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Section 1: 10-Q (10-Q)

ARCP 09.30.2013 10-Q SS
Table of Contents

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 September 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 October 31, 2013 was 185,448,022 shares.








AMERICAN REALTY CAPITAL PROPERTIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FORM 10-Q
September 30, 2013

 
Page
 
 





Table of Contents

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)


September 30, 2013

December 31, 2012


(Unaudited)


ASSETS




Real estate investments, at cost:






Land

$
521,139


$
249,541

Buildings, fixtures and improvements

2,121,178


1,336,726

Acquired intangible lease assets

328,733


212,223

Total real estate investments, at cost

2,971,050


1,798,490

Less: accumulated depreciation and amortization

(148,162
)

(56,110
)
Total real estate investments, net

2,822,888


1,742,380

Cash and cash equivalents

150,481


156,873

Investment in direct financing leases, net

57,449



Investment securities, at fair value

9,480


41,654

Derivatives assets, at fair value

7,088



Restricted cash

1,680


1,108

Prepaid expenses and other assets

48,165


7,416

Deferred costs, net

47,754


15,356

Assets held for sale

6,028


665

Total assets

$
3,151,013


$
1,965,452







LIABILITIES AND EQUITY





Mortgage notes payable

$
269,891


$
265,118

Convertible debt

300,975



Senior secured revolving credit facility



124,604

Senior corporate credit facility

600,000



Convertible obligation to Series C Convertible Preferred stockholders, at fair value

449,827



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

49,314



Below-market lease liabilities, net
 
4,200

 

Derivatives liabilities, at fair value

1,785


3,830

Accounts payable and accrued expenses

14,740


9,459

Deferred rent and other liabilities

7,404


4,336

Distributions payable

72


9,946

Total liabilities

1,698,208


417,293








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



8

Common stock, $0.01 par value, 750,000,000 and 240,000,000 shares authorized and 185,448,022 and 179,167,112 issued and outstanding at September 30, 2013 and December 31, 2012, respectively

1,848


1,792

Additional paid-in capital

1,803,315


1,653,900

Accumulated other comprehensive income (loss)

4,857


(3,934
)
Accumulated deficit

(480,817
)

(120,072
)
Total stockholders’ equity

1,329,203


1,531,694

Non-controlling interests

123,602


16,465

Total equity

1,452,805


1,548,159

Total liabilities and equity

$
3,151,013


$
1,965,452

The accompanying notes are an integral part of these statements.

1

Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC.
  
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for per share data)
(Unaudited)


Three Months Ended September 30,

Nine Months Ended September 30,


2013

2012

2013

2012
Revenues:












Rental income

$
56,681


$
18,301


$
138,060


$
35,713

Direct financing lease income

977




977



Operating expense reimbursements

3,226


515


6,878


773

Total revenues

60,884


18,816


145,915


36,486

Operating expenses:








Acquisition related

1,235


14,636


21,961


27,235

Merger and other transaction related

3,791




146,240


20

Property operating

4,103


1,076


8,972


1,656

General and administrative

1,586


496


4,018


1,523

Equity-based compensation

7,180


480


11,510


804

Depreciation and amortization

39,382


11,632


92,211


22,161

Operating fees to affiliates







212

Total operating expenses

57,277


28,320


284,912


53,611

Operating income (loss)

3,607


(9,504
)

(138,997
)

(17,125
)
Other income (expenses):








Interest expense

(24,135
)

(3,454
)

(41,589
)

(7,596
)
Loss on contingent value rights

(38,542
)



(69,676
)


Income from investment securities





218



Gain on sale of investment securities





451



Loss on derivative instruments

(99
)



(144
)


Other income, net

45


206


171


273

Total other expenses, net

(62,731
)

(3,248
)

(110,569
)

(7,323
)
Loss from continuing operations

(59,124
)

(12,752
)

(249,566
)

(24,448
)
Net (gain) loss from continuing operations attributable to non-controlling interests

(30
)

65


726


138

Net loss from continuing operations attributable to stockholders

(59,154
)

(12,687
)

(248,840
)

(24,310
)
Discontinued operations:








Net income (loss) from operations of held for sale properties

96


44


159


(53
)
(Loss) gain on held for sale properties



(47
)

14


(452
)
Net income (loss) from discontinued operations

96


(3
)

173


(505
)
Net (loss) income from discontinued operations attributable to non-controlling interests

(5
)



(9
)

27

Net income (loss) from discontinued operations attributable to stockholders

91


(3
)

164


(478
)
Net loss

(59,028
)

(12,755
)

(249,393
)

(24,953
)
Net (income) loss attributable to non-controlling interests

(35
)

65


717


165

Net loss attributable to stockholders

$
(59,063
)

$
(12,690
)

$
(248,676
)

$
(24,788
)
Other comprehensive income (loss):








Designated derivatives, fair value adjustments

(3,622
)

(1,198
)

9,218


(4,037
)
Unrealized (loss) gain on investment securities, net

(440
)

34


(427
)

34

Comprehensive loss

$
(63,125
)

$
(13,854
)

$
(239,885
)

$
(28,791
)
Basic and diluted net loss per share from continuing operations attributable to common stockholders

$
(0.32
)

$
(0.09
)

$
(1.49
)

$
(0.31
)
Basic and diluted net loss per share attributable to common stockholders

$
(0.32
)

$
(0.09
)

$
(1.49
)

$
(0.32
)
The accompanying notes are an integral part of these statements.

