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Section 1: 10-K (10-K)

ARCP 12.31.2014 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________
Commission file number: 001-35263 and 333-197780

AMERICAN REALTY CAPITAL PROPERTIES, INC.
ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
(Exact name of registrant as specified in its charter) 
Maryland (American Realty Capital Properties, Inc.)
 
45-2482685
Delaware (ARC Properties Operating Partnership, L.P.)
 
45-1255683
(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)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class:
Name of each exchange on which registered:
Common Stock, $0.01 par value per share (American Realty Capital Properties, Inc.)
NASDAQ Stock Market
Series F Preferred Stock, $0.01 par value per share (American Realty Capital Properties, Inc.)
NASDAQ Stock Market
 
 
 
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
 
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. American Realty Capital Properties, Inc. Yes o No x ARC Properties Operating Partnership, L.P. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. American Realty Capital Properties, Inc. Yes o No x ARC Properties Operating Partnership, L.P. Yes o No x
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. American Realty Capital Properties, Inc. Yes x No o ARC Properties Operating Partnership, L.P. Yes x No o
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). American Realty Capital Properties, Inc. Yes x No o ARC Properties Operating Partnership, L.P. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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.
American Realty Capital Properties, Inc.:
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
ARC Properties Operating Partnership, L.P.:
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
(Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). American Realty Capital Properties, Inc. Yes o No x ARC Properties Operating Partnership, L.P. Yes o No x
As of June 30, 2014, the aggregate market value of voting and non-voting common stock held by non-affiliates of American Realty Capital Properties, Inc. was $11.3 billion based on the closing sale price of $12.53 as reported on the NASDAQ Global Select Market on June 30, 2014. As of March 27, 2015, there were 905,193,685 shares of common stock outstanding. There is no public trading market for the units of limited partner interests of ARC Properties Operating Partnership, L.P. As a result, the aggregate market value of the common units held by non-affiliates of ARC Properties Operating Partnership, L.P. cannot be determined.




AMERICAN REALTY CAPITAL PROPERTIES, INC. AND
ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
For the fiscal year ended December 31, 2014

 
Page
 
 

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Forward-Looking Statements
Certain statements included herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent, belief or current expectations of American Realty Capital Properties, Inc. (“ARCP” or the “General Partner”), ARC Properties Operating Partnership, L.P. (the “OP” or the “Operating Partnership”) and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “targets,” “goals,” “projects,” “plans,” “intends,” “should,” variations of such words or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Any statements regarding ARCP’s or the OP’s future financial condition, results of operations and business are also forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
As used herein, the terms the “Company,” “we,” “our” and “us” refer to ARCP, a Maryland corporation, together with our consolidated subsidiaries, including the OP, a Delaware limited partnership of which we are the sole general partner. The “Former Manager” refers to ARC Properties Advisors, LLC, a Delaware limited liability company, our former external manager. “ARC” refers to AR Capital, LLC (formerly known as American Realty Capital II, LLC) and its affiliated companies, which formerly was our sponsor. During the years ended December 31, 2013 and 2012, we retained the Former Manager to manage our affairs on a day-to-day basis and, as a result, were generally externally managed, with the exception of certain acquisition, accounting and portfolio management services performed by our employees. We ceased to be externally managed on January 8, 2014.
The following are some of the assumptions, risks, uncertainties and other factors, although not all assumptions, risks, uncertainties and other factors, that could cause our actual results to differ materially from those presented in our forward-looking statements:
We encounter significant competition in the acquisition of properties and we may be unable to acquire properties on advantageous terms.
We are subject to risks associated with lease terminations, tenant defaults, bankruptcies and insolvencies and credit, geographic and industry concentrations with respect to tenants.
We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
We may not be able to effectively manage or dispose of assets acquired in connection with our Recent Acquisitions that do not fit within our target assets.
We may not be able to effectively integrate and manage our expanded portfolio and operations following our Recent Acquisitions.
We could be subject to unexpected costs or unexpected liabilities that may arise from our Recent Acquisitions.
Our properties may be subject to impairment charges.
We have substantial indebtedness, which may affect our ability to pay dividends, and expose us to interest rate fluctuations and the risk of default.
Our overall borrowing and operating flexibility may be adversely affected by the terms of our Amended Credit Agreement and the indentures governing our senior unsecured notes and convertible notes.
Our access to capital and terms of future financings may be adversely affected by our recent credit rating downgrade and loss of eligibility to register the offer and sale of our securities on Form S-3.
We may be affected by the incurrence of additional secured or unsecured debt.
We may not be able to achieve and maintain profitability.
We may be affected by risks associated with current and future litigation.
We may fail to remain qualified as a real estate investment trust for U.S. federal income tax purposes (“REIT”).
We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”) and thus subject to regulation under the Investment Company Act.
There can be no assurance as to when we will resume paying a dividend in respect of our and our OP’s respective common equity, or, when it is resumed, that it will be paid at a rate equal to or at the same frequency as our previously declared monthly dividend.
We may not generate cash flows sufficient to pay our dividends to stockholders, and therefore may be forced to borrow at higher rates to fund our dividends.

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We are subject to litigation and governmental investigations related to the findings of a recent Audit Committee investigation.
We have material weaknesses in our disclosure controls and procedures and our internal control over financial reporting and we may not be able to remediate such material weaknesses in a timely manner.
We may be unable to reestablish the financial network which supports Cole Capital and its Managed REITs and/or regain the prior transaction and capital raising volume of Cole Capital Corporation.
Our Cole Capital operations are subject to extensive governmental regulation.
We may not satisfy NASDAQ’s requirements for regaining compliance with its listing rules and, if so, NASDAQ could delist our common stock and Series F Preferred Stock.
We may be unable to retain or hire key personnel.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of this report.
We use certain defined terms throughout this document that have the following meanings:
Under a “net lease,” the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. There are various forms of net leases, most typically classified as triple net or double net. Triple net leases typically require the tenant to pay all costs associated with a property, including real estate taxes, insurance, utilities and routine maintenance, in addition to the base rent. Double net leases typically require the tenant to pay all the costs as triple net leases, but hold the landlord responsible for capital expenditures, including the repair or replacement of specific structural and/or bearing components of a property, such as the roof or structure of the building. Accordingly, the owner receives the rent “net” of these expenses, rendering the cash flow associated with the lease predictable for the term of the lease. Under a net lease, the tenant generally agrees to lease the property for a significant term and agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease.
Under a “modified gross lease,” the commercial enterprises occupying the leased property pay base rent plus a proportional share of some of the other costs associated with the property, such as property taxes, utilities, insurance and maintenance.
When we refer to a “creditworthy tenant,” we mean a tenant that has entered into a lease that we determine is creditworthy and may include tenants with an investment grade or below investment grade credit rating, as determined by major credit rating agencies, or unrated tenants. To the extent we determine that a tenant is a “creditworthy tenant” even though it does not have an investment grade credit rating, we do so based on our management’s determination that a tenant should have the financial wherewithal to honor its obligations under its lease with us. This determination is based on our management’s substantial experience closing net lease transactions and is made after evaluating all tenants’ due diligence materials that are made available to us, including financial statements and operating data.
When we refer to “annualized rental income,” we mean the rental income under our leases reflecting straight-line rent adjustments associated with contractual rent increases in the leases as required by generally accepted accounting principles in the United States (“U.S. GAAP”), which includes the effect of tenant concessions such as free rent, as applicable. When we refer to annualized rental income/net operating income (“NOI”) for net leases, we mean rental income on a straight-line basis, which includes the effect of tenant concessions such as free rent as applicable. For modified gross leased properties, NOI is rental income on a straight-line basis, which includes the effect of tenant concessions such as free rent, as applicable, plus operating expense reimbursement revenue less property expenses.
When we refer to properties that are net leased on a “long-term basis,” we mean properties with remaining primary lease terms of generally 10 years or longer on average.




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PART I
Item 1. Business.
Overview
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”). ARCP’s common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “ARCP.”
We operate through two business segments, Real Estate Investment (“REI”) and our private capital management business (“PCM”), Cole Capital® (“Cole Capital”), as further discussed in Note 5 – Segment Reporting. Through the REI segment, we acquire, own and operate single-tenant, freestanding, commercial real estate properties, primarily subject to long-term net leases with high credit quality tenants. We seek to acquire net lease assets by self-originating individual or small portfolio acquisitions, by executing sale-leaseback transactions, and in connection with build-to-suit or forward take-out opportunities, to the extent they are appropriate in terms of capitalization rate and scale. We have also advanced our investment objectives through strategic mergers and acquisitions. See Note 2 – Mergers and Significant Acquisitions and Sales to the consolidated financial statements in this report.
Cole Capital is contractually responsible for managing the affairs of the Managed REITs (as defined below) 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 receives compensation and reimbursement for services relating to these services.
Substantially all of our REI segment is conducted through the OP. We are the sole general partner and holder of 97.4% of the common equity interests in the OP as of December 31, 2014 with the remaining 2.6% common equity interests owned by certain unaffiliated investors. Under the limited partnership agreement of the OP (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 us, holders of OP Units have the right to redeem the OP Units for the cash value of a corresponding number of shares of our common stock or, at our option, as general partner of the OP, a corresponding number of shares of our common stock. The remaining rights of the holders of OP Units are limited, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP’s assets. Substantially all of the Cole Capital segment is conducted through Cole Capital Advisors, Inc. (“CCA”), an Arizona corporation and a wholly owned subsidiary of the OP. CCA is treated as a taxable REIT subsidiary (“TRS”) under Section 856 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).
Prior to January 8, 2014, we retained the Former Manager to manage our affairs on a day-to-day basis with the exception of certain acquisition, accounting and portfolio management services performed by our employees. In August 2013, our board of directors determined that it is in the best interests of us and our stockholders to become self-managed and we completed our transition to self-management on January 8, 2014. As of December 31, 2014, we had approximately 400 employees. For a discussion of certain transactions with the Former Manager in connection with our transition to self-management see Note 20 – Related Party Transactions and Arrangements to the consolidated financial statements.
As of December 31, 2014, we owned 4,648 properties consisting of 103.1 million square feet, which were 99.3% leased with a weighted-average remaining lease term of 11.8 years. In constructing our portfolio, we are committed to diversification by industry, tenant and geography. As of December 31, 2014, rental revenues derived from investment grade tenants and tenants affiliated with investment grade entities as determined by a major rating agency approximated 46.9% (we have attributed the rating of each parent company to its wholly owned subsidiary for purposes of this disclosure). Our strategy encompasses receiving the majority of our revenue from investment grade and creditworthy tenants as we further acquire properties and enter into or assume lease arrangements.
Recent Developments
Management and Board Changes
During the fourth quarter of 2014, the Company underwent a change in senior leadership as a result of the resignations of the Company’s Executive Chairman of the Board, Chief Executive Officer and director, President and Chief Operating Officer, Chief Financial Officer and Chief Accounting Officer. On October 28, 2014, the Company’s board of directors (the “Board of Directors”) appointed Michael J. Sodo as Chief Financial Officer and Gavin B. Brandon as Chief Accounting Officer. On December 15, 2014, William G. Stanley, who had been serving as the Company’s Lead Independent Director, became Interim Chairman of the Board and Interim Chief Executive Officer pending completion of the Board’s search, with the assistance of an independent search firm, for a new non-executive Chairman of the Board and a new permanent Chief Executive Officer.

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On March 10, 2015, the Company announced that the Board of Directors had appointed Glenn J. Rufrano to serve as the Company’s new Chief Executive Officer and a director, effective April 1, 2015. The Company also announced that, with the Restatement (as defined below) completed, the Company expecting to file this report by the end of March 2015 and the appointment of Mr. Rufrano, two of the Company’s directors, Leslie D. Michelson and Governor Edward G. Rendell, decided that it was the right time to step down from the Board of Directors, effective April 1, 2015, to make way for new directors. In addition to a non-executive Chairman of the Board, the Board of Directors is in the process of recruiting two other new independent directors, which will result in a seven-member board. The decision about renomination of the other existing directors for election at the 2015 annual meeting will be made by the disinterested members of the reconstituted board. Mr. Stanley will continue to serve as Interim Chairman of the Board until the appointment of the new non-executive Chairman of the Board.
Audit Committee Investigation and Restatement
On March 2, 2015, ARCP restated and amended its consolidated financial statements and related financial information as of and for the fiscal years ended December 31, 2013 and 2012 and the fiscal periods ended March 31, 2014 and 2013, June 30, 2014 and 2013 and September 30, 2013 and the OP restated and amended its consolidated financial statements and related financial information as of and for the fiscal years ended December 31, 2013 and 2012 and the fiscal periods ended June 30, 2014 and 2013 (collectively, the “Restatement”). The Restatement reflected the findings of an independent investigation conducted by the Audit Committee of the Board of Directors (the “Audit Committee”) into concerns regarding accounting practices and other matters that had first been reported to it on September 7, 2014 (the “Audit Committee Investigation”) as well as a review performed by the Company’s new management. For information concerning the findings of the Audit Committee Investigation, see the Explanatory Note at the beginning of any of the following reports, each filed as of March 2, 2015: Amendment No. 2 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013 or the Company’s Quarterly Report on Form 10-Q/A for the fiscal period ended March 31, 2014 or June 30, 2014.
Settlement of the Cole Capital Litigation
On September 30, 2014, an affiliate of the Company and RCS Capital Corporation (“RCAP”) entered into an equity purchase agreement (the “Cole Purchase Agreement”) pursuant to which RCAP agreed to purchase all of the Company’s outstanding equity interests in Cole Capital for $700.0 million plus an earn-out of up to an additional $130.0 million. On November 3, 2014, the Company received notice from RCAP purporting to terminate the Cole Purchase Agreement. On November 11, 2014, the Company filed litigation against RCAP in the Court of Chancery of the State of Delaware to enforce its rights under the Cole Purchase Agreement. On December 4, 2014, the Company announced that it had entered into a settlement agreement with RCAP that resolved their dispute relating to the Cole Purchase Agreement. The settlement included $42.7 million (inclusive of $10.0 million previously delivered) in cash paid by RCAP to the Company; a $15.3 million unsecured note issued by RCAP to the OP, which matures not later than March 31, 2017; and a release of the Company from a payment obligation in the amount of $2.0 million in favor of RCAP or its affiliates. In addition to the settlement, the Company and RCAP have agreed to terminate, unwind or otherwise discontinue agreements, arrangements and understandings between the two parties and any of their respective subsidiaries.
Recent Mergers and Portfolio Acquisitions and Sale
The following summarizes mergers and portfolio acquisitions (the “Recent Acquisitions”) and a major portfolio sale that have been consummated since January 1, 2014:
American Realty Capital Trust IV, Inc. Merger
On July 1, 2013, we entered into an Agreement and Plan of Merger, as amended on October 6, 2013 and October 11, 2013, (the “ARCT IV Merger Agreement”) with American Realty Capital Trust IV, Inc., a Maryland corporation (“ARCT IV”), and certain subsidiaries of each company. The ARCT IV Merger Agreement provided for the merger of ARCT IV with and into a subsidiary of the OP (the “ARCT IV Merger”). We consummated the ARCT IV Merger on January 3, 2014. See Note 2 – Mergers and Significant Acquisitions and Sales to the consolidated financial statements in this report for further discussion of the ARCT IV Merger.
ARCP 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 us and in 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 us prior to our transition to self-management on January 8, 2014. 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

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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 us to present historical financial information as if the entities were combined for all periods the entities were under common control. Therefore, the accompanying 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.
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 sold by 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. On January 8, 2014, the Company closed the acquisition of the remaining 79 properties in the Fortress Portfolio, for an aggregate contract purchase price of $400.9 million, exclusive of closing costs. The total purchase price of the Fortress Portfolio was $601.2 million, exclusive of closing costs.
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 $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 holding in the aggregate 33 properties (the “Inland Portfolio”) were allocated to the Company for a purchase price of $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 sold by Inland. As of December 31, 2014, the Company had closed on 32 of the 33 properties for a total purchase price of $288.2 million, exclusive of closing costs. The Company will not close on the remaining one property.
Cole Real Estate Investments, Inc. Merger
On October 22, 2013, ARCP and a wholly-owned subsidiary entered into an agreement and plan of merger (the “Cole Merger Agreement”) with Cole Real Estate Investments, Inc. (“Cole”), a publicly traded Maryland corporation. The Cole merger agreement provided for the merger of Cole with and into our wholly owned subsidiary (the “Cole Merger”). The Cole Merger was consummated on February 7, 2014. See Note 2 – Mergers and Significant Acquisitions and Sales to the consolidated financial statements in this report for further discussion of the Cole Merger.
Cole Credit Property Trust, Inc. Merger
On March 17, 2014, ARCP 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 CCPT Merger was consummated on May 19, 2014. See Note 2 – Mergers and Significant Acquisitions and Sales to the consolidated financial statements in this report for further discussion of the CCPT Merger.
Red Lobster Portfolio Acquisition
On May 15, 2014, we entered into a master purchase agreement to acquire over 500 properties, substantially all of which are operating as Red Lobster® restaurants from a third party. The transaction was structured as a sale-leaseback in which we purchased and immediately leased the portfolio back to the third party pursuant to the terms of multiple 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; Sale to Blackstone/DDR Joint Venture
On March 13, 2014, we announced our intention to spin off our multi-tenant shopping center business (the “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 MT 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 our common stock and every 10 OP Units held by third parties in the OP. On April 4, 2014, ARCM

