATM
 
January 1 - June 30, 2013
 
553,300

 
8.9

Private placement offering
 
June 7, 2013
 
29,411,764

 
455.0

Total
 
 
 
32,035,064

 
$
490.6

Upon the consummation of the ARCT III Merger, 29.2 million shares of the then outstanding shares of ARCT III's common stock holders elected to be paid in cash at $12.00 per share. In addition, upon the consummation of the ARCT III Merger, 148.1 million shares of ARCT III's common stock were converted to shares of our common stock at the ARCT III Exchange Ratio, resulting in an additional 140.7 million shares of our common stock outstanding after the exchange.
On August 1, 2012, we filed a $500 million universal shelf registration statement and a resale registration statement with the SEC. Each registration statement became effective on August 17, 2012. As of June 30, 2013, we had issued 2.1 million shares of common stock through a registered follow on offering and an ATM offering under the $500 million universal shelf registration statement. No preferred stock, debt or equity-linked security had been issued under the universal shelf registration statement. The resale registration statement, as amended, registers the resale of up to 1,882,248 shares of common stock issued in connection with any future conversion of certain currently outstanding restricted shares, convertible preferred stock or limited partnership interests in the OP. As of June 30, 2013, no common stock had been issued under the resale registration statement.
On March 14, 2013, we filed a universal automatic shelf registration statement and achieved well-known seasoned issuer (“WKSI”) status. The Company intends to maintain both the $500.0 million universal shelf registration statement and the WKSI universal automatic shelf registration statement.
In January 2013, we commenced an “at the market” equity offering program (“ATM”) in which we may from time to time offer and sell shares of our common stock having an aggregate offering proceeds of up to $60.0 million. The shares will be issued pursuant to our $500.0 million universal shelf registration statement.
In addition to our common stock offerings, on June 7, 2013, the Company issued 28.4 million shares convertible preferred stock (the “Series C Convertible Preferred Stock”) for gross proceeds of $445.0 million. See Note 10 Convertible Preferred Stock in the consolidated financial statements for a description of the conversion features of the Series C Convertible Preferred Stock.