2

Table of Contents

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
 


 


 
32,036,221

 
320

 
490,258

 

 

 
490,578

 

 
490,578

Conversion of Convertible Preferred Stock Series A and B to common stock
 
(828,472
)
 
(8
)
 
828,472

 
8

 

 

 

 

 

 

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
 

 

 
(28,315,016
)
 
(283
)
 
(357,634
)
 

 

 
(357,917
)
 

 
(357,917
)
Offering costs, commissions and dealer manager fees
 

 

 

 

 
(4,298
)
 

 

 
(4,298
)
 

 
(4,298
)
Equity-based compensation
 

 

 
643,000

 

 

 

 

 

 
9,827

 
9,827

Amortization of restricted shares
 

 

 

 

 
4,068

 

 

 
4,068

 

 
4,068

Consideration paid for assets of Manager in excess of carryover basis
 

 

 

 

 
(3,035
)
 

 

 
(3,035
)
 

 
(3,035
)
Equity component of convertible debt
 

 

 

 

 
9,372

 

 

 
9,372

 

 
9,372

Distributions declared
 

 

 

 

 

 

 
(112,069
)
 
(112,069
)
 

 
(112,069
)
Issuance of operating partnership units
 

 

 

 

 

 

 

 

 
108,247

 
108,247

Contributions from non-controlling interest holders
 

 

 

 

 

 

 

 

 
750

 
750

Distributions to non-controlling interest holders
 

 

 

 

 

 

 

 

 
(5,170
)
 
(5,170
)
Net loss
 

 

 

 

 

 

 
(248,676
)
 
(248,676
)
 
(717
)
 
(249,393
)
Other comprehensive income
 

 

 

 

 

 
8,791

 

 
8,791

 

 
8,791

Balance September 30, 2013
 

 
$

 
185,448,022

 
$
1,848

 
$
1,803,315

 
$
4,857

 
$
(480,817
)
 
$
1,329,203

 
$
123,602

 
$
1,452,805


The accompanying notes are an integral part of this statement.


3

Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(249,393
)
 
$
(24,953
)
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
 
73,493

 
18,046

Amortization of intangible lease assets
 
18,889

 
4,259

Amortization of deferred costs
 
6,914

 
1,226

Amortization of above-market lease asset
 
189

 
56

Amortization of discount on convertible debt
 
347

 

(Gain) loss on held for sale properties
 
(14
)
 
452

Equity-based compensation
 
13,895

 
837

Loss on derivative instruments
 
144

 

Unrealized loss on investments
 
14

 

Unrealized loss on contingent value rights obligations, net of settlement payments
 
49,314

 

Convertible obligations to Series C Convertible Preferred stockholders, fair value adjustment
 
4,827

 

Gain on sale of investments

 
(451
)
 

Changes in assets and liabilities:
 
 
 
 
Investment in direct financing leases
 
102

 

Prepaid expenses and other assets
 
(12,081
)
 
(3,284
)
Accounts payable and accrued expenses
 
4,464

 
1,559

Deferred rent and other liabilities
 
3,068

 
1,914

Net cash provided by operating activities
 
21,968

 
112

Cash flows from investing activities:
 
 
 
 
Investments in real estate and other assets
 
(1,173,497
)
 
(965,383
)
Investment in direct financing leases
 
(57,551
)
 

Capital expenditures
 
(113
)
 

Purchase of assets from Manager
 
(1,041
)
 

Proceeds from sale of property held for sale
 

 
553

Deposits for real estate investments
 
(28,836
)
 
(4,914
)
Purchases of investment securities
 
(12,004
)
 
(8,055
)
Proceeds from sale of investment securities
 
44,188

 

Net cash used in investing activities
 
(1,228,854
)
 
(977,799
)
Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
4,773

 
157,170

Proceeds from senior secured revolving credit facility
 

 
48,793

Payments on senior secured revolving credit facility
 
(124,604
)
 
(110
)
Proceeds from senior corporate credit facility
 
860,000

 

Payments on senior corporate credit facility
 
(260,000
)
 

Payments of deferred financing costs
 
(38,221
)
 
(13,650
)
Advance from affiliate bridge loan
 

 
796

Payment of affiliate bridge loan
 

 
(796
)
Proceeds from issuance of convertible debt
 
310,000

 

Common stock repurchases
 
(357,916
)
 
(896
)
Proceeds from issuances of preferred shares
 

 
9,000

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

 

Proceeds from issuances of common stock
 
490,577

 
1,653,988

Payments of offering costs and fees related to stock issuances
 
(4,041
)
 
(181,037
)
Consideration paid for assets of Manager in excess of carryover basis
 
(3,035
)
 

Contributions from non-controlling interest holders
 
750

 
3,000

Distributions to non-controlling interest holders
 
(5,170
)
 
(376
)
Distributions paid
 
(117,047
)
 
(20,225
)
Advances from affiliates, net
 

 
(623
)
Premium payment on interest rate cap
 

 
(13
)
Restricted cash
 
(572
)
 
(1,212
)
Net cash provided by financing activities
 
1,200,494

 
1,653,809

Net change in cash and cash equivalents
 
(6,392
)
 
676,122

Cash and cash equivalents, beginning of period
 
156,873

 
19,331

Cash and cash equivalents, end of period
 
$
150,481

 
$
695,453

Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
16,468

 
$
5,749

Cash paid for income taxes
 
354

 
88

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

 
12,613

Reclassification of deferred offering costs
 

 
900

The accompanying notes are an integral part of these statements.

