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Section 1: 10-Q (10-Q)

ARCP 6.30.2014 10-Q
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 June 30, 2014
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________
Commission file number: 001-35263

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

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

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

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

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

The number of outstanding shares of the registrant’s common stock on July 28, 2014 was 907,924,095 shares.








AMERICAN REALTY CAPITAL PROPERTIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FORM 10-Q
June 30, 2014

 
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)
(Unaudited)
 
 
June 30, 2014
 
December 31, 2013
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
3,361,195

 
$
1,379,453

Buildings, fixtures and improvements
 
12,445,972

 
5,294,342

Land and construction in progress
 
62,594

 
22,230

Acquired intangible lease assets
 
2,231,675

 
759,786

Total real estate investments, at cost
 
18,101,436

 
7,455,811

Less: accumulated depreciation and amortization
 
(661,005
)
 
(267,352
)
Total real estate investments, net
 
17,440,431

 
7,188,459

Investment in unconsolidated entities
 
102,047

 

Investment in direct financing leases, net
 
62,094

 
66,112

Investment securities, at fair value
 
219,204

 
62,067

Loans held for investment, net
 
97,587

 
26,279

Cash and cash equivalents
 
193,690

 
52,725

Restricted cash
 
69,544

 
35,881

Intangible assets, net
 
347,618

 

Deferred costs and other assets, net
 
405,056

 
279,261

Goodwill
 
2,304,880

 
96,720

Due from affiliates
 
73,336

 

Total assets
 
$
21,315,487

 
$
7,807,504

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Mortgage notes payable, net
 
$
4,227,494

 
$
1,301,114

Corporate bonds, net
 
2,546,089

 

Convertible debt, net
 
975,003

 
972,490

Credit facilities
 
1,896,000

 
1,969,800

Other debt, net
 
146,158

 
104,804

Below-market lease liabilities, net
 
283,518

 
77,789

Accounts payable and accrued expenses
 
154,741

 
808,489

Deferred rent, derivative and other liabilities
 
218,023

 
40,207

Distributions payable
 
3,837

 
10,278

Due to affiliates
 
835

 

Total liabilities
 
10,451,698

 
5,284,971

 
 
 
 
 
Series D preferred stock, $0.01 par value, 21,735,008 shares (part of 100,000,000 aggregate preferred shares authorized) issued and outstanding at June 30, 2014 and December 31, 2013, respectively
 
269,299

 
269,299

 
 
 
 
 
Preferred stock (excluding Series D Preferred Stock), $0.01 par value, 100,000,000 shares authorized and 42,730,013 and 42,199,547 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
 
427

 
422

Common stock, $0.01 par value, 1,500,000,000 shares authorized and 907,920,494 and 239,234,725 issued and outstanding at June 30, 2014 and December 31, 2013, respectively
 
9,079

 
2,392

Additional paid-in capital
 
11,904,537

 
2,939,287

Accumulated other comprehensive income
 
12,392

 
7,666

Accumulated deficit
 
(1,628,354
)
 
(864,516
)
Total stockholders’ equity
 
10,298,081

 
2,085,251

Non-controlling interests
 
296,409

 
167,983

Total equity
 
10,594,490

 
2,253,234

Total liabilities and equity
 
$
21,315,487

 
$
7,807,504


The accompanying notes are an integral part of these statements.

1

Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC.
  
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
314,843

 
$
52,664

 
$
559,288

 
$
93,651

Direct financing lease income
 
1,181

 

 
2,187

 

Operating expense reimbursements
 
28,545

 
2,281

 
49,641

 
4,191

Cole Capital revenue
 
37,412

 

 
91,479

 

Total revenues
 
381,981

 
54,945

 
702,595

 
97,842

Operating expenses:
 
 
 
 
 
 
 
 
Cole Capital reallowed fees and commissions
 
7,068

 

 
41,504

 

Acquisition related
 
8,453

 
37,289

 
20,337

 
47,616

Merger and other transaction related
 
13,286

 
6,393

 
235,478

 
144,162

Property operating
 
39,372

 
3,086

 
69,030

 
5,635

General and administrative
 
19,063

 
2,361

 
44,748

 
3,815

Equity based compensation
 
9,338

 
3,458

 
31,848

 
4,339

Depreciation and amortization
 
258,993

 
33,752

 
424,356

 
60,505

Total operating expenses
 
355,573

 
86,339

 
867,301

 
266,072

Operating income (loss)
 
26,408

 
(31,394
)
 
(164,706
)
 
(168,230
)
Other (expense) income:
 
 
 
 
 
 
 
 
Interest expense, net
 
(99,635
)
 
(11,068
)
 
(216,347
)
 
(17,124
)
Other income, net
 
6,526

 
1,167

 
10,915

 
2,020

Gain (loss) on derivative instruments, net
 
21,926

 
(40
)
 
1,729

 
(45
)
Loss on contingent value rights
 

 
(31,134
)
 

 
(31,134
)
Gain on disposition of properties, net
 
1,510

 

 
4,489

 

Gain on sale of investments
 

 

 

 
451

Total other expenses, net
 
(69,673
)
 
(41,075
)
 
(199,214
)
 
(45,832
)
Net loss from continuing operations
 
(43,265
)
 
(72,469
)
 
(363,920
)
 
(214,062
)
Discontinued operations:
 
 
 
 
 
 
 
 
Income from operations of held for sale properties
 

 
36

 

 
20

Gain on held for sale properties
 

 

 

 
14

Net income from discontinued operations
 

 
36

 

 
34

Net loss
 
(43,265
)
 
(72,433
)
 
(363,920
)
 
(214,028
)
Net loss attributable to non-controlling interests
 
2,937

 
475

 
14,911

 
907

Net loss attributable to the Company
 
(40,328
)
 
(71,958
)
 
(349,009
)
 
(213,121
)
Less: Dividends attributable to preferred shares
 
22,016

 
158

 
44,443

 
315

Less: Dividends attributable to participating securities
 
1,075

 
75

 
2,280

 
110

Net loss attributable to common stockholders
 
$
(63,419
)
 
$
(72,191
)
 
$
(395,732
)
 
$
(213,546
)
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share attributable to common stockholders
 
$
(0.08
)
 
$
(0.36
)
 
$
(0.58
)
 
$
(1.11
)
The accompanying notes are an integral part of these statements.

2

Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC.
  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands) (Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net loss attributable to the Company
 
$
(40,328
)
 
$
(71,958
)
 
$
(349,009
)
 
$
(213,121
)
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Designated derivatives, fair value adjustments
 
(6,883
)
 
14,058

 
(4,247
)
 
12,881

Unrealized gain (loss) on investment securities, net
 
5,878

 
(1,793
)
 
8,973

 
(1,365
)
Total other comprehensive (loss) income
 
(1,005
)
 
12,265

 
4,726

 
11,516

Total comprehensive loss attributable to the Company
 
$
(41,333
)
 
$
(59,693
)
 
$
(344,283
)
 
$
(201,605
)

The accompanying notes are an integral part of these statements.


