Toggle SGML Header (+)


Section 1: 10-Q (FORM 10-Q)

Form 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 September 30, 2014

OR

 

¨ 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.

ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

(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.)

2325 E. Camelback Road, Suite 1100, Phoenix, AZ   85016
(Address of principal executive offices)   (Zip Code)

(800) 606-3610

(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  ¨    No  x

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  ¨    No  x

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   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s common stock on February 27, 2015 was 905,338,684 shares.

 

 

 


Table of Contents

Explanatory Note

This report combines the Quarterly Reports on Form 10-Q for the period ended September 30, 2014 of American Realty Capital Properties, Inc. and ARC Properties Operating Partnership, L.P. Unless stated otherwise or the context otherwise requires, references to the “General Partner” or “ARCP” mean American Realty Capital Properties, Inc. and its consolidated subsidiaries, and references to the “Operating Partnership” or the “OP” mean ARC Properties Operating Partnership, L.P. and its consolidated subsidiaries. The terms the “Company”, “we”, “our”, and “us” mean the General Partner and the Operating Partnership collectively.

We believe combining the Quarterly Reports on Form 10-Q of ARCP and the Operating Partnership into this single report results in the following benefits:

 

    enhances investors’ understanding of ARCP and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

 

    eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the Company’s disclosure applies to both ARCP and the Operating Partnership; and

 

    creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

To help investors understand the differences between ARCP and the Operating Partnership, this report presents the following separate sections for each of ARCP and the Operating Partnership:

 

    consolidated financial statements;

 

    the following notes to the consolidated financial statements;

 

    Income per Common Share of ARCP and Income per Common Unit of the Operating Partnership

Additionally, this report amends and restates ARCP’s previously-issued unaudited consolidated financial statements for the comparable period ended September 30, 2013. Certain sections of this report contain information that has been amended where necessary to reflect the restatement of the previously-issued unaudited consolidated financial statements for the period ended September 30, 2013. Refer to the Explanatory Note and Note 2 - Restatement of Previously Reported Financial Statements to the audited consolidated financial statements contained in Amendment No. 2 to ARCP’s Annual Report on Form 10-K/A (the “Amended 10-K”) filed with the U.S. Securities and Exchange Commission on March 2, 2015 for further information about the restatements.


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FORM 10-Q

September 30, 2014

 

     Page  

PART I — FINANCIAL INFORMATION

  

Item 1. Financial Statements

     1   

Consolidated Balance Sheets of American Realty Capital Properties, Inc. as of September  30, 2014 and December 31, 2013 (Unaudited)

     1   

Consolidated Statements of Operations of American Realty Capital Properties, Inc. for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)

     2   

Consolidated Statements of Comprehensive Loss of American Realty Capital Properties, Inc. for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)

     3   

Consolidated Statement of Changes in Equity of American Realty Capital Properties, Inc. for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)

     5   

Consolidated Statements of Cash Flows of American Realty Capital Properties, Inc. for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)

     6   

Consolidated Balance Sheets of ARC Properties Operating Partnership, L.P. as of September  30, 2014 and December 31, 2013 (Unaudited)

     7   

Consolidated Statements of Operations of ARC Properties Operating Partnership, L.P. for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)

     8   

Consolidated Statements of Comprehensive Loss of ARC Properties Operating Partnership, L.P. for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)

     9   

Consolidated Statement of Changes in Equity of ARC Properties Operating Partnership, L.P. for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)

     10   

Consolidated Statements of Cash Flows of ARC Properties Operating Partnership, L.P. for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)

     12   

Notes to Consolidated Financial Statements as of September 30, 2014 (Unaudited)

     13   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     85   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     107   

Item 4. Controls and Procedures

     107   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     112   

Item 1A. Risk Factors

     112   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     112   

Item 3. Defaults Upon Senior Securities

     112   

Item 4. Mine Safety Disclosures

     112   

Item 5. Other Information

     112   

Item 6. Exhibits

     112   

Signatures

     113   


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)

 

    September 30, 2014     December 31, 2013
(As Restated) (1)
 
ASSETS    

Real estate investments, at cost:

   

Land

  $ 3,487,824      $ 1,380,308   

Buildings, fixtures and improvements

    12,355,029        5,297,400   

Land and construction in progress

    86,973        21,839   

Acquired intangible lease assets

    2,424,076        759,595   
 

 

 

   

 

 

 

Total real estate investments, at cost

    18,353,902        7,459,142   

Less: accumulated depreciation and amortization

    (828,624     (267,278
 

 

 

   

 

 

 

Total real estate investments, net

    17,525,278        7,191,864   

Investment in unconsolidated entities

    100,762        —     

Investment in direct financing leases, net

    57,441        66,112   

Investment securities, at fair value

    59,131        62,067   

Loans held for investment, net

    96,981        26,279   

Cash and cash equivalents

    145,310        52,725   

Restricted cash

    72,754        35,921   

Intangible assets, net

    323,332        —     

Deferred costs and other assets, net

    446,606        280,661   

Goodwill

    2,096,450        92,789   

Due from affiliates

    55,666        —     

Assets held for sale

    1,887,872        665   
 

 

 

   

 

 

 

Total assets

  $ 22,867,583      $ 7,809,083   
 

 

 

   

 

 

 
LIABILITIES AND EQUITY    

Mortgage notes payable, net

  $ 3,782,407      $ 1,301,114   

Corporate bonds, net

    2,546,294        —     

Convertible debt, net

    976,251        972,490   

Credit facilities

    4,259,000        1,969,800   

Other debt, net

    48,587        104,804   

Below-market lease liabilities, net

    318,494        77,169   

Accounts payable and accrued expenses

    180,338        730,571   

Deferred rent, derivative and other liabilities

    195,256        40,271   

Distributions payable

    9,927        10,903   

Due to affiliates

    2,757        103,434   

Liabilities associated with assets held for sale

    545,382        —     
 

 

 

   

 

 

 

Total liabilities

    12,864,693        5,310,556   
 

 

 

   

 

 

 

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

    —          269,299   
 

 

 

   

 

 

 

Preferred stock (excluding Series D Preferred Stock), $0.01 par value, 100,000,000 shares authorized and 42,822,383 and 42,199,547 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

    428        422   

Common stock, $0.01 par value, 1,500,000,000 shares authorized and 907,964,521 and 239,234,725 issued and outstanding at September 30, 2014 and December 31, 2013, respectively

    9,080        2,392   

Additional paid-in capital

    11,905,338        2,940,907   

Accumulated other comprehensive income

    8,600        7,666   

Accumulated deficit

    (2,182,731     (877,957
 

 

 

   

 

 

 

Total stockholders’ equity

    9,740,715        2,073,430   

Non-controlling interests

    262,175        155,798   
 

 

 

   

 

 

 

Total equity

    10,002,890        2,229,228   
 

 

 

   

 

 

 

Total liabilities and equity

  $ 22,867,583      $ 7,809,083   
 

 

 

   

 

 

 

 

(1) For discussion on the restatement adjustments, see Note 2 — Restatement of Previously Issued Consolidated Financial Statements.

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 September 30,     Nine Months Ended September 30,  
     2014     2013
(As Restated) (1)
    2014     2013
(As Restated) (1)
 

Revenues:

        

Rental income

   $ 365,712      $ 89,729      $ 924,646      $ 183,251   

Direct financing lease income

     625        1,201        2,812        1,201   

Operating expense reimbursements

     30,984        4,325        81,716        8,516   

Cole Capital revenue

     59,797        —          151,276        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  457,118      95,255      1,160,450      192,968   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

Cole Capital reallowed fees and commissions

  15,398      —        56,902      —     

Acquisition related(2)

  13,998      26,948      34,616      74,541   

Merger and other non-routine transactions(3)

  7,632      4,301      175,352      133,734   

Property operating

  40,977      5,430      110,018      11,065   

Management fees to affiliates

  —        —        13,888      12,493   

General and administrative(4)

  32,207      9,866      128,711      23,921   

Depreciation and amortization

  265,150      62,136      689,731      122,484   

Impairment of real estate

  2,299      2,074      3,855      2,074   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  377,661      110,755      1,213,073      380,312   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  79,457      (15,500   (52,623   (187,344
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

Interest expense, net

  (101,643   (27,189   (326,491   (45,414

Extinguishment of debt, net

  (5,396   —        (21,264   —     

Other income, net

  7,556      136      29,702      2,658   

Loss on derivative instruments, net

  (17,484   (38,651   (10,398   (69,830

Loss on held for sale assets and disposition of properties, net

  (256,894   —        (275,768   —     

Gain (loss) on sale of investments

  6,357      (2,246   6,357      (1,795
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses, net

  (367,504   (67,950   (597,862   (114,381
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

  (288,047   (83,450   (650,485   (301,725
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

Income from operations of held for sale assets

  —        96      —        159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from discontinued operations

  —        96      —        159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  (288,047   (83,354   (650,485   (301,566

Net loss attributable to non-controlling interests

  7,649      3,153      23,923      7,882   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the Company

$ (280,398 $ (80,201 $ (626,562 $ (293,684
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share from continuing operations attributable to common stockholders

$ (0.35 $ (0.36 $ (0.94 $ (1.50

Basic and diluted net loss per share from discontinued operations attributable to common stockholders

$ —      $ —      $ —      $ —     

 

(1) For discussion on the restatement adjustments, see Note 2 — Restatement of Previously Issued Consolidated Financial Statements.
(2) Includes $1.7 million to affiliates for the nine months ended September 30, 2014, and $10.1 million and $36.9 million to affiliates for the three and nine months ended September 30, 2013, respectively.
(3) Includes $137.8 million to affiliates for the nine months ended September 30, 2014, and $2.3 million and $109.2 million to affiliates for the three and nine months ended September 30, 2013, respectively.
(4) Includes $0.1 million and $16.1 million to affiliates for the three and nine months ended September 30, 2014, respectively, and $7.0 million and $16.3 million to affiliates for the three and nine months ended September 30, 2013, respectively.

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 September 30,     Nine Months Ended September 30,  
     2014     2013
(As Restated) (1)
    2014     2013
(As Restated) (1)
 

Net loss

     (288,047     (83,354     (650,485     (301,566

Other comprehensive income:

        

Designated derivatives, fair value adjustments

     8,469        (3,635     (1,112     9,246   

Unrealized gain (loss) on investment securities, net

     725        938        9,698        (427

Reclassification of previous unrealized gains on investment securities into net loss

     (7,652     —          (7,652     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

  1,542      (2,697   934      8,819   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

  (286,505   (86,051   (649,551   (292,747

Net loss attributable to non-controlling interests

  7,649      3,153      23,923      7,882   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss attributable to the Company

$ (278,856 $ (82,898 $ (625,628 $ (284,865
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For discussion on the restatement adjustments, see Note 2 — Restatement of Previously Issued Consolidated Financial Statements.