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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 MT Spin-off, shares of ARCM received by holders of our common stock, or OP Units, as applicable, could freely trade their newly received ARCM common stock. ARCM was expected to be externally managed by us. On May 21, 2014, we announced that we had reassessed our plans for the multi-tenant shopping center portfolio and entered into a letter of intent to sell such portfolio to Blackstone Real Estate Partners VII L.P. (“Blackstone”), expecting to finalize pertinent documentation related thereto within 30 days of such date. The 64 multi-tenant properties and seven single-tenant properties (the “Multi-tenant Portfolio”) included in such sale were the same properties that would have been spun off into ARCM and, consequently, we abandoned our proposed spin-off at such time. On June 11, 2014, certain of our indirect subsidiaries entered into an agreement of purchase and sale with BRE DDR Retail Holdings III LLC (the “Blackstone/DDR Joint Venture”), an entity indirectly jointly owned by affiliates of Blackstone and DDR Corp. (“DDR”), pursuant to which the parties consummated the sale of our multi-tenant shopping center portfolio. On October 17, 2014, we completed the sale of the Multi-tenant Portfolio for $1.9 billion to the Blackstone/DDR Joint Venture. Additionally, we entered into a letter of intent with an unrelated third party to sell five multi-tenant properties for $52.3 million bringing total expected sale proceeds to $2.0 billion. The transaction aimed to simplify our REI business model, allowing us to focus solely on its single-tenant, net lease investments of $1.3 billion of net proceeds, of which $1.2 billion was used to reduce our leverage by paying down our line of credit and $542.8 million of secured mortgage debt was either repaid or assumed by the Blackstone/DDR Joint Venture. We reported a net loss on sale of $262.0 million, which includes the write-off of $195.5 million of goodwill allocated to the cost basis of the Multi-tenant Portfolio.
Transition to Self-Management
Prior to January 8, 2014, the Former Manager, a wholly owned subsidiary of ARC, managed our affairs on a day-to-day basis, with the exception of certain acquisition, accounting and portfolio management services performed by our employees. In August 2013, the Board of Directors determined that it was in the best interests of us and our stockholders to become self-managed, and we completed our transition to self-management on January 8, 2014. In connection with becoming self-managed, we terminated the existing management agreement with the Former Manager.
Under the termination agreement, the Former Manager agreed to provide services previously provided under the management agreement, to the extent required by ARCP, for a tail period of 60 days following January 8, 2014 in exchange for a payment in the amount of $10.0 million. In addition, pursuant to a separate transition services agreement, affiliates of the Former Manager agreed to provide certain transition services, including accounting support, acquisition support, investor relations support, public relations support, human resources and administration, general human resources duties, payroll services, benefits services, treasury, insurance and risk management, information technology, telecommunications and Internet and services relating to office supplies for a 60-day term, which was subject to extension by ARCP. For additional services as required by ARCP, ARCP paid an hourly rate or flat rate to be agreed on, that was not to exceed market rate. See Note 20 – Related Party Transactions and Arrangements to the consolidated financial statements in this report for further discussion.
Information relating to certain employment agreements and incentive compensation arrangments entered into in connection with the transition to self-management and subsequently terminated will be included in Part III of this report, which is expected to be filed by amendment prior to April 30, 2015.
Investment Policies
Our primary business objective is to generate a predictable level of monthly rents paid by primarily investment-grade rated and other creditworthy tenants under long-term leases. After consummation of the Recent Acquisitions discussed above, we own a portfolio that combines properties with stable income from creditworthy tenants with properties that we believe have strong fundamental business operations with the prospect for long-term sustainability. Our ongoing focus will be on actively managing our portfolio of high-quality, well located net leased properties diversified by tenant, industry and geography. We intend to strategically reinvest certain disposition proceeds into core, single-tenant net lease real estate that maintains or improves the quality of our portfolio while seeking self-originated investment opportunities. We expect this investment strategy to provide for stable income from our diverse portfolio creditworthy tenants and other tenants. We intend to pursue an investment strategy that maximizes current cash flow and achieves sustainable long-term growth. We expect to achieve these objectives by acquiring net leased properties that either (a) have in-place long-term net leases located in sub-markets with stable or improving market fundamentals or (b) provide a vital location or infrastructure that is essential to the business operations of the tenant.
Primary Investment Focus
Our REI business focuses on investing in single-tenant, freestanding, commercial real estate properties, primarily subject to long-term net leases with high credit quality tenants including retail, restaurants, office and distribution properties. We seek to invest in properties with tenants that reflect a diversity of industries, geographies and sizes. A significant majority of our net lease investments have been and will continue to be in properties net leased to investment grade-tenants, although at any particular time our portfolio may not reflect this. Our properties are primarily located in “Main & Main’’ locations in markets that we believe

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exhibit demographic and economic trends that will support growth. We believe the diversification of our portfolio reduces the risks associated with potential adverse events that may impact any one tenant, industry, asset type or location. We believe our scale will enable us to continue to make acquisitions without exposing ourselves to excessive concentration risk. Our strategy encompasses receiving the majority of our revenue from investment grade and creditworthy tenants as we further acquire properties and enter into (or assume) lease arrangements.
Under net lease arrangements, tenants enter into long-term leases and pay most of the costs associated with the property and limited day-to-day property management by us is required. As a result, net lease companies are generally able to increase their size and scale with minimal incremental expense. This enables us to take advantage of economies of scale resulting in significant operational efficiencies as we grow. We believe that our focus on net leases has also enabled us to achieve greater tenant and geographic diversification, more stable cash flows, increased liquidity and lower cost of capital.
Investing in Real Property
We invest, and expect to continue to invest, primarily in single-tenant, freestanding commercial real estate properties net leased to investment grade and creditworthy tenants. When evaluating prospective investments in real property, our management considers relevant real estate and financial factors, including the location of the property, the leases and other agreements affecting the property, the creditworthiness of major tenants, its income-producing capacity, its physical condition, its prospects for appreciation, its prospects for liquidity, tax considerations and other factors. In this regard, our management will have substantial discretion with respect to the selection of specific investments, subject to approval of the Board of Directors.
As of December 31, 2014, we owned 4,648 properties, primarily double-net lease and triple-net lease assets, across property types. As a percentage of rental income, as of December 31, 2014, retail and restaurant properties represented 62%, office properties represented 23% and distribution properties represented 15% of our total portfolio. Our portfolio is located across 49 states, the District of Columbia, Puerto Rico, and Canada. Our tenant base is comprised of 803 tenants, which include well-known national, as well as regional, companies across 42 industries.
The following table lists the tenant whose annualized rental income represented greater than 10% of consolidated annualized rental income, as of December 31, 2014 and 2013:
Tenant
 
2014
 
2013
Red Lobster
 
11.6%
 
*
_______________________________________________
* The tenants’ annualized rental income was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.
The following table lists the state where we have a concentration of properties in which annualized rental income represented greater than 10% of consolidated annualized rental income, on a straight-line basis, as of December 31, 2014 and 2013:
State
 
2014
 
2013
Texas
 
12.7%
 
10.7%
We do not have any specific policy as to the amount or percentage of our assets which will be invested in any specific property, other than the requirements under REIT qualification rules. We currently anticipate that our real estate investments will continue to be diversified in multiple net leased single-tenant properties and in multiple geographic markets.
Purchase and Sale of Investments
We may dispose of properties in the future and redeploy funds into new acquisitions that better align with our strategic objectives. Further, on a limited and opportunistic basis, we intend to acquire and promptly resell medium-term net lease assets for immediate gain. To the extent we engage in these activities, to avoid adverse U.S. federal income tax consequences, we generally must do so through a taxable REIT subsidiary (“TRS”). In general, a TRS is treated as a regular “C corporation” and therefore must pay corporate-level taxes on its taxable income. Thus, our yield on such activities will be reduced by such taxes borne by the TRS.
Investments in Real Estate Mortgages
While our current portfolio consists of, and our business objectives emphasize acquiring, owning and operating commercial real estate properties, we may, at the discretion of the Board of Directors and without a vote of our stockholders, invest in mortgages and other types of real estate interests consistent with our qualification as a REIT. We acquired $97.6 million of mortgage loans and $211.9 million of collateralized mortgage backed securities (“CMBS”) pursuant to the Cole Merger and merger with CapLease

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Inc. (“CapLease”), a Maryland corporation, and certain subsidiaries of each company on May 28, 2013 (the “CapLease Merger”). Investments in real estate mortgages run the risk that one or more borrowers may default under the mortgages and that the collateral securing those mortgages may not be sufficient to enable us to recoup our full investment. Investments in mortgages are also subject to our policy not to be treated as an “investment company” under the Investment Company Act.
Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
Subject to the asset tests and income tests necessary for REIT qualification, we may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers (including partnership interests, limited liability company interests, common stock and preferred stock), where such investment would be consistent with our investment objectives, including for the purpose of exercising control over such entities. There are no limitations on the amount or percentage of our total assets that may be invested in any one issuer, other than those imposed by the gross asset tests we must meet in order to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). We do not intend that our investments in securities will require us to register as an “investment company” under the Investment Company Act, and we would generally divest appropriate securities before any such registration would be required.
Build-to-Suit and Properties Under Development
We are also expanding our investment activities beyond the traditional investment in completed properties with tenants in occupancy and paying rents by exploring a build-to-suit program and the acquisition of properties under development. Through the build-to-suit program and acquisition of properties under development or that require substantial refurbishment or renovation, we seek to source investments at higher rates of return relative to completed projects. We believe that by entering into projects with established developer partners, we can provide the capital needed to get projects built, while at the same time securing long-term investment assets for our company at yields significantly higher than those available for completed properties.
Cole Capital® 
We acquired Cole Capital as part of our acquisition of Cole. Cole Capital sponsors and manages direct investment programs, which primarily include four publicly registered, non-traded REITs (the “Managed REITS”). Cole Capital is responsible for managing the day-to-day affairs of the Managed REITs, identifying and making acquisitions and investments on behalf of the Managed REITs, 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 U.S. Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority, Inc. (“FINRA”) and various blue sky jurisdictions for such offerings.
Joint Ventures
We may acquire or enter into joint ventures from time to time, if we determine that doing so would be the most cost-effective and efficient means of raising capital. Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness may be incurred in connection with acquiring investments. Any such financing or indebtedness will have priority over our equity interest in such property.
Financing Policies
We rely on leverage to allow us to invest in a greater number of assets and enhance our asset returns. We expect our leverage levels to decrease over time, as a result of one or more of the following factors: scheduled principal amortization on our debt and lower leverage on new asset acquisitions. We expect to continue to strengthen our balance sheet through debt repayment or repurchase and also opportunistically grow our portfolio through new property acquisitions.
We intend to finance future acquisitions with the most advantageous source of capital available to us at the time of the transaction, which may include a combination of public and private offerings of our equity and debt securities, secured and unsecured corporate-level debt, property-level debt and mortgage financing and other public, private or bank debt. In addition, we may acquire properties in exchange for the issuance of common stock or OP Units and in many cases we may acquire properties subject to existing mortgage indebtedness.
When we use mortgage financing, we generally seek to finance our properties with, or acquire properties subject to, long-term, fixed-rate, non-recourse debt, effectively locking in the spread we expect to generate on our properties and isolating the default risk to solely the properties financed. Through non-recourse debt, we seek to limit the overall company exposure in the

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event we default on the debt to the amount we have invested in the asset or assets financed. We seek to finance our assets with “match-funded” or substantially “match-funded” debt, meaning that we seek to obtain debt whose maturity matches as closely as possible the lease maturity of the asset financed. At December 31, 2014, our corporate leverage ratio (total debt outstanding less on-hand cash and cash equivalents divided by base purchase price of acquired properties) was 56.6%.
We also may obtain secured or unsecured debt to acquire properties, and we expect that our financing sources will include banks, institutional investment firms, including asset managers and life insurance companies. Although we intend to maintain a conservative capital structure, our charter does not contain a specific limitation on the amount of debt we may incur and the Board of Directors may implement or change target debt levels at any time without the approval of our stockholders.
For information relating to recent amendments to our credit agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.” We intend to continue to emphasize unsecured corporate-level or OP-level debt in our financing and to seek to reduce the percentage of our assets which are secured by mortgage loans.
Lending Policies
We do not have a policy limiting our ability to make loans to other persons, although we may be so limited by applicable law, such as the Sarbanes-Oxley Act. Subject to REIT qualification rules, we may make loans to unaffiliated third parties. For example, we may consider offering purchase money financing in connection with the disposition of properties in instances where the provision of that financing would increase the value to be received by us for the property sold. We do not expect to engage in any significant lending in the future. We may choose to guarantee debt of certain joint ventures with third parties. Consideration for those guarantees may include, but is not limited to, fees, long-term management contracts, options to acquire additional ownership interests and promoted equity positions. The Board of Directors may, in the future, adopt a formal lending policy without notice to or consent of our stockholders.
Dividend Policy
Until the completion of the Restatement and the filing of this report and in connection with the Amended Credit Agreement (as defined below), the Company agreed to suspend payment of dividends on its common stock until it complied with certain requirements set forth in such amendments. The Board of Directors is currently evaluating our dividend policy and expects to adopt a policy of paying a common stock dividend in line with our industry peers, while still meeting the minimum distribution requirement to maintain our status as a REIT, as discussed below.
We intend to continue to pay regular monthly dividends to holders of our Series F cumulative redeemable preferred stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income.
We have the ability to fund dividends from any source, including borrowing funds and using the proceeds of equity and debt offerings. Dividends made by us will be authorized by the Board of Directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and our capital requirements.
Tax Status
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, federal income taxes on certain income and excise taxes on its undistributed income.
The OP is classified as a partnership for federal income tax purposes. As a partnership, the OP is not a taxable entity for federal income tax purposes. Instead, each partner in the OP is required to take into account its allocable share of the OP’s income, gains, losses, deductions, and credits for each taxable year. However, the OP may be subject to certain state and local taxes on its income and property.
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 Canada, and as a result, it files income tax returns in the U.S. federal jurisdiction, Canadian federal

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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.
Competition
We are subject to competition in the acquisition of properties and intense competition in the leasing of our properties. We compete with a number of developers, owners and operators of retail, restaurant, industrial and office real estate, many of which own properties similar to ours in the same markets in which our properties are located, in the leasing of our properties. We also may face new competitors and, due to our focus on single-tenant properties located throughout the United States, and because many of our competitors are locally or regionally focused, we will not encounter the same competitors in each region of the United States.
Many of our competitors have greater financial and other resources and may have other advantages over us. Our competitors may be willing to accept lower returns on their investments and may succeed in buying the properties that we have targeted for acquisition. We may also incur costs on unsuccessful acquisitions that we will not be able to recover.
Regulations
Our investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all material permits and approvals necessary under current law to operate our investments.
Environmental Matters
Under various federal, state and local environmental laws, a current owner of real estate may be required to investigate and clean up contaminated property. Under these laws, courts and government agencies have the authority to impose cleanup responsibility and liability even if the owner did not know of and was not responsible for the contamination. For example, liability can be imposed upon us based on the activities of our tenants or a prior owner. In addition to the cost of the cleanup, environmental contamination on a property may adversely affect the value of the property and our ability to sell, rent or finance the property, and may adversely impact our investment in that property.
Prior to acquisition of a property, we will obtain Phase I environmental reports, or will rely on recent Phase I environmental reports. These reports will be prepared in accordance with an appropriate level of due diligence based on our standards and generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs and other information on past uses of the property and nearby or adjoining properties. We may also obtain a Phase II investigation which may include limited subsurface investigations and tests for substances of concern where the results of the Phase I environmental reports or other information indicates possible contamination or where our consultants recommend such procedures.
Employees
As of December 31, 2014, we had approximately 400 employees compared to 12 employees at December 31, 2013.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. However, net leases that require the tenant to pay its allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance may reduce our exposure to increases in costs and operating expenses resulting from inflation.
Available Information
We electronically file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, and proxy statements, with the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet address at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC may be obtained from the website maintained for us at www.arcpreit.com.