3

Table of Contents

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

 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of Shares
 
Par
Value
 
Number
of Shares
 
Par
Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Accumulated
Deficit
 
Total Stock-holders’ Equity
 
Non-Controlling Interests
 
Total Equity
Balance, December 31, 2013
 
42,199,547

 
$
422

 
239,234,725

 
$
2,392

 
$
2,939,287

 
$
7,666

 
$
(864,516
)
 
$
2,085,251

 
$
167,983

 
$
2,253,234

Issuance of common stock, net
 

 

 
662,305,318

 
6,623

 
8,918,584

 

 

 
8,925,207

 

 
8,925,207

Conversion of Common OP Units to common stock
 

 

 
1,017,355

 
10

 
14,715

 

 

 
14,725

 
(14,725
)
 

Conversion of Preferred OP Units to Series F Preferred Stock
 
530,466

 
5

 

 

 
10,800

 

 

 
10,805

 
(10,805
)
 

Issuance of restricted share awards, net
 

 

 
5,363,096

 
54

 
(1,336
)
 

 

 
(1,282
)
 

 
(1,282
)
Equity-based compensation
 

 

 

 

 
22,487

 

 

 
22,487

 
9,361

 
31,848

Distributions declared on common stock
 

 

 

 

 

 

 
(368,106
)
 
(368,106
)
 

 
(368,106
)
Issuance of OP Units
 

 

 

 

 

 

 

 

 
153,885

 
153,885

Distributions to non-controlling interest holders
 

 

 

 

 

 

 

 

 
(16,418
)
 
(16,418
)
Distributions to participating securities
 

 

 

 

 

 

 
(2,280
)
 
(2,280
)
 

 
(2,280
)
Distributions to preferred shareholders
 

 

 

 

 

 

 
(44,443
)
 
(44,443
)
 

 
(44,443
)
Contributions from non-controlling interest holders
 

 

 

 

 

 

 

 

 
1,043

 
1,043

Non-controlling interests retained in Cole Merger
 

 

 

 

 

 

 

 

 
20,996

 
20,996

Net loss
 

 

 

 

 

 

 
(349,009
)
 
(349,009
)
 
(14,911
)
 
(363,920
)
Other comprehensive income
 

 

 

 

 

 
4,726

 

 
4,726

 

 
4,726

Balance, June 30, 2014
 
42,730,013

 
$
427

 
907,920,494

 
$
9,079

 
$
11,904,537

 
$
12,392

 
$
(1,628,354
)
 
$
10,298,081

 
$
296,409

 
$
10,594,490


The accompanying notes are an integral part of these statements.

4

Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
 
Six Months Ended June 30,
 
 
2014
 
2013
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(363,920
)
 
$
(214,028
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Issuance of OP Units
 
153,885

 
108,247

Depreciation and amortization
 
452,446

 
64,243

Gain on disposition of properties
 
(4,489
)
 
(14
)
Equity based compensation
 
31,848

 
6,717

Equity in income of unconsolidated entities
 
385

 

Loss on derivative instruments
 
8,048

 
45

Gain on sale of investments, net
 

 
(451
)
Unrealized loss on contingent value rights obligations, net of settlement payments
 

 
31,134

Gain on extinguishment of debt
 
(8,398
)
 

Changes in assets and liabilities:
 
 
 
 
Investment in direct financing leases
 
525

 

Deferred costs and other assets, net
 
(62,175
)
 
(10,300
)
Due from affiliates
 
(5,335
)
 

Accounts payable and accrued expenses
 
(133,960
)
 
4,554

Deferred rent, derivative and other liabilities
 
(35,298
)
 
2,676

Due to affiliates
 
223

 

Net cash provided by (used in) operating activities
 
33,785

 
(7,177
)
Cash flows from investing activities:
 
 
 
 
Investments in real estate and other assets
 
(1,246,588
)
 
(2,129,677
)
Acquisition of a real estate business, net of cash acquired
 
(755,701
)
 

Investment in direct financing leases
 

 
(76,410
)
Capital expenditures
 
(46,649
)
 
(30
)
Principal repayments received from borrowers
 
4,155

 

Investments in unconsolidated entities
 
(2,500
)
 

Return of investment from unconsolidated entities
 
4,033

 

Proceeds from disposition of properties
 
95,321

 

Investment in intangible assets
 
(266
)
 

Investment in other assets
 

 
(1,041
)
Deposits for real estate investments
 
(129,602
)
 
(47,086
)
Uses and refunds of deposits for real estate investments
 
196,075

 

Purchases of investment securities
 

 
(81,460
)
Line of credit advances to affiliates
 
(80,300
)
 

Line of credit repayments from affiliates
 
15,600

 

Proceeds from sale of investment securities
 

 
44,188

Net cash used in investing activities
 
(1,946,422
)
 
(2,291,516
)
Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
718,275

 
6,924

Payments on mortgage notes payable
 
(876,874
)
 

Payments on other debt
 
(7,524
)
 

Proceeds from credit facilities
 
3,246,000

 
825,000

Payments on credit facilities
 
(4,628,800
)
 
(349,604
)
Proceeds from corporate bonds
 
2,545,760

 

Payments of deferred financing costs
 
(80,515
)
 
(40,488
)
Common stock repurchases
 

 
(350,396
)
Proceeds from issuances of preferred shares
 

 
445,000

Proceeds from issuances of common stock, net offering costs
 
1,595,735

 
1,810,116

Consideration to Former Manager for internalization
 

 
(3,035
)
Contributions from non-controlling interest holders
 
1,043

 
29,758

Distributions to non-controlling interest holders
 
(16,418
)
 
(3,111
)
Distributions paid
 
(427,541
)
 
(90,740
)
Change in restricted cash
 
(15,539
)
 
(844
)
Net cash provided by financing activities
 
2,053,602

 
2,278,580

Net change in cash and cash equivalents
 
140,965

 
(20,113
)
Cash and cash equivalents, beginning of period
 
52,725

 
292,575

Cash and cash equivalents, end of period
 
$
193,690

 
$
272,462

Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
139,478

 
$
11,004

Cash paid for income taxes
 
7,622

 
382

Non-cash investing and financing activities:
 
 
 
 
Common stock issued through distribution reinvestment plan
 
$

 
$
20,619

The accompanying notes are an integral part of these statements.

5

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)


Note 1 — Organization
American Realty Capital Properties, Inc. (the “Company” or “ARCP”) is a self-managed Maryland corporation incorporated on December 2, 2010 that qualified as a real estate investment trust (“REIT”) 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 operates through two business segments, Real Estate Investment (“REI”) and private capital management, Cole Capital (“Cole Capital”), as further discussed in Note 5 — Segment Reporting. Substantially all of the Company’s REI segment 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 97.3% of the common equity interests in the OP as of June 30, 2014. As of June 30, 2014, certain affiliates of the Company and certain unaffiliated investors are limited partners and owners of 1.7% and 1.0%, respectively, of the common equity interests in the OP. Under the limited partnership agreement of the OP, after holding units of limited partner interests in the OP (“OP Units”) for a period of one year, unless otherwise consented to by the Company, holders of OP Units have the right to redeem 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 Company, a corresponding number of shares of the Company’s common stock. 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. Substantially all of the Cole Capital segment is conducted through Cole Capital Advisors, Inc. (“CCA”), an Arizona corporation and a wholly owned subsidiary of the OP. CCA is treated as a taxable REIT subsidiary (“TRS”) under Section 856 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).
Prior to January 8, 2014, ARC Properties Advisors, LLC (the “Former Manager”), a wholly owned subsidiary of AR Capital, LLC (“ARC”), managed the Company’s affairs on a day-to-day basis, with the exception of certain acquisition, accounting and portfolio management services performed by employees of the Company. In August 2013, the Company’s board of directors determined that it was in the best interests of the Company and its stockholders to become self-managed, and the Company completed its transition to self-management on January 8, 2014. In connection with becoming self-managed, the Company terminated the management agreement with its Former Manager and entered into employment and incentive compensation arrangements with its executives and acquired from its Former Manager certain assets necessary for its operations. See Note 19 — Related Party Transactions and Arrangements for further discussion.
The Company has advanced its investment objectives by not only growing its net lease portfolio through granular, self-originated acquisitions, but also through strategic mergers and acquisitions. See Note 2 — Mergers and Acquisitions for further discussion.
On June 11, 2014, the OP, through indirect subsidiaries (the “Sellers”), entered into an agreement of purchase and sale with BRE DDR Retail Holdings III LLC (the “Purchaser”), an entity indirectly jointly owned by affiliates of Blackstone Real Estate Partners VII L.P. and DDR Corp., by which the Sellers have agreed to sell to the Purchaser and the Purchaser has agreed to purchase from the Sellers 67 multi-tenant properties and nine single-tenant properties and the adjacent land and related property (the “Multi-Tenant Portfolio”). The purchase price of the Multi-Tenant Portfolio is $1.975 billion, subject to customary real estate adjustments. Properties may be excluded from the transaction in certain circumstances, in which case the purchase price will be reduced by the portion of the purchase price allocated to the excluded properties.
Note 2 — Mergers and Acquisitions
Completed Mergers and Significant Acquisitions
American Realty Capital Trust III, Inc. 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.