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)

(As restated as of December 31, 2013)

 

   

 

Preferred Stock

   

 

Common Stock

          Accumulated
Other
Comprehensive
Income
    Accumulated
Deficit
    Total Stock-
holders’
Equity
    Non-
Controlling
Interests
    Total Equity  
    Number
of Shares
    Par
Value
    Number
of Shares
    Par
Value
    Additional
Paid-In
Capital
           

Balance, December 31, 2013 (As Restated)

    42,199,547      $ 422        239,234,725      $ 2,392      $ 2,940,907      $ 7,666      $ (877,957   $ 2,073,430      $ 155,798      $ 2,229,228   

Issuance of common stock, net (1)

    —          —          662,305,318        6,623        8,916,830        —          —          8,923,453        —          8,923,453   

Conversion of Common OP Units to common stock

    —          —          1,098,074        11        16,264        —          —          16,275        (16,275     —     

Conversion of Preferred OP Units to Series F Preferred Stock

    622,836        6        —          —          12,464        —          —          12,470        (12,470     —     

Issuance of restricted share awards, net

    —          —          5,326,404        54        (4,310     —          —          (4,256     —          (4,256

Equity-based compensation

    —          —          —          —          23,183        —          —          23,183        9,622        32,805   

Distributions declared on common stock

    —          —          —          —          —          —          (593,846     (593,846     —          (593,846

Issuance of OP Units

    —          —          —          —          —          —          —          —          152,484        152,484   

Distributions to non-controlling interest holders

    —          —          —          —          —          —          —          —          (28,809     (28,809

Distributions to participating securities

    —          —          —          —          —          —          (3,617     (3,617     —          (3,617

Distributions to preferred shareholders

    —          —          —          —          —          —          (80,749     (80,749     —          (80,749

Contributions from non-controlling interest holders

    —          —          —          —          —          —          —          —          982        982   

Non-controlling interests retained in Cole Merger

    —          —          —          —          —          —          —          —          24,766        24,766   

Net loss

    —          —          —          —          —          —          (626,562     (626,562     (23,923     (650,485

Other comprehensive income

    —          —          —          —          —          934        —          934        —          934   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

  42,822,383    $ 428      907,964,521    $ 9,080    $ 11,905,338    $ 8,600    $ (2,182,731 $ 9,740,715    $ 262,175    $ 10,002,890   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $2.2 million to affiliates for the nine months ended September 30, 2014.

The accompanying notes are an integral part of these statements.

 

4


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In thousands, except for share data)

(Unaudited)

(As restated for the nine months ended September 30, 2013) (1)

 

   

 

Preferred Stock

   

 

Common Stock

          Accumulated
Other
Comprehensive
Income
    Accumulated
Deficit
    Total Stock-
holders’
Equity
    Non-
Controlling
Interests
    Total Equity  
    Number
of Shares
    Par
Value
    Number
of Shares
    Par
Value
    Additional
Paid-In
Capital
           

Balance, December 31, 2012 (As Restated)

    6,990,328      $ 70        184,553,676      $ 1,846      $ 1,778,883      $ (3,934   $ (124,286   $ 1,652,579      $ 16,181      $ 1,668,760   

Issuances of preferred stock

    36,053,490        360        —          —          —          —          —          360        —          360   

Issuances of common stock, net

    —          —          63,055,919        631        1,967,250        —          —          1,967,881        —          1,967,881   

Excess of ARCT IV Merger considerations over historical cost

    —          —          —          —          (557,545     —          —          (557,545     —          (557,545

Offering costs, commissions and dealer manager fees, including $159,323 to affiliates

    —          —          —          —          (164,831     —          —          (164,831     —          (164,831

Common stock issued through dividend reinvestment plan

    —          —          940,737        9        25,554        —          —          25,563        —          25,563   

Common stock repurchases

    —          —          (28,272,905     (283     (357,634     —          —          (357,917     —          (357,917

Conversion of Convertible Preferred Stock Series A and B to common stock

    (828,472     (8     829,629        8        —          —          —          —          —          —     

Conversion of OP Units to common stock

    —          —          599,233        6        5,793        —          —          5,799        (5,799     —     

Equity based compensation

    —          —          645,491        6        4,148        —          —          4,154        9,827        13,981   

Equity component of convertible debt

    —          —          —          —          9,372        —          —          9,372        —          9,372   

Distributions declared

    —          —          —          —          —          —          (181,823     (181,823     —          (181,823

Issuance of OP Units to affiliate

    —          —          —          —          —          —          —          —          107,771        107,771   

Contributions from non-controlling interest holders

    —          —          —          —          —          —          —          —          29,758        29,758   

Distributions to non-controlling interest holders

    —          —          —          —          —          —          —          —          (6,222     (6,222

Net loss

    —          —          —          —          —          —          (293,684     (293,684     (7,882     (301,566

Other comprehensive income

    —          —          —          —          —          8,819        —          8,819        —          8,819   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013 (As Restated)

  42,215,346    $ 422      222,351,780    $ 2,223    $ 2,710,990    $ 4,885    $ (599,793 $ 2,118,727    $ 143,634    $ 2,262,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For discussion on the restatement adjustments, see Note 2 — Restatement of Previously Issued Consolidated Financial Statements.

The accompanying notes are an integral part of these statements.

 

5


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

     Nine Months Ended September 30,  
     2014     2013
(As Restated)1
 

Cash flows from operating activities:

    

Net loss

   $ (650,485   $ (301,566

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Issuance of OP Units

     92,884        107,771   

Depreciation and amortization

     744,545        131,605   

Loss on held for sale assets and disposition of properties, net

     275,768        —     

Equity-based compensation

     32,805        13,981   

Equity in income of unconsolidated entities

     (247     —     

Distributions from unconsolidated entities

     6,149        —     

Loss on derivative instruments

     10,398        144   

Unrealized loss on investments

     —          14   

(Gain) loss on sale of investments, net

     (6,357     1,795   

Impairment of real estate

     3,855        2,074   

Loss on extinguishment of debt

     (14,637     —     

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

     —          49,314   

Loss on extinguishment of Series C Stock

     —          4,827   

Changes in assets and liabilities:

    

Investment in direct financing leases

     1,147        148   

Deferred costs, intangible and other assets, net

     (116,614     (20,513

Due from affiliates

     (2,365     (4,105

Accounts payable and accrued expenses

     (53,434     10,435   

Deferred rent, derivative and other liabilities

     (20,748     5,911   

Due to affiliates

     (37,520     6,107   
  

 

 

   

 

 

 

Net cash provided by operating activities

  265,144      7,942   
  

 

 

   

 

 

 

Cash flows from investing activities:

Investments in real estate and other assets

  (3,517,290   (3,241,834

Acquisition of a real estate business, net of cash acquired

  (756,232   —     

Investment in direct financing leases

  —        (75,551

Capital expenditures

  (30,168   (113

Real estate developments

  (33,610   —     

Leasing costs

  (3,210   —     

Principal repayments received from borrowers

  5,091      —     

Investments in unconsolidated entities

  (2,699   —     

Proceeds from disposition of properties

  129,212      —     

Investment in leasehold improvements, property and equipment

  (11,074   —     

Deposits for real estate investments

  (205,896   (31,115

Uses and refunds of deposits for real estate investments

  278,362      —     

Purchases of investment securities

  —        (81,464

Line of credit advances to affiliates

  (130,300   —     

Line of credit repayments from affiliates

  80,300      —     

Proceeds from sale of investment securities

  159,049      111,402   

Change in restricted cash

  (18,709   —     
  

 

 

   

 

 

 

Net cash used in investing activities

  (4,057,174   (3,318,675
  

 

 

   

 

 

 

Cash flows from financing activities:

Proceeds from mortgage notes payable

  1,007,787      6,897   

Payments on mortgage notes payable

  (1,028,017   —     

Payments on other debt

  (109,312   —     

Proceeds from credit facilities

  5,689,000      1,570,000   

Payments on credit facilities

  (4,708,800   (384,604

Proceeds from corporate bonds

  2,545,760      (53,397

Payments of deferred financing costs

  (92,233   (2,165

Proceeds from issuance of convertible debt

  —        310,000   

Common stock repurchases

  —        (358,093

Proceeds from issuances of preferred shares

  —        445,000   

Proceeds from issuances of common stock, net offering costs

  1,593,345      1,807,197   

Redemption of Series D Preferred Stock

  (316,126   —     

Contributions from non-controlling interest holders

  982      29,758   

Distributions to non-controlling interest holders

  (22,673   (5,615

Distributions paid

  (675,098   (157,646

Payments from affiliates, net

  —        (376

Change in restricted cash

  —        (572
  

 

 

   

 

 

 

Net cash provided by financing activities

  3,884,615      3,206,384   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

  92,585      (104,349

Cash and cash equivalents, beginning of period

  52,725      292,575   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 145,310    $ 188,226   
  

 

 

   

 

 

 

Supplemental Disclosures:

Cash paid for interest

$ 248,698    $ 18,774   

Cash paid for income taxes

  7,761      625   

Non-cash investing and financing activities:

Accrued capital expenditures and real estate developments

$ 12,634    $ —     

Common stock issued through distribution reinvestment plan

$ —      $ 25,568   

 

(1) For discussion on the restatement adjustments, see Note 2 — Restatement of Previously Issued Consolidated Financial Statements.

The accompanying notes are an integral part of these statements.