4

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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


Note 1 — Organization
American Realty Capital Properties, Inc. (the “Company” or “ARCP”), 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”). The Company's common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol "ARCP".
The Company acquires, owns and operates single-tenant, freestanding commercial real estate properties. The Company has acquired properties with 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 has advanced its investment objectives by growing its net lease portfolio through key mergers and acquisitions. Since January 1, 2013, the Company has completed or has definitive agreements to complete various mergers and portfolio acquisitions totaling approximately $18.0 billion of assets. 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 interests in the OP as of September 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 interests 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 the 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, with the exception of certain acquisition, accounting and portfolio management services performed by employees of the Company. The Company's board of directors determined that it is in the best interests of the Company and its stockholders to become self-managed prior to the pending closing of its merger with Cole Real Estate Investments, Inc. In connection with becoming self-managed, the Company expects to terminate the existing management agreement with the Manager, enter into appropriate employment and incentive compensation arrangements with its executives and acquire from the Manager certain assets necessary for its operations.
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 American Realty Capital Trust III, Inc. ("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, including restricted shares which became vested, 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.

5

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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 ARCT III 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.
Also in connection with the ARCT III Merger, the Company entered into an agreement with the Sponsor and its affiliates to internalize certain functions performed by them prior to the ARCT III Merger, reduce certain fees paid to affiliates, purchase certain corporate assets and pay certain merger related fees. See Note 14 — Related Party Transactions and Arrangements.
Accounting Treatment of the ARCT III Merger
The Company and ARCT III, from inception 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 significant 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 merger had occurred as of the beginning of the earliest period presented, therefore the accompanying financial statements including the notes thereto are presented as if the ARCT III Merger had occurred on January 1, 2012.
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 (the “GE Capital Portfolio”) for consideration of $826.3 million exclusive of closing costs; no liabilities were assumed. The 447 properties are subject to 409 property operating leases, which are accounted for on the straight-line rent basis of accounting, and 38 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 is 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.
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 provided for the merger of CapLease with and into a subsidiary of the Company (the “CapLease Merger”).

6

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

Pursuant to the terms and subject to the conditions set forth in the CapLease Merger Agreement, each outstanding share of common stock of CapLease, other than shares owned by the Company, CapLease or any of their respective wholly owned subsidiaries, were 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, were 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 were converted into the right to receive $8.50 in cash, without interest. Shares of the CapLease's outstanding restricted stock were accelerated and became fully vested, and restricted stock and any outstanding performance shares were fully earned and had the right to receive $8.50 per share.
On November 5, 2013, the Company completed the merger with CapLease based on the terms of the CapLease Merger Agreement and total cash consideration of $920.7 million was paid to the common and preferred shareholders. The merger will be accounted for under the acquisition method of accounting under U.S. GAAP. Under the acquisition method of accounting, the assets acquired and liabilities assumed from CapLease will be recorded as of the acquisition date at their respective fair values. Any excess of purchase price over the fair values will be recorded as goodwill. Results of operations for CapLease will be included in the Company’s consolidated financial statements from the date of acquisition.
Pending Mergers and Significant Acquisitions
American Realty Capital Trust IV Merger
On July 1, 2013, the Company entered into an Agreement and Plan of Merger, as amended on October 6, 2013, (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”).
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 exchanged for (i) $9.00 to be paid in cash, plus (ii) 0.5190 shares of the Company’s common stock, par value $0.01, and (iii) 0.5937 shares of a new series of preferred stock to be designated as Series F Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”), par value $0.01.
The Series F Preferred Stock will not be redeemable by the Company before the fifth anniversary of the date on which such Series F Preferred Stock is issued (the “Initial Redemption Date”), except under circumstances intended to preserve the Company’s status as a real estate investment trust for federal and/or state income tax purposes and except upon the occurrence of a change of control. On and after the Initial Redemption Date, the Company may, at its option, redeem shares of the Series F Preferred Stock, in whole or from time to time in part, at a redemption price of $25.00 per share plus, subject to exceptions, any accrued and unpaid dividends thereon to the date fixed for redemption. The shares of Series F Preferred Stock have no stated maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless the Company redeems or otherwise repurchases them or they become convertible and are converted into common stock (or, if applicable, alternative consideration).
In addition, each outstanding Class B unit of equity ownership of the ARCT IV will be converted into the right to receive 2.3591 Class B OP Units of the Company and other equity units of ARCT IV will receive 2.3961 OP Units of the Company. 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 ARCT IV 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 for total cash consideration of $5.8 million.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

ARCT IV's external advisor will be entitled to subordinated distributions of net sales proceeds in an amount estimated to be approximately $68.3 million, assuming an implied price of the Company's common stock of $13.50 per share upon the ARCT IV Merger. 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 of the Company 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 the Company's 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 the Company's common stock on the date of the ARCT IV Merger and will not be known until the ARCT IV Merger 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.
The ARCT IV Merger is expected to close in the 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 ARCT IV 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.
Fortress Portfolio Acquisition
On July 24, 2013, AR Capital, LLC and another related entity, on behalf of the Company and certain other entities sponsored directly or indirectly by AR Capital, LLC, entered into a purchase and sale agreement with subsidiaries of Fortress Investment Group LLC ("Fortress") for the purchase and sale of 196 properties owned by Fortress for an aggregate contract purchase price of approximately $972.5 million, subject to adjustments set forth in the purchase and sale agreement and exclusive of closing costs, which was allocated to the Company based on the pro-rata fair value of the properties acquired by the Company relative to the fair value of all 196 properties to be acquired from Fortress. Of the 196 properties, 120 properties are expected to be acquired by the Company from Fortress for a purchase price of approximately $601.2 million, subject to adjustments set forth in the purchase and sale agreement and exclusive of closing costs. On October 1, 2013, the Company closed on 41 of the 120 properties with a total purchase price of $200.3 million, exclusive of closing costs.The remaining properties are expected to close in the fourth quarter of 2013.
Inland Portfolio Acquisition
On August 8, 2013 the Company's Sponsor entered into a purchase and sale agreement with Inland American Real Estate Trust, Inc. ("Inland") for the purchase and sale of the equity interests of 67 companies owned by Inland for an aggregate contract purchase price of approximately $2.3 billion, subject to adjustments set forth in the purchase and sale agreement and exclusive of closing costs. Of the 67 companies, the equity interests of 10 companies (the "Inland Portfolio") will be acquired by the Company from Inland for a purchase price of approximately $501.0 million, subject to adjustments set forth in the purchase and sale agreement and exclusive of closing costs, which was allocated to the Company based on the pro-rata fair value of the Inland Portfolio relative to the fair value of all 67 companies to be acquired by the Company and other entities sponsored directly or indirectly by the Company's Sponsor from Inland. The Inland Portfolio is comprised of 33 properties. As of September 30, 2013, the Company has closed on five of the 33 properties for a total purchase price of $56.4 million, exclusive of closing costs. The remaining properties are expected to close in the fourth quarter of 2013.