50

Availability of Funds from Revolving Credit Facilities
On February 14, 2013, ARCT III, entered into the Credit Facility with Wells Fargo Bank, National Association, as administrative agent, RBS Citizens, N.A. and Regions Bank, as syndication agents, and Capital One, N.A. and JP Morgan Chase Bank, N.A., as documentation agents. Since that date the facility has been augmented to increase the commitments of certain lenders and add Bank of America N.A., Barclays Bank PLC, TD Bank N.A., U.S. Bank N.A., Union Bank N.A., UBS AG, Comerica Bank and First Tennessee Bank, as lenders.
These additional commitments increased the facility to $1.45 billion. The Credit Facility has an accordion feature, which if exercised in full, the aggregate commitments (comprised of revolving, term loan and delayed draw commitments) under the credit agreement would be $2.5 billion, subject to borrowing base availability.
The Credit Facility contains an $810.0 million term loan facility and a $640.0 million revolving credit facility. Loans under the Credit Facility are priced at a floating interest rate of LIBOR plus 1.60% to 2.20%, based upon our current leverage. To the extent that we receive an investment grade credit rating as determined by a major credit rating agency, at the our election, advances under the Credit Facility will be priced at their applicable rate plus 0.90% to 1.75% and term loans will be priced at a floating interest rate of LIBOR plus 1.15% to 2.00%, based upon our then current investment grade credit rating. We may also make fixed rate borrowings under the Credit Facility.
As of August 5, 2013, additional commitments from lenders increased the facility to $1.7 billion.
The Credit Facility provides for monthly interest payments. In the event of a default, each lender has the right to terminate its obligations under the credit facility, and to accelerate the payment on any unpaid principal amount of all outstanding loans. We have guaranteed the obligations under the credit facility. The revolving credit facility will terminate on February 14, 2017, unless extended, and the term loan facility will terminate on February 14, 2018. We may prepay borrowings under the Credit Facility and, to the extent that borrowings are unused under the revolving credit facility and the term loan facility, we incur an unused fee of 0.15% to 0.25% per annum on the unused amount depending on the unused balance as a percentage of the total facility and the type of funding. The Credit Facility also requires us to maintain certain property available for collateral as a condition to funding.
As of June 30, 2013, there was $600.0 million outstanding on the Credit Facility, which bore a floating interest rate, which on June 30, 2013 was 1.95%. $515.0 million of the Credit Facility's interest rate is fixed at 2.80% through the use of derivative instruments, used to hedge against interest rate volatility. At June 30, 2013, there was up to $1.9 billion available to us for future borrowings, subject to borrowing availability.
On February 28, 2013, we repaid all of the outstanding borrowings under the senior revolving credit facility in the amount of $124.6 million, and the credit agreement was terminated. The average interest rate on the borrowings during the period the balance was outstanding was 3.11%. On February 14, 2013, simultaneous with ARCT III entering into the Credit Facility, ARCT III terminated its secured credit facility agreement, which had been unused.
Convertible Senior Note Offering
On July 29, 2013, the Company issued $300.0 million of 3.00 % Convertible Senior Notes (“Notes”) due in 2018 in an underwritten public offering. The Notes will mature on August 1, 2018. The Notes may be converted into cash, common stock or a combination thereof in limited circumstances prior to February 1, 2018 and may be converted at any time into such consideration on or after February 1, 2018. Additionally, the underwriters have a 30-day option to purchase up to an additional $30.0 million of Notes. To date, $10.0 million of the over allotment option has been exercised. The Company intends to use the net proceeds of the offering (a) to repay outstanding indebtedness under its existing senior secured revolving credit facility (which will increase the availability of funds under such credit facility) and (b) for other general corporate purposes which includes investing in properties in accordance with its investment objectives.
Principal Use of Funds
Acquisitions
Generally, cash needs for property acquisitions will be met through proceeds from the public or private offerings of debt and equity and other financings. We may also from time to time enter into other agreements with third parties whereby third parties will make equity investments in specific properties or groups of properties that we acquire.
Our Manager evaluates potential acquisitions of real estate and real estate-related assets and engages in negotiations with sellers and borrowers on our behalf. Investors and stockholders should be aware that after a purchase contract is executed that contains specific terms the property will not be purchased until the successful completion of due diligence and negotiation of final binding agreements. During this period, we may decide to temporarily invest any unused proceeds from equity offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
To date, in addition to the CapLease Merger and ARCT IV merger discussed in Note 2 — Mergers and Acquisitions in the consolidated financial statements, we have identified various portfolio opportunities and have entered into various definitive