 

6


Table of Contents

ARC Properties Operating Partnership, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for unit and per unit data)

(Unaudited)

 

     September 30, 2014     December 31, 2013
(As Restated) (1)
 
ASSETS     

Real estate investments, at cost:

    

Land

   $ 3,487,824      $ 1,380,308   

Buildings, fixtures and improvements

     12,355,029        5,297,400   

Land and construction in progress

     86,973        21,839   

Acquired intangible lease assets

     2,424,076        759,595   
  

 

 

   

 

 

 

Total real estate investments, at cost

  18,353,902      7,459,142   

Less: accumulated depreciation and amortization

  (828,624   (267,278
  

 

 

   

 

 

 

Total real estate investments, net

  17,525,278      7,191,864   

Investment in unconsolidated entities

  100,762      —     

Investment in direct financing leases, net

  57,441      66,112   

Investment securities, at fair value

  59,131      62,067   

Loans held for investment, net

  96,981      26,279   

Cash and cash equivalents

  145,310      52,725   

Restricted cash

  72,754      35,921   

Intangible assets, net

  323,332      —     

Deferred costs and other assets, net

  446,606      280,661   

Goodwill

  2,096,450      92,789   

Due from affiliates

  55,666      —     

Assets held for sale

  1,887,872      665   
  

 

 

   

 

 

 

Total assets

$ 22,867,583    $ 7,809,083   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY

Mortgage notes payable, net

$ 3,782,407    $ 1,301,114   

Corporate bonds, net

  2,546,294      —     

Convertible debt, net

  976,251      972,490   

Credit facilities

  4,259,000      1,969,800   

Other debt, net

  48,587      104,804   

Below-market lease liabilities, net

  318,494      77,169   

Accounts payable and accrued expenses

  180,338      730,571   

Deferred rent, derivative and other liabilities

  195,256      40,271   

Distributions payable

  9,927      10,903   

Due to affiliates

  2,757      103,434   

Liabilities associated with assets held for sale

  545,382      —     
  

 

 

   

 

 

 

Total liabilities

  12,864,693      5,310,556   
  

 

 

   

 

 

 

General partner’s Series D Preferred equity - zero and 21,735,008 General Partner Preferred Units issued and outstanding at September 30, 2014 and December 31, 2013, respectively

  —        269,299   
  

 

 

   

 

 

 

General partner’s common equity - 907,978,649 and 239,248,853 General Partner OP Units issued and outstanding at September 30, 2014 and December 31, 2013, respectively

  8,726,024      1,018,124   

General partner’s preferred equity (excluding Series D Preferred equity) - 42,822,383 and 42,199,547 General Partner Preferred Units issued and outstanding at September 30, 2014 and December 31, 2013, respectively

  1,014,339      1,054,989   

Limited partners’ common equity - 35,435,194 and 17,832,274 Limited Partner OP Units issued and outstanding at September 30, 2014 and December 31, 2013, respectively

  233,229      139,082   

Limited Partners’ preferred equity - 98,629 and 721,465 Limited Partner Preferred Units issued and outstanding at September 30, 2014 and December 31, 2013, respectively

  3,996      16,466   
  

 

 

   

 

 

 

Total partners’ equity

  9,977,588      2,228,661   

Non-controlling interests

  25,302      567   
  

 

 

   

 

 

 

Total equity

  10,002,890      2,229,228   
  

 

 

   

 

 

 

Total liabilities and equity

$ 22,867,583    $ 7,809,083   
  

 

 

   

 

 

 

 

(1) For discussion on the restatement adjustments, see Note 2 — Restatement of Previously Issued Consolidated Financial Statements.

 

7


Table of Contents

ARC Properties Operating Partnership, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per unit data)

(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

Revenues:

        

Rental income

   $ 365,712      $ 89,729      $ 924,646      $ 183,251   

Direct financing lease income

     625        1,201        2,812        1,201   

Operating expense reimbursements

     30,984        4,325        81,716        8,516   

Cole Capital revenue

     59,797        —          151,276        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  457,118      95,255      1,160,450      192,968   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

Cole Capital reallowed fees and commissions

  15,398      —        56,902      —     

Acquisition related

  13,998      26,948      34,616      74,541   

Merger and other non-routine transactions

  7,632      4,301      175,352      133,734   

Property operating

  40,977      5,430      110,018      11,065   

Management fees to affiliates

  —        —        13,888      12,493   

General and administrative

  32,207      9,866      128,711      23,921   

Depreciation and amortization

  265,150      62,136      689,731      122,484   

Impairment of real estate

  2,299      2,074      3,855      2,074   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  377,661      110,755      1,213,073      380,312   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  79,457      (15,500   (52,623   (187,344
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

Interest expense, net

  (101,643   (27,189   (326,491   (45,414

Extinguishment of debt, net

  (5,396   —        (21,264   —     

Other income, net

  7,556      136      29,702      2,658   

Loss on derivative instruments, net

  (17,484   (38,651   (10,398   (69,830

Loss on held for sale assets and disposition of properties, net

  (256,894   —        (275,768   —     

Gain (loss) on sale of investments

  6,357      (2,246   6,357      (1,795
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses, net

  (367,504   (67,950   (597,862   (114,381
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

  (288,047   (83,450   (650,485   (301,725

Discontinued operations:

Income from operations of held for sale assets

  —        96      —        159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from discontinued operations

  —        96      —        159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  (288,047   (83,354   (650,485   (301,566

Net income attributable to non-controlling interests

  155      —        235      —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the unitholders

$ (288,202 $ (83,354 $ (650,720 $ (301,566
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share attributable to common unitholders

$ (0.35 $ (0.36 $ (0.94 $ (1.48

The accompanying notes are an integral part of these statements.

 

8


Table of Contents

ARC Properties Operating Partnership, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net loss

   $ (288,047   $ (83,354   $ (650,485   $ (301,566

Other comprehensive income:

        

Designated derivatives, fair value adjustments

     8,469        (3,635     (1,112     9,246   

Unrealized gain (loss) on investment securities, net

     725        938        9,698        (427

Reclassification of previous unrealized gains on investment securities into net loss

     (7,652     —          (7,652     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

  1,542      (2,697   934      8,819   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

  (286,505   (86,051   (649,551   (292,747

Net income attributable to non-controlling interests

  155      —        235      —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss attributable to unitholders

$ (286,660 $ (86,051 $ (649,786 $ (292,747
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

9


Table of Contents

ARC Properties Operating Partnership, L.P.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In thousands, except for unit data)

(Unaudited)

 

    Preferred Units     Common Units                    
    General Partner     Limited Partner     General Partner     Limited Partner                    
    Number of
Units
    Capital     Number of
Units
    Capital     Number of
Units
    Capital     Number of
Units
    Capital     Total
Partners’
Capital
    Non-
Controlling
Interests
    Total Capital  

Balance, December 31, 2013 (As Restated)

    42,199,547      $ 1,054,989        721,465      $ 16,466        239,248,853      $ 1,018,124        17,832,274      $ 139,082      $ 2,228,661      $ 567      $ 2,229,228   

Issuance of Common OP Units, net

    —          —          —          —          662,305,318        8,923,453        7,956,297        152,484        9,075,937        —          9,075,937   

Conversion of Limited Partners’ Common OP Units to General Partner’s Common OP units

    —          —          —          —          1,098,074        16,275        (1,098,074     (16,275     —          —          —     

Conversion of Limited Partners’ Preferred OP Units to General Partner’s Preferred OP units

    622,836        12,470        (622,836     (12,470     —          —          —          —          —          —          —     

Issuance of Common OP Units in connection with issuance of RSAs, net

    —          —          —          —          5,326,404        (4,256     —          —          (4,256     —          (4,256

Equity-based compensation

    —          —          —          —          —          23,183        10,744,697        9,622        32,805        —          32,805   

Distributions to Common OP Units, LTIP, and non-controlling interests

    —          —          —          —          —          (597,463     —          (27,561     (625,024     (1,248     (626,272

Distributions to Preferred OP Units

    —          (53,120     —          —          —          (27,629     —          —          (80,749     —          (80,749

Contributions from non-controlling interest holders

    —          —          —          —          —          —          —          —          —          982        982   

Non-controlling interests retained in Cole Merger

    —          —          —          —          —          —          —          —          —          24,766        24,766   

Net (loss) income

    —          —          —          —          —          (626,562     —          (24,158     (650,720     235        (650,485

Other comprehensive income

    —          —          —          —          —          899        —          35        934        —          934   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

    42,822,383      $ 1,014,339        98,629      $ 3,996        907,978,649      $ 8,726,024        35,435,194      $ 233,229      $ 9,977,588      $ 25,302      $ 10,002,890   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

10


Table of Contents

ARC Properties Operating Partnership, L.P.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In thousands, except for unit data)

(Unaudited)

 

    Preferred Units     Common OP Units                    
    General Partner     Limited Partners     General Partner     Limited Partners                    
    Number of
Units
    Capital     Number of
Units
    Capital     Number of
Units
    Capital     Number of
Units
    Capital     Total
Partners’
Capital
    Non-
controlling
Interests
    Total
Capital
 

Balance, December 31, 2012 (As Restated)

    6,990,328      $ 163,047        —        $ —          184,553,676      $ 1,489,587        1,621,349      $ 16,126      $ 1,668,760      $ —        $ 1,668,760   

Issuance of Common OP Units

    —          —          —          —          63,055,919        1,066,904        8,029,545        107,771        1,174,675        —          1,174,675   

Issuance of Common OP Units through distribution reinvestment plan

    —          —          —          —          940,737        25,563        —          —          25,563        —          25,563   

Offering costs, commissions and dealer manager fees

    —          —          —          —          —          (164,831     —          —          (164,831     —          (164,831

Repurchases of Common OP Units

    —          —          —          —          (28,272,905     (357,917     —          —          (357,917     —          (357,917

Issuance of Preferred OP Units

    36,053,490        901,337        721,465        15,878        —          —          630,689        13,880        931,095        —          931,095   

Excess of ARCT IV Merger considerations over historical cost

    —          —          —          —          —          (557,545     —          —          (557,545     —          (557,545

Conversion of Limited Partners’ Common OP Units to General Partner’s Common OP units

    —          —          —          —          599,233        5,799        (599,233     (5,799     —          —          —     

Conversion of General Partner’s Preferred Units to General Partner’s Common OP Units

    (828,472     (8     —          —          829,629        8        —          —          —          —          —     

Equity based compensation

    —          —          —          —          645,491        4,154        8,241,100        9,827        13,981        —          13,981   

Equity component of convertible debt

    —          —          —          —          —          9,372        —          —          9,372        —          9,372   

Distributions to Common OP Units and LTIPs

    —          —          —          —          —          (181,812     —          (6,222     (188,034     —          (188,034

Net loss

    —          —          —          —          —          (293,684     —          (7,882     (301,566     —          (301,566

Other comprehensive income

    —        $ —          —        $ —        $ —          8,362        —          457        8,819        —          8,819   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

(As Restated)

    42,215,346      $ 1,064,376        721,465      $ 15,878        222,351,780      $ 1,062,739        17,923,450      $ 120,466      $ 2,262,372      $ —        $ 2,262,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

11


Table of Contents

ARC Properties Operating Partnership, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

 

     Nine Months Ended September 30,  
     2014     2013  

Cash flows from operating activities:

    

Net loss

   $ (650,485   $ (301,566

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Issuance of common units in connection with the ARCT III and ARCT IV mergers

     92,884        107,771   

Depreciation and amortization

     744,545        131,605   

Loss on held for sale assets and disposition of properties, net

     275,768        —     

Equity-based compensation

     32,805        13,981   

Equity in income of unconsolidated entities

     (247     —     

Distributions from unconsolidated entities

     6,149        —     

Loss on derivative instruments

     10,398        144   

Unrealized loss on investments

     —          14   

(Gain) loss on sale of investments, net

     (6,357     1,795   

Impairment of real estate

     3,855        2,074   

Loss on extinguishment of debt

     (14,637     —     

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

     —          49,314   

Loss on extinguishment of Series C Stock

     —          4,827   

Changes in assets and liabilities:

    