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Item 1A. Risk Factors.
This “Risk Factors” section contains references to our “capital stock” and to our “stockholders.” Unless expressly stated otherwise, the references to our “capital stock” represent our common stock and any class or series of our preferred stock, while the references to our “stockholders” represent holders of our common stock and any class or series of our preferred stock.
Risks Related to Recent Events
Following the announcement made by the Company on October 29, 2014 that certain of its financial statements could no longer be relied upon, various broker-dealers and clearing firms participating in offerings of Cole Capital’s Managed REITs suspended sales activity with Cole Capital, resulting in a significant decrease in capital raising activity and, consequently, a decline in the overall revenue generated by Cole Capital. While the Company has completed the Restatement and has become current in its filings with the SEC, there can be no assurance that Cole Capital will successfully or timely reengage some or all of the broker-dealers and clearing firms that formerly participated in its Managed REITs’ offerings and, therefore, the long-term capital raising activity and financial success of Cole Capital could be adversely affected.
Three of the four Managed REITs currently sponsored and managed by Cole Capital have ongoing initial public offerings and are early in their acquisitions stage, with a large amount of real estate acquisitions to come in the future if and, to the extent such Managed REITs raise additional capital in their respective initial public offerings. Following the October 29, 2014 announcement made by the Company that, based upon the preliminary findings of the Audit Committee Investigation, the Audit Committee had concluded that certain of the Company’s financial statements could no longer be relied upon, various broker-dealers and clearing firms which were participating in the initial public offerings of Cole Capital’s Managed REITs notified Cole Capital that for an indefinite period of time, they would not participate in such Managed REITs’ initial public offerings. Further, following such suspensions, Cole Capital experienced certain personnel departures.
Cole Capital generates revenue from capital raising activity and advisory activity, the latter of which is also contingent upon successful capital raising activity as each of the Managed REITs is a blind pool whose portfolio is largely built through the deployment of proceeds received in the respective Managed REIT’s initial public offering. Revenue generated from Cole Capital’s capital raising activity is received in the form of dealer manager fees, which are earned at the point of sale of the Managed REITs’ common stock and, therefore, a reduction in capital raising activity directly results in a reduction in such dealer manager fees. Additionally, Cole Capital receives one-time acquisition fees and ongoing advisory fees from its advisory activity. Acquisition fees are earned, in large part, when Cole Capital deploys raised capital from a Managed REIT’s initial public offering into real estate acquisitions. Cole Capital also receives advisory fees determined by the value of each Managed REIT’s total assets. An increase in assets under management, which occurs as the Managed REITs deploy more raised capital, results in increased advisory fees. If the Managed REITs receive little or no proceeds from their initial public offerings, Cole Capital will receive little or no acquisition fees and asset management fees will remain at their same levels as the Managed REITs’ portfolios experience little increase in value, if any. Additional fees may be earned by Cole Capital following the completion of a Managed REIT’s initial public offering and deployment of capital therefrom and, therefore, a slowdown in capital raising activity could delay or eliminate Cole Capital’s receipt of those additional fees. A description of Cole Capital’s fees is contained in Note 20 – Related Party Transactions and Arrangements to the consolidated financial statements in this report.
While the Company has completed the Restatement and become current in its filings with the SEC, there can be no assurance that any or all of the broker-dealers and clearing firms participating in the initial public offerings of Cole Capital’s Managed REITs will reengage with Cole Capital on a timely basis or at all and that Cole Capital will find suitable replacements for its recently departed personnel. If these circumstances continue for a prolonged period of time, capital raising activity at Cole Capital would be negatively affected, reducing overall fee generation at Cole Capital and, therefore, the overall financial success of Cole Capital and the Company could be adversely affected and have an adverse effect on our financial condition, results of operations and cash flows. During the year ended December 31, 2014, we recorded significant impairment charges relating to the intangible asset value associated with the dealer manager and advisory contracts of the Managed REITs. See Note 3 – Summary of Significant Accounting Policies to the consolidated financial statements in this report for discussion of impairment charges.
Government investigations relating to the findings of the Audit Committee Investigation may require significant management time and attention, result in significant legal expenses or damages and cause our business, financial condition, results of operations and cash flows to suffer.
On November 13, 2014, we received the first of two subpoenas relating to the findings of the Audit Committee Investigation from the staff of the SEC, each of which calls for the production of documents. On December 19, 2014, we received a subpoena from the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts. The U.S. Attorney’s Office for the Southern District of New York has contacted counsel for the Company and counsel for the Audit Committee. We and the Audit Committee are cooperating with these regulators in their investigations. The amount of time needed to resolve these investigations is uncertain, and we cannot predict the outcome of these investigations or whether we will face additional government

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investigations, inquiries or other actions related to the matters described in this filing. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees in connection with the ongoing governmental investigations and any future government inquiries, investigations or actions. These matters could require us to expend significant management time and incur significant legal and other expenses and could result in civil and criminal actions seeking, among other things, injunctions against us and the payment of significant fines and penalties by us, which could have a material adverse effect on our financial condition, business, results of operations and cash flow. If any of these governmental authorities were to commence legal action, we could be required to pay significant penalties and could become subject to injunctions, a cease and desist order and other equitable remedies. We can provide no assurance as to the outcome of any governmental investigation.
ARCP and certain of our current and former officers and directors have been named as defendants in various lawsuits and other proceedings related to the findings of the Audit Committee Investigation and those lawsuits and other proceedings may require significant management time and attention, result in significant legal expenses or damages, including indemnification obligations, and have a material adverse effect on our business, financial condition, results of operations and cash flows.
Between October 30, 2014 and January 20, 2015, the Company and its current and former officers and directors (along with others) were named as defendants in ten putative securities class action complaints in the United States District Court for the Southern District of New York. At a February 10, 2015 status conference, the court consolidated these actions and appointed a lead plaintiff. The consolidated case is captioned In re American Realty Capital Properties, Inc. Litigation, 1:15-mc-00040-AKH. The consolidated class action complaint asserts claims for violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 promulgated thereunder, arising out of allegedly false and misleading statements in connection with the purchase or sale of the Company’s securities. The proposed class period runs from May 6, 2013 to October 29, 2014. In light of certain additional disclosures made by the Company on March 2, 2015, lead plaintiff has indicated an intention to file an amended class action complaint. The court has set a deadline of April 17 for lead plaintiff to file its amended complaint, and set a deadline of May 29 for the defendants to respond to the amended complaint.
In addition, on November 25, 2014, an additional putative securities class action complaint was filed in the Circuit Court for Baltimore County, Maryland, which the Company removed to the United States District Court for the District of Maryland (Northern Division) on December 23, 2014 and seeks to have transferred to the Southern District of New York. This action asserts claims for violations of Sections 11 and 15 of the Securities Act of 1933, arising out of allegedly false and misleading statements made in connection with the Company’s securities issued in connection with the Cole Merger. The Company is not yet required to respond to this complaint.
Between November 17, 2014 and January 29, 2015, nine shareholder derivative actions, purportedly in the name and for the benefit of the Company, were filed against certain of the Company’s current and former officers and directors in the United States District Court for the Southern District of New York, the Circuit Court for Baltimore City, Maryland and the Supreme Court of the State of New York. On February 9, 2015 and February 20, 2015, three of the plaintiffs who filed actions in the New York federal court voluntarily dismissed those actions without prejudice. The remaining six actions seek money damages and other relief on behalf of the Company for, among other things, alleged breaches of fiduciary duty, abuse of control, gross mismanagement and unjust enrichment in connection with the alleged conduct underlying the claims asserted in the securities class actions negligence and breach of contract. On February 10, 2015 status conference, the court consolidated the SDNY Derivative Actions under the caption Serafin v. Schorsch, et al., No. 14-cv-9672 (AKH) (the “SDNY Consolidated Derivative Action”) and directed the plaintiffs to file a consolidated amended complaint by March 10, 2015.  On February 18, 2015, the parties to the New York Derivative Action entered into a stipulation setting a deadline of April 20, 2015 for the Company and defendants to respond to the complaint in the action.  On March 10, 2015, the plaintiffs in the SDNY Consolidated Derivative Action filed a consolidated amended complaint.  The Company and defendants are required to file motions to dismiss the consolidated amended complaint in the SDNY Consolidated Derivative Action by April 3, 2015.  On March 18, 2015, the parties to the Maryland Derivative Actions entered into a stipulation providing for, among other things, the consolidation of those actions. The plaintiffs and certain defendants in the Maryland state action have sought to consolidate those two actions, after which the plaintiffs intend to file a consolidated complaint.
On December 18, 2014, a former employee, Lisa McAlister, filed a defamation action against the Company and certain of its former officers and directors in the New York Supreme Court, captioned McAlister v. American Realty Capital Properties, Inc., et al., Index No. 162499/2014. On January 26, 2015, ARCP and defendants filed a motion to dismiss plaintiff’s complaint. Subsequently, Ms. McAlister voluntarily dismissed her complaint.
On January 7, 2015, Ms. McAlister also filed a complaint, No. 2-4173-15-016, with the Occupational Safety and Health Administration of the United States Department of Labor. Subsequently, Ms. McAlister voluntarily withdrew her complaint.

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On January 15, 2015, the Company and certain of its former directors and officers were named as defendants in an individual securities fraud action filed in the United States District Court for the Southern District of New York, captioned Jet Capital Master Fund, L.P. v. American Realty Capital Properties, Inc., et al., No. 15-cv-307 (AKH) (the “Jet Capital Action”).  The Jet Capital Action seeks money damages and asserts claims for alleged violations of Sections 10(b), 18 and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as common law fraud under New York law in connection with the purchase of the Company’s securities. At the request of the parties, the court has set a deadline of May 29 for the defendants to respond to the complaint.
On February 20, 2015, the Company, certain of its current and former directors and officers, and ARC Properties Operating Partnership L.P. (in addition to several other individuals and entities) were named as defendants in an individual securities fraud action filed in the United States District Court for the Southern District of New York, captioned Twin Securities, Inc. v. American Realty Capital Properties, Inc., et al., No. 15-cv-1291 (the “Twin Securities Action”). The Twin Securities Action seeks money damages and asserts claims for alleged violations of Sections 10(b), 14(a), 18, and 20(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 promulgated thereunder, Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as well as common law fraud under New York law in connection with the purchase of the Company’s securities. The Company is not yet required to respond to the complaint in the Twin Securities Action.
As a result of the various litigations described above, we may be obligated to advance legal expenses to and indemnify our current and former directors, officers and employees, as well as certain outside individuals and entities, including underwriters of prior securities offerings and directors of Cole Real Estate Investment, Inc. and ARCT IV. In addition, any of these lawsuits or other legal proceedings may require significant management time and attention, result in significant legal expenses or damages and have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
We have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. As previously disclosed in connection with the Restatements, the Company’s new management concluded that, as a result of certain material weaknesses at each evaluation date, the Company’s disclosure controls and procedures and internal control over financial reporting were not effective at December 31, 2013, March 31, 2014 June 30, 2014 or September 30, 2014. Although, during the fourth quarter of 2014, the Company’s prior senior management resigned and new management commenced taking remedial actions, the existing material weaknesses had not been remediated at December 31, 2014 and, accordingly, management concluded that our disclosure controls and procedures and our internal control over financial reporting were not effective at that date. See Item 9A “Controls and Procedures.”
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The Company is committed to remediating its material weaknesses as promptly as possible. Implementation of the Company’s remediation plans has commenced and is being overseen by the Audit Committee. However, there can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise in the future. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, could result in material misstatements in our financial statements and cause us to fail to meet our reporting and financial obligations, which in turn could have a material adverse effect on our financial condition and the trading price of our common stock.
We have not been in compliance with the requirements of NASDAQ for continued listing, and if NASDAQ does not concur that we have adequately remedied our non-compliance, our common stock may be delisted from trading on NASDAQ, which could have a material adverse effect on us and our shareholders.
We were delinquent in the filing of our Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2014 (the “Third Quarter 10-Q”) and this Annual Report on Form 10-K for the fiscal year ended December 31, 2014. As a result, we have not been in compliance with the listing rules of NASDAQ. On January 12, 2015, we submitted a compliance plan to NASDAQ and the staff at NASDAQ granted us an exception to file our Third Quarter 10-Q and any other delinquent SEC filings on or before April 15, 2015 in order to enable us to regain compliance with the listing rules. We filed our Third Quarter 10-Q with the SEC on March 2, 2015 and have now filed this Form 10-K. As a result, we currently believe that we have adequately remedied our non-compliance with NASDAQ’s listing rules within NASDAQ’s terms of exception. However, there can be no assurance that NASDAQ will concur that we have remedied our current non-compliance, in which case our common stock could remain subject to delisting

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by NASDAQ. Moreover, although we may be able to avail ourselves of a cure period, if the Board of Directors does not appoint additional independent directors on or before April 1, 2015, we will not be in compliance with NASDAQ rules requires that we have a majority of independent directors and a three-member Audit Committee. If our common stock were delisted, there can be no assurance whether or when it would again be listed for trading on NASDAQ or any other securities exchange. In addition, the market price of our shares might decline and become more volatile, and our shareholders might find that their investment in our shares has limited liquidity. Furthermore, institutions whose charters do not allow them to hold securities in unlisted companies might sell our shares, which could have a further adverse effect on the price of our stock.
Prior to the filing of this report and the provision of other required deliverables to the lenders under the credit facility, the amended credit agreement prohibited us and the OP from making distributions in respect of their respective common equity; although ARCP and the OP expect to this prohibition to end on the filing date of this report, there can be no assurance as to when or at what rate we and the OP will resume common equity distributions.
In connection with their entry into the Consent and Waiver (as defined below), ARCP and the OP agreed that, until such time as they had delivered the required financial statements and provided certain other financial deliverables to the lenders under the amended and restated credit agreement (the “Amended Credit Agreement”), ARCP and the OP would not make distribution payments in respect of our respective common equity. They expect this prohibition to end on the date of filing this report and providing this report and the other requisite deliverables to the lenders. However, there can be no assurance as to the timing of the declaration of their common stock distribution or the rate or frequency at which such distribution will be set and there can be no assurance that the rate at which they reinstate their common equity distributions will be consistent with the previous common equity distribution rate and frequency. Further, their ability to fund any future common equity distributions to be paid by ARCP and the OP to their respective common equity holders may be adversely affected by their recently reduced borrowing capacity under the Amended Credit Agreement.
The recent downgrades in our credit ratings by Standard & Poor’s and Moody’s could impact our access to capital and materially adversely affect our business and financial condition.
The credit ratings for our senior notes have been downgraded by Moody’s Investor Service, Inc. and Standard & Poor’s Rating Services to a non-investment grade credit rating and there can be no assurance that they will not be downgraded further. The current downgrade, and any further downgrade, could adversely affect the cost and availability of capital we can access, as well as the terms of any financing we obtain. Since we depend in part on debt financing to fund our growth, such an adverse change in our credit rating could have a material adverse effect on our financial condition, results of operations and liquidity, the trading price of the notes, and future growth and on transactions in which we must obtain debt capital at an advantageous cost. Credit ratings are not recommendations to purchase, hold or sell the notes. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure or marketing of the notes.
As a result of the delayed filing of our periodic reports with the SEC, we are not currently eligible to use a registration statement on Form S-3 to register the offer and sale of securities, which may adversely affect our ability to raise future capital or complete acquisitions.
We are not currently eligible to register the offer and sale of our securities using a registration statement on Form S-3 and we will not become eligible until we have timely filed certain periodic reports required under the Securities Exchange Act of 1934 for 12 consecutive calendar months. There can be no assurance when we will meet this requirement, which depends in part upon our ability to file our periodic reports on a timely basis in the future. Should we wish to register the offer and sale of our securities to the public before we are eligible to do so on Form S-3, our transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially having an adverse effect on our financial condition.
Risks Related to Our Properties and Operations
Our growth will partially depend upon our ability to successfully acquire future properties, and we may be unable to enter into and consummate property acquisitions on advantageous terms or our property acquisitions may not perform as we expect due to competitive conditions and other factors.
We acquire primarily freestanding, single-tenant properties net leased primarily to investment-grade and other credit tenants. The acquisition of properties entails various risks, including the risks that our investments may not perform as we expect, that we may be unable to quickly and efficiently integrate our new acquisitions into our existing operations and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate. Further, we expect to finance future acquisitions through a combination of borrowings under a credit facility with Wells Fargo, National Association, as administrative agent and other lenders party thereto (the “Credit Facility”), as amended, proceeds from equity or debt offerings by ARCP or the Operating Partnership or its subsidiaries and proceeds from property contributions and divestitures, which may not be available and which

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could adversely affect our cash flows. Any of the above risks could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.
In addition, our growth strategy includes the disciplined acquisition of properties as opportunities arise. Our ability to acquire properties on satisfactory terms and successfully integrate and operate them is subject to the following significant risks:
we may be unable to acquire desired properties because of competition from other real estate investors with more capital, including other real estate operating companies, REITs and investment funds, including the Managed REITs;
we may acquire properties that are not accretive to our results upon acquisition, and we may not successfully manage and lease those properties to meet our expectations;
competition from other potential acquirers may significantly increase the purchase price of a desired property;
we may be unable to generate sufficient cash from operations, or obtain the necessary debt or equity financing to consummate an acquisition or, if obtainable, financing may not be on satisfactory terms;
we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
agreements for the acquisition of properties are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations, and we may spend significant time and money on potential acquisitions that we do not consummate;
the process of acquiring or pursuing the acquisition of a new property may divert the attention of our management from our existing business operations;
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;
market conditions may result in future vacancies and lower-than-expected rental rates; and
we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as cleanup of environmental contamination, claims by tenants, vendors or other persons against the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.
If we cannot complete property acquisitions on favorable terms, or operate acquired properties to meet our goals or expectations, our business, financial condition, results of operations and cash flow, the per share trading price of our common stock, and our ability to satisfy our debt service obligations and to pay dividends to our stockholders could be materially adversely affected.
We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all, which could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for dividends to our stockholders, the per share trading price of our common stock and our ability to satisfy our debt service obligations.
Because we compete with a number of real estate operators in connection with the leasing of our properties, the possibility exists that one or more of our tenants will extend or renew its lease with us when the lease term expires on terms that are less favorable to us than the terms of the then-expiring lease, or that such tenant or tenants will not renew at all. Because we depend, in large part, on rental payments from our tenants, if one or more tenants renews its lease on terms less favorable to us, does not renew its lease or we do not re-lease a significant portion of the space made available due to vacancy, our financial condition, results of operations, cash flow, cash available for dividends to our stockholders, the per share trading price of our common stock and our ability to satisfy our debt service obligations could be materially adversely affected.
We are dependent on single-tenant leases for our revenue and, accordingly, lease terminations or tenant defaults could have a material adverse effect on our results of operations.
We focus our investment activities on ownership of freestanding, single-tenant commercial properties that are net leased to a single tenant. Therefore, the financial failure of, or other default in payment by, a single tenant under its lease is likely to cause a significant reduction in our operating cash flows from that property and a significant reduction in the value of the property, and could cause a significant reduction in our revenues. If a lease is terminated or defaulted on, we may experience difficulty or significant delay in re-leasing such property, or we may be unable to find a new tenant to re-lease the vacated space, which could result in us incurring a loss. To the extent that we have entered into a master lease with a particular tenant, the termination of such master lease could affect each property subject to the master lease, resulting in the loss of revenue from all such properties. Additionally, we would then be obligated to re-lease all of the locations previously subject to the master lease. Overall, the current economic conditions may put financial pressure on and increase the likelihood of the financial failure of, or other default in payment by, one or more of the tenants to whom we have exposure.