51

agreements for property purchases, one of which is to acquire 121 properties for an aggregate purchase price of approximately $604.1 million, exclusive of closing costs. The portfolio is entirely free standing single tenant net leased properties aggregating 6.2 million square feet, 100% leased to 16 tenants, 35.4% of which are investment grade rated, with average remaining lease terms of 13.8 years. The properties are geographically diverse, located in 30 states.
The Company expects to finance the aggregate purchase price of the previously announced mergers and acquisitions described above in part through the assumption of outstanding indebtedness, and expects to finance the balance of the aggregate purchase price through a combination of (i) available cash on hand and (iii) any funds available and not otherwise allocated to previously announced acquisitions from (a) a portion of the $896.0 million in net proceeds from the sale of shares of ARCP common stock and convertible preferred stock in separate previously disclosed private placement transactions, which transactions were completed on June 7, 2013; (b) a portion of the $289.2 million in net proceeds (or $318.2 million if the underwriters exercise their over allotment option in full) from the sale of the Notes; (c) an expected issuance of approximately $500 million of ARCP common stock; (d) funds available from the issuance of common stock through the Company's current at-the-market program or any successor program thereto; (e) financing available under the Company's credit facility, where the company has commitments (including revolving and term loans) for total borrowing of up to $1.7 billion with an accordion feature of up to $2.5 billion, subject to borrowing base availability among other conditions; and (f) additional alternative financing arrangements, as needed, from the issuance of additional common stock, preferred securities or other debt, equity or equity-linked financings.
Dividends
The amount of dividends payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for dividends, financial condition, capital expenditure requirements, as applicable, and annual dividend requirements needed to qualify and maintain our status as a REIT under the Code. Operating cash flows are expected to increase as additional properties are acquired in our investment portfolio.
We, our board of directors and Manager share a similar philosophy with respect to paying our dividends. The dividends should principally be derived from cash flows generated from real estate operations. In order to improve our operating cash flows and our ability to pay dividends from operating cash flows, our Manager has in the past agreed to waive certain fees including asset management and incentive fees. Our Manager will determine if a portion or all of such fees will be waived in subsequent periods on a quarter-to-quarter basis. Base asset management fees waived during the three and six months ended June 30, 2013 were $2.0 million and $2.4 million, respectively. Property management and leasing fees of $0.8 million were waived during the six months ended June 30, 2013; there were no property management and leasing fees during the three months ended June 30, 2013. The fees that were waived relating to the activity are not deferrals and accordingly, will not be paid. Because our Manager waived certain fees that we owed, cash flow from operations that would have been used to pay such fees to our Manager was available to pay dividends to our stockholders. See Note 14 — Related Party Transactions and Arrangements in the consolidated financial statements within this report for further information on fees paid to and forgiven by our Manager.
The management agreement with our Manager provides for payment of the asset management fee. Our Manager will waive such portion of its management fee that, when added to our AFFO, without regard to the waiver of the management fee, would increase our AFFO so that it equals the dividends declared by us for the prior six months. For purposes of this determination, AFFO is FFO (as defined by NAREIT), adjusted to (i) include acquisition fees and related expenses which is deducted in computing FFO; (ii) include non-cash restricted stock grant amortization, if any, which is deducted in computing FFO; and (iii) include impairments of real estate related investments, if any (including properties, loans receivable and equity and debt investments) which are deducted in computing FFO. Our Manager will determine if such fees will be partially or fully waived in subsequent periods on a quarter-to-quarter basis.
In addition, pursuant to our administrative support agreement with our Sponsor, our Sponsor had agreed to pay or reimburse us for certain of our general and administrative costs to the extent that the amount of our dividends declared until September 6, 2012, which was one year following the closing of our IPO, exceeded the amount of our AFFO in order that such dividends do not exceed the amount of our AFFO, computed without regard to such general and administrative costs paid for, or reimbursed, by our Sponsor.
As our real estate portfolio matures, we expect cash flows from operations to cover our dividends. As the cash flows from operations become more significant, our Manager may discontinue its past practice of forgiving fees and may charge the entire fee in accordance with the agreement with our Manager. There can be no assurance that our Manager will continue to waive earned asset management or incentive fees in the future. 

52

The following table shows the sources for the payment of dividends to common stockholders for the three and six months ended June 30, 2013 (dollars in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
 
March 31, 2013
 
June 30, 2013
 
June 30, 2013
 
 
Dividends
 
% of
Dividends
 
Dividends
 
% of
Dividends
 
Dividends
 
% of
Dividends
Dividends:
 
 
 
 
 
 
 
 
 
 
 
 
Distributions paid in cash
 
$
27,409

 
 
 
$
37,088

 
 
 
$
64,497

 
 
Distributions reinvested
 
4,895

 
 
 
—

 
 
 
4,895

 
 
 
 
$
32,304

 
 
 
$
37,088

 
 
 
$
69,392

 
 
Source of dividends:
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations
 
$
—

 
0.0
%
 
$
5,674

 
15.3
%
 
$
5,674

 
8.2
%
Proceeds from financing activities
 
27,409

 
84.8
%
 
31,414

 
84.7
%
 
58,823

 
84.8
%
Common stock issued under the DRIP
 
4,895

 
15.2
%
 
—

 
0.0
%
 
4,895

 
7.0
%
Total sources of dividends
 
$
32,304

 
100.0
%
 
$
37,088

 
100.0
%
 
$
69,392

 
100.0
%
Net loss attributable to stockholders (in accordance with U.S. GAAP)
 
$
(137,934
)
 
 
 
$
(51,679
)
 
 
 
$
(189,613
)
 