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Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

Cole Real Estate Investments, Inc. Merger
On October 22, 2013, the Company entered into an Agreement and Plan of Merger (the “Cole Merger Agreement”) with Cole Real Estate Investments, Inc., a Maryland corporation (“Cole”), and certain subsidiaries of each company. The Cole Merger Agreement provides for the merger of Cole with and into a subsidiary of the Company (the “Cole Merger”).
Pursuant to the terms and subject to the conditions set forth in the Cole Merger Agreement, at the effective time of the Cole Merger, each outstanding share of common stock of Cole will be exchanged for (i) 1.0929 shares of common stock of ARCP, par value $0.01 per share, or (ii) $13.82 in cash. In no event will the cash consideration be paid with respect to more than 20% of the shares of Cole common stock issued and outstanding as of immediately prior to the consummation of the merger. If the aggregate elections for payment in cash exceed 20% of the number of shares of Cole common stock issued and outstanding as of immediately prior to the consummation of the merger, then the amount of cash consideration paid will be reduced on a pro rata basis to 20% with the remaining consideration paid in ARCP common stock. Cash will be paid in lieu of any fractional shares. In addition, upon the consummation of the Cole Merger all of Cole's restricted stock units and restricted performance units outstanding on that date will become vested and exchanged based on the same exchange provisions as for common stock. The merger is expected to close in the first half of 2014. However, as of the filing of this Quarterly Report on Form 10-Q, the consummation of the Cole Merger has not yet occurred and, although the Company believes that the completion of the Cole Merger is probable, the closing of the Cole Merger is subject to a vote by the common stockholders of both Cole and the Company and other customary conditions, and therefore there can be no assurance that the Cole Merger will be consummated. Accordingly, the Company cannot assure that the Cole Merger will be completed based on the terms of the Cole 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 nine months ended September 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 nine months ended September 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.
As part of the update to the provisional allocation of the purchase price for the GE Capital portfolio, the Company reclassified approximately $9.9 million from investment in direct financing leases receivables to investments in real estate, at cost.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

Convertible Obligation to Series C Convertible Preferred Stockholders
On June 7, 2013, the Company issued, through a private placement, 28.4 million shares of Series C Convertible Preferred Stock (the “Series C Stock”) for gross proceeds of $445.0 million. Due to an unconditional obligation to either redeem or convert the Series C Stock into a variable number of shares of common stock that is predominantly based on a fixed monetary amount, the preferred securities are classified as an obligation under U.S. GAAP and are presented in the consolidated balance sheet as a liability. In September 2013, the Company entered into an agreement with the investors in the Series C Stock whereby, promptly following the closing of the CapLease Merger, the Series C Stock will be converted, in accordance with the terms of the original agreement, into 1.4 million shares of common stock representing an estimated $18.3 million of value, with the remaining balance of Series C Stock settled in cash. Total consideration to be paid in cash is estimated to be $435.6 million. The conversion and redemption of Series C Stock is expected to close promptly following the Company's merger with CapLease, which, as discussed in Note 2 — Mergers and Acquisitions, consummated on November 5, 2013. Certain holders of the Series C Stock have agreed to reinvest their cash proceeds into a new Series D Cumulative Convertible Preferred stock (“Series D Stock”) representing $249.6 million or 18.8 million shares. The remaining Series C stock holders have agreed to reinvest their cash proceeds from the redemption of the Series C Stock into common stock representing $186.0 million or 15.1 million shares. The convertible obligation to Series C convertible preferred stockholders is recorded at fair value at September 30, 2013, which approximates the estimated settlement value. The preferred shares liability will be carried at fair value and adjusted on a quarterly basis.
Convertible Debt
On July 29, 2013 the Company issued $300.0 million of Convertible Senior Notes and issued an additional $10.0 million of Convertible Senior Notes on August 1, 2013. The notes mature August 1, 2018 and are convertible to cash or shares of the Company's common stock at the Company's option in accordance with the agreement. In accordance with U.S GAAP, the notes are accounted for as a liability with a separate equity component recorded for the conversion option. The liability was recorded on the issuance date at fair value based on a discounted cash flow analysis using current market rates for debt instruments with similar terms. The difference between the initial proceeds from the notes and the estimated fair value of the debt instruments resulted in a debt discount, with an offset recorded to additional paid-in capital representing the equity component. The debt discount is being amortized to interest expense over the expected life of the Convertible Senior Notes.
Contingent Valuation Rights
On June 7, 2013, the Company issued to certain 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”). In September 2013, certain investors holding the Common Stock CVR's received $20.4 million representing the maximum payment of $1.50 per share as defined in the agreement. The remaining Common Stock CVR holders have deferred settlement of the amount owed to them of $23.7 million and will reinvest those proceeds in Series D Stock, which reinvestment is expected to occur, as discussed above, promptly following the CapLease Merger, which consummated on November 5, 2013.
In accordance with an agreement with the Preferred Stock CVR holders dated September 15, 2013, the Preferred Stock CVR's will be settled for $0.90 per Preferred CVR or a total of $25.6 million.
The holders of certain of the Preferred Stock CVR's have agreed to reinvest their payment into Series D Stock representing $14.6 million or 1.1 million shares with the remaining $11.0 million paid in cash. The settlement of the Preferred Stock CVR will occur promptly following the CapLease Merger, which consummated on November 5, 2013.
Changes in the fair value of the contingent valuation rights obligation is 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.