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The failure by any major tenant with leases in multiple locations to make rental payments to us, because of a deterioration of its financial condition or otherwise, or the termination or non-renewal of a lease by a major tenant, would have a material adverse effect on us.
Our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our tenants. While we evaluate the creditworthiness of our tenants by reviewing available financial and other pertinent information, there can be no assurance that any tenant will be able to make timely rental payments or avoid defaulting under its lease. At any time, our tenants may experience an adverse change in their business. For example, the downturn in the global economy that commenced in 2008 may have adversely affected, or may in the future adversely affect, one or more of our tenants. If any of our tenants’ businesses experience significant adverse changes, they may decline to extend or renew leases upon expiration, fail to make rental payments when due, close a number of stores, exercise early termination rights (to the extent such rights are available to the tenant) or declare bankruptcy. If a tenant defaults, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.
If any of the foregoing were to occur, it could result in the termination of the tenant’s leases and the loss of rental income attributable to the terminated leases. If a lease is terminated or defaulted on, we may be unable to find a new tenant to re-lease the vacated space at attractive rents or at all, which would have a material adverse effect on our results of operations and our financial condition. Furthermore, the consequences to us would be exacerbated if one of our major tenants were to experience an adverse development in its business that resulted in it being unable to make timely rental payments or to default under its lease. The occurrence of any of the situations described above would have a material adverse effect on our results of operations and our financial condition.
The acquisition of the Red Lobster Portfolio resulted in 11.6% of our annualized base rent as of December 31, 2014 being derived from a single tenant, which is a non-investment grade tenant that owns a business that has previously reported declines in revenues and other operational difficulties.
The acquisition of the Red Lobster Portfolio resulted in 11.6% of annualized base rent as of December 31, 2014 being derived from a single tenant, a wholly owned subsidiary of Golden Gate Capital. A downturn in the demand for casual restaurant dining generally or casual seafood dining at Red Lobster® restaurants specifically could adversely impact the ability of such tenant to satisfy its rent obligations. In addition, Red Lobster does not constitute an investment grade tenant and has reported declines in revenue. A default by such tenant could result in a material reduction in our cash flows or result in material losses in the value of our property portfolio.
If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
We have entered and may continue to enter into sale-leaseback transactions. In a sale-leaseback transaction, we purchase a property and then lease it back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our financial condition, cash flow and the amount available for distributions to our stockholders.
If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property and, as a result, would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property.
We are subject to tenant geographic concentrations that make us more susceptible to adverse events with respect to certain geographic areas.
We are subject to geographic concentrations, the most significant of which, as of December 31, 2014, are the following:
$175.3 million, or 12.7%, of our annualized rental income came from properties located in Texas;
$82.3 million, or 6.0%, of our annualized rental income came from properties located in Illinois;
$81.1 million, or 5.9%, of our annualized rental income came from properties located in Florida;
$75.7 million, or 5.5%, of our annualized rental income came from properties located in California; and
$67.9 million, or 4.9%, of our annualized rental income came from properties located in Georgia.

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Any downturn of the economies in one or more of these states, or in any other state in which we, may have a significant credit concentration in the future, could result in a material reduction of our cash flows or material losses to us.
Our net leases may require us to pay property-related expenses that are not the obligations of our tenants.
Under the terms of the majority of our net leases, in addition to satisfying their rent obligations, our tenants are responsible for the payment of real estate taxes, insurance and ordinary maintenance and repairs. However, under the provisions of certain existing leases and leases that we may enter into in the future with our tenants, we may be required to pay some expenses, such as the costs of environmental liabilities, roof and structural repairs, insurance, certain non-structural repairs and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations will be adversely affected and the amount of cash available to meet expenses and to pay dividends to holders of our capital stock may be reduced.
Net leases may not result in fair market lease rates over time, which could negatively impact our income and reduce the amount of funds available to make distributions to stockholders.
The vast majority of our rental income comes from net leases, which generally provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to freely sublease the property, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Furthermore, net leases typically have longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not enter into net leases.
Long-term leases with tenants may not result in fair value over time.
Long-term leases do not allow for significant changes in rental payments and do not expire in the near term. If we do not accurately judge the potential for increases in market rental rates when negotiating these long-term leases, significant increases in future property operating costs, to the extent not covered under the net leases, could result in us receiving less than fair value from these leases. These circumstances would adversely affect our revenues and funds available for distribution to our stockholders.
Any of our properties that incurs a vacancy could be difficult to sell or re-lease.
We have and may continue to experience vacancies either by the continued default of a tenant under its lease or the expiration of one of our leases. Certain of our properties may be specifically suited to the particular needs of a tenant (e.g., a retail bank branch or distribution warehouse) and major renovations and expenditures may be required in order for us to re-lease vacant space for other uses. We may have difficulty obtaining a new tenant for any vacant space we have in our properties, including our presently vacant property. If the vacancies continue for a long period of time, we may suffer reduced revenues, resulting in less cash available to be distributed to stockholders. In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.
Our properties may be subject to impairment charges.
We periodically evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and legal structure. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. Since our investment focus is on properties net leased to a single tenant, the financial failure of, or other default in payment by, a single tenant under its lease may result in a significant impairment loss. If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded. During the year ended December 31, 2014, we recorded significant property related impairment charges. See Note 3 – Summary of Significant Accounting Policies to the consolidated financial statements in this report for discussion of impairment charges.
Our real estate investments are relatively illiquid and therefore we may not be able to dispose of properties when appropriate or on favorable terms.
The real estate investments made, and to be made, by us are relatively difficult to sell quickly. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of a property. In addition, the Internal Revenue Code of 1986, as amended (the “Code”), imposes restrictions on the ability of a REIT to dispose of properties that are not applicable to other types of real estate companies. We may be unable to realize our investment objectives by disposition or refinancing of a property at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes

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in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions, and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located.
Our investments in properties backed by below investment grade credits will have a greater risk of default.
As of December 31, 2014, 53.1% of our annualized rental income is derived from tenants who do not have investment grade credit ratings from a major ratings agency or are not affiliates of companies having an investment grade credit rating. We also may invest in other properties in the future where the tenant is not rated or the tenant’s credit rating is below investment grade. These investments will have a greater risk of default and bankruptcy than investments in properties leased exclusively to investment grade tenants.
Our investments in properties where the underlying tenant does not have a publicly available credit rating will expose us to certain risks.
When we invest in properties where the underlying tenant does not have a publicly available credit rating, we will rely on our own estimates of the tenant’s credit rating. If our lender or a credit rating agency disagrees with our ratings estimates, or our ratings estimates are inaccurate, we may not be able to obtain our desired level of leverage or our financing costs may exceed those that we projected. This outcome could have an adverse impact on our returns on that asset and hence our operating results.
ARCP has a history of operating losses and cannot assure you that it will achieve profitability.
Since ARCP’s inception in 2010, ARCP has experienced net losses (calculated in accordance with GAAP) each fiscal year and, as of December 31, 2014, had an accumulated deficit of $2.8 billion. The extent of ARCP’s future operating losses and the timing of when ARCP will achieve profitability are uncertain, and depends on the demand for, and value of, ARCP’s portfolio of properties and ARCP may never achieve or sustain profitability.
Dividends paid from sources other than our cash flow from operations, particularly from proceeds of financings, will result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute stockholders’ interests in us, which may adversely affect our ability to fund future dividends with cash flow from operations and may adversely affect stockholders’ overall return.
Our cash flows provided by operations were $502.9 million for the year ended December 31, 2014. During the year we paid dividends of $920.3 million partially funded from cash flows from operations and through $3.3 billion from proceeds of financing activities, which exclude dividends paid. Additionally, we may in the future pay dividends from sources other than from our cash flow from operations.
We may not generate sufficient cash flow from operations to pay dividends. If we have not generated sufficient cash flow from our operations and other sources, such as from borrowings, and/or the sale of additional securities to fund distributions, we may use the proceeds from offerings of securities. We have not established any limit on the amount of proceeds from an offering that may be used to fund dividends, except that, in accordance with our organizational documents and Maryland law, we may not make dividend distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences; or (3) jeopardize our ability to qualify as a REIT.
If we fund dividends from the proceeds of offerings of securities, we will have less funds available for acquiring properties or other real estate-related investments. As a result, the return you realize on your investment may be reduced. Funding dividends from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding dividends with the sale of assets or the proceeds of offerings of securities may affect our ability to generate cash flows. Funding dividends from the sale of additional securities could dilute your interest in us if we sell shares of our common stock or securities convertible or exercisable into shares of our common stock to third party investors. Payment of dividends from these sources could restrict our ability to generate sufficient cash flow from operations, affect our profitability and/or affect the dividends payable to you upon a liquidity event, any or all of which may have an adverse effect on your investment.
We disclose Funds from Operations (“FFO”) and adjusted funds from operations (AFFO”), which are non-GAAP financial measures, including in documents filed with the SEC; however, FFO and AFFO are not equivalent to our net income or loss as determined under GAAP, and you should consider GAAP measures to be more relevant to our operating performance.
We use and disclose to investors FFO and AFFO, which are non-GAAP financial measures. See ’’Management’s Discussion and Analysis of Financial Condition and Results of Operations - Funds from Operations and Adjusted Funds from Operations.’’ FFO and AFFO are not equivalent to our net income or loss as determined in accordance with GAAP, and investors should consider GAAP measures to be more relevant to evaluating our operating performance. FFO and AFFO and GAAP net income differ because

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one or both of FFO and AFFO exclude gains and losses from the sale of property, plus depreciation and amortization, merger related and other non-routine transaction costs, acquisition-related fees and expenses and other non cash charges.
Because of the differences between FFO and AFFO and GAAP net income or loss, FFO and AFFO may not be accurate indicators of our operating performance, especially during periods in which we are acquiring properties. In addition, FFO and AFFO are not necessarily indicative of cash flow available to fund cash needs and investors should not consider FFO and AFFO as alternatives to cash flows from operations, as an indication of our liquidity, or as indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders.
Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO and AFFO. Also, because not all companies calculate FFO and AFFO the same way, comparisons with other companies may not be meaningful.
Operating expenses of our properties will reduce our cash flow and funds available for future distributions.
For certain of our properties, we are responsible for some or all of the operating costs of the property. In some of these instances, our leases require the tenant to reimburse us for all or a portion of these costs, either in the form of an expense reimbursement or increased rent. Our reimbursement may be limited to a fixed amount or a specified percentage annually. To the extent operating costs exceed our reimbursement, our returns and net cash flows from the property and hence our overall operating results and cash flows could be materially adversely affected.
We would face potential adverse effects from tenant defaults, bankruptcies or insolvencies.
The bankruptcy of our tenants may adversely affect the income generated by our properties. If our tenant files for bankruptcy, we generally cannot evict the tenant solely because of such bankruptcy. In addition, a bankruptcy court could authorize a bankrupt tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant would pay in full amounts it owes us under the lease. Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our cash flow and results of operations.
We have assumed, and expect in the future to continue to assume, liabilities in connection with our property acquisitions, including unknown liabilities.
We have assumed existing liabilities, some of which may have been unknown or unquantifiable at the time of the transaction, related to our formation transactions, the Recent Acquisitions and certain other property acquisitions, and expect in the future to continue to assume existing liabilities related to our property acquisitions. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of tenants or other persons dealing with the sellers prior to our acquisition of the properties, tax liabilities, employment-related issues, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. If the magnitude of such unknown liabilities is high, either singly or in the aggregate, they could adversely affect our business, financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to make distributions to our stockholders.
We face intense competition, which may decrease or prevent increases in the occupancy and rental rates of our properties.
We compete with numerous developers, owners and operators of retail, industrial and office real estate, many of which own properties similar to ours in the same markets in which our properties are located. If one of our properties becomes vacant and our competitors (which would include funds sponsored by us) offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer substantial rent abatements. As a result, our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay dividends to our stockholders may be adversely affected.
The value of our real estate investments is subject to risks associated with our real estate assets and with the real estate industry.
Our real estate investments are subject to various risks, fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for dividends, as well as the value of our properties. These events include, but are not limited to:
adverse changes in international, national or local economic and demographic conditions such as the recent global economic downturn;
vacancies or our inability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early termination rights or tenant-favorable renewal options;

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adverse changes in financial conditions of buyers, sellers and tenants of properties;
inability to collect rent from tenants;
competition from other real estate investors with significant capital, including other real estate operating companies, REITs and institutional investment funds;
reductions in the level of demand for commercial space generally, and freestanding net leased properties specifically, and changes in the relative popularity of our properties;
increases in the supply of freestanding single-tenant properties;
fluctuations in interest rates, which could adversely affect our ability, or the ability of buyers and tenants of our properties, to obtain financing on favorable terms or at all;
increases in expenses, including, but not limited to, insurance costs, labor costs, energy prices, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies, all of which have an adverse impact on the rent a tenant may be willing to pay us in order to lease one or more of our properties; and
changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the Americans with Disabilities Act of 1990.
In addition, periods of economic slowdown or recession, such as the recent global economic downturn, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If we cannot operate our properties to meet our financial expectations, our business, financial condition, results of operations and cash flow, the market price of our common stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders could be materially adversely affected.
A potential change in U.S. accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants, which could reduce overall demand for our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. Under capital lease accounting for a tenant, both the leased asset and liability are reflected on its balance sheet. If the lease does not meet any of the criteria for a capital lease, the lease is considered an operating lease by the tenant, and the obligation does not appear on the tenant’s balance sheet; rather, the contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus, entering into an operating lease can appear to enhance a tenant’s balance sheet in comparison to direct ownership. The Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board (the “IASB”) conducted a joint project to re-evaluate lease accounting. In August 2010, the FASB and the IASB jointly released exposure drafts of a proposed accounting model that would significantly change lease accounting. Based on comments received, a revised exposure was released in May 2013. Changes to the accounting guidance could affect both our accounting for leases as well as that of our current and potential tenants. These changes may affect how our real estate leasing business is conducted. For example, if the accounting standards regarding the financial statement classification of operating leases are revised, then companies may be less willing to enter into leases with us in general or desire to enter into leases with us with shorter terms because the apparent benefits to their balance sheets could be reduced or eliminated. This in turn could make it more difficult for us to enter into leases on terms we find favorable. After receiving extensive comments on the Exposure Drafts, the Boards are considering all feedback received and are re-deliberating all significant issues through 2015.
Risks Related to Financing
We will rely on external sources of capital to fund future capital needs, and if we encounter difficulty in obtaining such capital, we may not be able to make future acquisitions necessary to grow our business or meet maturing obligations.
In order to qualify as a REIT under the Code, we are required, among other things, to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. Because of this dividend requirement, we may not be able to fund, from cash retained from operations, all of our future capital needs, including capital needed to make investments and to satisfy or refinance maturing obligations.
We expect to rely on external sources of capital, including debt and equity financing, to fund future capital needs. However, the U.S. and global economic slowdown that commenced in 2008 has had an impact on the capital environment, characterized by limited availability, increasing costs and significant volatility. If we are unable to obtain needed capital on satisfactory terms or at all, we may not be able to make the investments needed to expand our business, or to meet our obligations and commitments as they mature.