6

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

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 ARCT III’s operating partnership (“ARCT III OP”) was converted into the right to receive 0.95 of the same class of unit of equity ownership in the OP.
Upon the closing of the ARCT III Merger on February 28, 2013, the Company paid an aggregate of $350 million in cash for 29.2 million shares that elected cash consideration, or 16.5% of the then outstanding shares of ARCT III’s common stock (which is equivalent to 27.7 million shares of the Company’s common stock based on the ARCT III Exchange Ratio). In addition, 140.7 million shares of the Company’s common stock were issued in exchange for 148.1 million shares of ARCT III’s common stock adjusted for the ARCT III Exchange Ratio.
Upon the consummation of the ARCT III Merger, American Realty Capital Trust III Special Limited Partner, LLC (the “ARCT III Special Limited Partner”), the holder of the special limited partner interest in the ARCT III OP, was entitled to subordinated distributions of net sales proceeds from the 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 to affiliates of the Company’s Former Manager. The parties had agreed that such OP Units would be subject to a minimum one-year holding period from the date of issuance before being redeemable by the holder for cash or, at the option of the Company, the Company’s common stock.
Also in connection with the ARCT III Merger, the Company entered into an agreement with ARC 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 19 — Related Party Transactions and Arrangements.
Accounting Treatment for 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 ARC. ARC and its related parties had significant ownership interests in the Company and ARCT III through the ownership of shares of common stock and other equity interests. In addition, the advisors of both entities were contractually eligible to receive potential fees for their services to both of the companies including asset management fees, incentive fees and other fees and continued to receive fees from the Company prior to the Company’s transition to self-management. Due to the significance of these fees, the advisors and ultimately ARC were 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 qualified 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 consolidated financial statements including the notes thereto are presented as if the ARCT III Merger had occurred on January 1, 2013.
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”).
On November 5, 2013, the Company completed the CapLease Merger. Pursuant to the terms of 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, was converted into the right to receive $8.50. Each outstanding share of preferred stock of CapLease, other than shares owned by the Company, CapLease or any of their respective wholly owned subsidiaries, was converted into the right to receive an amount in cash 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, each outstanding unit of equity ownership of CapLease’s operating partnership, other than units owned by CapLease or any wholly owned subsidiary of CapLease, was converted into the right to receive $8.50. Vesting of CapLease’s outstanding restricted stock was accelerated and restricted stock and any outstanding performance shares were fully earned and received $8.50 per share. In total, cash consideration of $920.7 million was paid to CapLease’s common and preferred shareholders.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Accounting Treatment for the CapLease Merger
The CapLease Merger has been 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 have been recorded as of the acquisition date at their respective fair values. Any excess of purchase price over the fair values is recorded as goodwill. Results of operations for CapLease are included in the Company’s consolidated financial statements from the date of acquisition.
American Realty Capital Trust IV, Inc. Merger
On July 1, 2013, the Company entered into an Agreement and Plan of Merger, as amended on October 6, 2013 and October 11, 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 provided for the merger of ARCT IV with and into a subsidiary of the OP (the “ARCT IV Merger”). The Company consummated the ARCT IV Merger on January 3, 2014 (the "ARCT IV Merger Date").
Pursuant to the terms of the ARCT IV Merger Agreement, as amended, each outstanding share of common stock of ARCT IV, including unvested restricted shares that vested in conjunction with the ARCT IV Merger, was exchanged for (i) $9.00 in cash, (ii) 0.5190 of a share of the Company’s common stock (the “ARCT IV Exchange Ratio”) and (iii) 0.5937 of a share of a new series of preferred stock of the Company designated as the 6.70% Series F Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”) and each outstanding unit of ARCT IV’s operating partnership (“ARCT IV OP Unit”), other than ARCT IV OP Units held by American Realty Capital Trust IV Special Limited Partner, LLC, (the “ARCT IV Special Limited Partner”) and American Realty Capital Advisors IV, LLC (the “ARCT IV Advisor”) was exchanged for (i) $9.00 in cash, (ii) 0.5190 of an OP Unit and (iii) 0.5937 of a OP Unit designated as Series F Preferred Units (“Series F OP Units”). In total, the Company paid $650.9 million in cash, issued 36.9 million shares of common stock and 42.2 million shares of Series F Preferred Stock, and issued 0.6 million OP Units and 0.7 million Series F OP Units to the former ARCT IV shareholders and ARCT IV OP Unit holders in connection with the consummation of the ARCT IV Merger. In addition, each outstanding ARCT IV Class B Unit (as defined below) and each outstanding ARCT IV OP Unit held by the ARCT IV Special Limited Partner and the ARCT IV Advisor was converted into 2.3961 OP Units, resulting in the Company issuing 1.2 million OP Units.
On January 3, 2014, the OP entered into a Contribution and Exchange Agreement (the “ARCT IV Contribution and Exchange Agreement”) with the ARCT IV OP, the ARCT IV Special Limited Partner and ARC Real Estate Partner, LLC, an entity under common ownership with the Former Manager. The ARCT IV Special Limited Partner was entitled to receive certain distributions from the ARCT IV OP, including the subordinated distribution of net sales proceeds resulting from an “investment liquidity event” (as defined in the agreement of limited partnership of the ARCT IV OP). The ARCT IV Merger constituted an “investment liquidity event,” as a result of which the ARCT IV Special Limited Partner, in connection with management’s successful attainment of the 6.0% performance hurdle and the return to ARCT IV’s stockholders of approximately $358.3 million in addition to their initial investment, was entitled to receive a subordinated distribution of net sales proceeds from the ARCT IV OP equal to approximately $63.2 million. Pursuant to the ARCT IV Contribution and Exchange Agreement, the ARCT IV Special Limited Partner contributed its interest in the ARCT IV OP, inclusive of the subordinated distribution proceeds received, to the ARCT IV OP in exchange for 2.8 million equity units of the ARCT IV OP, based on an agreed upon price per share of $22.50. The fair value of these units at date of issuance was $78.2 million and has been included in merger and other transaction costs in the accompanying consolidated statement of operations for the six months ended June 30, 2014. Upon consummation of the ARCT IV Merger, these equity units were immediately converted to 6.7 million OP Units after application of the exchange ratio of 2.3961 per share. In conjunction with the ARCT IV Merger Agreement, the ARCT IV Special Limited Partner agreed to a minimum two-year holding period for these OP units before being redeemable by the holder for cash or, at the option of the Company, the Company's common stock.
In addition, as part of the ARCT IV Contribution and Exchange Agreement, ARC Real Estate Partners, LLC, contributed $750,000 in cash to the ARCT IV OP, effective prior to the consummation of the ARCT IV Merger, in exchange for ARCT IV OP Units. Upon the consummation of the ARCT IV Merger, these equity units converted at an exchange ratio of 2.3961 OP Units per ARCT IV OP Unit, resulting in the Company issuing 0.1 million OP Units.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Accounting Treatment for the ARCT IV Merger
The Company and ARCT IV, from inception to the ARCT IV Merger date, were considered to be entities under common control. Both entities’ advisors were wholly owned subsidiaries of ARC. ARC and its related parties had 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 were contractually eligible to receive potential fees for their services to both of the companies including asset management fees, incentive fees and other fees and had continued to receive fees from the Company prior to the Company’s transition to self-management. Due to the significance of these fees, the advisors and ultimately ARC were 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 qualified 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. Therefore, the accompanying consolidated financial statements including the notes thereto are presented as if the ARCT IV Merger, including the impact of the equity transactions entered to consummate the merger, had occurred on January 1, 2013.
Fortress Portfolio Acquisition
On July 24, 2013, ARC and another related entity, on behalf of the Company and certain other entities sponsored directly or indirectly by ARC, entered into a purchase and sale agreement with affiliates of funds managed by Fortress Investment Group LLC (“Fortress”) for the purchase of 196 properties owned by Fortress, for an aggregate contract purchase price of $972.5 million, subject to adjustments set forth in the purchase and sale agreement and exclusive of closing costs, which were 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 were allocated to and assigned by the Company (the “Fortress Portfolio”). 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. During the six months ended June 30, 2014, the Company closed the acquisition of the remaining 79 properties in the Fortress Portfolio for an aggregate contract purchase price of $400.9 million, exclusive of closing costs. The total purchase price of the Fortress Portfolio was $601.2 million, exclusive of closing costs.
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. (“Cole”), a Maryland corporation, and a wholly owned subsidiary of the Company. The Cole Merger Agreement provided for the merger of Cole with and into a wholly owned subsidiary of the Company (the “Cole Merger”). The Company consummated the Cole Merger on February 7, 2014 (the “Cole Acquisition Date”).