10

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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 equity in the consolidated balance sheets. In addition, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Furthermore, upon conversion of OP Units to common stock, any difference between the fair value of common shares gives and the carrying value of the OP Units converted is recorded as a component of equity. As of September 30, 2013 and December 31, 2012, there were 9,051,661 and 1,621,349 OP Units outstanding, respectively.
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 6 — 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.
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 6 — 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.

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Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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 September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013(1)
 
2012
Real estate investments, at cost:
 
 
 
 
 
 
 
 
Land
 
$
13,620

 
$
62,171

 
$
273,047

 
$
146,439

Buildings, fixtures and improvements
 
71,046

 
334,566

 
787,192

 
707,499

Total tangible assets
 
84,666

 
396,737

 
1,060,239

 
853,938

Acquired intangibles:
 
 
 
 
 
 
 
 
In-place leases
 
10,014

 
56,622

 
117,458

 
117,797

Below market leases
 
(4,200
)
 

 
(4,200
)
 

Total assets acquired, net
 
90,480

 
453,359

 
1,173,497

 
971,735

OP Units issued to acquire real estate investments
 

 

 

 
(6,352
)
Cash paid for acquired real estate investments
 
$
90,480

 
$
453,359

 
$
1,173,497

 
$
965,383

Number of properties acquired
 
38

 
207

 
528

 
377

_______________________________________________
(1) Excludes 38 properties comprised of $57.4 million of net investments subject to direct financing leases.
Land, buildings, fixtures and improvements, in-place lease intangibles, investments in direct financing leases and below market leases amounting to $826.3 million, are comprised of $202.3 million, $502.5 million, $68.3 million, $57.4 million and $(4.2) million, respectively, which have been provisionally assigned to each class of asset, pending receipt of the final appraisals and other information being prepared by a third-party specialist. 
As part of the update to the preliminary allocation of the purchase prices for the GE Capital portfolio, the Company reclassified approximately $9.9 million from direct financing lease receivables to investments in real estate at cost.
During the second quarter of 2013, the Company classified a Shaw's Supermarket in Plymouth, MA, as a held for sale property. As of September 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 nine months ended September 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 $1.2 million and $14.6 million for the three months ended September 30, 2013 and 2012, respectively, and merger and other transaction related expenses of $3.8 million for the three months ended September 30, 2013. The unaudited pro forma net loss attributable to stockholders was adjusted to exclude acquisition related expenses of $22.0 million and $27.2 million for the nine months ended September 30, 2013 and 2012, respectively, and merger and other transaction related expenses of $146.2 million and $20 thousand for the nine months ended September 30, 2013 and 2012, respectively.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in thousands)
 
2013
 
2012
 
2013
 
2012
Pro forma revenues
 
$
59,074

 
$
20,949

 
$
177,222

 
$
160,534

Pro forma net income (loss) attributable to stockholders
 
$
(53,842
)
 
$
864

 
$
(68,300
)
 
$
71,352


12

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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)
October 1, 2013 - December 31, 2013
 
$
54,638

 
$
1,083

2014
 
217,104

 
4,410

2015
 
213,758

 
4,324

2016
 
209,300

 
4,279

2017
 
198,779

 
3,975

Thereafter
 
1,298,718

 
12,258

Total
 
$
2,192,297

 
$
30,329

_______________________________________________
(1) 38 properties are subject to direct financing leases and, therefore, 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):
 
 
September 30, 2013
Future minimum lease payments receivable
 
$
30,329

Unguaranteed residual value of property
 
41,859

Unearned income
 
(14,739
)
Net investment in direct financing leases
 
$
57,449

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 September 30, 2012. Annualized rental income for net leases is rental income on a straight-line basis as of the period reported, which includes the effect of tenant concessions such as free rent, as applicable. There were no tenants exceeding 10% of consolidated annualized rental income on a straight-line basis at September 30, 2013.
 
 
September 30,
Tenant
 
2013
 
2012
Dollar General
 
*
 
16.9%
FedEx
 
*
 
14.1%
Citizens Bank
 
*
 
13.6%
_______________________________________________
* 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 on a straight-line basis for the periods presented.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

Geographic Concentration
The Company had no concentrations of properties where annual rental income for properties in any state, on a straight-line basis represented greater than 10% of consolidated annualized rental income on a straight-line basis as of September 30, 2013 or 2012.
Note 5 — Investment Securities
Investment securities are considered available-for-sale and, therefore, increases or decreases in the fair value of these investments are recorded in accumulated other comprehensive income (loss) as a component of equity on the consolidated balance sheets unless the securities are considered to be other than temporarily impaired at which time the losses are reclassified to expense.
The following table details the unrealized gains and losses on investment securities as of September 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 September 30, 2013
 
$
10,000

 
$

 
$
(520
)
 
$
9,480

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

 
$
223

 
$
(316
)
 
$
41,654

At September 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 nine months ended September 30, 2013, resulting in a gain on sale of investments of $0.5 million.
Note 6 — 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.