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Any additional debt we incur will increase our leverage. Our access to capital will depend upon a number of factors over which we have little or no control, including:
 general market conditions;
the market’s perception of our growth potential;
our current debt levels;
our current and expected future earnings;
our cash flow and cash dividends; and
the market price per share of our common stock.
We may not be in a position to take advantage of attractive investment opportunities for growth if we are unable to access the capital markets on a timely basis on favorable terms.
Our ability to sell equity to expand our business will depend, in part, on the market price of our common stock, and our failure to meet market expectations with respect to our business could negatively affect the market price of our common stock and limit our ability to sell equity.
The availability of equity capital to us will depend, in part, on the market price of our common stock, which, in turn, will depend upon various market conditions and other factors that may change from time to time, including:
 the extent of investor interest, including the impact of recent events;
our ability to satisfy the dividend requirements applicable to REITs;
the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;
our financial performance and that of our tenants;
analyst reports about us and the REIT industry;
general stock and bond market conditions, including changes in interest rates on fixed-income securities, which may lead prospective purchasers of our common stock to demand a higher annual yield from future dividends;
a failure to maintain or increase our dividend, which is dependent, to a large part, on FFO, which, in turn, depends upon increased revenue from additional acquisitions and rental increases; and
other factors such as governmental regulatory action and changes in REIT tax laws.
Our failure to meet market expectations with regard to future earnings and cash dividends would likely adversely affect the market price of our common stock and, as a result, the availability of equity capital to us. See also “As a result of the delayed filing of our periodic reports with the SEC, we are not currently eligible to use a registration statement on Form S-3 to register the offer and sale of securities, which may adversely affect our ability to raise future capital or complete acquisitions.”
We have substantial amounts of indebtedness outstanding, which may affect our ability to make dividends, may expose us to interest rate fluctuation risk and may expose us to the risk of default under our debt obligations.
As of December 31, 2014, our aggregate indebtedness was $10.5 billion. We may incur significant additional debt for various purposes including, without limitation, the funding of future acquisitions, capital improvements and leasing commissions in connection with the repositioning of a property.
We intend to incur additional indebtedness in the future, including borrowings under our existing $3.6 billion Credit Facility. At December 31, 2014, we had $416.0 million undrawn commitments under the Credit Facility.
Payments of principal and interest on borrowings may leave us with insufficient cash resources to make the dividend payments necessary to maintain our REIT qualification. Our substantial outstanding indebtedness, and the limitations imposed on us by our debt agreements, could have other significant adverse consequences, including as follows:
our cash flow may be insufficient to meet our required principal and interest payments;
we may be unable to borrow additional funds as needed or on satisfactory terms, which could, among other things, adversely affect our ability to capitalize upon emerging acquisition opportunities or meet needs to fund capital improvements and leasing commissions;
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;
we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

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we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations;
certain of the property subsidiaries’ loan documents may include restrictions on such subsidiary’s ability to make dividends to us;
we may be unable to hedge floating-rate debt, counterparties may fail to honor their obligations under our hedge agreements, these agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge agreements, we would be exposed to then-existing market rates of interest and future interest rate volatility;
we may default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases;
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements;
requiring the use of a substantial portion of our cash flow from operations for the payment of principal and interest on indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements;
limiting our flexibility in planning for, or reacting to, changes in our business and industry; and
putting us at a disadvantage compared to our competitors with less indebtedness.
 If we default under a loan or indenture (including any default in respect of the financial maintenance and negative covenants contained in the Credit Facility), we may automatically be in default under any other loan or indenture that has cross-default provisions (including the Credit Facility), and further borrowings under the Credit Facility will be prohibited, outstanding indebtedness under the Credit Facility, our indenture or such other loans may be accelerated, and to the extent the Credit Facility, our indenture or such other loans are secured, directly or indirectly by any properties or assets, lenders or trustees under the Credit Facility, our indenture or such other loans may foreclose on the collateral securing such indebtedness as a result. In addition, increases in interest rates may impede our operating performance and put us at a competitive disadvantage. Further, payments of required debt service or amounts due at maturity, or creation of additional reserves under loan agreements or indentures, could adversely affect our financial condition and operating results.
If any one of these events were to occur, our business, financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to make dividends to our stockholders could be materially and adversely affected. In addition, any foreclosure on our properties could create taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the REIT dividend requirements imposed by the Code.
The indenture governing our senior notes and the Amended Credit Agreement contain restrictive covenants that limit our operating flexibility.
The indenture governing our senior notes and the Amended Credit Agreement require us to meet specified financial and operating covenants, including financial maintenance covenants with respect to maximum consolidated leverage ratio, maximum secured recourse indebtedness, minimum fixed charge coverage, minimum borrowing base interest coverage, maximum secured leverage, minimum tangible net worth and maximum variable rate indebtedness and borrowing base asset value ratio. In addition, the Amended Credit Agreement contains certain customary negative covenants that restrict the ability of our OP to incur secured and unsecured indebtedness. These covenants may restrict our ability to expand or fully pursue our business strategies or certain acquisition transactions. Further, pursuant to two amendments to the Amended Credit Agreement executed in the fourth quarter of 2014 following the announcements made by the Company on October 29, 2014 with respect to its financial statements, certain covenants and terms related thereto became more restrictive, including: a requirement that we maintain a minimum unencumbered asset value of $10.5 billion; the reduction of our overall borrowing capacity to $3.6 billion; and the removal of a “covenant holiday” upon our consummation of a material acquisition. Our ability to pay distributions could also be impacted by these restrictions.
Our ability to comply with these and other provisions of the indenture governing our senior notes and the Amended Credit Agreement may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments or other events adversely impacting us. Any failure to comply with these financial maintenance covenants and negative covenants would constitute a default under the Credit Facility and/or senior note indenture, as applicable and would prevent further borrowings under the Credit Facility, and could cause those and other obligations to become due and payable. If any of our indebtedness is accelerated, we may not be able to repay it.

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Our organizational documents have no limitation on the amount of indebtedness that we may incur. As a result, we may become highly leveraged in the future, which could adversely affect our financial condition.
Our business strategy contemplates the use of both secured and unsecured debt to finance long-term growth. While we intend to limit our indebtedness to maintain an overall net debt to gross asset value of approximately 45% to 55%, provided that we may exceed this amount for individual properties in select cases where attractive financing is available, our governing documents contain no limitations on the amount of debt that we may incur and the Amended Credit Agreement contains less strict limitations. Further, the Board of Directors may change our financing policy at any time without stockholder approval. As a result, we may be able to incur substantial additional debt, including secured debt, in the future, which could result in an increase in our debt service and harm our financial condition.
Increases in interest rates would increase our debt service costs, may adversely affect any future refinancing of our debt and our ability to incur additional debt, and could adversely affect our financial condition, cash flow and results of operations.
Certain of our borrowings bear interest at variable rates, and we may incur additional variable-rate debt in the future. Increases in interest rates would result in higher interest expenses on our existing unhedged variable rate debt, and increase the costs of refinancing existing debt or incurring new debt. Additionally, increases in interest rates may result in a decrease in the value of our real estate and decrease the market price of ARCP’s common stock and could accordingly adversely affect our financial condition, cash flow and results of operations.
We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness, and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash in the future. To a certain extent, our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors, many of which are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.
Additionally, if we incur additional indebtedness in connection with future acquisitions or development projects or for any other purpose, our debt service obligations could increase. We may need to refinance all or a portion of our indebtedness or before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
our financial condition and market conditions at the time; and
restrictions in the agreements governing our indebtedness.
As a result, we may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity, or delaying strategic acquisitions and alliances or capital expenditures, any of which could have a material adverse effect on our operations. We cannot assure you that we will be able to effect any of these actions on commercially reasonable terms, or at all.
Additional Risks Relating to our REI Segment
The continued recovery of real estate markets from the recent recession is dependent upon forecasted moderate economic growth which, if significantly slower than expected, could have a negative impact on the performance of our investment portfolio.
The U.S. economy is in its fifth year of recovery from a severe global recession. Based on moderate economic growth in the future, and historically low levels of new supply in the commercial real estate pipeline, a stronger recovery is forecasted for all property sectors over the next two years. Nevertheless, this ongoing economic recovery remains fragile, and could be slowed or halted by significant external events. As a result, real estate markets could perform lower than expected as a result of reduced tenant demand. A severe weakening of the economy or a renewed recession could also lead to higher tenancy default and vacancy rates, which could create an oversupply of rentable space, increased property concessions and tenant improvement expenditures and reduced rental rates to maintain occupancies. There can be no assurance that our real estate investments will not be adversely impacted by a severe slowing of the economy or renewed recession. Tenant defaults, fluctuations in interest rates, limited availability of capital and other economic conditions beyond our control could negatively impact our portfolio and decrease the value of your investment.

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Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and cash flows, and there can be no assurance as to future costs and the scope of coverage that may be available under insurance policies.
We carry comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of the properties in our portfolio under a blanket insurance policy with policy specifications, limits and deductibles customarily carried for similar properties. In addition, we carry professional liability and directors’ and officers’ insurance. We have selected policy specifications and insured limits that we believe are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for certain losses, including, but not limited to, losses caused by riots or war. Certain types of losses may be either uninsurable or not economically insurable, such as losses due to earthquakes, riots or acts of war. Should an uninsured loss occur, we could lose both our investment in and anticipated profits and cash flow from a property. If any such loss is insured, we may be required to pay a significant deductible on any claim for recovery of such a loss prior to our insurer being obligated to reimburse us for the loss, or the amount of the loss may exceed our coverage for the loss. In addition, future lenders may require such insurance, and our failure to obtain such insurance could constitute a default under our loan agreements. In addition, we may reduce or discontinue terrorism, earthquake, flood or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. Our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases. As a result, our business, financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to make dividends to our stockholders may be materially and adversely affected.
If we or one or more of our tenants experiences a loss that is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.
If any of our insurance carriers becomes insolvent, we could be adversely affected.
We carry several different lines of insurance, placed with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. Replacing insurance coverage at unfavorable rates and the potential of uncollectible claims due to carrier insolvency could adversely affect our results of operations and cash flows.
Terrorism and other factors affecting demand for our properties could harm our operating results.
The strength and profitability of our business depends on demand for and the value of our properties. Future terrorist attacks in the United States, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of terrorism or war could have a negative impact on our operations. Such terrorist attacks could have an adverse impact on our business even if they are not directed at our properties. In addition, the terrorist attacks of September 11, 2001 have substantially affected the availability and price of insurance coverage for certain types of damages or occurrences, and our insurance policies for terrorism include large deductibles and co-payments. The lack of sufficient insurance for these types of acts could expose us to significant losses and could have a negative impact on our operations.
We may be required to make significant capital expenditures to improve our properties in order to retain and attract tenants, causing a decline in operating revenue and reducing cash available for debt service and distributions to stockholders.
Upon expiration of leases at our properties, we may be required to make rent or other concessions to tenants, or accommodate requests for renovations, build-to-suit remodeling and other improvements. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire and to attract new tenants. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or capital is otherwise unavailable, we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which would result in declines in revenue from operations and reduce cash available for debt service and dividends to stockholders.
Difficult conditions in the commercial real estate markets may cause us to experience market losses related to our holdings, and these conditions may not improve in the near future.
Our results of operations are materially affected by conditions in the real estate markets, the financial markets and the economy generally and may cause commercial real estate values, including the values of our properties, and market rental rates, including rental rates that we are able to charge, to decline significantly. Recent economic and credit market conditions have contributed to increased volatility and diminished expectations for real estate markets, as well as adversely impacted inflation, energy costs, geopolitical issues and the availability and cost of credit, and may continue to do so going forward. The further deterioration of

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the real estate market may cause us to record losses on our assets, reduce the proceeds we receive upon sale or refinance of our assets or adversely impact our ability to lease our properties. Declines in the market values of our properties may adversely affect our results of operations and credit availability, which may reduce earnings and, in turn, cash available for dividends to our stockholders. Economic and credit market conditions may also cause one or more of the tenants to whom we have exposure to fail or default in their payment obligations, which could cause us to record material losses or a material reduction in our cash flows.
Because we own real property, we are subject to extensive environmental regulation, which creates uncertainty regarding future environmental expenditures and liabilities.
Environmental laws regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under various provisions of these laws, an owner or operator of real estate, such as us, is or may be liable for costs related to soil or groundwater contamination on, in, or migrating to or from its property. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site. Such laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these substances, or the failure to properly remediate them, may adversely affect our ability to sell or lease our property or to borrow using such property as collateral. In addition, persons exposed to hazardous or toxic substances may sue us for personal injury damages. For example, certain laws impose liability for release of or exposure to asbestos-containing materials and contamination from past operations or from off-site sources. As a result, in connection with our current or former ownership, operation, management and development of real properties, we may be potentially liable for investigation and cleanup costs, penalties, and damages under environmental laws.
Although all of our properties were, at the time they were acquired by our predecessor, subjected to preliminary environmental assessments, known as Phase I assessments, by independent environmental consultants that identify certain liabilities, Phase I assessments are limited in scope, and may not include or identify all potential environmental liabilities or risks associated with the property. Further, any environmental liabilities that arose since the date the studies were done would not be identified in the assessments. Unless required by applicable laws or regulations, we may not further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments.
We cannot assure you that these or other environmental studies identified all potential environmental liabilities, or that we will not incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to sell any affected properties.
We are subject to risks relating to mortgage, bridge or mezzanine loans.
Investing in mortgage, bridge or mezzanine loans involves risk of defaults on those loans caused by many conditions beyond our control, including local and other economic conditions affecting real estate values, interest rate changes, rezoning, and failure by the borrower to maintain the property. If there are defaults under these loans, we may not be able to repossess and sell quickly any properties securing such loans. An action to foreclose on a property securing a loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of any lawsuit brought in connection with the foreclosure if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the loan, which could reduce the value of our investment in the defaulted loan. In addition, investments in mezzanine loans involve a higher degree of risk than long-term senior mortgage loans secured by income-producing real property because the investment may become unsecured as a result of foreclosure on the underlying real property by the senior lender.
We are subject to risks relating to real estate-related securities in general.
Investments in real estate-related securities involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Issuers of real estate-related equity securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate-related investments discussed herein, including risks relating to rising interest rates.
Real estate-related securities are often unsecured and also may be subordinated to other obligations of the issuer. As a result, investments in real estate-related securities are subject to risks of (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities, (2) substantial market price volatility resulting from changes in prevailing interest rates in the case of traded equity securities, (3) subordination to the prior claims of banks and other senior lenders to the issuer, (4) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets, (5) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations and (6) the declining creditworthiness and potential for insolvency of the issuer

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during periods of rising interest rates and economic slowdown or downturn. These risks may adversely affect the value of outstanding real estate-related securities and the ability of the issuers thereof to repay principal and interest or make distribution payments.
We may not have the expertise necessary to maximize the return on our investment in real estate-related securities. If we determine that it is advantageous to us to make the types of investments in which we do not have experience, we intend to employ persons, engage consultants or partner with third parties that have, in our opinion, the relevant expertise necessary to assist us in evaluating, making and administering such investments.
We are subject to risks relating to CMBS.
CMBS are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, these securities are subject to all of the risks of the underlying mortgage loans. In a rising interest rate environment, the value of CMBS may be adversely affected when payments on underlying mortgages do not occur as anticipated, resulting in the extension of the security’s effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The value of CMBS may also change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities market as a whole. In addition, CMBS are subject to the credit risk associated with the performance of the underlying mortgage properties. CMBS are issued by investment banks, not financial institutions, and are not insured or guaranteed by the U.S. government.
CMBS are also subject to several risks created through the securitization process. Subordinate CMBS are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes delinquent loans, there is a risk that interest payments on subordinate CMBS will not be fully paid. Subordinate CMBS are also subject to greater credit risk than those CMBS that are more highly rated. In certain instances, third-party guarantees or other forms of credit support can reduce the credit risk.
The value of CMBS can be negatively impacted by any dislocation in the mortgage-backed securities market in general. Currently, the mortgage-backed securities market is suffering from a severe dislocation created by mortgage pools that include sub-prime mortgages secured by residential real estate. Sub-prime loans often have high interest rates and are often made to borrowers with credit scores that would not qualify them for prime conventional loans. In recent years, banks made a great number of the sub-prime residential mortgage loans with high interest rates, floating interest rates, interest rates that reset from time to time and/or interest-only payment features that expire over time. These terms, coupled with rising interest rates, have caused an increasing number of homeowners to default on their mortgages. Purchasers of mortgage-backed securities collateralized by mortgage pools that include risky sub-prime residential mortgages have experienced severe losses as a result of the defaults and such losses have had a negative impact on the CMBS market.
Our build-to-suit program is subject to additional risks related to properties under development.
Following our consummation of the Cole and CapLease Mergers, we began to engage in build-to-suit programs and acquisition of properties under development. In connection with these businesses, we enter into purchase and sale arrangements with sellers or developers of suitable properties under development or construction. In such cases, we are obligated to purchase the property at the completion of construction, provided that the construction conforms to definitive plans, specifications, and costs approved by us in advance. We may advance significant amounts in connection with certain development projects as well. We may continue this business.
As a result, we are subject to potential development risks and construction delays and the resultant increased costs and risks, as well as the risk of loss of certain amounts that we have advanced should a development project not be completed. If we engage in development or construction projects, we will be subject to uncertainties associated with re-zoning for development, environmental concerns of governmental entities and/or community groups, and the builder’s ability to build in conformity with plans, specifications, budgeted costs and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance may also be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks if we make periodic progress payments or other advances to builders before they complete construction. These and other such factors can result in increased project costs or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also will rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If these projections are inaccurate, we may pay too much for a property and our return on our investment could suffer. If we contract with a development company for newly developed properties, we anticipate that it will be obligated to pay a substantial earnest money deposit at the time of contracting to acquire such properties. In the case of properties to be developed by a development company, we anticipate that it will be required to close the purchase of the property upon completion of the development of the property. At the time of contracting and the payment of the earnest money deposit, the