 
Loan Obligations
The payment terms of our loan obligations vary. In general, only interest amounts are payable monthly with all unpaid principal and interest due at maturity. Some of our loan agreements stipulate that we comply with specific reporting and financial covenants mainly related to debt coverage ratios and loan to value ratios. Each loan that has these requirements has specific ratio thresholds that must be met. As of June 30, 2013 we were in compliance with the debt covenants under our loan agreements.
As of June 30, 2013, we had non-recourse mortgage indebtedness of $269.9 million which was collateralized by 165 properties. Our mortgage indebtedness bore interest at weighted average rate of 4.25% per annum and had a weighted average maturity of 4.99 years. We may in the future incur additional mortgage debt on the properties we currently own or use long-term non-recourse financing to acquire additional properties in the future.
As of June 30, 2013, there was $600.0 million outstanding on the Credit Facility, which bore a floating interest rate of 1.95%. $515.0 million of the Credit Facility's interest rate is fixed at 2.802% through the use of derivative instruments. At June 30, 2013, there was up to $1.9 billion available to us for future borrowings, subject to certain conditions including borrowing base availability.
At June 30, 2013, our leverage ratio (net debt, excluding debt convertible to common stock, divided by enterprise value) was 20.8%.
On February 28, 2013, we repaid all of the outstanding borrowings under our senior revolving credit facility, and the credit agreement was terminated.
On February 14, 2013, simultaneous with ARCT III entering into the Credit Facility, ARCT III terminated its secured credit facility agreement, which had been unused.
Our loan obligations require the maintenance of financial covenants, as well as restrictions on corporate guarantees, the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. At June 30, 2013 and 2012, the Company was in compliance with the debt covenants under all of our loan obligations.

53

Contractual Obligations
The following is a summary of our contractual obligations as of June 30, 2013 (in thousands):
 
 
Total
 
July 1, 2013 - December 31, 2013
 
2014 – 2015
 
2016 – 2017
 
Thereafter
Principal payments due on mortgage notes payable
 
$
269,918

 
$
74

 
$
13,956

 
$
186,588

 
$
69,300

Interest payments due on mortgage notes payable
 
61,498

 
5,795

 
22,689

 
16,592

 
16,422

Principal payments due on senior corporate credit facility
 
600,000

 
—

 
—

 
—

 
600,000

Interest payments due on senior corporate credit facility
 
74,406

 
8,044

 
32,176

 
32,176

 
2,010

Principal obligation to Series C Convertible Preferred stockholders, at fair value
 
445,000

 
445,000

 
—

 
—

 
—

Interest payments due on obligation to Series C Convertible Preferred Stock
 
13,038

 
13,038

 
—

 
—

 
—

Contingent value rights obligation to preferred and common investors, at fair value
 
31,134

 
31,134

 
—

 
—

 
—

Payments due on ground lease obligations
 
4,050

 
174

 
697

 
702

 
2,477

Total
 
$
1,499,044

 
$
503,259

 
$
69,518

 
$
236,058

 
$
690,209

Election as a REIT
We elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with the taxable year ended December 31, 2011. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax to the extent we distribute our REIT taxable income to our stockholders, and so long as we distribute at least 90% of our REIT taxable income. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income. We believe we are organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year ending December 31, 2013.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, our net leases may require the tenant to pay its allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
We have entered into agreements with affiliates, whereby we pay or have paid in the past certain fees or reimbursements to our Sponsor, our Manager or their affiliates for acquisition fees and expenses, organization and offering costs, asset management fees and reimbursement of operating costs and have in the past paid sales commissions and dealer manager fees. See Note 14 — Related Party Transactions and Arrangements in our financial statements included in this report for a discussion of the various related-party transactions, agreements and fees.
In addition, the partnership agreement of the OP provides for the special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to ARC Real Estate Partners, LLC, a limited partner of the OP. In connection with this special allocation, ARC Real Estate Partners, LLC has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP. ARC Real Estate Partners, LLC is directly or indirectly controlled by certain officers and directors of ARCP.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

54

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable-rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
As of June 30, 2013, our debt included fixed-rate debt, including debt that has interest rates that are fixed with the use of derivative instruments, with a carrying value of $1.2 billion and a fair value of $1.2 billion. Changes in market interest rates on our fixed rate debt impact fair value of the debt, but they have no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our debt to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from their June 30, 2013 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed rate debt by approximately $16.0 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by approximately $21.0 million.
As of June 30, 2013, our debt included variable-rate debt with a carrying value of $85.0 million. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from their June 30, 2013 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate notes payable would increase or decrease our interest expense by approximately $0.9 million annually.
As the information presented above includes only those exposures that existed as of June 30, 2013, it does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and, assume no other changes in our capital structure.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that the disclosure controls and procedures are effective.
No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