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Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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 $4.8 million will be reclassified from other comprehensive income as an increase to interest expense. During the three and nine months ended September 30, 2013, the Company accelerated the reclassification of approximately $27,000 from other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur.
As of September 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 September 30, 2013 and December 31, 2012 (dollar amounts in thousands):
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
September 30, 2013
 
December 31, 2012
Interest rate products
 
Derivative assets, at fair value
 
$
7,088

 
$

Interest rate products
 
Derivative liabilities, at fair value
 
$
(1,785
)
 
$
(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 nine months ended September 30, 2013 and 2012, respectively (amounts in thousands).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 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)
 
$
(4,880
)
 
$
(1,541
)
 
$
6,009

 
$
(4,715
)
Amount of gain (loss) reclassified from accumulated other comprehensive income into income as interest expense (effective portion)
 
$
(1,258
)
 
$
(343
)
 
$
(3,209
)
 
$
(678
)
Amount of gain (loss) recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
 
$
(56
)
 
$
(91
)
 
$
(79
)
 
$
(91
)

15

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of September 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
September 30, 2013
 
$
7,088

 
$
(1,785
)
 
$

 
$
7,088

 
$
(1,785
)
 
$

 
$

 
$
5,303

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.
As of September 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 $2.0 million. As of September 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 $2.0 million at September 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 nine months ended September 30, 2013 and 2012 (amounts in thousands):
AOCI Component
 
Amount Reclassified from AOCI
 
Affected Line Items in the Consolidated Statements of Operations and Comprehensive Loss
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
Unrealized loss on investment securities, net
 
$

 
$

 
$
93

 
$

 
Gain on sale of investment securities
Designated derivatives, fair value adjustment
 
(1,258
)
 
(343
)
 
(3,209
)
 
(678
)
 
Interest expense
Note 7 — Mortgage Notes Payable
The Company’s mortgage notes payable consist of the following as of September 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)
September 30, 2013
 
165

 
$
269,891

 
4.25
%
 
4.68
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 September 30, 2013 and 3.32% to 6.13% at December 31, 2012.
(2)
Weighted average remaining years until maturity as of September 30, 2013 and December 31, 2012, respectively.

16

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

The following table summarizes the scheduled aggregate principal repayments subsequent to September 30, 2013 (amounts in thousands):
Year
 
Total
October 1, 2013 - December 31, 2013
 
$
47

2014
 
189

2015
 
13,767

2016
 
16,820

2017
 
169,768

Thereafter
 
69,300

Total
 
$
269,891

The Company’s mortgage loan agreements generally require restrictions on corporate guarantees and the maintenance of financial covenants including maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios). As of September 30, 2013, the Company was in compliance with the debt covenants under the mortgage loan agreements.
Note 8 — Other Long Term Debt
The Company has the following class of convertible preferred stock outstanding at September 30, 2013:
Issue
 
Date Issued
 
Units
 
Gross Proceeds
(In thousands)
 
Liquidation Preference
 
Dividend/Interest Rate
 
 
 
 
 
Shares classified as Liabilities:
 
 
 
 
 
 
 
 
 
 
Series C Convertible Preferred Stock
 
June 7, 2013
 
28,398,213

 
$
445,000

 
$
15.67

 
5.81
%
Convertible Obligation to Series C Convertible Preferred Stockholders
The fair value of the convertible obligation to Series C convertible preferred stockholders (“Series C Stock”) was determined to approximate the proceeds received at issuance of $445.0 million. Pursuant to the terms of Series C Stock purchase agreements, the Series C Stock is expected to be settled promptly following the Company’s merger with CapLease or December 31, 2013, in a combination of common shares of the Company and cash consideration at the election of the Company. At September 30, 2013, the fair value of the obligation was remeasured and determined to be $449.8, which is based predominately on the estimated settlement value. The change in fair value is recorded as interest expense in the consolidated statement of operations and comprehensive loss. The settlement is expected to close promptly following the CapLease Merger, which, as discussed in Note 2 — Mergers and Acquisitions, consummated on November 5, 2013.
On September 15, 2013, the Company entered into definitive purchase agreements pursuant to which it will issue Series D Preferred, par value $0.01 per share, at a 5.81% coupon and common stock, par value $0.01 per share, to institutional holders of Series C Convertible Preferred Stock promptly following the close of the Company's merger with CapLease, which consummated on November 5, 2013, via a private placement. In accordance with the terms of the purchase agreement relating to the Company’s previously issued Series C Preferred, Series C Preferred will be redeemed for cash or common stock. Pursuant to the new definitive purchase agreements, the Company will issue approximately 21.7 million shares of Series D Preferred and 15.1 million shares of common stock to the holders of Series C Preferred. The shares of Series D Preferred will be convertible, in certain circumstances, into common stock or Series E Cumulative Preferred Stock or redeemable into cash, at the discretion of the Company.
Convertible Senior Note Offering
On July 29, 2013, the Company issued $300.0 million of Convertible Senior Notes and issued an additional $10.0 million of Convertible Senior Notes on August 1, 2013. The notes mature August 1, 2018 and are convertible to cash or shares of the Company’s common stock at the Company's option in accordance with the agreement. The fair value of the notes was determined at issuance to be $300.6 million, resulting in a debt discount of $9.4 million with an offset recorded to additional paid-in capital representing the equity component of the notes for the conversion options. The discount is being amortized to interest expense over the expected life of the notes. As of September 30, 2013, the carrying value of the notes was $301.0 million.