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development company typically will not have acquired title to any real property and there is a risk that its earnest money deposit made to the development company may not be fully refunded.
Additional Risks Relating to our Cole Capital Segment
Cole Capital, which was acquired from Cole, is subject to risks that are particular to their role as sponsor and dealer manager for direct investment program offerings.
Cole Capital, including Cole Capital Corporation, which was Cole’s broker-dealer subsidiary and is a wholesale broker-dealer registered with the SEC and a member firm of FINRA, is subject to various risk and uncertainties that are common in the securities industry. Such risks and uncertainties include:
the volatility of financial markets;
extensive governmental regulation;
litigation; and
intense competition.
Cole Capital, which involves sponsoring and distributing interests in direct investment programs, will depend on a number of factors including our ability to enter into agreements with broker-dealers and independent investment advisors who will sell interests to their clients, our success in investing the proceeds of each offering, managing the properties acquired and generating cash flow to make distributions to investors in our direct investment programs and our success in entering into liquidity event for the direct investment programs. We are subject to competition from other sponsors and dealer managers of direct investment programs and other investments, and there can be no assurance that this business will be successful.
Sponsorship of non-traded REITs also involves risks relating to the possibility that such programs will not receive capital at the levels and timing that are anticipated and that sufficient capital will not be raised to repay investments of cash in, and loans to, such non-traded REITs needed to meet up-front costs, the initial breaking of escrow and the acquisition of properties will not be made, as well as risks relating to competition from other sponsors of other similar programs.
In addition, Cole Capital is subject to risks that are particular to its function as a wholesale broker-dealer and sponsoring non-traded REITs. For example, the broker-dealer provides substantial promotional support to broker-dealers selling a particular offering, including by providing sales literature, forums, webinars, press releases and other mass forms of communication. Due to Cole Capital acting as a sponsor of non-traded REITs and the volume of materials that Cole Capital Corporation may provide throughout the course of an offering, much of Cole Capital’s activities may be scrutinized by regulators. We and Cole Capital Corporation may be exposed to significant liability under federal and state securities laws. Additionally, Cole Capital Corporation may be subject to fines and suspension from the SEC and FINRA. For a description of recent developments that affected Cole Capital, see “Following the announcements made by the Company on October 29, 2014 that certain of its financial statements could no longer be relied upon, various broker-dealers and clearing firms participating in offerings of Cole Capital’s Managed REITs suspended sales activity with Cole Capital, resulting in a significant decrease in capital raising activity and, consequently, a decline in the overall revenue generated by Cole Capital. While the Company has completed its restatements and has become current in its filings with the SEC, there can be no assurance that Cole Capital will successfully or timely reengage all of the broker-dealers and clearing firms that participated in its Managed REITs’ offerings prior to the October 29, 2014 announcements and, therefore, the capital raising activity and long-term financial success of Cole Capital could be negatively affected.”
Failure to comply with the net capital requirements could subject us to sanctions imposed by the SEC or FINRA.
Our broker-dealer subsidiary is required to maintain certain levels of minimum net capital subject to the SEC’s net capital rule. The net capital rule is designed to measure the general financial integrity and liquidity of a broker-dealer. Compliance with the net capital rule limits those operations of broker-dealers that require the intensive use of their capital, such as underwriting commitments and principal trading activities. The rule also limits the ability of securities firms to pay dividends or make payments on certain indebtedness, such as subordinated debt, as it matures. FINRA may enter the offices of a broker-dealer at any time, without notice, and calculate the firm’s net capital. If the calculation reveals a deficiency in net capital, FINRA may immediately restrict or suspend certain or all the activities of a broker-dealer. Our broker-dealer subsidiary may not be able to maintain adequate net capital, or its net capital may fall below requirements established by the SEC, and it may be subject to disciplinary action in the form of fines, censure, suspension, expulsion or the termination of business altogether. In addition, if these net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited. A large operating loss or charge against net capital could adversely affect our broker-dealer’s ability to expand or even maintain its present levels of business, which could have a material adverse effect on its business of sponsoring and distributing interests in direct investment programs. In addition, our broker-dealer subsidiary may become subject to net capital requirements in other foreign jurisdictions in which it operates. We cannot predict its future capital needs or its ability to obtain additional financing.

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Broker-dealers and other financial services firms are subject to extensive regulations and increased scrutiny.
The financial services industry is subject to extensive regulation by U.S. federal, state and international government agencies, as well as various self-regulatory agencies. Recent turmoil in the financial markets has contributed to significant rule changes, heightened scrutiny of the conduct of financial services firms and increasing penalties for rule violations. Our broker-dealer subsidiary may be adversely affected by new laws or rules or changes in the interpretation of existing rules or more rigorous enforcement. Significant new rules are developing under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Some of these rules could impact our broker-dealer subsidiary’s business, including through the potential implementation of a more stringent fiduciary standard for brokers and enhanced regulatory oversight over incentive compensation.
Our broker-dealer subsidiary also may be adversely affected by other evolving regulatory standards, such as those relating to suitability and supervision. Legal claims or regulatory actions against our broker-dealer subsidiary also could have adverse financial effects on us or harm our reputation, which could harm our business prospects.
Our broker-dealer subsidiary, which is registered as a broker-dealer under the Exchange Act and is a member of FINRA, is subject to regulation, examination and supervision by the SEC, FINRA, other self-regulatory organizations and state securities regulators. Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales practices, use and safekeeping of clients’ funds and securities’ capital adequacy, record-keeping and the conduct and qualification of officers, employees and independent contractors. Failure by our broker-dealers to comply with applicable laws or regulations could result in censures, penalties or fines, the issuance of cease and desist orders, the suspension or expulsion from the securities industry of any such broker-dealer, or its officers, employees or independent contractors or other similar adverse consequences. Additionally, the adverse publicity arising from the imposition of sanctions could harm our reputation and cause us to lose existing clients or fail to gain new clients.
Financial services firms are also subject to rules and regulations relating to the prevention and detection of money laundering. The USA PATRIOT Act of 2001 mandates that financial institutions, including broker-dealers and investment advisors, establish and implement anti-money laundering (“AML”) programs reasonably designed to achieve compliance with the Bank Secrecy Act of 1970 and the rules thereunder. Financial services firms must maintain AML policies, procedures and controls, designate an AML compliance officer to oversee the firm’s AML program, implement appropriate employee training and provide for annual independent testing of the program. Our broker-dealer subsidiary has established AML programs but there can be no assurance of the effectiveness of these programs. Failure to comply with AML requirements could subject our broker-dealer subsidiary to disciplinary sanctions and other penalties. Financial services firms must also comply with applicable privacy and data protection laws and regulations, including SEC Regulation S-P and applicable provisions of the 1999 Gramm-Leach-Bliley Act, the Fair Credit Reporting Act of 1970 and the 2003 Fair and Accurate Credit Transactions Act. Any violations of laws and regulations relating to the safeguarding of private information could subject our broker-dealer subsidiary to fines and penalties, as well as to civil action by affected parties.
Risks Related to our Organization and Structure
We are a holding company with no direct operations. As a result, we rely on funds received from the Operating Partnership to pay liabilities and dividends, our stockholders’ claims will be structurally subordinated to all liabilities of the Operating Partnership and our stockholders do not have any voting rights with respect to the Operating Partnership’s activities, including the issuance of additional OP units.
We are a holding company and conduct all of our operations through the Operating Partnership. We do not have, apart from our ownership of the Operating Partnership, any independent operations. As a result, we rely on distributions from the Operating Partnership to pay any dividends we might declare on shares of our common stock. We also rely on distributions from the Operating Partnership to meet any of our obligations, including tax liability on taxable income allocated to us from the Operating Partnership (which might make distributions to us not equal to the tax on such allocated taxable income).
In addition, because we are a holding company, stockholders’ claims will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, claims of our stockholders will be satisfied only after all of our and the Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
As of December 31, 2014, we owned approximately 97.4% of the OP units in the Operating Partnership. However, the Operating Partnership may issue additional OP units in the future. Such issuances could reduce our ownership percentage in the Operating Partnership. Because our stockholders will not directly own any OP units, they will not have any voting rights with respect to any such issuances or other partnership-level activities of the Operating Partnership.

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Our charter and bylaws and Maryland law contain provisions that may delay or prevent a change of control transaction.
Our charter, subject to certain exceptions, limits any person to actual or constructive ownership of no more than 9.8% in value of the aggregate of our outstanding shares of stock and not more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. The Board of Directors, in its sole discretion and upon receipt of certain representations and undertakings, may exempt a person (prospectively or retroactively) from the ownership limits. However, the Board of Directors may not, among other limitations, grant an exemption from the ownership limits to any person whose ownership, direct or indirect, in excess of the 9.8% ownership limit would cause us to fail to qualify as a REIT. In addition, our charter provides that we may not consolidate, merge, sell all or substantially all of our assets or engage in a share exchange unless such actions are approved by the affirmative vote of at least two-thirds of the Board of Directors. The ownership limits and the other restrictions on ownership and transfer of our stock and the Board approval requirements contained in our charter may delay or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Further, certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of requiring a third party seeking to acquire us to negotiate with the Board of Directors, including:
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of our company who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and stockholder supermajority voting requirements on these combinations; and
“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
The Board of Directors previously adopted a resolution which exempted certain business combination transactions from the above requirements, as permitted by the MGCL. Such transactions would include combinations: (1) between us and any person, provided that such business combination is first approved by the Board of Directors (including a majority of directors who are not affiliates or associates of such person); and (2) between us and ARC, the Former Manager, the Operating Partnership or any of their respective affiliates. Consequently, the five-year prohibition and the supermajority vote requirements described above will not apply to such business combinations. However, if this resolution is repealed, or the Board of Directors does not otherwise approve a business combination with a person other than ARC, the Former Manager, the Operating Partnership or any of their respective affiliates, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Additionally, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, we may, by amendment to our bylaws, opt in to the control shares provisions of the MGCL in the future.
Finally, Title 3, Subtitle 8 of the MGCL permits the Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, such as a classified board, some of which we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then current market price. While we continue to consider these corporate governance matters, our governing documents and the MGCL provide the above-described protections against a change of control transaction, among others.
The Board of Directors may create and issue a class or series of common or preferred stock without stockholder approval.
The Board of Directors is empowered under our charter to amend our charter from time to time to increase or decrease the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue, to designate and issue from time to time one or more classes or series of stock and to classify or reclassify any unissued shares of our common stock or preferred stock without stockholder approval. The Board of Directors may determine the relative preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any class or series of stock issued. As a result, we may issue series or classes of stock with voting rights, rights to dividends or other rights, senior to the rights of holders of our capital stock. The issuance of any such stock could

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also have the effect of delaying or preventing a change of control transaction that might otherwise be in the best interests of our stockholders.
Certain provisions in the LPA may delay or prevent unsolicited acquisitions of us.
Certain provisions in the LPA may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:
redemption rights of qualifying parties;
transfer restrictions on the OP units;
the ability of the General Partner in some cases to amend the LPA without the consent of the limited partners;
the right of the limited partners to consent to transfers of the general partnership interest of the General Partner and mergers or consolidations of our company under specified limited circumstances; and
restrictions relating to our qualification as a REIT under the Code.
The LPA also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Tax protection provisions on certain properties could limit our operating flexibility.
We have agreed with the ARC Real Estate Partners, LLC, an affiliate of the Former Manager, to indemnify it against adverse tax consequences if we were to sell, convey, transfer or otherwise dispose of all or any portion of the interests in the continuing properties acquired by us in the formation transactions, in a taxable transaction. However, we can sell these properties in a taxable transaction if we pay ARC Real Estate Partners, LLC cash in the amount of its tax liabilities arising from the transaction and tax payments. These tax protection provisions apply until September 6, 2021, which is the 10th anniversary of the closing of our IPO. Although it may be in our stockholders’ best interest that we sell a property, it may be economically disadvantageous for us to do so because of these obligations. We have also agreed to make debt available for the Contributor to guarantee. We agreed to these provisions in order to assist the Contributor in preserving its tax position after its contribution of its interests in our initial properties. As a result, we may be required to incur and maintain more debt than we would otherwise.
The Company’s fiduciary duties as sole general partner of the Operating Partnership could create conflicts of interest.
The Company has fiduciary duties to the Operating Partnership and the limited partners in the Operating Partnership, the discharge of which may conflict with the interests of its stockholders. The LPA provides that, in the event of a conflict between the duties owed by the Company’s directors to the Company and the duties that the Company owes in its capacity as the sole general partner of the Operating Partnership to the Operating Partnership’s limited partners, the Company’s directors are under no obligation to give priority to the interests of such limited partners. As a holder of OP units, the Company will have the right to vote on certain amendments to the LPA (which require approval by a majority in interest of the limited partners, including the Company) and individually to approve certain amendments that would adversely affect their rights, as well as the right to vote on mergers and consolidations of the Company in its capacity as sole general partner of the Operating Partnership in certain limited circumstances. These voting rights may be exercised in a manner that conflicts with the interests of the Company’s stockholders. For example, the Company cannot adversely affect the limited partners’ rights to receive distributions, as set forth in the LPA, without their consent, even though modifying such rights might be in the best interest of the Company’s stockholders generally.
The Board of Directors may change significant corporate policies without stockholder approval.
Our investment, financing, borrowing and dividend policies and our policies with respect to other activities, including growth, debt, capitalization and operations, will be determined by the Board of Directors. These policies may be amended or revised at any time and from time to time at the discretion of the Board of Directors without a vote of our stockholders. In addition, the Board of Directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A change in these policies could have an adverse effect on our business, financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to make distributions to our stockholders.
We may not be able to maintain our competitive advantages if we are not able to attract and retain key personnel.
Our success depends to a significant extent on our ability to attract and retain key members of our executive team and staff. While we have taken steps to retain such key personnel, there can be no assurance that we will be able to retain the services of individuals whose knowledge and skills are important to our businesses. Our success also depends on our ability to prospectively attract, expand, integrate, train and retain qualified management personnel. Because the competition for qualified personnel is

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intense, costs related to compensation and retention could increase significantly in the future. Additionally, integration of the Recent Acquisitions can be disruptive and may lead to the departure of key employees. If we were to lose a sufficient number of our key employees and were unable to replace them in a reasonable period of time, these losses could seriously damage our business and adversely affect our results of operations.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and investor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations, business relationships or confidential information will not be negatively impacted by such an incident.
Risks Relating to the Recent Acquisitions
We could incur liability as a result of a lawsuit to which Cole is subject in connection with the merger between Cole and Cole Holdings Corporation (Cole Holdings), pursuant to which Cole became a self-managed REIT.
Three outstanding putative class action and/or derivative lawsuits, which were filed in early 2014, assert claims for breach of fiduciary duty, abuse of control, corporate waste, unjust enrichment, aiding and abetting breach of fiduciary duty and other claims relating to the merger between a wholly owned subsidiary of Cole and Cole Holdings, pursuant to which Cole became a self-managed REIT. The Court in one of the lawsuits has granted defendants’ motion to dismiss with prejudice, but the plaintiffs have filed a notice of appeal of this dismissal. The other two lawsuits, which also purport to assert claims under the Securities Act, are pending in the United States District Court for the District of Arizona. Defendants filed a motion to dismiss both complaints on January 10, 2014.
Whether or not any plaintiffs’ claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect our operations.
We could incur liability as a result of an adverse judgment in litigation challenging one or more of our Recent Acquisitions, including the Cole Merger, the CapLease Merger and the ARCT III Merger.
Stockholders of Cole have filed lawsuits and may file additional lawsuits challenging the Cole Merger, which name and may name ARCP as a defendant. To date, eleven such lawsuits have been filed. Two putative class actions have been filed in in the U.S. District Court of Arizona, captioned as: (i) Wunsch v. Cole Real Estate Investment, Inc., et al.; and (ii) Sobon v. Cole Real Estate Investments, Inc., et al. Eight other putative stockholder class action lawsuits have been filed in the Circuit Court for Baltimore City, Maryland, captioned as: (i) Operman v. Cole Real Estate Investments, Inc., et al.; (ii) Branham v. Cole Real Estate Investments, Inc., et al.; (iii) Wilfong v. Cole Real Estate Investments, Inc., et al.; (iv) Polage v. Cole Real Estate Investments, Inc., et al.; (v) Flynn v. Cole Real Estate Investments, Inc., et al.; (vi) Corwin v. Cole Real Estate Investments, Inc., et al.; (vii) Green v. Cole Real Estate Investments, Inc., et al.; and (viii) Morgan v. Cole Real Estate Investments, Inc., et al. (collectively, the ‘‘Baltimore Actions’’). All of these lawsuits name ARCP, Cole and the Cole board of directors as defendants. All of the named plaintiffs in the Baltimore Actions and the two actions filed in the U.S. District Court of Arizona claim to be Cole stockholders and purport to represent all holders of Cole’s common stock. Each complaint generally alleges that the individual defendants breached fiduciary duties owed to plaintiff, the other public stockholders of Cole and to Cole, and that certain entity defendants aided and abetted those breaches. In addition, certain lawsuits claim that the individual defendants breached their duty of candor to our stockholders and the Branham, Polage and Flynn lawsuits assert claims derivatively against the individual defendants for their alleged breach of fiduciary duties owed to Cole. The Polage lawsuit also asserts derivative claims for waste of corporate assets and unjust enrichment. The eight Baltimore Actions were consolidated on December 12, 2013. The Wunsch and Sobon lawsuits, which were consolidated by court order on January 17, 2014, also allege that the joint proxy statement filed in relation to the Cole Merger contains materially incomplete and misleading disclosures in violation of Sections 14(a) and 20(a) of the Exchange Act. Among other remedies, the complaints seek money damages, costs and attorneys’ fees.
On January 10, 2014, solely to avoid the costs, risks, and uncertainties inherent in litigation and without admitting any liability or wrongdoing, ARCP, Cole and the other named defendants in the Baltimore Actions entered into a memorandum of understanding