Pursuant to the terms of the Cole Merger Agreement, each share of common stock of Cole issued and outstanding immediately prior to the effectiveness of the Cole Merger, including unvested restricted stock units and performance stock units that vested in conjunction with the Cole Merger, other than shares owned by the Company, any subsidiary of the Company or any wholly owned subsidiary of Cole, was converted into the right to receive either (i) 1.0929 shares of common stock of the Company (the “Stock Consideration”) or (ii) $13.82 in cash (the “Cash Consideration” and together with the Stock Consideration, the “Merger Consideration”). Approximately 98% of all outstanding Cole shareholders received Stock Consideration and approximately 2% of outstanding Cole shareholders elected to receive Cash Consideration, pursuant to the terms of the Cole Merger Agreement, resulting in the Company issuing approximately 520.8 million shares of the Company's common stock and paying $181.8 million in cash to Cole's shareholders based on their elections.
In addition, the Company issued approximately 2.8 million shares of the Company's common stock, in the aggregate, to certain executives of Cole pursuant to letter agreements entered into between the Company and such individuals concurrently with the execution of the Cole Merger Agreement, as previously disclosed by the Company. Additionally, effective as of the Cole Acquisition Date, the Company issued, but has not yet allocated, 0.4 million shares with dividend equivalent rights commensurate with the Company’s common stock.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Accounting Treatment for the Cole Merger
The Cole Merger has been 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 Cole have been recorded as of the acquisition date at their respective fair values. Any excess of purchase price over the fair values is recorded as goodwill. Results of operations for Cole are included in the Company’s consolidated financial statements subsequent to the Cole Acquisition Date.
Inland Portfolio Acquisition
On August 8, 2013, ARC and another related entity, on behalf of the Company and certain other entities sponsored directly or indirectly by ARC, entered into a purchase and sale agreement with Inland American Real Estate Trust, Inc. (“Inland”) for the purchase 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”) were allocated to the Company 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 from Inland by the Company and the other entities sponsored directly or indirectly by ARC. The Inland Portfolio is comprised of 33 properties. As of June 30, 2014, the Company had closed on 32 of the 33 properties for a total purchase price of $288.2 million, exclusive of closing costs. The Company will not close on the remaining one property.
Cole Credit Property Trust, Inc. Merger
On March 17, 2014, the Company and a wholly owned subsidiary entered into an Agreement and Plan of Merger (the “CCPT Merger Agreement”) with Cole Credit Property Trust, Inc., a Maryland corporation (“CCPT”). The CCPT Merger Agreement provided for the merger of CCPT with and into a subsidiary of the OP (the “CCPT Merger”). The Company consummated the CCPT Merger on May 19, 2014 (the “CCPT Acquisition Date”). The estimated fair value of the consideration transferred at the CCPT Acquisition Date totaled approximately $73.2 million, which was paid in cash.
Pursuant to the CCPT Merger Agreement, the Company commenced a cash tender offer to purchase all of the outstanding shares of common stock of CCPT (the “CCPT Common Stock”) (other than shares owned by CCPT, the Company or any subsidiary of the Company), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated March 31, 2014, and the related Letter of Transmittal (together with any amendments or supplements to the foregoing, the “Offer”), at a price of $7.25 per share (the “Offer Price”), net to the seller in cash, without interest, less any applicable withholding tax. On May 19, 2014, the Company accepted for payment and paid for all shares of CCPT Common Stock that were validly tendered in the Offer. As of the expiration of the Offer, a total of 7,735,069 shares of CCPT Common Stock were validly tendered and not withdrawn, representing approximately 77% of the shares of CCPT Common Stock outstanding.
Immediately following the acceptance for payment and payment for the shares of CCPT Common Stock that were validly tendered in the Offer, the Company exercised its option (the “Top-Up Option”), granted pursuant to the CCPT Merger Agreement, to purchase, at a price per share equal to the Offer Price, 13,457,874 newly issued shares of CCPT Common Stock (collectively, the “Top-Up Shares”). The Top-Up Shares, taken together with the shares of CCPT Common Stock owned, directly or indirectly, by the Company immediately following the acceptance for payment and payment for the shares of CCPT Common Stock that were validly tendered in the Offer, constituted one share more than 90% of the outstanding shares of CCPT Common Stock (after giving effect to the issuance of all shares subject to the Top-Up Option), the applicable threshold required to effect a short-form merger under applicable Maryland law without stockholder approval.
Following the consummation of the Offer and the exercise of the Top-Up Option, in accordance with the CCPT Merger Agreement, the Company completed its acquisition of CCPT by effecting of a short-form merger under Maryland law, pursuant to which CCPT was merged with and into a subsidiary of the OP, with the subsidiary surviving the merger as a wholly owned subsidiary of the Company. The CCPT Merger became effective following the filing of the Articles of Merger with the State Department of Assessments and Taxation of Maryland and the filing of the Certificate of Merger with the Secretary of State of the State of Delaware with an effective date of May 19, 2014 (the “Effective Time”).
At the Effective Time, each share of CCPT Common Stock not purchased in the Offer (other than shares held by the CCPT, the Company or any subsidiary of the Company, which were automatically canceled and retired and ceased to exist) was converted into the right to receive an amount, in cash and without interest, equal to the Offer Price.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Accounting Treatment for the CCPT Merger
The CCPT Merger has been 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 CCPT have been recorded as of the acquisition date at their respective fair values. Any excess of purchase price over the fair values is recorded as goodwill. Results of operations for CCPT are included in the Company’s consolidated financial statements subsequent to the CCPT Acquisition Date.
Pending Significant Acquisition
Purchase Agreement for Red Lobster Portfolio
On May 16, 2014, the Company, through a wholly owned subsidiary, entered into a master purchase agreement to acquire over 500 properties, substantially all of which are operating as Red Lobster® restaurants (the “Red Lobster Portfolio”) from a third party. The transaction is structured as a sale-leaseback in which the Company will purchase the Red Lobster Portfolio and will immediately lease the portfolio back to the third party pursuant to the terms of multiple master leases (the “Master Leases”). The overall sale-leaseback transaction consists of 521 Red Lobster® restaurants for a purchase price of $1.59 billion. The fee-simple assets have a weighted average lease term of approximately 25 years and represent approximately 95% of the overall portfolio transaction value. The overall weighted average lease term of the portfolio is in excess of 24 years. On July 28, 2014, the Company closed on 492 of the properties and expects to close on the remaining 29 properties early in the third quarter of 2014.
Note 3 — Summary of Significant Accounting Policies
The consolidated financial statements of the Company included herein were prepared in conformity with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three and six months ended June 30, 2014 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, 2013 of the Company, which are included on Form 10-K filed with the SEC on February 27, 2014 and Form 8-K filed with the SEC on May 20, 2014. There have been no significant changes to these policies during the six months ended June 30, 2014, other than the updates described below.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company, consolidated joint venture arrangements and its subsidiaries. The portions of the unconsolidated joint venture arrangements not owned by the Company are presented as noncontrolling interests. In addition, 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. Upon conversion of OP Units to common stock, any difference between the fair value of common shares issued and the carrying value of the OP Units converted is recorded as a component of equity. As of June 30, 2014 and December 31, 2013, there were 24,771,215 and 9,591,173 OP Units outstanding, respectively. In addition, as discussed in Note 2 — Mergers and Acquisitions, the historical information of ARCT III and ARCT IV has been presented as if the mergers had occurred as of the beginning of the earliest period presented.
Reclassification
Certain reclassifications have been made to the previously issued historical financial statements of the Company to conform to this presentation. Refer to Note 4 — Acquisitions of CapLease, Cole and CCPT and Note 6 — Real Estate Investments.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Investment in Unconsolidated Entities
Investment in Unconsolidated Joint Ventures
Investment in unconsolidated joint ventures as of June 30, 2014 consisted of the Company’s interest in six joint ventures that owned six properties (the “Unconsolidated Joint Ventures”). As of June 30, 2014, the Company owned aggregate equity investments of $98.1 million in the Unconsolidated Joint Ventures. The Company accounts for the Unconsolidated Joint Ventures using the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over operating and financial policies of these investments. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the joint ventures’ earnings and distributions.
Investment in Managed REITs
As of June 30, 2014, the Company owned aggregate equity investments of $3.9 million in the following publicly registered, non-traded REITs: Cole Credit Property Trust IV, Inc. (“CCPT IV”); Cole Corporate Income Trust, Inc. (“CCIT”); Cole Real Estate Income Strategy (Daily NAV), Inc. (“INAV”); Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”); and Cole Credit Property Trust V, Inc. (“CCPT V,” and collectively with CCPT IV, CCIT, INAV and CCIT II, the “Managed REITs”). Prior to the CCPT Acquisition Date, CCPT was a Managed REIT and accounted for using the equity method. As of the CCPT Acquisition Date, the Company had an approximately $5,000 equity investment in CCPT. The Company accounts for these investments using the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over the Managed REITs’ operating and financial policies through its advisory and property management agreements with the respective Managed REITs. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the respective Managed REIT’s earnings and distributions.