17

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

Note 9 — Credit Facility
Senior Corporate Credit Facility
The Company and the OP are parties to a credit facility with Wells Fargo, National Association (the "Credit Facility"), as administrative agent and other lenders party thereto.
At September 30, 2013, the Credit Facility has commitments of $1.7 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, borrowing base availability and other conditions.
At September 30, 2013, the Credit Facility contains an $940.0 million term loan facility and a $760.0 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 revolving 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.
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 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 September 30, 2013, there was $600.0 million outstanding on the Credit Facility, of which $85.0 million bore a floating interest rate of 1.93%, and for $515.0 million of the Credit Facility's floating base interest rate is fixed through the use of derivative instruments used to hedge interest rate volatility. Including the spread, which can vary based on our leverage, interest on this portion was 2.78% at September 30, 2013. At September 30, 2013, there was up to $1.9 billion available to the Company for future borrowings, subject to additional lender commitments and borrowing availability.
The Credit Facility requires restrictions on corporate guarantees as well as the maintenance of financial covenants including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) and the maintenance of a minimum net worth. At September 30, 2013, the Company was in compliance with the debt covenants under the Credit Facility.
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 10 — 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.

18

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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 September 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 September 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.
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 September 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
September 30, 2013:








Investment in real estate fund

$


$
9,480


$


$
9,480

Interest rate swap assets



7,088




7,088

Interest rate swap liabilities



(1,785
)



(1,785
)
Convertible obligation to Series C Convertible Preferred stockholders



(449,827
)



(449,827
)
Contingent value rights obligation to investors



(49,314
)



(49,314
)









December 31, 2012:








Investment in preferred securities

$
41,654


$


$


$
41,654

Interest rate swap liabilities



(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 nine months ended September 30, 2013, except for the transfer of the contingent value rights obligation to preferred shareholders and convertible obligations to Series C Convertible preferred shareholders from Level 3 to Level 2 of $49.3 million and $449.8 million, respectively, as the obligations are now based on observable inputs.
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 nine months ended September 30, 2013:

19

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

 
 
Contingent value rights obligation to investors
 
Convertible obligation to Series C Convertible Preferred stockholders
 
Total
Beginning balance
 
$

 
$

 
$

Fair value at issuance
 

 
(445,000
)
 
(445,000
)
Settlement of the CVR obligation to common investors
 
20,362

 

 
20,362

Fair value adjustment
 
(69,676
)
 
(4,827
)
 
(74,503
)
Transfers to Level 2
 
49,314

 
449,827

 
499,141

Ending balance
 
$

 
$

 
$

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.
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
 
September 30, 2013
 
September 30, 2013
 
December 31, 2012
 
December 31, 2012
Convertible debt
 
3
 
$
300,975

 
$
300,628

 
$

 
$

Mortgage notes payable
 
3
 
269,891

 
273,536

 
265,118

 
271,056

Senior secured revolving credit facility
 
3
 

 

 
124,604

 
124,604

Senior corporate credit facility
 
3
 
600,000

 
600,000

 

 

 
 
 
 
$
1,170,866

 
$
1,174,164

 
$
389,722

 
$
395,660

The fair value of mortgage notes payable and convertible debt are obtained by calculating the present value at current market rates. The terms of the senior corporate credit facility, which take into account the Company's leverage ratio are considered commensurate with the market, as such, the outstanding balance on the facility approximates fair value.
Note 11 — Preferred and Common Stock
Convertible Preferred Stock
During the three months ended September 30, 2013, the Company converted all 545,454 outstanding shares of its Series A Convertible Preferred Stock and all 283,018 outstanding shares of Series B Convertible Preferred Stock into 829,629 shares of the Company's common stock, which included dividends on the preferred stock.
Preferred Stock
On September 16, 2013, the Board of Directors unanimously approved the issuance of Series D Preferred Stock and the issuance of Series E Preferred Stock. As of September 30, 2013, there were no shares issued or outstanding under the Series D Preferred Stock plan or the Series E Preferred Stock plan. On October 6, 2013, in connection with the modification to the ARCT IV Merger, the Board of Directors unanimously approved the issuance of Series F Preferred 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.

20

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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 September 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.
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.
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.

21

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

The following are the Company's equity offerings of common stock during the nine months ended September 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 - September 30, 2013
 
553,300

 
8.9

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

 
455.0

Dividends paid in common stock (2)
 
August 5, 2013
 
1,157

 

Total
 
 
 
32,036,221

 
$
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.
(2) Represents common shares issued to holders of the Series A Preferred Stock in lieu of unpaid dividends.

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 eighth day of such month. During the nine months ended September 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
 
December 8, 2013*
October 23, 2013
 
$1.00
 
**
_______________________________________________
* The dividend increase became effective at the close of the CapLease Merger, which consummated on November 5, 2013.
** The dividend increase is contingent upon, and effective with, the close of the Cole Merger.
The annualized dividend rate at September 30, 2013 was $0.910 per share.
Common Stock Repurchases
On August 20, 2013, the Company's board of directors reauthorized its $250 million share repurchase program which was originally authorized in February 2013. During the three and nine months ended September 30, 2013, the Company repurchased approximately 0.6 million shares at an average price of $13.06 per share or $7.5 million in total.
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 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.
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.

22

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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 of which vested during the nine months ended September 30, 2013. 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.
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 September 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 awarded to the Manager under the Equity Plan is updated at the end of each quarter based on quarter end closing stock price through the final vesting date.
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.

23

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

The following tables detail the restricted shares activity within the Equity Plan, Director Stock Plan and RSP during the nine months ended September 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
 
625,000

 
14.30

 
18,000

 
14.58

Forfeited
 

 

 

 

Awarded September 30, 2013
 
884,909

 
$
13.57

 
48,300

 
$
12.13

Unvested Restricted Shares
 
 
Equity 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
 
625,000

 
14.30

 
18,000

 
14.58

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

 

 

 

Unvested, September 30, 2013
 
625,000

 
$
14.30

 
18,000

 
$
14.58

For the three months ended September 30, 2013 and 2012, compensation expense for restricted shares was $1.1 million and $0.4 million, respectively. For the nine months ended September 30, 2013 and 2012, compensation expense for restricted shares was $1.7 million and $0.7 million, respectively. Compensation expense of $2.2 million for the accelerated vesting of restricted shares in conjunction with the ARCT III Merger was recorded as merger and other transaction related costs, during the nine months ended September 30, 2013.
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.