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with the plaintiffs in the Baltimore Actions to settle the cases. The memorandum of understanding contemplates that the parties will enter into a stipulation of settlement. On August 14, 2014, the parties in the Baltimore Actions executed a Stipulation and Release and Agreement of Compromise and Settlement (the “Settlement Stipulation”). The parties in the Baltimore Actions submitted the Settlement Stipulation, along with related filings, for approval by the Maryland court on August 18, 2014. On August 25, 2014, the Baltimore Court entered an Order on Preliminary Approval of Derivative and Class Action Settlement and Class Action Certification (the “Preliminary Approval Order”). Pursuant to the Preliminary Approval Order, the defendants mailed the Notice of Pendency of Derivative and Class Action (the “Class Notice”) to the Cole shareholders on October 7, 2014. On December 3, 2014, the parties in the Baltimore Actions executed an Amended Stipulation and Release and Agreement of Compromise and Settlement (the “Amended Stipulation”) modifying the Settlement Stipulation. A final settlement hearing in the Baltimore Actions was held on December 12, 2014, and on January 13, 2015, the Baltimore Court issued an order approving the settlement pursuant to the terms of the Amended Stipulation. Two objectors subsequently filed a notice of appeal of the settlement order. Following court approval of the settlement of the Baltimore Actions, the Wunsch case was dismissed voluntarily on January 21, 2015.
One additional putative class action has been filed in the Supreme Court of New York, captioned as: Realistic Partners v. Schorsch et al. (the ‘‘Realistic Partners Action’’). This lawsuit names ARCP, the ARCP board of directors and Cole as defendants. The named plaintiff claims to be an ARCP stockholder and purports to represent all holders of ARCP’s common stock. The complaint generally alleges that ARCP and the individual defendants breached a fiduciary duty of candor allegedly owed to plaintiff and to the other public stockholders of ARCP, and that Cole aided and abetted those breaches. On January 17, 2014, solely to avoid the costs, risks, and uncertainties inherent in litigation and without admitting any liability or wrongdoing, ARCP, Cole and the other named defendants in the Realistic Partners Action entered into a memorandum of understanding with the plaintiff in the Realistic Partners Action to settle the case. The memorandum of understanding contemplates that the parties will enter into a stipulation of settlement. The stipulation of settlement will be subject to customary conditions, including court approval following notice to ARCP’s and Cole’s stockholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled by the court to consider the fairness, reasonableness, and adequacy of the settlement. In the event the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the Cole Merger, the Cole Merger Agreement, and any disclosure made in connection therewith, among other claims, pursuant to terms that will be disclosed to stockholders prior to final approval of the settlement. In addition, in connection with the settlement, the parties contemplate that plaintiff’s counsel in the Realistic Partners Action will file a petition in the court for an award of attorneys’ fees and expenses to be paid by ARCP, which the defendants may oppose. ARCP will pay or cause to be paid any attorneys’ fees and expenses awarded by the court. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.
A number of lawsuits by CapLease’s stockholders have been filed challenging the CapLease Merger, some of which name ARCP and the OP as defendants. Additionally, a lawsuit was commenced on behalf of holders of certain series of CapLease’s preferred stock in connection with the CapLease Merger alleging that the conversion of such preferred stock pursuant to the terms of the CapLease Merger Agreement violated the Articles Supplementary classifying and designating such preferred stock.
After the announcement of the ARCT III Merger Agreement, Randell Quaal filed a putative class action lawsuit on January 30, 2013 against the Company, the OP, ARCT III, ARCT III OP, the members of the board of directors of ARCT III and certain subsidiaries of the Company in the Supreme Court of the State of New York. In February 2013, the parties agreed to a memorandum of understanding regarding settlement of all claims asserted on behalf of the alleged class of ARCT III stockholders. In connection with the settlement contemplated by the memorandum of understanding, the class action and all claims asserted therein will be dismissed, subject to court approval. If the parties enter into a stipulation of settlement, a hearing will be scheduled at which the court will consider the fairness, reasonableness and adequacy of the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of settlement, that the court will approve any proposed settlement, or that any eventual settlement will be under the same terms as those contemplated by the memorandum of understanding, therefore any losses that may be incurred to settle this matter are not determinable.
We cannot assure you as to the outcome of these lawsuits, including the costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims. Whether or not any plaintiffs’ claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect the operation of our business.
Our future results will suffer if we do not effectively manage our expanded portfolio and operations following the Recent Acquisitions.
Following the Recent Acquisitions, we have an expanded portfolio and operations and may continue to expand its operations through additional acquisitions and other strategic transactions, some of which may involve complex challenges. Our future success will depend, in part, upon our ability to manage our expansion opportunities, integrate new operations into our existing business

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in an efficient and timely manner, successfully monitor our operations, costs, regulatory compliance and service quality, and maintain other necessary internal controls. We cannot assure you that our expansion or acquisition opportunities will be successful, or that we will realize the expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.
ARCP may be unable to integrate the recently acquired GE Capital, Fortress, Red Lobster and Inland Portfolios into ARCP’s existing portfolio or CapLease’s, ARCT IV’s and Cole’s businesses with ARCP’s business successfully and realize the anticipated synergies and related benefits of such transactions and other pending acquisitions or do so within the anticipated timeframe.
ARCP’s consummation of the CapLease Merger, the ARCT IV Merger and the Cole Merger, involves the combination of companies that, prior to the consummation thereof, operated as independent companies. Additionally, ARCP recently acquired the GE Capital, Fortress, Red Lobster and Inland Portfolios. ARCP may be required to devote significant management attention and resources to integrating ARCP’s business practices and operations with those of CapLease, ARCT IV and Cole and the acquired GE Capital, Inland, Red Lobster and Fortress Portfolios. Potential difficulties ARCP may encounter in the integration process include the following:
the inability to successfully combine ARCP’s business with CapLease’s, ARCT IV’s or Cole’s business or the GE Capital, Inland and Fortress Portfolios into ARCP’s portfolio, in each case in a manner that permits the combined company to achieve the anticipated cost savings, which would result in the anticipated benefits of the mergers and acquisitions not being realized in the timeframe anticipated or at all;
the complexities associated with managing the combined business out of several different locations and integrating personnel from the two companies;
the additional complexities of combining companies with different histories, cultures, potential regulatory restrictions, markets and tenant bases;
the failure to retain ARCP’s key employees or those of CapLease or Cole;
the inability to divest certain ARCT IV, CapLease or Cole assets not fundamental to ARCP’s business;
potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the combinations; and
performance shortfalls as a result of the diversion of management’s attention caused by completing the mergers and acquisitions described above and integrating the operations related thereto.
For all these reasons, our stockholders should be aware that it is possible that the integration process following the Recent Acquisitions could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with tenants, vendors and employees or to achieve the anticipated benefits of such transactions, or could otherwise adversely affect the business and our financial results.
U.S. Federal Income and Other Tax Risks
Our failure to remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock.
We elected to be taxed as a REIT commencing with the taxable year ended December 31, 2011 and believe we have operated, and intend to operate, in a manner that has allowed us to have qualified as a REIT and will allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification if the Board of Directors determines that not qualifying as a REIT is in our best interests, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. We structured our activities in a manner designed to satisfy all requirements for qualification as a REIT. However, the REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Accordingly, we cannot be certain that we have been or will be successful in qualifying to be taxed as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could result in our disqualification as a REIT for past or future periods.
If we fail to qualify as a REIT for any taxable year and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In

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addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even with our REIT qualification, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to our stockholders.
Even with our REIT qualification, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Code) will be subject to a 100% tax. In addition, we may not make sufficient dividends to avoid income and excise taxes on retained income. We also may decide to retain net capital gain we earn from the sale or other disposition of our property or other assets and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated for federal income tax purposes as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We may, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of our operating partnership or at the level of the other companies through which we indirectly own our assets, such as TRSs, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to our stockholders.
To qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to U.S. federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which dividends we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these dividends or make taxable stock dividends. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders’ investments.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we generally will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including our operating partnership, but generally excluding our TRSs, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. While we qualify as a REIT, we intend to avoid the 100% prohibited transaction tax by (a) conducting activities that may otherwise be considered prohibited transactions through a TRS (but such TRS will incur corporate rate income taxes with respect to any income or gain recognized by it), (b) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary, will be treated as a prohibited transaction and/or (c) structuring certain dispositions of our properties to comply with the requirements of a prohibited transaction “safe harbor” available under the Code for properties that, among other requirements, have been held for at least two years. However, despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our operating partnership, but generally excluding our TRSs, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Our TRSs are subject to corporate-level taxes and our dealings with our TRSs may be subject to 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value

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of the stock will automatically be treated as a TRS. Overall, as of the end of each calendar quarter, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.
A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to advisory agreements with the Managed REITs. We may use TRSs generally to hold properties for sale in the ordinary course of business or to hold assets or conduct activities that we cannot conduct directly as a REIT. Our TRSs will be subject to applicable U.S. federal, state, local and foreign income tax on their taxable income. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to ensure that the TRS is subject to an appropriate level of corporate taxation. The rules which are applicable to us as a REIT also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.
If our operating partnership failed to qualify as a partnership or was not otherwise disregarded for U.S. federal income tax purposes, then we would cease to qualify as a REIT.
We intend to maintain the status of our operating partnership as a partnership for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of our operating partnership as a partnership for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our operating partnership could make to us. This would also result in our failing to qualify as a REIT, and becoming subject to a corporate-level tax on our income. This would substantially reduce our cash available to pay distributions and the yield on our stockholders’ investments. In addition, if one or more of the partnerships or limited liability companies through which our operating partnership owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, then it would be subject to taxation as a corporation, thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
We may choose to make distributions in our own stock, in which case stockholders may be required to pay U.S. federal income taxes in excess of the cash distributions stockholders receive.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with U.S. GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may make taxable stock distributions, such as distributions that are payable in cash and/or shares of our common stock at the election of each stockholder. Taxable stockholders receiving taxable stock distributions will be required to include the amount of such distributions (i.e., the value of the stock received plus the amount of any cash received) as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock.
Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.
The taxation of distributions to our stockholders can be complex; however, dividends that we make to our stockholders generally will be taxable as ordinary income.
Dividends that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. However, a portion of our dividends may (1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us as qualified dividend income generally to the extent they are attributable to dividends we receive from our TRSs, or (3) constitute a nondividend distribution generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A nondividend distribution is not taxable to the extent of a stockholder’s adjusted basis in our common stock, but instead has the effect of reducing such adjusted basis, but not below zero, in our common stock. Any nondividend distribution in excess of a stockholder’s adjusted

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basis in our common stock, will be taxed to such stockholder as long term capital gain if such stockholder held our common shares for more than one year, or short term capital gain, if the shares of our stock have been held for one year or less.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum federal tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20% (not including the net investment income tax). Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock. Tax rates could be changed in future legislation.
If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with U.S. GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be “preferential dividends.” A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. Currently, there is uncertainty as to the IRS’s position regarding whether certain arrangements that REITs have with their stockholders could give rise to the inadvertent payment of a preferential dividend (e.g., the pricing methodology for stock purchased under a distribution reinvestment plan inadvertently causing a greater than 5% discount on the price of such stock purchased). While we believe that our operations have been structured in such a manner that we will not be treated as inadvertently paying preferential dividends, there is no de minimis or reasonable cause exception with respect to preferential dividends under the Code. Therefore, if the IRS were to take the position that we inadvertently paid a preferential dividend, we may be deemed either to (a) have distributed less than 100% of our REIT taxable income and be subject to tax on the undistributed portion, or (b) have distributed less than 90% of our REIT taxable income and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of one or both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities, qualified real estate assets and stock of a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, qualified real estate assets and stock of a TRS) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

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The ability of the Board of Directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce dividends to our stockholders.
Our charter provides that the Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. While we elected to be taxed as a REIT, we may terminate our REIT election if we determine that qualifying as a REIT is no longer in the best interests of our stockholders. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the market price of our common stock.
We may incur adverse tax consequences if ARCT III, CapLease, ARCT IV or Cole has failed qualify as a REIT for U.S. federal income tax purposes.
If ARCT III, CapLease, ARCT IV or Cole has failed to qualify as a REIT for U.S. federal income tax purposes at any time prior to the ARCT III Merger, the CapLease Merger, the ARCT IV Merger and the Cole Merger, respectively, we may inherit significant tax liabilities and could fail to qualify as a REIT should disqualifying activities continue after the mergers.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common stock.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their tax advisor with respect to the impact of recent legislation on their investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a regular corporation. As a result, our charter provides the Board of Directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. The Board of Directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help insure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by the Board of Directors, for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8% in value of the aggregate of our outstanding shares of stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. The Board of Directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if the Board of Directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

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Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on dividends received from us and upon the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as, and to the extent, may be specified by an applicable income tax treaty, unless the dividends are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, distributions attributable to sales or exchanges of “U.S. real property interests,” or USRPIs, by us generally will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a U.S. trade or business. However, a distribution of USRPI gain will not be treated as effectively connected income if (a) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States; and (b) the non-U.S. stockholder does not own more than 5% of the class of our stock at any time during the one year period ending on the date of such distribution. We anticipate that our shares will be “regularly traded” on an established securities market for the foreseeable future, although, no assurance can be given that this will be the case.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI under FIRPTA. Our common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe that we are a domestically-controlled qualified investment entity. However, because our common stock is and will be publicly traded, no assurance can be given that we are or will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our common stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 5% or less of our common stock at any time during the five-year period ending on the date of the sale. We encourage our stockholders to consult their tax advisor to determine the tax consequences applicable to them if they are non-U.S. stockholders.
Dividends or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (a) we are a “pension-held REIT,” (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock, or (c) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code. We encourage our stockholders to consult their tax advisor to determine the tax consequences applicable to them if they are tax-exempt stockholders.
Even if we qualify as a REIT for federal income tax purposes and incur no federal corporate or excise taxes on our federal taxable income, we may still be subject to various taxes in the state, local and foreign taxing jurisdictions in which we directly or indirectly own properties or otherwise conduct business.
Not all taxing jurisdictions recognize the favorable tax treatment afforded to REITs under the Code. As such, we may be subject to regular corporate net income taxes in certain state, local or foreign taxing jurisdictions. In addition, we, the Operating Partnership, our TRSs, and/or other entities through which we conduct our business may also be subject to state, local or foreign income, franchise, sales, transfer, excise or other taxes. Any taxes that we incur directly or indirectly will reduce our cash available for distribution to our stockholders. Additionally, changes in state, local or foreign tax law could reduce the cash flow from certain investments made by us and could make such investments less attractive to potential buyers when we seek to liquidate such investments.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
General
As of December 31, 2014, we owned 4,648 properties, comprised of 103.1 million square feet and located in 49 states, the District of Columbia, Puerto Rico, and Canada. Our properties were 99.3% occupied with a weighted-average remaining lease term of 11.8 years as of December 31, 2014.

