Equity-based Compensation

Equity Plan

The General Partner has adopted an equity plan (the “Equity Plan”), which provides for the grant of stock options, stock appreciation rights, restricted shares of Common Stock (“Restricted Shares”), restricted stock units (“Restricted Stock Units”), deferred stock units (“Deferred Stock Units”), dividend equivalent rights and other stock-based awards to the General Partner’s and its affiliates’ non-executive directors, officers and other employees and advisors or consultants who provide services to the General Partner or its affiliates. To date, the General Partner has granted fully vested shares of Common Stock, Restricted Shares, Restricted Stock Units and Deferred Stock Units under the Equity Plan. Restricted Shares provide for rights identical to those of Common Stock. Restricted Stock Units do not provide for any rights of a common stockholder prior to the vesting of such Restricted Stock Units. In accordance with U.S. GAAP, Restricted Shares are considered issued and outstanding. As is the case when fully vested shares of Common Stock are issued from the Equity Plan, for each Restricted Share awarded under the Equity Plan, the Operating Partnership issues a General Partner OP Unit to the General Partner with identical terms. Upon vesting of Restricted Stock Units or Deferred Stock Units, the Operating Partnership issues a General Partner OP Unit to the General Partner for each share of Common Stock issued as a result of such vesting.

The General Partner has 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. As of December 31, 2016, the General Partner had cumulatively awarded under its Equity Plan approximately 4.1 million Restricted Shares, net of the forfeiture of 3.6 million Restricted Shares through that date, 3.4 million Restricted Stock Units, net of the forfeiture of 0.5 million Restricted Stock Units through that date, and 0.2 million Deferred Stock Units, collectively representing approximately 7.7 million shares of Common Stock. Accordingly, as of such date, approximately 92.1 million additional shares were available for future issuance.

During the years ended December 31, 2015 and 2014, the General Partner awarded 5,634 and 165,838 shares of Common Stock, respectively. The fair value of the awards was determined using the closing stock price on the grant date and expensed in full on the grant date. The Company recorded $0.1 million and $2.0 million of compensation expense related to the awards for the years ended December 31, 2015 and 2014, respectively, which is recorded in general and administrative expense in the accompanying consolidated statements of operations. No such shares of Common Stock were awarded during the year ended December 31, 2016.

Restricted Shares

The Company has issued Restricted Shares to certain employees and non-executive directors beginning in 2011. In addition, the Company issued Restricted Shares to employees of affiliates of the Former Manager prior to 2015. The fair value of the Restricted Shares granted to employees under the Equity Plan is generally determined using the closing stock price on the grant date and is expensed over the requisite service period on a straight-line basis. The fair value of Restricted Shares granted to non-executive directors and employees of affiliates of the Former Manager under the Equity Plan was measured based upon the fair value of goods or services received or the equity instruments granted, whichever was more reliably determinable, and was expensed in full at the date of grant.

During the years ended December 31, 2016, 2015 and 2014 the Company recorded $2.7 million, $3.9 million and $29.7 million, respectively, of compensation expense related to the Restricted Shares, which is recorded in general and administrative expense in the accompanying consolidated statements of operations. As of December 31, 2016, there was $3.6 million of unrecognized compensation expense related to the Restricted Shares with a weighted-average remaining term of 1.9 years.

The following table details the activity of the Restricted Shares during the year ended December 31, 2016:



	Restricted Shares		Weighted-Average Grant Date Fair Value
Unvested shares, December 31, 2014	2,684,062		$	13.84
Granted	4,010		9.76
Vested	(989,621	)	13.88
Forfeited	(458,789	)	13.68
Unvested shares, December 31, 2015	1,239,662		$	13.86
Granted	—		—
Vested	(586,863	)	$	13.91
Forfeited	(90,393	)	$	14.08
Unvested shares, December 31, 2016	562,406		$	13.78

Time-Based Restricted Stock Units

Under the Equity Plan, the Company may award Restricted Stock Units to employees that will vest if the recipient maintains his/her employment over the requisite service period (the “Time-Based Restricted Stock Units”). The fair value of the Time-Based Restricted Stock Units granted to employees under the Equity Plan is generally determined using the closing stock price on the grant date and is expensed over the requisite service period on a straight-line basis, which is generally three years. During the years ended December 31, 2016 and 2015, the Company recorded $3.4 million and $1.8 million, respectively, of compensation expense related to the Time-Based Restricted Stock Units, which is recorded in general and administrative expense in the accompanying consolidated statements of operations. No Time-based Restricted Stock Units were awarded during the year ended December 31, 2014. As of December 31, 2016, there was $6.3 million of unrecognized compensation expense related to the Time-Based Restricted Stock Units with a weighted-average remaining term of 1.8 years.