55

PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
The information contained in “Note 13 — Commitments and Contingencies — Litigation” of our notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1. Except as set forth therein, as of the end of the period covered by this Quarterly Report on Form 10-Q, we are not a party to, and none of our properties are subject to, any material pending legal proceedings.
Item 1A. Risk Factors.
There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2012, as amended and supplemented by subsequent Quarterly Reports on Form 10-Q and by subsequent Current Reports on Form 8-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On April 19, 2013, we issued approximately 38,300 shares of our common stock upon the conversion of limited partner interests in the OP (the “OP Unit Conversion”) at a purchase price of $16.23, for an aggregate purchase price of approximately $0.6 million.
On June 11, 2013, we issued approximately 560,900 shares of our common stock upon the conversion of limited partner interests in the OP at a purchase price of $14.56, for an aggregate purchase price of approximately $5.4 million.
On June 7, 2013, we closed on a private placement transaction for the sale and issuance of approximately 29.4 million shares of our common stock, par value $0.01 per share, at a purchase price of $15.47 per share, for an aggregate purchase price of $455.0 million (the “Common Stock Transaction”).
Concurrently with the closing of the Common Stock Transaction, we closed on a private placement transaction for the sale of approximately 28.4 million shares of a 5.81% convertible preferred stock designated as Series C Convertible Preferred Stock, at a purchase price of $15.67 per share, for an aggregate purchase price of $445.0 million (the “Preferred Stock Transaction”). After deducting for fees and expenses, the aggregate net proceeds from (i) the Common Stock Transaction were approximately $453.0 million and (ii) the Preferred Stock Transaction were approximately $443.0 million, for aggregate net proceeds from both transactions of approximately $896.0 million.
The shares of common stock and Series C Convertible Preferred Stock offered and sold pursuant to the OP Unit Conversion, the Common Stock Transaction and the Preferred Stock Transaction were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable
Item 5. Other Information.
None
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.

56

SIGNATURES

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

 
 
AMERICAN REALTY CAPITAL PROPERTIES, INC.
 
 
 
 
 
By: /s/ NICHOLAS S. SCHORSCH
 
 
Nicholas S. Schorsch
 
 
Chief Executive Officer and Chairman of the Board of Directors
 
 
(Principal Executive Officer)
 
 
 
 
 
By: /s/ BRIAN S. BLOCK
 
 
Brian S. Block
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer and Principal Accounting Officer)

Date: August 6, 2013



57

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the six months ended June 30, 2013 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit
No.
 
Description
1.1 (7)
 
Underwriting Agreement, dated July 23, 2013, by and among American Realty Capital Properties, Inc., ARC Properties Operating Partnership, L.P., J.P. Morgan Securities LLC and Citigroup Global Markets Inc., as representatives of the several underwriters listed therein.
2.1 (1)
 
Agreement and Plan of Merger, dated as of May 28, 2013, among American Realty Capital Properties, Inc., ARC Properties Operating Partnership, L.P., Safari Acquisition, LLC, CapLease, Inc., Caplease, LP,  and CLF OP General Partner LLC
2.2 (5)
 
Agreement and Plan of Merger, dated as of July 1, 2013, among American Realty Capital Properties, Inc., American Realty Capital Trust IV, Inc., Thunder Acquisition, LLC, ARC Properties Operating Partnership, L.P. and American Realty Capital Operating Partnership IV, L.P.
3.5 (4)
 
Articles Supplementary for the Series C Convertible Preferred Stock of American Realty Capital Properties, Inc., dated June 6, 2013
3.6 (6)
 
Articles of Amendment to Articles of Amendment and Restatement of American Realty Capital Properties, Inc., effective July 2, 2013
4.1 (7)
 
Indenture, dated as of July 29, 2013, between American Realty Capital Properties, Inc. and U.S. Bank National Association, as trustee
4.2 (7)
 
First Supplemental Indenture, dated as of July 29, 2013, between American Realty Capital Properties, Inc. and U.S. Bank National Association, as trustee
4.3 (7)
 
Form of 3.00% Convertible Senior Notes due 2018 (included in Exhibit 4.2)
10.49 (1)
 
Voting Agreement, dated as of May 28, 2013, by and among American Realty Capital Properties, Inc., Paul H. McDowell, William R. Pollert, Shawn P. Seale, Robert C. Blanz and Paul C. Hughes
10.50 (1)
 