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Industry Distribution
The following table details the industry distribution of our portfolio as of December 31, 2014 (dollars in thousands):
Industry
 
Number of Leases
 
Square Feet
 
Square Feet as a % of Total Portfolio
 
Annualized Rental Income
 
Annualized Rental Income as a % of Total Portfolio
Accommodation & Food Services
 
1

 
9,513

 
%
 
$
228

 
%
Administrative & Support Services
 
5

 
430,227

 
0.4
%
 
4,054

 
0.3
%
Agricultural
 
2

 
137,520

 
0.1
%
 
1,245

 
0.1
%
Billboard
 
5

 

 
%
 
53

 
%
Construction
 
1

 
27,115

 
%
 
344

 
%
Education
 
5

 
1,887,164

 
1.8
%
 
20,763

 
1.5
%
Entertainment & Recreation
 
23

 
850,981

 
0.8
%
 
15,752

 
1.1
%
Finance
 
309

 
3,086,515

 
3.0
%
 
65,965

 
4.8
%
Government & Public Services
 
31

 
1,275,972

 
1.2
%
 
30,995

 
2.3
%
Healthcare
 
82

 
1,662,903

 
1.6
%
 
30,246

 
2.2
%
Information & Communications
 
17

 
1,507,709

 
1.5
%
 
27,289

 
2.0
%
Insurance
 
20

 
2,163,389

 
2.1
%
 
40,764

 
3.0
%
License Agreement
 
8

 

 
%
 
8

 
%
Logistics
 
63

 
4,800,451

 
4.7
%
 
41,507

 
3.0
%
Manufacturing
 
69

 
19,428,581

 
18.8
%
 
127,237

 
9.2
%
Mining & Natural Resources
 
16

 
736,172

 
0.7
%
 
14,744

 
1.1
%
Other Services
 
38

 
5,234,675

 
5.1
%
 
19,417

 
1.4
%
Parking Lot
 
2

 
8,400

 
%
 
38

 
%
Professional Services
 
72

 
4,242,109

 
4.1
%
 
59,606

 
4.3
%
Real Estate
 
3

 
44,059

 
%
 
658

 
%
Rental
 
44

 
712,860

 
0.7
%
 
6,734

 
0.5
%
Restaurants - Other
 
998

 
6,818,126

 
6.6
%
 
253,936

 
18.4
%
Restaurants - Quick Service
 
1,218

 
4,372,927

 
4.2
%
 
121,506

 
8.8
%
Retail - Apparel & Jewelry
 
15

 
1,402,799

 
1.4
%
 
15,311

 
1.1
%
Retail - Automotive
 
167

 
1,197,391

 
1.2
%
 
21,987

 
1.6
%
Retail - Department Stores
 
14

 
1,050,948

 
1.0
%
 
8,591

 
0.6
%
Retail - Discount
 
830

 
10,282,525

 
10.0
%
 
93,982

 
6.8
%
Retail - Electronics & Appliances
 
23

 
701,381

 
0.7
%
 
9,617

 
0.7
%
Retail - Gas & Convenience
 
127

 
526,556

 
0.5
%
 
27,114

 
2.0
%
Retail - Grocery & Supermarket
 
87

 
5,631,656

 
5.5
%
 
59,055

 
4.3
%
Retail - Hobby, Books & Music
 
10

 
364,971

 
0.4
%
 
3,557

 
0.3
%
Retail - Home & Garden
 
103

 
7,866,439

 
7.6
%
 
57,724

 
4.2
%
Retail - Home Furnishings
 
39

 
452,976

 
0.4
%
 
7,400

 
0.5
%
Retail - Internet
 
3

 
3,048,444

 
3.0
%
 
14,159

 
1.0
%
Retail - Office Supply
 
5

 
97,396

 
0.1
%
 
1,355

 
0.1
%
Retail - Pet Supply
 
25

 
902,817

 
0.9
%
 
18,444

 
1.3
%
Retail - Pharmacy
 
339

 
4,915,236

 
4.8
%
 
110,836

 
8.1
%
Retail - Specialty (Other)
 
27

 
575,679

 
0.6
%
 
6,362

 
0.5
%
Retail - Sporting Goods
 
22

 
1,271,446

 
1.2
%
 
14,876

 
1.1
%
Retail - Warehouse Clubs
 
17

 
2,630,903

 
2.6
%
 
22,368

 
1.7
%
Transportation
 
1

 
49,920

 
%
 
6

 
%
Utilities
 
2

 
40,734

 
%
 
931

 
0.1
%
Vacant
 
43

 
700,961

 
0.7
%
 

 
%
 
 
4,931

 
103,148,546

 
100
%
 
$
1,376,764

 
100
%

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Table of Contents

Geographical Distribution
The following table details the geographic distribution of our portfolio as of December 31, 2014 (dollars in thousands):
State/Possession
 
Number of Properties
 
Square Feet
 
Square Feet as a % of Total Portfolio
 
Annualized Rental Income
 
Annualized Rental Income as a % of Total Portfolio
Alabama
 
158

 
1,765,783

 
1.7
%
 
$
32,818

 
2.4
%
Alaska
 
3

 
25,070

 
%
 
774

 
0.1
%
Alberta
 
4

 
31,667

 
%
 
1,912

 
0.1
%
Arizona
 
88

 
3,009,724

 
2.9
%
 
53,067

 
3.9
%
Arkansas
 
103

 
1,027,467

 
1.0
%
 
13,083

 
1.0
%
California
 
102

 
5,028,083

 
4.9
%
 
75,691

 
5.5
%
Colorado
 
59

 
1,935,612

 
1.9
%
 
29,251

 
2.1
%
Connecticut
 
20

 
99,818

 
0.1
%
 
2,840

 
0.2
%
Delaware
 
12

 
106,658

 
0.1
%
 
2,582

 
0.2
%
District of Columbia
 
1

 
3,210

 
%
 
44

 
%
Florida
 
303

 
5,230,412

 
5.1
%
 
81,141

 
5.9
%
Georgia
 
227

 
5,010,854

 
4.9
%
 
67,873

 
4.9
%
Idaho
 
20

 
146,935

 
0.1
%
 
4,542

 
0.3
%
Illinois
 
193

 
6,136,866

 
6.0
%
 
82,280

 
6.0
%
Indiana
 
147

 
5,972,034

 
5.8
%
 
46,595

 
3.4
%
Iowa
 
54

 
1,621,488

 
1.6
%
 
15,524

 
1.1
%
Kansas
 
53

 
2,400,807

 
2.3
%
 
17,035

 
1.2
%
Kentucky
 
95

 
2,242,251

 
2.2
%
 
27,355

 
2.0
%
Louisiana
 
103

 
1,685,842

 
1.6
%
 
23,878

 
1.7
%
Maine
 
25

 
648,410

 
0.6
%
 
8,547

 
0.6
%
Manitoba
 
2

 
15,900

 
%
 
827

 
0.1
%
Maryland
 
35

 
871,590

 
0.8
%
 
17,910

 
1.3
%
Massachusetts
 
41

 
2,650,803

 
2.6
%
 
31,059

 
2.3
%
Michigan
 
194

 
2,495,930

 
2.4
%
 
39,966

 
2.9
%
Minnesota
 
48

 
585,633

 
0.6
%
 
9,188

 
0.7
%
Mississippi
 
81

 
1,843,066

 
1.8
%
 
16,397

 
1.2
%
Missouri
 
172

 
1,954,947

 
1.9
%
 
27,910

 
2.0
%
Montana
 
10

 
85,057

 
0.1
%
 
1,701

 
0.1
%
Nebraska
 
25

 
695,991

 
0.7
%
 
12,719

 
0.9
%
Nevada
 
33

 
753,105

 
0.7
%
 
9,870

 
0.7
%
New Hampshire
 
20

 
250,717

 
0.2
%
 
4,398

 
0.3
%
New Jersey
 
39

 
1,693,388

 
1.6
%
 
37,458

 
2.7
%
New Mexico
 
57

 
934,278

 
0.9
%
 
14,514

 
1.0
%
New York
 
94

 
1,809,498

 
1.8
%
 
34,465

 
2.5
%
North Carolina
 
187

 
3,965,561

 
3.8
%
 
43,417

 
3.2
%
North Dakota
 
12

 
200,818

 
0.2
%
 
4,589

 
0.3
%
Ohio
 
301

 
5,829,486

 
5.7
%
 
56,768

 
4.1
%
Oklahoma
 
90

 
2,113,928

 
2.0
%
 
27,318

 
2.0
%
Ontario
 
11

 
77,885

 
0.1
%
 
4,242

 
0.3
%
Oregon
 
17

 
319,773

 
0.3
%
 
4,433

 
0.3
%
Pennsylvania
 
176

 
5,806,529

 
5.6
%
 
60,286

 
4.4
%
Puerto Rico
 
3

 
87,550

 
0.1
%
 
2,429

 
0.2
%

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Table of Contents

State/Possession
 
Number of Properties
 
Square Feet
 
Square Feet as a % of Total Portfolio
 
Annualized Rental Income
 
Annualized Rental Income as a % of Total Portfolio
Rhode Island
 
14

 
214,079

 
0.2
%
 
$
3,649

 
0.3
%
Saskatchewan
 
2

 
16,800

 
%
 
796

 
0.1
%
South Carolina
 
126

 
3,380,193

 
3.3
%
 
30,641

 
2.2
%
South Dakota
 
11

 
124,104

 
0.1
%
 
1,614

 
0.1
%
Tennessee
 
137

 
3,487,182

 
3.4
%
 
34,528

 
2.5
%
Texas
 
628

 
12,037,105

 
11.7
%
 
175,323

 
12.7
%
Utah
 
14

 
142,598

 
0.1
%
 
3,178

 
0.2
%
Vermont
 
8

 
36,749

 
%
 
734

 
0.1
%
Virginia
 
120

 
2,135,543

 
2.1
%
 
38,281

 
2.8
%
Washington
 
27

 
492,078

 
0.5
%
 
11,840

 
0.9
%
West Virginia
 
44

 
271,806

 
0.3
%
 
6,917

 
0.5
%
Wisconsin
 
88

 
1,569,827

 
1.5
%
 
18,858

 
1.4
%
Wyoming
 
11

 
70,058

 
0.1
%
 
1,709

 
0.1
%
 
 
4,648

 
103,148,546

 
100.0
%
 
$
1,376,764

 
100.0
%
Tenant Concentration
Red Lobster’s annualized rental income, on a straight-line basis, represented 11.6% of consolidated annualized rental income on a straight-line basis as of December 31, 2014.

Property Type
The following table details the property type of our portfolio as of December 31, 2014 (dollars in thousands):
Property Type
 
Number of Properties
 
Square Feet
 
Square Feet as a % of Total Portfolio
 
Annualized Rental Income
 
Annualized Rental Income as a % of Total Portfolio
Billboard
 
4

 

 
%
 
$
51

 
%
Construction in Progress
 
22

 
710,262

 
0.7
%
 
6,782

 
0.5
%
Distribution
 
94

 
28,303,085

 
27.4
%
 
142,393

 
10.3
%
Industrial
 
79

 
11,766,597

 
11.5
%
 
67,213

 
4.9
%
Multi-Tenant Retail
 
20

 
1,880,571

 
1.8
%
 
26,501

 
1.9
%
Office
 
165

 
17,414,512

 
16.9
%
 
314,059

 
22.9
%
Parking Lot
 
1

 
8,400

 
%
 
1

 
%
Restaurant
 
2,175

 
11,084,904

 
10.7
%
 
372,200

 
27.0
%
Retail
 
2,084

 
31,736,460

 
30.8
%
 
447,564

 
32.5
%
Vacant
 
4

 
243,755

 
0.2
%
 

 
%
 
 
4,648

 
103,148,546

 
100.0
%
 
$
1,376,764

 
100.0
%
Property Financing
Our mortgage notes payable consist of the following as of December 31, 2014 and 2013 (dollar amounts in thousands):
 
 
Encumbered Properties
 
Outstanding Loan Amount
 
Weighted Average
Effective Interest Rate
(1)
 
Weighted Average Maturity (2)
December 31, 2014
 
776

 
$
3,689,795

 
4.88
%
 
6.18
December 31, 2013
 
177

 
$
1,258,661

 
3.42
%
 
3.41
_______________________________________________
(1)
Mortgage notes payable have fixed rates or are fixed by way of interest rate swap arrangements. Effective interest rates range from 2.75% to 7.20% at December 31, 2014 and 1.83% to 6.28% at December 31, 2013.
(2)
Weighted-average remaining years until maturity as of December 31, 2014 and 2013, respectively.

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In addition, we have financing, which is not secured by interests in real property, which is described under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Future Minimum Lease Payments
The following table presents future minimum base rental cash payments due to us over the next 10 years. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items (amounts in thousands):
 
 
Future Minimum Base Rent Payments
2015
 
$
1,249,809

2016
 
1,244,263

2017
 
1,212,087

2018
 
1,174,316

2019
 
1,132,671

2020
 
1,093,941

2021
 
1,051,088

2022
 
971,473

2023
 
890,911

2024
 
811,181

Thereafter
 
5,238,869

 
 
$
16,070,609

Future Lease Expirations
The following is a summary of lease expirations for the next 10 years at the properties we own as of December 31, 2014 (dollar amounts in thousands):
Year of Expiration
 
Number of Leases Expiring
 
Square Feet
 
Square Feet as a % of Total Portfolio
 
Annualized Rental Income Expiring
 
Annualized Rental Income Expiring as a % of Total Portfolio
2015
 
129

 
1,764,327

 
1.7
%
 
$
20,620

 
1.5
%
2016
 
153

 
3,555,200

 
3.5
%
 
34,004

 
2.5
%
2017
 
278

 
5,073,324

 
4.9
%
 
59,116

 
4.3
%
2018
 
248

 
3,107,173

 
3.0
%
 
41,052

 
3.0
%
2019
 
201

 
3,343,272

 
3.2
%
 
56,797

 
4.1
%
2020
 
188

 
3,672,980

 
3.6
%
 
45,729

 
3.3
%
2021
 
183

 
12,263,521

 
11.9
%
 
92,984

 
6.8
%
2022
 
265

 
9,379,757

 
9.1
%
 
79,730

 
5.8
%
2023
 
234

 
6,536,828

 
6.3
%
 
86,953

 
6.3
%
2024
 
199

 
10,305,839

 
10.0
%
 
127,311

 
9.3
%
 
 
2,078

 
59,002,221

 
57.2
%
 
$
644,296

 
46.9
%
Item 3. Legal Proceedings.
The information contained under the heading “Litigation” in Note 17 – Commitments and Contingencies to our consolidated financial statements in this report is incorporated by reference into this Item 3.
Item 4. Mine Safety Disclosures.
Not applicable.

44

Table of Contents

PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information
Our common stock is currently traded on the NASDAQ under the symbol “ARCP”. Set forth below is a line graph comparing the cumulative total stockholder return on our common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the FTSE National Association of Real Estate Investment Trusts All Equity REITs Index (“FTSE NAREIT All Equity REITs”) and the S&P 500 Index (“S&P 500”) for the period commencing September 6, 2011, the date of our IPO, and ending December 31, 2014. The graph assumes an investment of $100 on September 6, 2011.

Comparison to Cumulative Total Return

For each calendar quarter indicated, the following table reflects respective high, low and closing sales prices for the common stock as quoted by NASDAQ and the dividends paid per common share in each such period:
 
 
First Quarter 2013
 
Second Quarter 2013
 
Third Quarter 2013
 
Fourth Quarter 2013
 
First Quarter 2014
 
Second Quarter 2014
 
Third Quarter 2014
 
Fourth Quarter 2014
High
 
$
14.92

 
$
18.05

 
$
15.36

 
$
13.94

 
$
14.96

 
$
14.17

 
$
13.44

 
$
12.48

Low
 
$
12.45

 
$
13.99

 
$
12.13

 
$
12.16

 
$
12.60

 
$
11.76

 
$
12.00

 
$
7.38

Close
 
$
14.67

 
$
15.26

 
$
12.20

 
$
12.85

 
$
14.02

 
$
12.53

 
$
12.06

 
$
9.05

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid monthly per common share
 
$
0.23

 
$
0.23

 
$
0.23

 
$
0.23

 
$
0.33

 
$
0.25

 
$
0.25

 
$
0.25

Holders
As of March 27, 2015, we had 905,193,685 shares of common stock outstanding held by 5,344 stockholders of record.
Dividends
On December 23, 2014, pursuant to a waiver and consent relating to the Credit Facility, we agreed to not pay a dividend on our common stock until the filing of this report. Our board of directors is currently reviewing our dividend policy and following delivery of its financial statements, expects to adopt a policy of paying a common stock dividend in line with our industry peers, while still meeting the minimum distribution requirement to maintain our status as a REIT.

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Table of Contents

Securities Authorized for Issuance Under Equity Compensation Plans
See Note 19 – Equity-based Compensation to the consolidated financial statements in this report for discussion on the Company’s equity plans.
Purchases of Equity Securities
During the fourth quarter of 2014, the Company purchased the following shares in order to satisfy the minimum tax withholding obligation for state and federal payroll taxes on employee stock awards:
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
October
 
347,935

 
$
9.42

November
 
9,566

 
9.00

December
 
9,165

 
9.26

Total
 
366,666

 
$
9.40

Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report. The selected financial data (in thousands, except share and per share amounts) presented below was derived from our consolidated financial statements.
Balance sheet data (amounts in thousands):
 
 
December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
Total real estate investments, at cost
 
$
18,292,560

 
$
7,459,142

 
$
1,875,615

 
$
209,326

 
$

Total assets
 
$
20,515,139

 
$
7,809,083

 
$
2,182,195

 
$
221,578

 
$
279

Mortgage notes payable, net
 
$
3,759,935

 
$
1,301,114

 
$
265,118

 
$
35,320

 
$

Credit facilities
 
$
3,184,000

 
$
1,819,800

 
$
124,604

 
$
42,407

 
$

Corporate bonds, net
 
$
2,546,499

 
$

 
$

 
$

 
$

Convertible debt, net
 
$
977,521

 
$
972,490

 
$

 
$

 
$

Other debt
 
$
45,826

 
$
104,804

 
$

 
$

 
$

Due to affiliates
 
$
559

 
$
103,434

 
$
1,522

 
$

 
$

Total liabilities
 
$
11,132,809

 
$
5,310,556

 
$
513,435

 
$
80,790

 
$
279

Total equity
 
$
9,382,330

 
$
2,229,228

 
$
1,668,760

 
$
140,788

 
$


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Table of Contents

Operating data, cash flow data and per share data (amounts in thousands except share and per share data):
 
 
Year ended December 31,
 
Period from December 2, 2010 (Date of Inception) to December 31, 2010
 
 
2014
 
2013
 
2012
 
2011
 
Operating data:
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
1,579,257

 
$
329,323

 
$
67,207

 
$
3,970

 
$

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Cole Capital reallowed fees and commissions
 
66,228

 

 

 

 

Acquisition related
 
38,831

 
76,113

 
45,070

 
3,898

 

Merger and other non-routine transactions
 
200,514

 
210,543

 
2,603

 

 

Property operating
 
137,741

 
23,616

 
3,522

 
220

 

Management fees to affiliates
 
13,888

 
17,462

 
212

 

 

General and administrative
 
174,741

 
123,172

 
5,458

 
749

 

Depreciation and amortization
 
916,003

 
210,976