Investment in direct financing leases

     1,147        148   

Deferred costs, intangible and other assets, net

     (116,614     (20,513

Due from affiliates

     (2,365     (4,105

Accounts payable and accrued expenses

     (53,434     10,435   

Deferred rent, derivative and other liabilities

     (20,748     5,911   

Due to affiliates

     (37,520     6,107   
  

 

 

   

 

 

 

Net cash provided by operating activities

  265,144      7,942   
  

 

 

   

 

 

 

Cash flows from investing activities:

Investments in real estate and other assets

  (3,517,290   (3,241,834

Acquisition of a real estate business, net of cash acquired

  (756,232   —     

Investment in direct financing leases

  —        (75,551

Capital expenditures

  (30,168   (113

Real estate developments

  (33,610   —     

Leasing costs

  (3,210   —     

Principal repayments received from borrowers

  5,091      —     

Investments in unconsolidated entities

  (2,699   —     

Proceeds from disposition of properties

  129,212      —     

Investment in leasehold improvements, property and equipment

  (11,074   —     

Deposits for real estate investments

  (205,896   (31,115

Uses and refunds of deposits for real estate investments

  278,362      —     

Purchases of investment securities

  —        (81,464

Line of credit advances to affiliates

  (130,300   —     

Line of credit repayments from affiliates

  80,300      —     

Proceeds from sale of investment securities

  159,049      111,402   

Change in restricted cash

  (18,709   —     
  

 

 

   

 

 

 

Net cash used in investing activities

  (4,057,174   (3,318,675
  

 

 

   

 

 

 

Cash flows from financing activities:

Proceeds from mortgage notes payable

  1,007,787      6,897   

Payments on mortgage notes payable

  (1,028,017   —     

Payments on other debt

  (109,312   —     

Proceeds from credit facilities

  5,689,000      1,570,000   

Payments on credit facilities

  (4,708,800   (384,604

Proceeds from corporate bonds

  2,545,760      (53,397

Payments of deferred financing costs

  (92,233   (2,165

Proceeds from issuance of convertible debt

  —        310,000   

Repurchases of OP units

  —        (358,093

Proceeds from issuances of preferred units

  —        445,000   

Proceeds from issuances of OP units, net of offering costs

  1,593,345      1,807,197   

Redemption of Series D Preferred Stock

  (316,126   —     

Contributions from non-controlling interest holders

  982      29,758   

Distributions to non-controlling interest holders

  (22,673   (5,615

Distributions paid

  (675,098   (157,646

Payments from affiliates, net

  —        (376

Change in restricted cash

  —        (572
  

 

 

   

 

 

 

Net cash provided by financing activities

  3,884,615      3,206,384   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

  92,585      104,349   

Cash and cash equivalents, beginning of period

  52,725      292,575   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 145,310    $ 188,226   
  

 

 

   

 

 

 

Supplemental Disclosures:

Cash paid for interest

$ 248,698    $ 18,774   

Cash paid for income taxes

  7,761      625   

Non-cash investing and financing activities:

Accrued capital expenditures and real estate developments

$ 12,634    $ —     

Common stock issued through distribution reinvestment plan

$ —      $ 25,568   

The accompanying notes are an integral part of these statements.

 

12


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited)

Note 1 — Organization

American Realty Capital Properties, Inc. (the “General Partner” 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.”

ARCP is the general partner of ARC Properties Operating Partnership, L.P. (together with its subsidiaries, the “Operating Partnership” or the “OP”), a Delaware limited partnership, which was formed on January 13, 2011 to conduct the business of acquiring, owning and operating single-tenant, freestanding commercial real estate properties. The Operating Partnership is the entity through which substantially all of the General Partner’s operations are conducted. Together, the General Partner, with the Operating Partnership and their consolidated subsidiaries are known as the “Company.” The term the “Company” refers to the General Partner and the Operating Partnership collectively.

The actions of the Operating Partnership and its relationship with ARCP are governed by that certain Third Amended and Restated Agreement of Limited Partnership (the “LPA”), effective as of January 3, 2014, as amended. The General Partner does not have any significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the General Partner and the Operating Partnership are substantially the same. Additionally, pursuant to the LPA, all administrative expenses and expenses associated with the formation and continuity of existence and operation of the General Partner incurred by the General Partner on the Operating Partnership’s behalf shall be treated as expenses of the Operating Partnership. Further, when the General Partner issues any equity instrument that has been approved by the General Partner’s board of directors to date, the LPA requires the Operating Partnership to issue the General Partner equity instruments with substantially similar terms, to protect the integrity of the Company’s umbrella partnership REIT structure, pursuant to which each holder of interests in the Operating Partnership has a proportionate economic interest in the Operating Partnership reflecting its capital contributions thereto. The LPA also provides that the Operating Partnership issue debt that mirrors debt issued by ARCP. The LPA will be amended to provide for the issuance of any additional class of equivalent equity instruments to the extent the General Partner’s board of directors authorizes the issuance of any new class of equity securities.

The Company operates through two business segments, Real Estate Investment (“REI”) and private capital management, Cole Capital (“Cole Capital”), as further discussed in Note 6 — Segment Reporting. Substantially all of the Company’s REI segment is conducted through the OP. ARCP is the sole general partner and holder of 97.3% of the common equity interests in the OP as of September 30, 2014. As of September 30, 2014, certain affiliates of ARCP 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 LPA, after holding units of limited partner interests in the OP (“OP Units”) for a period of one year, unless otherwise consented to by ARCP, holders of OP Units have the right to redeem the OP Units for the cash value of a corresponding number of shares of ARCP’s common stock or, at the option of ARCP, a corresponding number of shares of ARCP’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 Cole Capital’s business 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 its best interest and the best interest of 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, ARCP terminated the management agreement with its Former Manager and ARCP and the OP entered into employment and incentive compensation arrangements with ARCP executives. See Note 20 — 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 3 — Mergers and Acquisitions for further discussion.

 

13


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

Note 2 — Restatement of Previously Issued Consolidated Financial Statements

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

The Company determined that the restatement was necessary after an investigation was conducted by the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) with the assistance of independent counsel and forensic accountants. The Audit Committee initiated the investigation in response to concerns regarding accounting practices and other matters that were first reported to it on September 7, 2014. The restatement corrects errors that were identified as a result of the investigation, as well as certain other errors that were identified by the Company. The Company has determined that it would be appropriate to correct such errors.

Year ended December 31, 2013

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

Nine months Ended September 30, 2013 Error Corrections

Merger and Other Non-routine Transaction Related

In light of the findings of the investigation conducted by the Audit Committee, the Company performed an internal review of all acquisition, merger and other non-routine transaction related expenses. The work resulted in the identification of the following errors:

 

    The Company identified $13.0 million of management fees that were improperly classified as merger and other non-routine transaction related expenses. Such amounts have been properly classified as operating fees to affiliates in the nine months ended September 30, 2013. No such expenses were identified in the three months ended September 30, 2013.

 

    Upon consummation of the Company’s merger with American Realty Capital Trust III, Inc. (“ARCT III”) (Note 3 —Mergers and Acquisitions), the OP entered into an agreement with an affiliate to acquire certain furniture, fixtures, equipment (“FF&E”) and other assets. The Company originally capitalized $4.1 million of FF&E costs and expensed $1.7 million of FF&E costs in the nine months ended September 30, 2013. The Company has concluded that there was no evidence of the receipt and it could not support the value of the FF&E. As such, the Company has expensed the amount originally capitalized and recognized the expense in merger and other non-routine transaction related expense for the nine months ended September 30, 2013. See Note 20 — Related Party Transactions and Arrangements for further discussion. No such expenses were identified in the three months ended September 30, 2013.

 

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

 

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

 

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

 

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

 

14


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

The Company has updated the caption from “merger and other transaction related” to “merger and other non-routine transactions” to appropriately include non-recurring costs that may not have been incurred solely for a merger transaction. See Note 4 — Summary of Significant Accounting Policies for a further breakout of the merger costs and other one-time costs.

Management Fees to Affiliate

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

General and Administrative

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

Impairment of Real Estate

The Company originally believed that the risk of impairment of its real estate and related assets was mitigated by the fact that substantially all of the Company’s real estate portfolio had been acquired in 2012 and 2013. As a result, the Company had failed to monitor events and changes in circumstances that could indicate that the carrying amount of its real estate and related assets may not be recoverable. The Company performed a detailed analysis of the portfolio in connection with the restatement and noted certain properties with impairment indicators. The Company assessed the recoverability of the carrying amounts as of the date in which the impairment indicators existed. Based on this assessment, the Company noted one property with a carrying amount in excess of the fair value of its expected undiscounted cash flows as of September 30, 2013. As a result, the Company reduced the carrying amount of the real estate and related net assets to their estimated fair values by recognizing an impairment loss of $2.1 million for the three and nine months ended September 30, 2013.

Net Loss Attributable to Non-Controlling Interests

The original calculation of the net loss attributable to non-controlling interest holders for the three and nine months ended September 30, 2013 excluded expenses that were improperly recorded at the Company’s level. These expenses were incurred by the OP, and therefore should have been included in the Company’s determination of the net loss attributable to its non-controlling interest holders. In addition, the net loss attributable to the non-controlling interest holders has been adjusted to reflect the impact of the cumulative restatement adjustments discussed and presented herein. As a result, the 2013 restated consolidated financial statements reflect an increase of $2.9 million and $6.7 million for net loss attributable to non-controlling interest holders and corresponding decreases in net loss attributable to stockholders during the three and nine months ended September 30, 2013, respectively.

Due to Affiliates

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

Other Changes

Along with restating the consolidated financial statements to correct the errors discussed above, the Company recorded adjustments for certain previously identified immaterial accounting errors related to the three and nine months ended September 30, 2013 that arose in the normal course of business. In connection with the original financial statement issuance, the Company assessed the impact of these immaterial errors and concluded that they were not material, individually or in the aggregate, to the consolidated unaudited financial statements for the nine months ended September 30, 2013. However, in conjunction with the restatement, the Company determined that it would be appropriate to correct such errors.

The Company also recorded certain reclassifications to conform the presentation of its restated consolidated statement of operations for the three and nine months ended September 30, 2013 to the current period classification and maintain comparability.