Leasehold Improvements and Property and Equipment
The Company leases its office facilities under operating leases. Leasehold improvements related to these are recorded at cost less accumulated amortization. Leasehold improvements are amortized over the lesser of the estimated useful life or remaining lease term.
Property and equipment, which primarily include office furniture, fixtures and equipment and computer hardware and software, are stated at cost less accumulated depreciation. Property and equipment are depreciated on a straight-line method over the estimated useful lives of the assets, which range from five to seven years. The Company reassesses the useful lives of its property and equipment and adjusts the future monthly depreciation expense based on the new useful life, as applicable. If the Company disposes of an asset, the asset and related accumulated depreciation are written off upon disposal.
Impairments
Investment in Unconsolidated Entities
The Company is required to determine whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of any of its investment in the unconsolidated entities. If an event or change in circumstance has occurred, the Company is required to evaluate its investment in the unconsolidated entity for potential impairment and determine if the carrying amount of its investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an unconsolidated entity for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions.  The use of different judgments and assumptions could result in different conclusions. No impairment indicators were identified, and no impairment losses were recorded related to the Company’s unconsolidated entities for the period from the Cole Acquisition Date to June 30, 2014.
Leasehold Improvements and Property and Equipment
Leasehold improvements and property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If this review indicates that the carrying amount of the asset is not recoverable, the Company records an impairment loss, measured at fair value by estimated discounted cash flows or market appraisals. No impairments of leasehold improvements or property or equipment were identified during the six months ended June 30, 2014.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Program Development Costs
The Company pays for organization, registration and offering expenses associated with the sale of common stock of the Managed REITs.  The reimbursement of these expenses by the Managed REITs is limited to a certain percentage of the proceeds raised from their offerings, in accordance with their respective advisory agreements and charters. Such expenses paid by the Company on behalf of the Managed REITs in excess of these limits that are expected to be collected are recorded as program development costs. The Company assesses the collectability of the program development costs, considering the offering period and historical and forecasted sales of shares under the Managed REITs’ respective offering and reserves for any balances considered not collectible. No reserves were recorded as of June 30, 2014, as the Company expects to be reimbursed for all of the program development costs by the Managed REITs as additional proceeds from their respective offerings are raised. Program development costs are included in deferred costs and other assets, net in the accompanying consolidated balance sheets.
Due from Affiliates
The Company receives or may be entitled to receive compensation and reimbursement for services primarily relating to the Managed REITs’ offerings and the investment, management, financing and disposition of their respective assets. Refer to Note 19 — Related Party Transactions and Arrangements for further explanation.
Reportable Segments
The Company has concluded that it has two reportable segments as it has organized its operations into two segments for management and internal financial reporting purposes, REI and Cole Capital. The identification and aggregation of reportable segments requires the Company’s management to exercise certain judgments. Refer to Note 5 — Segment Reporting for further information.
Revenue Recognition - Cole Capital
Revenue consists of securities sales commissions and dealer manager fees, real estate acquisition fees, property management fees, advisory fees, asset management fees and performance fees for services relating to the Managed REITs’ offerings and the investment and management of their respective assets, in accordance with the respective advisory and dealer manager agreements. The Company records revenue related to acquisition fees, securities sales commissions and dealer manager fees upon completion of a transaction and advisory, asset and property management fees as services are performed. The Company is also reimbursed for certain costs incurred in providing these services. Securities sales commission and dealer manager reimbursements are recorded as revenue as the expenses are incurred. Other reimbursements are recorded as revenue when reimbursements are reasonably assured.
Income Taxes
The Company currently qualifies and has elected to be taxed as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code. As a REIT, except as discussed below, the Company generally is not subject to federal income tax on taxable income that it distributes to its stockholders so long as it distributes at least 90% of its annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the Company maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.
The Company conducts substantially all of its Cole Capital business operations through a TRS. A TRS is a subsidiary of a REIT that is subject to corporate federal, state and local income taxes, as applicable. The Company’s use of a TRS enables it to engage in certain business activities while complying with the REIT qualification requirements and to retain any income generated by these businesses for reinvestment without the requirement to distribute those earnings. The Company conducts all of its business in the United States, and as a result, the Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. Certain of the Company’s inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The Company provides for income taxes in accordance with current authoritative accounting and tax guidance. The tax expense or benefit related to significant, unusual or extraordinary items is recognized in the quarter in which those items occur. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the quarter in which the change occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.
Repurchase Agreements
In certain circumstances, the Company may obtain financing through a repurchase agreement. The Company evaluates the initial transfer of a financial instrument and the related repurchase agreement for sale accounting treatment. In instances where the Company maintains effective control over the transferred securities, the Company accounts for the transaction as a secured borrowing, and accordingly, both the securities and related repurchase agreement payable are recorded separately in the accompanying consolidated balance sheets in investment securities, at fair value and other debt, net, respectively. In instances where the Company does not maintain effective control over the transferred securities, the Company accounts for the transaction as a sale of securities for proceeds consisting of cash and a forward purchase contract.
Recent Accounting Pronouncements
In April 2014, the U.S. Financial Accounting Standards Board issued Accounting Standards Update, 2014-08 Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which amends the reporting requirements for discontinued operations by updating the definition of a discontinued operation to be a component of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, resulting in fewer disposals that qualify for discontinued operations reporting yet the pronouncement also requires expanded disclosures for discontinued operations. The Company adopted ASU 2014-08 effective January 1, 2014. Starting with the first quarter of 2014, the results of operations for all qualifying disposals and properties classified as held for sale that were not previously reported in discontinued operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 will be presented within income from continuing operations on the accompanying consolidated statements of income.
In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the impact of the new standard on its financial statements.
Note 4 — Acquisitions of CapLease, Cole and CCPT
CapLease Acquisition
On November 5, 2013 (the “CapLease Acquisition Date”), the Company completed the CapLease Merger, an acquisition of a real estate investment trust that primarily owned and managed a diversified portfolio of single tenant commercial real estate properties subject to long-term leases, the majority of which were net leases, to high credit quality tenants, by acquiring 100% of the outstanding common stock and voting interests of CapLease. The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The Company’s consolidated financial statements include the results of operations of CapLease subsequent to the CapLease Acquisition Date.
The purchase price includes a cash payment of $920.7 million, which was funded by the Company through additional borrowings under its revolving credit facility and the credit facility assumed from CapLease. See Note 12 — Other Debt and Note 13 — Credit Facilities.
The purchase price allocation for the CapLease Merger is considered preliminary, and additional adjustments may be recorded during the measurement period in accordance with U.S. GAAP. The purchase price allocation will be finalized as the Company receives additional information relevant to the acquisition, including a final valuation of the assets purchased and liabilities assumed.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The preliminary purchase price for the acquisition was allocated to assets acquired and liabilities assumed based on their estimated fair value. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the CapLease Acquisition Date initially recorded, as well as measurement period adjustments made and the revised estimated fair values of the assets acquired and liabilities assumed at the CapLease Acquisition Date (in thousands):
 