Deferred Stock Units

The Company may award Deferred Stock Units to non-executive directors under the Equity Plan. Each Deferred Stock Unit represents the right to receive one share of Common Stock. The Deferred Stock Units provide for immediate vesting on the grant date and will be settled with Common Stock either on the earlier of the date on which the respective director separates from the Company or the third anniversary of the grant date, or if granted pursuant to the director’s voluntary election to participate in the director’s deferred compensation program, on the date the director separates from the Company. The fair value of the Deferred Stock Units is determined using the closing stock price on the grant date and is expensed over the requisite service period or on the grant date for awards with no requisite service period. During each of the years ended December 31, 2016 and 2015, the Company recorded $0.8 million of expense related to Deferred Stock Units, which is recorded in general and administrative expense in the accompanying consolidated statements of operations. No Deferred Stock Units were awarded during the year ended December 31, 2014. As of December 31, 2016, there is no unrecognized compensation expense related to the Deferred Stock Units.

The following table details the activity of the Time-Based Restricted Stock Units and Deferred Stock Units during the year ended December 31, 2016.



	Time-Based Restricted Stock Units		Weighted-Average Grant Date Fair Value		Deferred Stock Units		Weighted-Average Grant Date Fair Value
Unvested units, December 31, 2014	—		$	—	—		$	—
Granted	671,405		9.61		90,076		8.75
Vested	(41,112	)	9.46		(90,076	)	8.75
Forfeited	(41,155	)	9.76		—		—
Unvested units, December 31, 2015	589,138		$	9.61	—		$	—
Granted	736,427		7.82		87,513		9.18
Vested	(199,556	)	9.52		(87,513	)	9.18
Forfeited	(40,095	)	8.68		—		—
Unvested units, December 31, 2016	1,085,914		$	8.43	—		$	—

Market-Based Restricted Stock Units

During the year ended December 31, 2015, the General Partner awarded Restricted Stock Units to certain employees under the Equity Plan that were contingent upon the Common Stock reaching a certain market price (the “Market-Based Restricted Stock Units”). The Market-Based Restricted Stock Units were contingent upon the closing price of the Common Stock equaling or exceeding $10 per share for 20 consecutive trading days (the “Market Condition”) and the grantee’s continued employment as of such date on which the Market Condition was met. On July 28, 2016, 610,839 Market-Based Restricted Stock Units vested, of which 199,858 shares were withheld to cover grantees’ tax withholding obligations, resulting in 410,981 shares being issued.

The fair value and derived service period of the Market-Based Restricted Stock Units as of their grant date was determined using a Monte Carlo simulation, which took into account multiple input variables that determine the probability of satisfying the Market Condition. The method required the input of assumptions, including the future dividend yield and expected volatility of the Common Stock. Compensation expense was recognized on a straight-line basis over the derived service period regardless of whether the Market Condition was satisfied, provided that the requisite service condition had been achieved. The Market-Based Restricted Stock Units were fully expensed during the year ended December 31, 2015; however, the Company recorded contra-expense due to the forfeiture of such awards. During the years ended December 31, 2016 and 2015, the Company recorded contra-expense of $0.8 million related to forfeitures and expense of $6.0 million, respectively, which is recorded in general and administrative expense in the accompanying consolidated statements of operations. There were no such expenses related to the Market-Based Restricted Stock Units for the year ended December 31, 2014. As of December 31, 2016, there is no unrecognized compensation expense related to the Market-Based Restricted Stock Units.

Long-Term Incentive Awards

The General Partner may award long-term incentive-based Restricted Stock Units (the “LTI Target Awards”) to employees under the Equity Plan. Vesting of the LTI Target Awards is based upon the General Partner’s level of achievement of total stockholder return (“TSR”), including both share price appreciation and Common Stock dividends, as measured equally against a market index and against a peer group generally over a three year period.

The fair value and derived service period of the LTI Target Awards as of their grant date is determined using a Monte Carlo simulation which takes into account multiple input variables that determine the probability of satisfying the required TSR, as outlined in the award agreements. This method requires the input of assumptions, including the future dividend yield, the expected volatility of the Common Stock and the expected volatility of the market index constituents and the peer group. Compensation expense is recognized on a straight-line basis over the derived service period regardless of whether the necessary TSR is attained, provided that the requisite service condition has been achieved. During the years ended December 31, 2016 and 2015, the Company recorded $4.6 million and $1.9 million, respectively, of expense related to the LTI Target Awards, which is recorded in general and administrative expense in the accompanying consolidated statements of operations. There were no such expenses related to the LTI Target Awards for the year ended December 31, 2014. As of December 31, 2016, there is $7.1 million of unrecognized compensation expense related to the LTI Target Awards with a weighted-average remaining term of 1.6 years.