 

15


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

September 30, 2013 Restated Consolidated Balance Sheet

 

     September 30, 2013  
     As Previously
Reported (1)
    ARCT IV
Recast (2)
    Reclassifications     Restatement
Adjustments
    As Restated  
ASSETS           

Real estate investments, at cost:

          

Land

   $ 521,139      $ 494,330      $ —        $ (1,581   $ 1,013,888   

Buildings, fixtures and improvements

     2,121,178        1,429,122        —          (1,028     3,549,272   

Acquired intangible lease assets

     328,733        221,663        347        (85     550,658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate investments, at cost

  2,971,050      2,145,115      347      (2,694   5,113,818   

Less: accumulated depreciation and amortization

  (148,162   (30,941   (143   230      (179,016
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate investments, net

  2,822,888      2,114,174      204      (2,464   4,934,802   

Cash and cash equivalents

  150,481      37,745      —        —        188,226   

Investment in direct financing leases, net

  57,449      17,954      —        —        75,403   

Investment securities, at fair value

  9,480      —        —        —        9,480   

Derivative assets, at fair value

  7,088      28      (7,116   —        —     

Restricted cash

  1,680      —        —        —        1,680   

Prepaid expenses and other assets

  48,165      15,111      (63,276   —        —     

Receivable for Issuances of common stock

  —        14,311      (14,311   —        —     

Deferred costs, net

  47,754      —        (47,754   —        —     

Assets held for sale

  6,028      —        —        (14   6,014   

Deferred costs and other assets, net

  —        —        132,253      598      132,851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND EQUITY

Mortgage notes payable

  269,891      2,124      —        —        272,015   

Convertible debt

  300,975      —        —        —        300,975   

Senior corporate credit facility

  600,000      710,000      —        —        1,310,000   

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

  449,827      —        —        —        449,827   

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

  49,314      —        —        —        49,314   

Below-market lease liabilities, net

  4,200      —        —        (620   3,580   

Derivative liabilities, at fair value

  —        —        —        —        —     

Accounts payable and accrued expenses

  14,740      662,432      (897   (5,303   670,972   

Deferred rent and other liabilities

  9,189      2,901      897      —        12,987   

Distributions payable

  72      9,810      —        436      10,318   

Due to affiliates

  —        —        —        6,107      6,107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Convertible preferred stock, $0.01 par value, 100,000,000 shares authorized, 42,215,346 shares issued and outstanding at September 30, 2013

  —        422      —        —        422   

Common stock, $0.01 par value, 750,000,000 shares authorized and 222,351,780 issued and outstanding at September 30, 2013

  1,848      375      —        —        2,223   

Additional paid-in capital

  1,803,315      904,640      —        3,035      2,710,990   

Accumulated other comprehensive income

  4,857      28      —        —        4,885   

Accumulated deficit

  (480,817   (121,392   —        2,416      (599,793
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

  1,329,203      784,073      —        5,451      2,118,727   

Non-controlling interests

  123,602      27,983      —        (7,951   143,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Certain line items have been consolidated from the original presentation in the Quarterly Report on Form 10-Q filing for the three and nine month period ended September 30, 2013.
(2) These financial statements have been recast in applying the carryover basis of accounting to include ARCT IV.

 

16


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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

 

     Three Months Ended  
     September 30, 2013  
     As Previously
Reported (1)
    ARCT IV
Recast (2)
    Reclassifications     Restatement
Adjustments
    As Restated  

Revenues:

          

Rental income

   $ 56,681      $ 33,054      $ (6   $ —        $ 89,729   

Direct financing lease income

     977        224        —          —          1,201   

Operating expense reimbursements

     3,226        1,093        6        —          4,325   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  60,884      34,371      —        —        95,255   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

Acquisition related

  1,235      25,713      —        —        26,948   

Merger and other non-routine transactions

  3,791      2,122      —        (1,612   4,301   

Property operating

  4,103      1,341      —        (14   5,430   

Management fees to affiliate

  —        —        —        —        —     

General and administrative

  1,586      822      —        7,458      9,866   

Equity-based compensation

  7,180      —        —        (7,180   —     

Depreciation and amortization

  39,382      23,030      —        (276   62,136   

Operating fees to affiliate

  —        —        —        —        —     

Impairment of real estate

  —        —        —        2,074      2,074   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  57,277      53,028      —        450      110,755   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  3,607      (18,657   —        (450   (15,500
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

Interest expense

  (24,135   (3,054   —        —        (27,189

Loss on contingent value rights

  (38,542   —        38,542      —     

Income from investment securities

  —        —        —        —        —     

Gain (loss) on sale of investment securities

  —        (2,246   —        —        (2,246

Loss on derivative instruments

  (99   —        (38,542   (38,651

Other income, net

  45      44      —        47      136   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses, net

  (62,731   (5,256   —        37      (67,950
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

  (59,124   (23,913   —        (413   (83,450

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

  (30   260      —        2,923      3,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations attributable to stockholders

  (59,154   (23,653   —        2,514      (80,293
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

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

  96      —        —        —        96   

(Loss) gain on held for sale properties

  —        —        —        —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

  96      —        —        96   

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

  (5   —        —        5      —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations attributable to stockholders

  91      —        —        5      96   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  (59,028   (23,913   —        (413   (83,354

Net (income) loss attributable to non-controlling interests

  (35   260      —        2,928      3,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to stockholders

$ (59,063 $ (23,653 $ —      $ 2,515    $ (80,201
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share from continuing operations attributable to common stockholders

$ (0.32 $ —      $ —      $ —      $ (0.36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share attributable to common stockholders

$ (0.32 $ —      $ —      $ —      $ (0.36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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

 

     Nine Months Ended  
     September 30, 2013  
     As Previously
Reported (1)
    ARCT IV
Recast (2)
    Reclassifications     Restatement
Adjustments
    As Restated  

Revenues:

          

Rental income

   $ 138,060      $ 45,102      $ 89      $ —        $ 183,251   

Direct financing lease income

     977        224        —          —          1,201   

Operating expense reimbursements

     6,878        1,727        (89     —          8,516   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  145,915      47,053      —        —        192,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

Acquisition related

  21,961      52,603      —        (23   74,541   

Merger and other non-routine transactions

  146,240      3,835      —        (16,341   133,734   

Property operating

  8,972      2,107      —        (14   11,065   

Management fees to affiliate

  —        —        —        12,493      12,493   

General and administrative

  4,018      2,214      34      17,655      23,921   

Equity-based compensation

  11,510      —        —        (11,510   —     

Depreciation and amortization

  92,211      30,620      (34   (313   122,484   

Operating fees to affiliate

  —        —        —        —        —     

Impairment of real estate

  —        —        —        2,074      2,074   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  284,912      91,379      —        4,021      380,312   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  (138,997   (44,326   —        (4,021   (187,344
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

Interest expense

  (41,589   (3,240   —        (585   (45,414

Loss on contingent value rights

  (69,676   —        69,676      —        —     

Income from investment securities

  218      1,798      (2,016   —        —     

Gain (loss) on sale of investment securities

  451      (2,246   —        —        (1,795

Loss on derivative instruments

  (144   —        (69,676   (10   (69,830

Other income, net

  171      463      2,016      8      2,658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses, net

  (110,569   (3,225   —        (587   (114,381
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

  (249,566   (47,551   —        (4,608   (301,725

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

  726      415      —        6,741      7,882   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations attributable to stockholders

  (248,840   (47,136   —        2,133      (293,843
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

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

  159      —        —        —        159   

(Loss) gain on held for sale properties

  14      —        —        (14   —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

  173      —        —        (14   159   

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

  (9   —        —        9      —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations attributable to stockholders

  164      —        —        (5   159   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  (249,393   (47,551   —        (4,622   (301,566

Net (income) loss attributable to non-controlling interests

  717      415      —        6,750      7,882   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to stockholders

$ (248,676 $ (47,136 $ —      $ 2,128    $ (293,684
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share from continuing operations attributable to common stockholders

$ (1.49 $ —      $ —      $ —      $ (1.50

Basic and diluted net loss per share attributable to common stockholders

$ (1.49 $ —      $ —      $ —      $ (1.50

 

(1) Certain line items have been consolidated from the original presentation in the Quarterly Report on Form 10-Q filing for the three and nine month period ended September 30, 2013.
(2) These financial statements have been recast in applying the carryover basis of accounting to include ARCT IV.

 

18


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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

 

     Three Months Ended September 30, 2013  
     As Previously
Reported (2)
    ARCT IV
Recast (3)
    Restatement
Adjustments
    As Restated  

Net loss

   $ (59,028   $ (23,913   $ (413   $ (83,354

Other comprehensive loss:

        

Designated derivatives, fair value adjustments

     (3,622     (13     —          (3,635

Change in unrealized gain/loss on investment securities

     (440     —          1,378        938   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

  (4,062   (13   1,378      (2,697
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

  (63,090   (23,926   965      (86,051

Net (income) loss attributable to non-controlling interests

  (30   260      2,923      3,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss attributable to the Company

$ (63,120 $ (23,666 $ 3,888    $ (82,898
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Nine Months Ended September 30, 2013  
     As Previously
Reported (2)
    ARCT IV
Recast (3)
    Restatement
Adjustments
    As Restated  

Net loss

   $ (249,393   $ (47,551   $ (4,622   $ (301,566

Other comprehensive income:

        

Designated derivatives, fair value adjustments

     9,218        28        —          9,246   

Change in unrealized gain/loss on investment securities

     (427     —          —          (427
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

  8,791      28      —        8,819   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

  (240,602   (47,523   (4,622   (292,747

Net loss attributable to non-controlling interests

  717      415      6,750      7,882   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss attributable to the Company

$ (239,885 $ (47,108 $ 2,128    $ (284,865
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The statement of comprehensive loss was originally included within the consolidated statement of operations in the recasted filing; it is now presented as a standalone financial statement.
(2) Certain line items have been consolidated from the original presentation in the Quarterly Report on Form 10-Q filing for the three and nine month period ended September 30, 2013.
(3) These financial statements have been recast in applying the carryover basis of accounting to include ARCT IV.