 
 
Preliminary
 
 
 
Amounts Previously Recognized as of the CapLease Acquisition Date (1)
 
Measurement Period Adjustments
 
Adjusted Amounts Recognized as of the CapLease Acquisition Date
Fair value of consideration given
 
$
920,697

 
$

 
$
920,697

 
 
 
 
 
 
 
 
Assets purchased, at fair value:
 
 
 
 
 
 
Land
 
235,843

 
(2,778
)
 
233,065

Buildings, fixtures and improvements
 
1,596,481

 
(4,836
)
 
1,591,645

Land and construction in process
 
12,352

 
391

 
12,743

Acquired intangible lease assets
 
191,964

 
308

 
192,272

Total real estate investments
 
2,036,640

 
(6,915
)
 
2,029,725

Cash and cash equivalents
 
41,799

 

 
41,799

Investment securities
 
60,730

 

 
60,730

Loans held for investment
 
26,457

 

 
26,457

Restricted cash
 
29,159

 
(40
)
 
29,119

Deferred costs and other assets, net
 
21,564

 
152

 
21,716

Deferred costs
 
325

 

 
325

Total identifiable assets purchased
 
2,216,674

 
(6,803
)
 
2,209,871

 
 
 
 
 
 
 
Liabilities assumed, at fair value:
 
 
 
 
 
 
Mortgage notes payable
 
1,037,510

 

 
1,037,510

Secured credit facility
 
121,000

 

 
121,000

Other debt
 
114,208

 

 
114,208

Below-market leases
 
57,058

 

 
57,058

Derivative liabilities
 
158

 

 
158

Accounts payable and accrued expenses
 
46,484

 
106

 
46,590

Deferred rent, derivative and other liabilities
 
8,867

 
(64
)
 
8,803

Total liabilities assumed
 
1,385,285

 
42

 
1,385,327

 
 
 
 
 
 
 
Non-controlling interest retained by third party
 
567

 

 
567

 
 
 
 
 
 
 
Net identifiable assets acquired by Company
 
830,822

 
(6,845
)
 
823,977

Goodwill
 
$
89,875

 
$
6,845

 
$
96,720

____________________________________
(1)
As reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

15

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

After the December 31, 2013 financial statements were issued, the Company received final purchase and sale agreements for three properties that were sold to third parties during the six months ended June 30, 2014.  After giving consideration to the sales price of these properties, the Company has estimated that the fair value of these properties originally acquired as part of the CapLease Merger to be $6.9 million lower than originally valued.  As a result of the sale, the carrying amount of real estate investments was retrospectively decreased by $6.9 million as of the CapLease Acquisition Date, with a corresponding increase to goodwill in the accompanying consolidated balance sheet as of December 31, 2013.  The impact to depreciation expense recognized during the year ended December 31, 2013 was not significant, and, therefore, the Company has not retrospectively adjusted its consolidated statements of operations. In addition to the adjustment above, the Company identified other minor adjustments primarily relating to additional accounts receivables and accrued expenses as of the CapLease Acquisition Date.
Management is in the process of further evaluating the purchase price accounting. The fair value of real estate investments and below-market leases have been estimated by the Company with the assistance of third-party valuation firms. Based on a preliminary analysis received to-date, the estimated fair value of these assets and liabilities total $2.0 billion and $57.1 million, respectively. The recorded values represent the estimated fair values related to such assets and liabilities. Upon completion of the analysis, including a review of the appraisals and assessment of current market rates, changes to the estimated fair values may result. Such post-closing adjustments are customary in nature in accordance with ASC 805, Business Combinations.
The ascribed value of the noncontrolling interest has been estimated based on the fair value of the percentage ownership of The Woodlands, Texas development activity not held by the Company. See Note 6 Real Estate Investments for further information on this development project.
The fair value of the remaining CapLease assets and liabilities have been calculated in accordance with the Company’s policy on purchase price allocation, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Goodwill of approximately $96.7 million is expected to be assigned to the REI segment upon completion of the valuation. The goodwill recognized is attributed to the enhancement of the Company’s year-round rental revenue stream, expected synergies and the assembled work force at CapLease.
The pro forma consolidated statements of operations in Note 6 — Real Estate Investments are presented as if CapLease had been included in the consolidated results of the Company for the entire periods ended June 30, 2014 and 2013.
Cole Acquisition
On February 7, 2014, the Company completed its acquisition of Cole, as discussed in Note 2 — Mergers and Acquisitions. The Company accounted for the Cole Merger as a business combination under the acquisition method of accounting. Therefore, the Company’s consolidated financial statements include the results of operations of Cole subsequent to the Cole Acquisition Date.
Fair Value of Consideration Transferred
The Company is in the process of gathering certain additional information in order to finalize its assessment of the fair value of the consideration transferred; thus, the fair values of currently recorded assets and liabilities are subject to change. The estimated fair value of the consideration transferred at the Cole Acquisition Date totaled approximately $7.5 billion and consisted of the following (in thousands):
 
As of Cole Acquisition
Date (Preliminary)
Estimated Fair Value of Consideration Transferred:
 
Cash
$
181,775

Common stock
7,302,480

Total consideration transferred
$
7,484,255

The fair value of the 520.8 million shares of common stock issued, excluding those common shares transferred to former Cole executives, was determined based on the closing market price of the Company’s common stock on the Cole Acquisition Date.

16

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Allocation of Consideration
The consideration transferred pursuant to the Cole Merger Agreement was allocated to the assets acquired and liabilities assumed for the REI segment and Cole Capital, based upon their preliminary estimated fair values as of the Cole Acquisition Date. The Company is in the process of gathering certain additional information in order to finalize its assessment of the fair value of certain intangible assets; thus, the provisional measurements of intangible assets and goodwill are subject to change. Such post-closing adjustments are customary in nature in accordance with ASC 805, Business Combinations. The measurement periods recorded for the period from the Cole Acquisition Date to June 30, 2014 are presented consolidated and by segments in the tables below.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, including all measurement period adjustments, at the Cole Acquisition Date (in thousands):
 
Preliminary
 
Amount Previously Recorded as of the Cole Acquisition Date
 
Measurement Period Adjustments
 
Adjusted Total as of Cole Acquisition Date
Identifiable Assets Acquired at Fair Value:
 
 
 
 
 
Land
$
1,737,390

 
$
(609
)
 
$
1,736,781

Buildings, fixtures and improvements
5,898,895

 
(1,609
)
 
5,897,286

Acquired intangible lease assets
1,323,614

 
(315
)
 
1,323,299

Total real estate investments
8,959,899

 
(2,533
)
 
8,957,366

Investment in unconsolidated entities
103,966

 

 
103,966

Investment securities, at fair value
151,197

 

 
151,197

Loans held for investment, net
72,326

 

 
72,326

Cash and cash equivalents
151,160

 
(1,195
)
 
149,965

Restricted cash
15,704

 

 
15,704

Intangible assets
385,368

 

 
385,368

Deferred costs and other assets
95,974

 
1,615

 
97,589

Due from affiliates
3,301

 

 
3,301

Total identifiable assets acquired
9,938,895

 
(2,113
)
 
9,936,782

 
 
 
 
 
 
Identifiable Liabilities Assumed at Fair Value:
 
 
 
 
 
Mortgage notes payable, net
2,719,072

 
(12,487
)
 
2,706,585

Credit facilities
1,309,000

 

 
1,309,000

Other debt
49,013

 

 
49,013

Below-market lease liabilities
212,377

 
14

 
212,391

Accounts payable and accrued expenses
133,909

 
(3,243
)
 
130,666

Deferred rent, derivative and other liabilities
153,293

 
20,449

 
173,742

Dividends payable
6,271

 

 
6,271

Contingent consideration
51,979

 

 
51,979

Due to affiliates
44

 

 
44

Total liabilities assumed
4,634,958

 
4,733

 
4,639,691

 
 
 
 
 

Noncontrolling interests
20,996

 

 
20,996

 
 
 
 
 
 
Net identifiable assets acquired
5,282,941

 
(6,846
)
 