Management Letter Agreement, dated as of May 28, 2013, among American Realty Capital Properties, Inc., Paul H. McDowell, William R. Pollert, Shawn P. Seale, Robert C. Blanz, Michael J. Heneghan and Paul C. Hughes
10.51 (2)
 
Securities Purchase Agreement, dated as of June 4, 2013, between American Realty Capital Properties, Inc. and investors party thereto
10.52(2)
 
Convertible Preferred Stock Purchase Agreement, dated as of June 4, 2013, between American Realty Capital Properties, Inc. and investors party thereto
10.53(3)
 
Purchase and Sale Agreement, dated as of May 31, 2013, among American Realty Capital Properties, Inc., ARC Properties Operating Partnership, L.P., CNL APF Partners, LP, USRP (SFGP), LLC, CNL Funding 2000-A, LLC, Net Lease Funding 2005, LLC and CNL Restaurant Capital Corp.
10.54(4)
 
Form of Common Stock CVR Agreement
10.55(4)
 
Form of Convertible Preferred Stock CVR Agreement
10.56(5)
 
Letter Agreement, dated as of July 1, 2013, among American Realty Capital Properties, Inc., American Realty Capital Trust IV, Inc., American Realty Capital Operating Partnership IV, L.P., American Realty Capital Trust IV Special Limited Partner, LLC, American Realty Capital Advisors IV, LLC and American Realty Capital Properties IV, LLC
10.57(5)
 
Asset Purchase and Sale Agreement, dated as of July 1, 2013, between ARC Properties Operating Partnership, L.P. and American Realty Capital Advisors IV, LLC
10.58*
 
Augmenting Lender and Increasing Lender Supplement and Incremental Amendment, dated as of March 28, 2013, to the Credit Agreement, among ARC Properties Operating Partnership, L.P., Tiger Acquisition, LLC, American Realty Capital Properties, Inc., the lenders party thereto and Wells Fargo Bank, National Association
10.59*
 
Third Amendment to Credit Agreement, by and among ARC Properties Operating Partnership, L.P., Tiger Acquisition, LLC, American Realty Capital Properties, Inc., the Lenders party thereto, and Wells Fargo Bank, National Association, dated as of May 28, 2013
10.60*
 
Fourth Amendment to Credit Agreement, by and among ARC Properties Operating Partnership, L.P., Tiger Acquisition, LLC, American Realty Capital Properties, Inc., the Lenders party thereto, and Wells Fargo Bank, National Association, dated as of July 22, 2013
10.61*
 
Augmenting Lender and Increasing Lender Supplement and Incremental Amendment to the Credit Agreement, dated as of August 1, 2013, among ARC Properties Operating Partnership, L.P., Tiger Acquisition, LLC, American Realty Capital Properties, Inc., the Lenders party thereto and Wells Fargo Bank, National Association
31.1 *
 
Certification of the Principal 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
31.2 *
 
Certification of the Principal 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
32 *
 
Written statements of the Principal Executive Officer and Principal 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

58

Exhibit
No.
 
Description
101 *
 
XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital Properties, Inc.'s Quarterly Report on Form 10-Q for the three months ended June 30, 2013, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
_______________________________________________
*    Filed herewith
(1)    Filed as an exhibit to American Realty Capital Properties, Inc.'s Current Report on Form 8-K filed with the SEC on May 28, 2013.
(2) Filed as an exhibit to American Realty Capital Properties, Inc.'s Current Report on Form 8-K filed with the SEC on June 5, 2013.
(3) Filed as an exhibit to American Realty Capital Properties, Inc.'s Amended Current Report on Form 8-K/A filed with the SEC on June 7, 2013.
(4) Filed as an exhibit to American Realty Capital Properties, Inc.'s Current Report on Form 8-K filed with the SEC on June 12, 2013.
(5) Filed as an exhibit to American Realty Capital Properties, Inc.'s Current Report on Form 8-K filed with the SEC on July 2, 2013.
(6) Filed as an exhibit to American Realty Capital Properties, Inc.'s Current Report on Form 8-K filed with the SEC on July 9, 2013.
(7) Filed as an exhibit to American Realty Capital Properties, Inc.'s Current Report on Form 8-K filed with the SEC on July 29, 2013.


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