24

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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). Since certain awards under the OPP plan are dependent on the comparison of the Company's current market capitalization to the the Company's market capitalization at the inception of plan, the issuance of additional common shares by the Company may result in higher awards.
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 September 30, 2013, 100% of the OPP 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 is measured at each reporting date and is being amortized over the performance period. During the three and nine months ended September 30, 2013, the Company has recorded expense of $6.1 million and $9.8 million, respectively, for the OPP.
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 certain ground and office lease obligations (amounts in thousands):
 
 
Future Minimum
Base Rent Payments
October 1, 2013 - December 31, 2013
 
$
261

2014
 
731

2015
 
732

2016
 
733

2017
 
737

Thereafter
 
6,754

Total
 
$
9,948


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AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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:
ARCT III Litigation Matters
Since the announcement of the ARCT III Merger Agreement on December 17, 2012, Randell Quaal filed a putative class action lawsuit filed on January 30, 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 plaintiff 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.
CapLease Litigation Matters
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.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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.
Counsel who filed each of these three cases reached an agreement with each other as to who will serve as lead plaintiff and lead plaintiffs' counsel in the cases and where they will be prosecuted. Thus, on August 9, 2013, counsel in the Tarver Action filed a motion for stay in the Baltimore Court, information the court they had agreed to join and participate in the prosecution of the Mizani and Carach Actions in the New York Court. The defendants consented to the stay of the Tarver Action in Baltimore Court, and on September 5, 2013, Judge Pamela J. White issued an order granting to stay. Consequently, there has been no subsequent activity in the Baltimore Court in the Tarver Action. Also on August 9, 2013, all counsel involved in the Mizani and Carach Actions filed a joint stipulation in the New York Court, reflecting agreement among all parties in the Mizani and Carach Actions should be consolidated and setting out a schedule for early motion practice in response to the complaints filed. All defendants filed a motion to dismiss all claims on September 23, 2013. Plaintiffs' response to those motions is due on or before November 7, 2013. To date, no injunctive filings have been made by or on behalf of the plaintiffs. 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.
On October 8, 2013, John Poling filed a punitive class action lawsuit in the Circuit Court of Baltimore City against ARCP, ARC Operating Partnership, L.P., Safari Acquisition LLC, CapLease, CapLease LP, CFL OP General Partner, LLC and members of the CapLease, Inc. board of directions. The complaint alleges, that the merger agreement breaches terms of the CapLease' 8.375% Series B Cumulative Redeemable Preferred Stock and the terms of the 7.25% Series C Cumulative Redeemable Preferred Stock and is in violation of the Series B Articles Supplementary and the Series C Articles Supplementary. The complaint alleges breach of contract and breach of fiduciary duty. The plaintiff seeks, among other things, declaratory relief, damages and an injunction to halt the redemption of the Series B and Series C Preferred Stock. 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.
Cole Litigation Matters
To date, five lawsuits have been filed in connection with the Cole Merger. The first, Wunsch v. Cole Real Estate Investments, Inc., et al (“Wunsch”), No. 13-CV-2186, is a putative class action that was filed on October 25, 2013 in the U.S. District Court for the District of Arizona. On October 30, 2013, October 31, 2013 and November 1, 2013, four other putative stockholder class action lawsuits were filed in the Circuit Court for Baltimore City, Maryland, captioned as: (i)Operman v. Cole Real Estate Investments, Inc., et al; (ii) Branham v. Cole Real Estate Investments, Inc., et al; (iii) Wilfong v. Cole Real Estate Investments, Inc., et al. and (iv) Polage v. Cole Real Estate Investments, Inc., et al. All of these lawsuits name the Company, Cole and Cole’s board of directors as defendants; Wunsch, Branham, Wilfong and Polage also name Merger Sub as a defendant. All of the named plaintiffs claim to be Cole stockholders and purport to represent all holders of the Cole’s stock. Each complaint generally alleges that the individual defendants breached fiduciary duties owed to plaintiff and the other public stockholders of Cole, and that certain entity defendants aided and abetted those breaches. In addition, the Operman lawsuit claims that the individual defendants breached their duty of candor to shareholders and the Branham and Polage lawsuits assert claims derivatively against the individual defendants for their alleged breach of fiduciary duties owed to Cole. The Polage lawsuit also asserts derivative claims for waste of corporate assets and unjust enrichment. Among other remedies, the complaints seek injunctive relief prohibiting the defendants from completing the proposed merger or, in the event that an injunction is not awarded, unspecified money damages, costs and attorneys’ fees.

The Company believes that the lawsuits in connection with the Cole Merger are without merit and that it has substantial meritorious defenses to the claims set forth in the complaints. 
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.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

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

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 and OP units. As of September 30, 2013 and December 31, 2012, 5.09% and 1.39%, respectively, of the total equity units issued by the Company were owned by affiliates.
Fees Paid in Connection with Common Stock Offerings
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. RCS has also received compensation for various other Company equity transactions.
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 September 30,
 
Nine Months Ended September 30,
 
Payable as of
 
 
2013
 
2012
 
2013
 
2012
 
September 30, 2013
 
December 31, 2012
Total commissions and fees paid to RCS
 
$

 
$
80,739

 
$

 
$