The following table details the activity of the unvested Market-Based Restricted Stock Units and the LTI Target Awards during the year ended December 31, 2016.



	Market-Based Restricted Stock Units		Weighted-Average Grant Date Fair Value		LTI Target Awards		Weighted-Average Grant Date Fair Value
Unvested units, December 31, 2014	—		$	—	—		$	—
Granted	922,686		8.57		816,783		11.42
Vested	—		—		(3,311	)	11.77
Forfeited	(217,882	)	8.53		(82,024	)	11.77
Unvested units, December 31, 2015	704,804		$	8.58	731,448		$	11.38
Granted	—		—		855,471		7.14
Vested	(610,839	)	8.58		(8,065	)	11.44
Forfeited	(93,965	)	8.58		(56,367	)	11.15
Unvested units, December 31, 2016	—		$	—	1,522,487		$	9.00

Director Stock Plan

The General Partner adopted the Non-Executive Director Stock Plan (the “Director Stock Plan”), which provided for the grant of Restricted Shares of Common Stock to each of the General Partner’s non-executive directors. As of December 31, 2014, a total of 99,000 shares of Common Stock was reserved for issuance under the Director Stock Plan and the General Partner had awarded 45,000 of such shares. As of December 31, 2015, all shares awarded by the General Partner have vested and there was no activity within the Director Stock Plan during the years ended December 31, 2016 or 2015. In accordance with the LPA, the Operating Partnership issued an equal number of General Partner OP Units when the General Partner awarded shares under the Director Stock Plan.

The fair value of these Restricted Shares, as well as the corresponding General Partner OP Units issued by the Operating Partnership, under the Director Stock Plan is determined based upon the closing stock price on the grant date.

Multi-Year Outperformance Plans

Upon consummation of the the acquisition of American Realty Capital Trust III, Inc. on February 28, 2013 (the “ARCT III Merger”), the Company entered into the 2013 Advisor Multi-Year Outperformance Agreement (the “OPP”) with the Former Manager, whereby the Former Manager was able to earn compensation upon the attainment of stockholder value creation targets.

Under the OPP, the Former Manager was granted long-term incentive plan units of the OP (“LTIP Units”), which could be earned or forfeited based on the General Partner’s total return to stockholders, as defined by the OPP, for the three-year period that commenced on December 11, 2012.

Pursuant to previous authorization from the General Partner’s board of directors, as a result of the termination of the management agreement with the Former Manager, all of the approximately 8.2 million LTIP Units were deemed vested and convertible into OP Units upon the consummation of the Company’s transition to self-management on January 8, 2014 and were converted into OP Units on such date. There are no awards outstanding under the OPP and the OPP has been terminated.

During the year ended December 31, 2014, the Operating Partnership recorded expenses of $1.6 million for the LTIP Units under the OPP, which is recorded in general and administrative expense in the accompanying consolidated statements of operations. As of December 31, 2014, all LTIP Units under the OPP were earned and $93.9 million of the expense was allocated to the non-controlling interest on the consolidated balance sheet.

On October 3, 2013, the General Partner’s board of directors approved a multi-year outperformance plan (the “2014 OPP”), which became effective upon the General Partner’s transition to self-management on January 8, 2014. Under the 2014 OPP, individual agreements were entered into between the General Partner and the participants selected by the General Partner’s board of directors (the “Participants”) that set forth the Participant’s participation percentage in the 2014 OPP and the number of LTIP Units of the OP subject to the award (“OPP Agreements”). Under the 2014 OPP and the OPP Agreements, the Participants were eligible to earn performance-based bonus awards equal to the Participant’s participation percentage of a pool that is funded up to a maximum award opportunity of approximately 5% of the General Partner’s equity market capitalization at the time of the approval of the 2014 OPP which, following the Audit Committee’s and Company’s review, was determined to be $120.0 million, not the $218.1 million pool which had been used originally to calculate and report the awards issued to the Participants.

During the three months ended December 31, 2014, all of the Participants in the 2014 OPP departed from the Company and forfeited all of their interests in the 2014 OPP. As such, all equity-based compensation expense related to the 2014 OPP was reversed in the three months ended December 31, 2014 and no expense was recorded during the year ended December 31, 2015 or 2016.

The Compensation Committee of the General Partner’s board of directors (the “Compensation Committee”) elected to terminate the 2014 OPP on April 23, 2015, which had zero LTIP Units outstanding following the departures of the Participants in the fourth quarter of 2014. During the first quarter of 2015, the Compensation Committee, with input from its independent compensation consultant, elected to adopt the LTI Target Award structure described above.