5,276,095

Goodwill
2,184,703

 
23,457

 
2,208,160

Net assets acquired
$
7,467,644

 
$
16,611

 
$
7,484,255


17

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed for the REI segment as initially recorded at the Cole Acquisition Date, as well as measurement period adjustments made and the revised estimated fair values of the assets acquired and liabilities assumed at the Cole Acquisition Date (in thousands):
 
Preliminary
 
REI Segment
(As initially recorded)
 
Measurement Period Adjustments
 
REI Segment
(Adjusted)
Identifiable Assets Acquired at Fair Value:
 
 
 
 
 
Land
$
1,737,390

 
$
(609
)
 
$
1,736,781

Buildings, fixtures and improvements
5,898,895

 
(1,609
)
 
5,897,286

Acquired intangible lease assets
1,323,614

 
(315
)
 
1,323,299

Total real estate investments
8,959,899

 
(2,533
)
 
8,957,366

Investment in unconsolidated entities
100,659

 

 
100,659

Investment securities, at fair value
151,197

 

 
151,197

Loans held for investment, net
72,326

 

 
72,326

Cash and cash equivalents
130,747

 
(1,195
)
 
129,552

Restricted cash
15,704

 

 
15,704

Deferred costs and other assets
45,081

 
1,615

 
46,696

Total identifiable assets acquired
9,475,613

 
(2,113
)
 
9,473,500

 
 
 
 
 
 
Identifiable Liabilities Assumed at Fair Value:
 
 
 
 
Mortgage notes payable, net
2,719,072

 
(12,487
)
 
2,706,585

Credit facilities
1,309,000

 

 
1,309,000

Other debt
49,013

 

 
49,013

Below-market lease liabilities
212,377

 
14

 
212,391

Accounts payable and accrued expenses
73,441

 
13,059

 
86,500

Deferred rent, derivative and other liabilities
42,764

 
12,164

 
54,928

Dividends payable
6,271

 

 
6,271

Contingent consideration
3,606

 

 
3,606

Total liabilities assumed
4,415,544

 
12,750

 
4,428,294

 
 
 
 
 
 
Noncontrolling interests
20,996

 

 
20,996

 
 
 
 
 
 
Net identifiable assets acquired
5,039,073

 
(14,863
)
 
5,024,210

Goodwill
1,628,571

 
31,474

 
1,660,045

Net assets acquired
$
6,667,644

 
$
16,611

 
$
6,684,255


18

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed for Cole Capital as initially recorded at the Cole Acquisition Date, as well as measurement period adjustments made and the revised estimated fair values of the assets acquired and liabilities assumed at the Cole Acquisition Date (in thousands):
 
Preliminary
 
Cole Capital
(As initially recorded)
 
Measurement Period Adjustments
 
Cole Capital
(Adjusted)
Identifiable Assets Acquired at Fair Value:
 
 
 
 
 
Investment in unconsolidated entities
$
3,307

 
$

 
$
3,307

Cash and cash equivalents
20,413

 

 
20,413

Intangible assets
385,368

 

 
385,368

Deferred costs and other assets
50,893

 

 
50,893

Due from affiliates
3,301

 

 
3,301

Total identifiable assets acquired
463,282

 

 
463,282

 
 
 
 
 
 
Identifiable Liabilities Assumed at Fair Value:
 
 
 
 
Accounts payable and accrued expenses
60,468

 
(16,302
)
 
44,166

Deferred rent, derivative and other liabilities
110,529

 
8,285

 
118,814

Contingent consideration
48,373

 

 
48,373

Due to affiliates
44

 

 
44

Total liabilities assumed
219,414

 
(8,017
)
 
211,397

 
 
 
 
 
 
Net identifiable assets acquired
243,868

 
8,017

 
251,885

Goodwill
556,132

 
(8,017
)
 
548,115

Net assets acquired
$
800,000

 
$

 
$
800,000


The fair value of real estate investments, including acquired lease intangibles, and below-market lease liabilities allocated to the REI segment have been estimated by the Company with the assistance of a third-party valuation firm. Based on a preliminary analysis received to date, the estimated fair value of these assets and liabilities total $9.0 billion and $212.4 million, respectively. The recorded values represent the estimated fair values related to such assets and liabilities. Upon completion of the analysis, including a review of the appraisals and assessment of current market rates, changes to the estimated fair values may result.
The intangible assets acquired primarily consist of management and advisory contracts that the Company has with the Managed REITs and are subject to an estimated useful life of approximately four years. The Company recorded $38.0 million of amortization expense for the period from the Cole Acquisition Date to June 30, 2014. The estimated amortization expense for the remainder of the year ending December 31, 2014 is $48.6 million. The estimated amortization expense for each of the years ending December 31, 2015, 2016 and 2017 is $96.3 million and the estimated amortization expense for the year ending December 31, 2018 is $9.8 million.
Goodwill of approximately $1.7 billion is expected to be assigned to the REI segment upon completion of the external valuation. The goodwill recognized is attributed to the enhancement of the Company’s year-round rental revenue stream, realized and expected synergies, the impact of the merger on lowering the Company’s cost of capital, as well as the benefits of critical mass, improved portfolio diversification, and enhanced access to capital markets. Goodwill of approximately $548.1 million is expected to be assigned to Cole Capital upon completion of the external valuation. The goodwill is primarily supported by management’s belief that Cole Capital brings an established management platform with numerous strategic benefits including growth from new income streams and the ability to offer new products. None of the goodwill is expected to be deductible for income tax purposes.
The fair value of the remaining Cole assets and liabilities have been calculated in accordance with the Company’s policy on purchase price allocation, as disclosed in the Company’s Annual Report on Form 10-K and related financial statements in its Current Report Form 8-K filed with the SEC on May 20, 2014 for the year ended December 31, 2013.

19

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The amounts of revenue and net income related to Cole property acquisitions and Cole Capital included in the accompanying consolidated statements of operations from the Cole Acquisition Date to the period ended June 30, 2014 was $366.2 million and $32.0 million respectively.
The pro forma consolidated statements of operations in Note 6 — Real Estate Investments are presented as if Cole had been included in the consolidated results of the Company for the entire periods ended June 30, 2014 and 2013.
CCPT Acquisition
On May 19, 2014, the Company completed its acquisition of CCPT, as discussed in Note 2 — Mergers and Acquisitions. The Company accounted for the CCPT Merger as a business combination under the acquisition method of accounting. Therefore, the Company’s consolidated financial statements include the results of operations of CCPT subsequent to the CCPT Acquisition Date.
Fair Value of Consideration Transferred
The Company is in the process of gathering certain additional information in order to finalize its assessment of the fair value of the consideration transferred; thus, the fair values of currently recorded assets and liabilities are subject to change. The estimated fair value of the consideration transferred at the CCPT Acquisition Date totaled approximately $73.2 million, which was paid in cash. The acquisition was funded by the Company through additional borrowings under its revolving credit facility.
Allocation of Consideration
The consideration transferred pursuant to the CCPT Merger Agreement was allocated to the assets acquired and liabilities assumed based upon their preliminary estimated fair values as of the CCPT Acquisition Date. The Company is in the process of gathering certain additional information in order to finalize its assessment of the fair value of certain intangible assets; thus, the provisional measurements of intangible assets and goodwill are subject to change. Such post-closing adjustments are customary in nature in accordance with ASC 805, Business Combinations. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed by segment at the CCPT Acquisition Date (in thousands):
 
Preliminary
 
May 19, 2014
Identifiable Assets Acquired at Fair Value:
 
Land
$
28,258

Buildings, fixtures and improvements
113,296

Acquired intangible lease assets
17,960

Total real estate investments
159,514

Cash and cash equivalents
167

Restricted cash
2,420

Prepaid expenses and other assets
297

Total identifiable assets acquired
162,398

Identifiable Liabilities Assumed at Fair Value:
 
Mortgage notes payable
85,286

Unsecured credit facility
800

Accounts payable and accrued expenses
443

Below-market lease liability
1,752

Due to affiliates
568

Deferred rent and other liabilities
390

Total liabilities assumed
89,239

 
 