 

19


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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

 

     Nine Months Ended September 30, 2013  
     As Previously
Reported (1)
    ARCT IV
Recast (2)
    Restatement
Adjustments
    As Restated  

Cash flows from operating activities:

        

Net loss

   $ (249,393     (47,551   $ (4,622   $ (301,566

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Issuance of operating partnership units for ARCT III Merger and other transaction related expenses

     108,247        —          (476     107,771   

Depreciation

     99,832        31,501        272        131,605   

(Gain) loss on held for sale properties

     (14     —          14        —     

Impairment of real estate

     —          —          2,074        2,074   

Equity-based compensation

     13,895        18        68        13,981   

Loss on derivative instruments

     144        —          —          144   

Unrealized loss on investments

     14        —          —          14   

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

     49,314        —          —          49,314   

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

     4,827        —          —          4,827   

(Gain) loss on sale of investments

     (451     2,246        —          1,795   

Changes in assets and liabilities:

        

Investment in direct financing leases

     102        46        —          148   

Prepaid expenses and other assets

     (12,081     (8,432     —          (20,513

Accounts payable and accrued expenses

     4,464        11,251        (5,280     10,435   

Deferred rent and other liabilities

     3,068        2,843        —          5,911   

Due from Affiliates

     —          (4,105     —          (4,105

Due to Affiliates

     —          —          6,107        6,107   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  21,968      (12,183   (1,843   7,942   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

Investments in real estate and other assets

  (1,173,497   (2,068,337   —        (3,241,834

Investment in direct financing leases

  (57,551   (18,000   —        (75,551

Capital expenditures

  (113   —        —        (113

Purchase of assets from Manager

  (1,041   —        1,041      —     

Deposits for real estate investments

  (28,836   (2,279   —        (31,115

Purchases of investment securities

  (12,004   (69,460   —        (81,464

Proceeds from sale of investment securities

  44,188      67,214      —        111,402   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  (1,228,854   (2,090,862   1,041      (3,318,675
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

Proceeds from mortgage notes payable

  4,773      2,124      —        6,897   

Proceeds from senior corporate credit facility

  860,000      710,000      —        1,570,000   

Payments on senior corporate credit facility

  (384,604   —        —        (384,604

Proceeds from corporate bonds

  (38,221   (15,176   —        (53,397

Proceeds from issuance of convertible debt

  310,000      —        —        310,000   

Common stock repurchases

  (357,916   (177   —        (358,093

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

  445,000      —        —        445,000   

Proceeds from issuance of common stock, net

  486,536      1,320,729      (68   1,807,197   

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

 

20


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

     Nine Months Ended September 30, 2013  
     As Previously
Reported (1)
    ARCT IV
Recast (2)
    Restatement
Adjustments
    As Restated  

Payments of deferred financing costs

   $ —        $ —        $ (2,165   $ (2,165

Consideration paid for assets of Manager in excess of carryover basis

     (3,035     —          3,035        —     

Contributions from non-controlling interest holders

     750        29,008        —          29,758   

Distributions to non-controlling interest holders

     (5,170     (445     —          (5,615

Distributions paid

     (117,047     (40,599     —          (157,646

Advances from affiliates, net

     —          (376     —          (376

Restricted cash

     (572     —          —          (572
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

  1,200,494      2,005,088      802      3,206,384   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

  (6,392   (97,957   —        (104,350

Cash and cash equivalents, beginning of period

  156,873      135,702      —        292,575   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 150,481    $ 37,745    $ —      $ 188,226   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Certain line items have been consolidated from the original presentation in the Quarterly Report on Form 10-Q filing for the nine month period ended September 30, 2013.
(2) These financial statements have been recast in applying the carryover basis of accounting to include ARCT IV.

Note 3 — Mergers and Acquisitions

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 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 ARCP’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 (the “ARCT III OP”) was converted into the right to receive 0.95 of the same class of unit of equity ownership in the OP.

Upon the closing of the ARCT III Merger on February 28, 2013, 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 ARCP’s common stock based on the ARCT III Exchange Ratio). In addition, 140.7 million shares of ARCP’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. In accordance with the LPA, the OP issued a corresponding number of General Partner OP Units to ARCP when ARCP issued common stock to former common stockholders of ARCT III.

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 which, when after applying the ARCT III Exchange Ratio, resulted 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 ARCP, common stock of ARCP.

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 and pay certain merger related fees. See Note 20 — Related Party Transactions and Arrangements.

 

21


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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 the Company and ARCT III 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 Operating Partnership, on behalf of ARCP, prior to ARCP’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 for all periods that entities were under common control. Therefore, the accompanying consolidated financial statements including the notes thereto are presented as if the ARCT III Merger had occurred at inception.

CapLease, Inc. Merger

On May 28, 2013, the Company entered into an Agreement and Plan of Merger (the “CapLease Merger Agreement”) with CapLease, a Maryland corporation, 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, the OP, or any other of their respective wholly owned subsidiaries, was converted into the right to receive $8.50. Shares of CapLease’s outstanding restricted stock was accelerated and became fully vested, 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.

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 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 ARCT IV Merger was consummated on January 3, 2014 (the “ARCT IV Merger Date”).

 

22


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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 ARCP’s common stock (the “ARCT IV Exchange Ratio”) and (iii) 0.5937 of a share of a new series of preferred stock 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 (each, an “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 a Limited Partner OP Unit and (iii) 0.5937 of a Limited Partner OP Unit designated as Series F Preferred Units (“Limited Partner Series F OP Units”). In total, the Operating Partnership, on ARCP’s behalf, paid $651.4 million in cash, ARCP issued 36.9 million shares of common stock and 42.2 million shares of Series F Preferred Stock to the former ARCT IV shareholders, and the Operating Partnership issued 0.7 million units of Limited Partner Series F OP units and 0.6 million Limited Partner OP Units to the former 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 Limited Partner OP Units, resulting in the Company issuing 1.2 million Limited Partner OP Units. In accordance with the LPA, the OP issued a corresponding number of General Partner OP Units and Series F Preferred Units to ARCP when shares of ARCP’s common stock and Series F Preferred Stock were issued to former common stockholders of ARCT IV, respectively.

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 Partners, LLC (“ARC Real Estate”), 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 a 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 non-routine transactions in the accompanying consolidated statement of operations for the nine months ended September 30, 2014. Upon consummation of the ARCT IV Merger, these equity units were immediately converted to 6.7 million Limited Partner OP Units after application of the exchange ratio of 2.3961 per ARCT IV OP Unit. In conjunction with the ARCT IV Merger Agreement, the ARCT IV Special Limited Partner agreed to a minimum two-year holding period for these Limited Partner OP Units before being redeemable by the holder for cash or, at the option of the General Partner, the common stock of ARCP.

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 Limited Partner OP Units per ARCT IV OP Unit, resulting in the Operating Partnership issuing 0.1 million Limited Partner OP Units to ARC Real Estate Partners, LLC.

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, OP Units 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 OP prior to ARCP’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 for all periods that entities were under common control. 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 into to consummate the merger, had occurred at inception.

 

23


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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 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 quarter ended March 31, 2014, the Company closed the acquisition of the remaining 79 properties in the Fortress Portfolio on January 8, 2014, 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, ARCP 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 Operating Partnership 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 ARCP’s common stock (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 ARCP issuing approximately 520.8 million shares of common stock and paying $181.8 million in cash to Cole’s shareholders based on their elections. In accordance with the LPA, the Operating Partnership issued a corresponding number of General Partner OP Units to ARCP when shares of ARCP’s common stock were issued to former common stockholders of Cole.

In addition, ARCP issued approximately 2.8 million shares of 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, ARCP issued, but has not yet allocated, 365,321 shares with dividend equivalent rights commensurate with ARCP’s common stock. In accordance with the LPA, the Operating Partnership issued a corresponding number of General Partner OP Units to ARCP when shares of ARCP’s common stock were issued to former executives of Cole.

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 were 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 Operating Partnership, on the Company’s behalf, and the other entities sponsored directly or indirectly by ARC. The Inland Portfolio is comprised of 33 properties. As of September 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.

 

24


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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 Company (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 and its subsidiaries 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 Company, 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.

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.

Red Lobster Portfolio Acquisition

On May 15, 2014, the Operating Partnership, 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 was structured as a sale-leaseback in which the Operating Partnership agreed to purchase the Red Lobster Portfolio and would 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 consisted of 522 Red Lobster® restaurants and 20 other branded restaurant properties for a purchase price of $1.7 billion. The Company closed the Red Lobster Portfolio acquisition in the third quarter of 2014.

Abandoned Spin-off of Multi-Tenant Shopping Center Portfolio

On March 13, 2014, the Company announced its intention to spin off its multi-tenant shopping center business (“MT Spin-off”) into a publicly traded REIT, American Realty Capital Centers, Inc., which was expected to operate under the name “ARCenters” and to trade on the NASDAQ Global Market under the symbol “ARCM.” The OP was expected to retain 25% ownership of ARCM. The

 

25


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

spin-off was expected to be effectuated through a pro rata taxable special distribution of one share of ARCM common stock for every 10 shares of the Company’s common stock and every 10 OP Units held by third parties in the OP. On April 4, 2014, ARCM filed a Registration Statement on Form 10 to register ARCM’s common stock, par value $0.01 per share, pursuant to Section 12(b) of the Exchange Act so that, upon consummation of the spin-off, shares of ARCM received by holders of the Company’s common stock, or OP Units, as applicable, could freely trade their newly received ARCM common stock. ARCM was expected to be externally managed by the Company. On May 21, 2014, the Company announced that it had reassessed its plans for the multi-tenant shopping center portfolio and entered into a letter of intent to sell such portfolio to Blackstone, expecting to finalize pertinent documentation related thereto within 30 days of such date. The properties included in such sale were the same properties that would have been spun off into ARCM and, consequently, the Company abandoned its proposed spin-off at such time. On June 11, 2014, indirect subsidiaries of the Company entered into an Agreement of Purchase and Sale with BRE DDR Retail Holdings III LLC, an entity indirectly jointly owned by affiliates of Blackstone Real Estate Partners VII L.P. and DDR Corp., pursuant to which the parties definitively documented the sale of the Company’s multi-tenant shopping center portfolio. The properties to be sold pursuant to such agreement were the same properties that the Company had previously intended to spin off into an externally managed, NASDAQ traded REIT, American Realty Capital Centers, Inc. In light of the Company’s entry into such agreement, it abandoned its previously contemplated spin-off.

Note 4 — Summary of Significant Accounting Policies

The consolidated financial statements of the Company included herein include the accounts of ARCP and its consolidated subsidiaries, including the Operating Partnership. All intercompany amounts have been eliminated. The financial statements 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, 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 in the Amended 10-K. There have been no significant changes to these policies during the nine months ended September 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 consolidated joint venture arrangements not owned by the Company are presented as non-controlling 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 September 30, 2014 and December 31, 2013, there were 24,690,496 and 9,591,173 OP Units outstanding, respectively. In addition, as discussed in Note 3 —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.

The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of the qualitative and quantitative significance of fees it earns from certain of its relationships and investments. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity (“VIE”). A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.

 

26


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, its form of ownership interest, its representation on the entity’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and to replace the manager of and/or liquidate the entity. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE’s operations and the difference between consolidating the VIE and accounting for it on the equity method would be material to the Company’s financial statements.

The Company continually evaluates the need to consolidate joint ventures and the managed investment programs based on standards set forth in GAAP as described above.

Investment in Unconsolidated Entities

Investment in Unconsolidated Joint Ventures

Investment in unconsolidated joint ventures as of September 30, 2014 consisted of the Company’s interest in six joint ventures that owned six properties (the “Unconsolidated Joint Ventures”). As of September 30, 2014, the Company owned aggregate equity investments of $96.4 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. The Company records its proportionate share of net income from the Unconsolidated Joint Ventures within the Other income, net line item in the consolidated statement of operations. During the three and nine months ended September 30, 2014, the Company recognized $0.2 million and $1.6 million, respectively, of net income from the Unconsolidated Joint Ventures. The Company did not recognize any net income from the Unconsolidated Joint Ventures during the three and nine months ended September 30, 2013.