Net identifiable assets acquired
$
73,159


20

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The fair value of real estate investments, including acquired lease intangibles, and below-market lease liabilities have been estimated by the Company with the assistance of a third-party valuation firm. Based on a preliminary analysis received to date, the estimated fair value of these assets and liabilities total $159.5 million and $1.8 million, respectively. The recorded values represent the estimated fair values related to such assets and liabilities. Upon completion of the analysis, including a review of the appraisals and assessment of current market rates, changes to the estimated fair values may result.
The fair value of the remaining CCPT assets and liabilities have been calculated in accordance with the Company’s policy on purchase price allocation, as disclosed in the Company’s Annual Report on Form 10-K and related financial statements in its Current Report Form 8-K filed with the SEC on May 20, 2014 for the year ended December 31, 2013.
The amounts of revenue and net loss related to CCPT property acquisitions included in the accompanying consolidated statements of operations from the Cole Acquisition Date to the period ended June 30, 2014 was $1.5 million and $0.3 million respectively.
Note 5 — Segment Reporting
The Company operates under two segments, REI and Cole Capital.
REI - Through its REI segment, the Company acquires, owns and operates primarily single-tenant, freestanding commercial real estate properties primarily subject to net leases with high credit quality tenants. The Company focuses on investing in properties that are net leased to credit tenants, which are generally large public companies with investment-grade ratings and other creditworthy tenants. The Company’s long-term business strategy is to continue to acquire a diverse portfolio consisting of approximately 70% long-term leases and 30% medium-term leases, with an average remaining primary 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 (10 years or longer) that currently have a primary remaining lease duration of generally three to eight years, on average. The Company seeks to acquire granular, self-originated single-tenant net lease assets, which may be purchased through sale-leaseback transactions, small portfolio acquisitions and in connection with build-to-suit opportunities, to the extent they are appropriate in terms of capitalization rate and scale. The Company expects this investment strategy to provide for stable income from credit tenants and for growth opportunities from re-leasing of current below market leases. As of June 30, 2014, the Company owned 3,966 properties comprising 106.8 million square feet of single and multi-tenant retail and commercial space located in 49 states, which include properties owned through consolidated joint ventures. As of June 30, 2014, the rentable space at these properties was 98.8% leased with a weighted average remaining lease term of 9.95 years. As of June 30, 2014, the Company also owned 25 commercial mortgage-backed securities (“CMBS”), 14 loans held for investment and, through the Unconsolidated Joint Ventures, had interests in six properties comprising 1.6 million rentable square feet of commercial and retail space.
Cole Capital - Cole Capital is contractually responsible for managing the Managed REITs’ affairs on a day-to-day basis, identifying and making acquisitions and investments on the Managed REITs’ behalf and recommending to each of the Managed REIT’s respective board of directors an approach for providing investors with liquidity. Cole Capital serves as the dealer manager and distributes shares of common stock for certain Managed REITs and advises them regarding offerings, manages relationships with participating broker-dealers and financial advisors and provides assistance in connection with compliance matters relating to the offerings. Cole Capital receives compensation and reimbursement for services relating to the Managed REITs’ offerings and the investment, management, financing and disposition of their respective assets, as applicable. Cole Capital also develops new REIT offerings, including obtaining regulatory approvals from the SEC, the Financial Industry Regulatory Authority, Inc. (“FINRA”) and various blue sky jurisdictions for such offerings.

21

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The Company allocates certain operating expenses, such as audit and legal fees, board of director fees, employee related costs and benefits and general overhead expenses between its two segments. The following tables present a summary of the comparative financial results and total assets for each business segment (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
REI:
 
 
 
 
 
 
 
 
Rental income
 
$
314,843

 
$
52,664

 
$
559,288

 
$
93,651

Direct financing lease income
 
1,181

 

 
2,187

 

Operating expense reimbursements
 
28,545

 
2,281

 
49,641

 
4,191

Total real estate investment revenues
 
344,569

 
54,945

 
611,116

 
97,842

Acquisition related
 
8,453

 
37,289

 
20,337

 
47,616

Merger and other transaction related
 
13,286

 
6,393

 
235,478

 
144,162

Property operating expenses
 
39,372

 
3,086

 
69,030

 
5,635

General and administrative expenses
 
7,033

 
2,361

 
13,629

 
3,815

Equity based compensation
 
9,338

 
3,458

 
31,848

 
4,339

Depreciation and amortization
 
234,219

 
33,752

 
385,223

 
60,505

Total operating expenses
 
311,701

 
86,339

 
755,545

 
266,072

Operating income (loss)
 
32,868

 
(31,394
)
 
(144,429
)
 
(168,230
)
Interest expense, net
 
(99,661
)
 
(11,068
)
 
(216,378
)
 
(17,124
)
Other (expense) income, net
 
(3,057
)
 
1,167

 
(3,858
)
 
2,020

Gain (loss) on derivative instruments, net
 
21,926

 
(40
)
 
1,729

 
(45
)
Loss on contingent value rights
 

 
(31,134
)
 

 
(31,134
)
Gain on disposition of properties, net
 
1,510

 

 
4,489

 

Gain on sale of investments
 

 

 

 
451

Total other expenses, net
 
(79,282
)
 
(41,075
)
 
(214,018
)
 
(45,832
)
Net loss from continuing operations
 
(46,414
)
 
(72,469
)
 
(358,447
)
 
(214,062
)
Discontinued operations:
 
 
 
 
 
 
 
 
Income from operations of held for sale properties
 

 
36

 

 
20

Gain on held for sale properties
 

 

 

 
14

Net income from discontinued operations
 

 
36

 

 
34

Net loss
 
$
(46,414
)
 
$
(72,433
)
 
$
(358,447
)
 
$
(214,028
)
 
 
 
 
 
 
 
 
 

22

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Cole Capital:
 
 
 
 
 
 
 
 
Dealer manager and distribution fees, selling commissions and offering reimbursements
 
$
9,969

 
$

 
$
52,422

 
$

Transaction service fees
 
14,411

 

 
18,970

 

Management fees and reimbursements
 
13,032

 

 
20,087

 

Total Cole Capital revenues
 
37,412

 

 
91,479

 

Cole Capital reallowed fees and commissions
 
7,068

 

 
41,504

 

General and administrative expenses
 
12,030

 

 
31,119

 

Depreciation and amortization
 
24,774

 

 
39,133

 

Total operating expenses
 
43,872

 

 
111,756

 

Total other income
 
9,609

 

 
14,804

 

Net income (loss)
 
$
3,149

 
$

 
$
(5,473
)
 
$

 
 
 
 
 
 
 
 
 
Total Company:
 
 
 
 
 
 
 
 
Total revenues
 
$
381,981

 
$
54,945

 
$
702,595

 
$
97,842

Total operating expenses
 
$
355,573

 
$
86,339

 
$
867,301

 
$
266,072

Total other expense
 
$
(69,673
)
 
$
(41,075
)
 
$
(199,214
)
 
$
(45,832
)
Loss from continuing operations
 
$
(43,265
)
 
$
(72,469
)
 
$
(363,920
)
 
$
(214,062
)
Income from discontinued operations
 
$

 
$
36

 
$

 
$
34

Net loss
 
$
(43,265
)
 
$
(72,433
)
 
$
(363,920
)
 
$
(214,028
)
 
Total Assets
 
June 30, 2014
 
December 31, 2013
REI
$
20,197,707

 
$
7,807,504

Cole Capital
1,117,780

 

Total Company
$
21,315,487

 
$
7,807,504


23

Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Note 6 — Real Estate Investments
Excluding the Cole Merger, the ARCT IV Merger and the CCPT Merger, the Company acquired interests in 337 commercial properties, including 18 land parcels, for an aggregate purchase price of $1.5 billion during the six months ended June 30, 2014 (the “2014 Acquisitions”). The Company is in the process of obtaining and reviewing the final third-party appraisals for some of the 2014 Acquisitions, and as such, the fair value of the related asset acquired and liabilities assumed during the six months ended June 30, 2014 are provisionally allocated. The following table presents the allocation of the fair value of the assets acquired and liabilities assumed during the periods presented (dollar amounts in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Real estate investments, at cost:
 
 
 
 
 
 
 
 
Land
 
$
109,075

 
$
416,887