Investment in Managed REITs

As of September 30, 2014, the Company owned aggregate equity investments of $4.4 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 approximate $5,000 equity investment in CCPT. The Company accounts for these investments using the equity method of accounting which 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. The Company records its proportionate share of net income from the Managed REITs within the Other income, net line item in the consolidated statement of operations. During the three and nine months ended September 30, 2014, the Company recognized $0.4 million of net income and $1.4 million of net loss, respectively, from the Managed REITs. The Company did not recognize any net income from the Managed REITs during the three and nine months ended September 30, 2013.

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.

 

27


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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 impairments of unconsolidated entities were identified during the nine months ended September 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. The evaluation of an investment in a property 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. The Company identified properties during the three and nine months ended September 30, 2014 and 2013 with impairment indicators for which the undiscounted future cash flows expected as a result of the use and eventual disposition of the real estate and related assets was less than the carrying amount of each respective properties, as discussed in Note 11 — Fair Value of Financial Instruments.

In addition to the properties discussed in Note 11 — Fair Value of Financial Instruments, as of September 30, 2014, the Company noted potential impairment indicators at certain properties with an aggregate carrying value of $145.5 million. However, the Company’s estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered as of September 30, 2014. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term, which will result in the need to record an impairment loss to reduce such assets to fair value. Any such impairment losses may have a material impact on the Company’s assets and stockholder’s equity, operating and net loss and comprehensive loss. The evaluation of properties 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.

Goodwill

In the case of a business combination, after identifying all tangible and intangible assets and liabilities, the excess consideration paid over the fair value of the assets and liabilities acquired and assumed, respectively, represents goodwill. Goodwill that arose as a result of the Company’s mergers and acquisitions was recorded in the Company’s consolidated financial statements.

In the event the Company disposes of a property that constitutes a business under U.S. GAAP from a reporting unit with goodwill, the Company will allocate a portion of the reporting unit’s goodwill to that business in determining the gain or loss on the disposal of the business. The amount of goodwill allocated to the business will be based on the relative fair value of the business to the fair value of the reporting unit. The REI segment and Cole Capital each comprise one reporting unit.

The Company will evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value, by reporting unit, may not be recoverable. The Company’s annual testing date is during the fourth quarter. The Company will test goodwill for impairment by first comparing the book value of net assets to the fair value of each reporting unit. If the fair value is determined to be less than the book value or if qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company will estimate the fair value of the reporting units using discounted cash flows and relevant competitor multiples. The evaluation of goodwill 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. In conjunction with the disposition of the Multi-Tenant Portfolio, as defined in Note 22 — Property Dispositions, the Company evaluated the remaining portion of goodwill assigned to the REI segment for impairment. The fair value of the REI segment was determined to be greater than the book value of its net assets. As such, no goodwill impairment was recorded during the nine months ended September 30, 2014.

Subsequent to September 30, 2014, the Company noted potential impairment indicators of goodwill such that it is reasonably possible that the estimate of the fair value of each reporting unit may change in the near term, which will result in the need to record an impairment loss to reduce goodwill to fair value. Any such impairment losses may have a material impact on the Company’s assets and stockholder’s equity, operating and net loss and comprehensive loss.

 

28


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

The following summarizes the Company’s goodwill activity during the nine months ended September 30, 2014 by segment (in thousands):

 

     REI Segment      Cole Capital      Consolidated  

Balance as of January 1, 2014

   $ 92,789       $ —         $ 92,789   

Cole Merger (1)

     1,654,085         558,835         2,212,920   

Goodwill allocated to dispositions (2)

     (209,259      —           (209,259
  

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2014

$ 1,537,615    $ 558,835    $ 2,096,450   
  

 

 

    

 

 

    

 

 

 

 

(1) Goodwill recognized from the Cole Merger was assigned to the REI segment and Cole Capital based on the excess consideration paid over the fair value of the assets and liabilities acquired and assumed in each segment. Refer to Note 5 — Acquisitions of CapLease, Cole and CCPT for further discussion.
(2) Goodwill allocated to the cost basis of properties sold or classified as held for sale is included in loss on held for sale assets and disposition of properties, net, in the consolidated statement of operations.

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 offerings and reserves for any balances considered not collectible. No reserves were recorded as of September 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.

Acquisition Related Expenses and Merger and Other Non-routine Transaction Related Expenses

All direct costs incurred as a result of a business combination are classified as acquisition costs or merger and other non-routine transaction costs and expensed as incurred. In addition, indirect costs, such as internal salaries, that are tracked and documented in a manner that clearly indicate that the activities driving the cost directly relate to activities necessary to complete, or effect, a business combination are classified as acquisition related expenses. Similar costs incurred in relation to mergers with entities under common control (which are not accounted for as acquisitions) are included in the caption “merger and other non-routine transactions.” Acquisition related expenses include legal and other transaction related costs incurred in connection with self-originated acquisitions including purchases of portfolios. Other non-routine transaction costs are also presented within the line item merger and other non-routine transactions in the consolidated statements of operations.

 

29


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

Merger and other non-routine transaction related expenses include the following costs (amounts in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013
(As Corrected)
     2014      2013
(As Corrected)
 

Merger related costs:

           

Strategic advisory services

   $ 3,150       $ 750       $ 35,765       $ 12,549   

Transfer taxes

     —           —           5,109         1,085   

Legal fees and expenses

     579         2,052         5,126         5,242   

Personnel costs and other reimbursements

     —           348         751         987   

Multi-tenant spin-off

     2,270         —           7,450         —     

Other fees and expenses

     —           (52      1,676         5,408   

Other non-routine costs

           

Post-transaction support services

     —           1,200         14,251         3,200   

Subordinated distribution fees

     —           —           78,244         98,360   

Furniture, fixtures and equipment

     —           —           14,085         5,800   

Legal fees and expenses

     743         —           2,569         950   

Personnel costs and other reimbursements

     —           —           2,718         —     

Other fees and expenses

     890         3         7,608         153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 7,632    $ 4,301    $ 175,352    $ 133,734   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 20 — 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 6 — 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

ARCP 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, ARCP 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 ARCP 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 Operating Partnership is classified as a partnership for federal income tax purposes. As a partnership, the Operating Partnership is not a taxable entity for federal income tax purposes. Instead, each partner in the Operating Partnership is required to take into account its allocable share of the Operating Partnership’s income, gains, losses, deductions, and credits for each taxable year. However, the Operating Partnership may be subject to certain state and local taxes on its income and property.

 

30


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

As of September 30, 2014, the Operating Partnership, ARCP, ARCT III and ARCT IV had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended December 31, 2010 remain open to examination by the major taxing jurisdictions to which the Operating Partnership, ARCP, ARCT III and ARCT IV are subject.

Under the LPA, the Operating Partnership is to conduct business in such a manner as to permit ARCP at all times to qualify as a REIT.

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, it 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.

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.

In conjunction with the acquisition of the Red Lobster Portfolio, the Company entered into a reverse section 1031 like-kind exchange agreement with a third party intermediary. The exchange agreement is for a maximum of 180 days and allows the Company, for tax purposes, to defer gains on the sale of other properties sold within this period. Until the earlier of termination of the exchange agreements or 180 days after the first acquisition date, the third party intermediary is the legal owner of each property, although the Company controls the activities that most significantly impact each property and retains all of the economic benefits and risks associated with each property. Each property is held by the third party intermediary in a variable interest entity for which the Company is the primary beneficiary. Accordingly, the Company consolidates these properties and their operations even during the period they are held by the third party intermediary. As of September 30, 2014, 541 Red Lobster properties acquired in July and September of 2014 were held by the third party intermediary. The Company has consolidated each of these properties since the date of acquisition.

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 (“FASB”) 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. Beginning with the first quarter of 2014, the results of operations for all properties sold and properties classified as held for sale that do not meet the criteria to qualify as a discontinued operation and were not previously reported in discontinued operations in the Amended 10-K for the year ended December 31, 2013 are presented within income from continuing operations on the accompanying consolidated statements of income.

 

31


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), 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.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early application permitted. The Company does not believe ASU 2014-15, when effective, will have a material impact on the Company’s consolidated unaudited financial statements because the Company currently does not have any conditions that give rise to substantial doubt about its ability to continue as a going concern.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), which eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model. These changes will require re-evaluation of certain entities for consolidation and will require the Company to revise its documentation regarding the consolidation or deconsolidation of such entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and is to be applied retrospectively, with early adoption permitted. The Company is currently evaluating the impact of the new standard on its financial statements.

Note 5 — 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 13 — Other Debt and Note 14 — 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.

 

32


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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 revised estimated fair values of the assets acquired and liabilities assumed at the CapLease Acquisition Date (in thousands):

 

     Preliminary  
     Adjusted Amounts Recognized
as of the CapLease Acquisition
Date (1)
 

Fair value of consideration given

   $ 920,697   
  

 

 

 

Assets purchased, at fair value:

Land

  235,843   

Buildings, fixtures and improvements

  1,596,481   

Land and construction in process

  12,352   

Acquired intangible lease assets

  191,964   
  

 

 

 

Total real estate investments

  2,036,640   

Cash and cash equivalents

  41,799   

Investment securities

  60,730   

Loans held for investment

  26,457   

Restricted cash

  29,119   

Deferred costs and other assets, net

  21,574   
  

 

 

 

Total identifiable assets purchased

  2,216,319   
  

 

 

 

Liabilities assumed, at fair value:

Mortgage notes payable

  1,037,510   

Secured credit facility

  121,000   

Other debt

  114,208   

Below-market leases

  57,058   

Derivative liabilities

  158   

Accounts payable and accrued expenses

  49,291   

Deferred rent, derivative and other liabilities

  8,619   
  

 

 

 

Total liabilities assumed

  1,387,844   
  

 

 

 

Non-controlling interest retained by third party

  567   
  

 

 

 

Net identifiable assets acquired by Company

  827,908   
  

 

 

 

Goodwill

$ 92,789   
  

 

 

 

 

(1) As reported in the Amended 10-K.

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 non-controlling interest has been estimated based on the fair value at the acquisition date of the percentage ownership of The Woodlands, Texas development activity not held by the Company. See Note 7 — Real Estate Investments for further information on this development project.

 

33


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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 Amended 10-K for the year ended December 31, 2013.

Goodwill of approximately $92.8 million has been preliminarily assigned to the REI segment. 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 7 — Real Estate Investments are presented as if CapLease had been included in the consolidated results of the Company for the nine months ended September 30, 2014 and 2013.

Cole Acquisition

On February 7, 2014, the Company completed its acquisition of Cole, as discussed in Note 3 — 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

     7,285,868   
  

 

 

 

Total consideration transferred

$ 7,467,643   
  

 

 

 

The fair value of the 520.8 million shares of ARCP’s common stock issued, excluding those common shares transferred to former Cole executives, was determined based on the closing market price of ARCP’s common stock on the Cole Acquisition Date. In accordance with the LPA, the Operating Partnership issued a corresponding number of General Partner OP Units to ARCP when shares of ARCP’s common stock were issued to former stockholders of Cole.

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 September 30, 2014 are presented consolidated and by segments in the tables below.

 

34


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

The following table summarizes the revised estimated fair values of the assets acquired and liabilities assumed at the Cole Acquisition Date (in thousands):

 

     Preliminary  
     Adjusted Total as of
Cole Acquisition
Date
 

Identifiable Assets Acquired at Fair Value:

  

Land

   $ 1,737,839   

Buildings, fixtures and improvements

     5,901,827   

Acquired intangible lease assets

     1,324,217   
  

 

 

 

Total real estate investments

  8,963,883   

Investment in unconsolidated entities

  103,966   

Investment securities, at fair value

  151,197   

Loans held for investment, net

  72,326   

Cash and cash equivalents

  149,965   

Restricted cash

  15,704   

Intangible assets

  385,368   

Deferred costs and other assets

  94,667   

Due from affiliates

  3,301   
  

 

 

 

Total identifiable assets acquired

$ 9,940,377   
  

 

 

 

Identifiable Liabilities Assumed at Fair Value:

Mortgage notes payable, net

  2,706,585   

Credit facilities

  1,309,000   

Other debt

  49,013   

Below-market lease liabilities

  212,433   

Accounts payable and accrued expenses

  142,243   

Deferred rent, derivative and other liabilities

  235,299   

Dividends payable

  6,271   

Due to affiliates

  44   
  

 

 

 

Total liabilities assumed

  4,660,888   
  

 

 

 

Non-controlling interests

  24,766   

Net identifiable assets acquired

  5,254,723   

Goodwill

  2,212,920   
  

 

 

 

Net assets acquired

$ 7,467,643   
  

 

 

 

 

35


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

The following table summarizes the revised estimated fair values of the assets acquired and liabilities assumed for the REI segment as initially recorded at the Cole Acquisition Date (in thousands):

 

     Preliminary  
     REI Segment
(Adjusted)
 

Identifiable Assets Acquired at Fair Value:

  

Land

   $ 1,737,839   

Buildings, fixtures and improvements

     5,901,827   

Acquired intangible lease assets

     1,324,217   
  

 

 

 

Total real estate investments

  8,963,883   

Investment in unconsolidated entities

  100,659   

Investment securities, at fair value

  151,197   

Loans held for investment, net

  72,326   

Cash and cash equivalents

  129,552   

Restricted cash

  15,704   

Deferred costs and other assets

  43,774   
  

 

 

 

Total identifiable assets acquired

$ 9,477,095   
  

 

 

 

Identifiable Liabilities Assumed at Fair Value:

Mortgage notes payable, net

  2,706,585   

Credit facilities

  1,309,000   

Other debt

  49,013   

Below-market lease liabilities

  212,433   

Accounts payable and accrued expenses

  87,628   

Deferred rent, derivative and other liabilities

  67,841   

Dividends payable

  6,271   
  

 

 

 

Total liabilities assumed

  4,438,771   
  

 

 

 

Non-controlling interests

  24,766   
  

 

 

 

Net identifiable assets acquired

  5,013,558   

Goodwill

  1,654,085   
  

 

 

 

Net assets acquired

$ 6,667,643   
  

 

 

 

 

36


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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
(Adjusted)
 

Identifiable Assets Acquired at Fair Value:

  

Investment in unconsolidated entities

   $ 3,307   

Cash and cash equivalents

     20,413   

Intangible assets

     385,368   

Deferred costs and other assets

     50,893   

Due from affiliates

     3,301   
  

 

 

 

Total identifiable assets acquired

  463,282   
  

 

 

 

Identifiable Liabilities Assumed at Fair Value:

Accounts payable and accrued expenses

  54,615   

Deferred rent, derivative and other liabilities

  167,458   

Due to affiliates

  44   
  

 

 

 

Total liabilities assumed

  222,117   
  

 

 

 

Net identifiable assets acquired

  241,165   

Goodwill

  558,835   
  

 

 

 

Net assets acquired

$ 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 $62.3 million of amortization expense for the period from the Cole Acquisition Date to September 30, 2014. The estimated amortization expense for the remainder of the year ending December 31, 2014 is $24.3 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.

Subsequent to September 30, 2014, the Company noted potential impairment indicators of intangible assets acquired in the Cole Merger such that it is reasonably possible that the estimate of the fair value of such intangible assets may change in the near term, which will result in the need to record an impairment loss to reduce the intangible assets to fair value. Any such impairment losses may have a material impact on the Company’s assets and stockholder’s equity, operating and net loss and comprehensive loss.

Goodwill of approximately $1.7 billion has been preliminarily assigned to the REI segment. 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 $558.8 million has been preliminarily assigned to Cole Capital. 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/A for the year ended December 31, 2013.

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 September 30, 2014 was $625.8 million and $68.9 million respectively.

 

37


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

The pro forma consolidated statements of operations in Note 7 — Real Estate Investments are presented as if Cole had been included in the consolidated results of the Company for the entire periods ended September 30, 2014 and 2013.

CCPT Acquisition

On May 19, 2014, the Company completed its acquisition of CCPT, as discussed in Note 3 — 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   
  

 

 

 

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 Amended 10-K for the year ended December 31, 2013.

 

38


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

The amounts of revenue and net loss related to CCPT property acquisitions included in the accompanying consolidated statements of operations from the CCPT Acquisition Date to the period ended September 30, 2014 was $5.0 million and $2.3 million respectively.

Note 6 — 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. As of September 30, 2014, the Company owned 4,714 properties comprising 113.8 million square feet of single- and multi-tenant retail and commercial space located in 49 states and Canada, which include properties owned through consolidated joint ventures. The rentable space at these properties was 99.2% leased with a weighted average remaining lease term of 11.50 years. In addition, as of September 30, 2014, the Company owned 10 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.

On September 30, 2014, the Company entered into a definitive equity purchase agreement (the “Purchase Agreement”), to sell Cole Capital to RCAP, and, in conjunction with the sale agreement, entered into sub-advisory agreements to provide acquisition and property management services to Cole Capital subsequent to the closing of the transaction. These agreements were subsequently terminated by RCAP on November 3, 2014 as a result of the Audit Committee investigation into the Company. On December 4, 2014, a settlement agreement was reached as discussed within Note 24 — Subsequent Events.

 

39


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

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 operating segments. The following tables present a summary of the comparative financial results and total assets for each business segment (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013
(As Restated)¹
     2014      2013
(As Restated)¹
 

REI:

           

Rental income

   $ 365,712       $ 89,729       $ 924,646       $ 183,251   

Direct financing lease income

     625         1,201         2,812         1,201   

Operating expense reimbursements

     30,984         4,325         81,716         8,516   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate investment revenues

  397,321      95,255      1,009,174      192,968   
  

 

 

    

 

 

    

 

 

    

 

 

 

Acquisition related

  13,998      26,948      34,616      74,541   

Merger and other non-routine transactions

  7,613      4,301      173,406      133,734   

Property operating

  40,977      5,430      110,018      11,065   

Management fees to affiliate

  —        —        13,888      12,493   

General and administrative

  14,942      9,866      68,580      23,921   

Depreciation and amortization

  240,073      62,136      625,521      122,484   

Impairment of real estate

  2,299      2,074      3,855      2,074   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

  319,902      110,755      1,029,884      380,312   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

  77,419      (15,500   (20,710   (187,344
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense, net

  (101,643   (27,189   (326,491   (45,414

Extinguishment of debt, net

  (5,396   —        (21,264   —     

Other income, net

  8,508      136      16,799      2,658   

Loss on derivative instruments, net

  (17,484   (38,651   (10,398   (69,830

Loss on disposition of property

  (256,894   —        (275,768   —     

Gain (loss) on sale of investments

  6,357      (2,246   6,357      (1,795
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expenses, net

  (366,552   (67,950   (610,765   (114,381
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss from continuing operations

  (289,133   (83,450   (631,475   (301,725
  

 

 

    

 

 

    

 

 

    

 

 

 

Discontinued operations:

Income from operations of held for sale assets

  —        96      —        159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income from discontinued operations

  —        96      —        159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

$ (289,133 $ (83,354 $ (631,475 $ (301,566
  

 

 

    

 

 

    

 

 

    

 

 

 

Cole Capital:

Dealer manager and distribution fees, selling commissions and offering reimbursements

$ 21,535    $ —      $ 73,957    $ —     

Transaction service fees

  22,972      —        41,942      —     

Management fees and reimbursements

  15,290      —        35,377      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Cole Capital revenues

  59,797      —        151,276      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Cole Capital reallowed fees and commissions

  15,398      —        56,902      —     

General and administrative expenses

  17,265      —        60,131      —     

Merger and other non-routine transactions

  19      —        1,946      —     

Depreciation and amortization

  25,077      —        64,210      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

  57,759      —        183,189      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

  (952   —        12,903      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss from continuing operations

  1,086      —        (19,010   —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Discontinued operations:

Income from operations of held for sale assets

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

$ 1,086    $ —      $ (19,010 $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Company:

Total revenues

$ 457,118    $ 95,255    $ 1,160,450    $ 192,968   

Total operating expenses

$ 377,661    $ 110,755    $ 1,213,073    $ 380,312   

Total other expense

$ (367,504 $ (67,950 $ (597,862 $ (114,381

Loss from continuing operations

$ (288,047 $ (83,450 $ (650,485 $ (301,725

Income (loss) from discontinued operations

$ —      $ 96    $ —      $ 159   

Net loss

$ (288,047 $ (83,354 $ (650,485 $ (301,566

 

(1) For discussion of the restatement adjustments, see Note 2 — Restatement of Previously Issued Consolidated Financial Statements.

 

40


Table of Contents

AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited) – (Continued)

 

     Total Assets  
     September 30, 2014      December 31, 2013  

REI

   $ 21,834,806       $ 7,809,083   

Cole Capital

     1,032,777         —     
  

 

 

    

 

 

 

Total Company

$ 22,867,583    $ 7,809,083   
  

 

 

    

 

 

 

Note 7 — Real Estate Investments

Excluding the Cole Merger, the ARCT IV Merger and the CCPT Merger, the Company acquired interests in 1,092 commercial properties, including 28 land parcels, for an aggregate purchase price of $3.8 billion during the nine months ended September 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 assets acquired and liabilities assumed during the nine months ended September 30, 2014 are provisionally allocated. The following table presents the preliminary allocation of the fair value of the assets acquired and liabilities assumed during the periods presented (dollar amounts in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013
(As Restated)
     2014      2013
(As Restated)
 

Real estate investments, at cost: