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Section 1: 10-Q (10-Q)

ARCP 03.31.2015 10-Q
Table of Contents

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

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
 
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)

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 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 May 5, 2015, there were 905,138,182 shares of common stock outstanding.




AMERICAN REALTY CAPITAL PROPERTIES, INC. AND
ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
For the quarterly period ended March 31, 2015

 
Page
PART I — FINANCIAL INFORMATION
PART II — OTHER INFORMATION


Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data) (Unaudited)

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
 
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
3,434,414

 
$
3,472,298

Buildings, fixtures and improvements
 
12,081,061

 
12,307,758

Land and construction in progress
 
83,284

 
77,450

Intangible lease assets
 
2,386,904

 
2,435,054

Total real estate investments, at cost
 
17,985,663

 
18,292,560

Less: accumulated depreciation and amortization
 
1,238,320

 
1,034,122

Total real estate investments, net
 
16,747,343

 
17,258,438

Investment in unconsolidated entities
 
95,390

 
98,053

Investment in direct financing leases, net
 
54,822

 
56,076

Investment securities, at fair value
 
56,493

 
58,646

Loans held for investment, net
 
41,357

 
42,106

Cash and cash equivalents
 
788,739

 
416,711

Restricted cash
 
64,578

 
62,651

Intangible assets, net
 
142,851

 
150,359

Deferred costs and other assets, net
 
400,884

 
389,922

Goodwill
 
1,871,114

 
1,894,794

Due from affiliates
 
58,457

 
86,122

Assets held for sale
 

 
1,261

Total assets
 
$
20,322,028


$
20,515,139

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Mortgage notes payable and other debt, net
 
$
3,672,496

 
$
3,805,761

Corporate bonds, net
 
2,546,701

 
2,546,499

Convertible debt, net
 
978,769

 
977,521

Credit facility
 
3,184,000

 
3,184,000

Below-market lease liabilities, net
 
304,754

 
317,838

Accounts payable and accrued expenses
 
160,129

 
163,025

Deferred rent, derivative and other liabilities
 
139,241

 
127,611

Distributions payable
 
9,959

 
9,995

Due to affiliates
 
547

 
559

Total liabilities
 
10,996,596

 
11,132,809

Commitments and contingencies (Note 13)
 
 
 


Preferred stock, $0.01 par value, 100,000,000 shares authorized and 42,834,138 issued and outstanding as of March, 31, 2015 and December 31, 2014, respectively
 
428

 
428

Common stock, $0.01 par value, 1,500,000,000 shares authorized and 905,134,719 and 905,530,431 issued and outstanding as of March, 31, 2015 and December 31, 2014, respectively
 
9,051

 
9,055

Additional paid-in capital
 
11,919,358

 
11,920,253

Accumulated other comprehensive (loss) income
 
(4,136
)
 
2,728

Accumulated deficit
 
(2,826,524
)
 
(2,778,576
)
Total stockholders’ equity
 
9,098,177

 
9,153,888

Non-controlling interests
 
227,255

 
228,442

Total equity
 
9,325,432

 
9,382,330

Total liabilities and equity
 
$
20,322,028


$
20,515,139


The accompanying notes are an integral part of these statements.

-1


Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC.  
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Revenues:
 
 
 
 
Rental income
 
$
342,759

 
$
244,415

Direct financing lease income
 
741

 
1,006

Operating expense reimbursements
 
22,974

 
21,476

Cole Capital revenue
 
27,494

 
54,257

Total revenues
 
393,968


321,154

Operating expenses:
 
 
 
 
Cole Capital reallowed fees and commissions
 
2,031

 
34,436

Acquisition related (including $0 and $1,539 to affiliates, respectively)
 
2,182

 
13,417

Merger and other non-routine transactions (including $0 and $137,738 to affiliates, respectively)
 
16,423

 
160,298

Property operating
 
30,999

 
29,755

Management fees to affiliates
 

 
13,888

General and administrative (including $0 and $15,592 to affiliates, respectively)
 
33,106

 
55,369

Depreciation and amortization
 
219,141

 
173,842

Total operating expenses
 
303,882


481,005

Operating income (loss)
 
90,086


(159,851
)
Other (expense) income:
 
 
 
 
Interest expense, net
 
(95,699
)
 
(120,951
)
Extinguishment of debt, net
 
429

 
(9,399
)
Other income, net
 
8,961

 
3,975

Loss on derivative instruments, net
 
(1,028
)
 
(7,121
)
Loss on disposition of real estate, net
 
(31,368
)
 
(17,605
)
Total other expenses, net
 
(118,705
)

(151,101
)
Loss before income and franchise taxes
 
(28,619
)

(310,952
)
(Provision for) benefit from income and franchise taxes
 
(2,074
)
 
5,112

Net loss
 
(30,693
)
 
(305,840
)
Net loss attributable to non-controlling interests
 
723

 
14,396

Net loss attributable to the Company
 
$
(29,970
)
 
$
(291,444
)
 
 
 
 
 
Basic and diluted net loss per share attributable to common stockholders
 
$
(0.05
)
 
$
(0.58
)

The accompanying notes are an integral part of these statements.

2


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

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net loss
 
$
(30,693
)
 
$
(305,840
)
Other comprehensive (loss) income:
 
 
 
 
Designated derivatives, fair value adjustments
 
(7,660
)
 
(2,298
)
Unrealized gain on investment securities, net
 
796

 
3,095

Total other comprehensive (loss) income
 
(6,864
)

797

 
 
 
 
 
Total comprehensive loss
 
(37,557
)
 
(305,043
)
Comprehensive loss attributable to non-controlling interests
 
723

 
14,396

Total comprehensive loss attributable to the Company

$
(36,834
)

$
(290,647
)

The accompanying notes are an integral part of these statements.



3


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

 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of Shares
 
Par
Value
 
Number
of Shares
 
Par
Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Accumulated
Deficit
 
Total Stock-holders’ Equity
 
Non-Controlling Interests
 
Total Equity
Balance, January 1, 2015
 
42,834,138

 
$
428

 
905,530,431

 
$
9,055

 
$
11,920,253

 
$
2,728

 
$
(2,778,576
)

$
9,153,888


$
228,442


$
9,382,330

Repurchases of common stock to settle tax obligation
 

 

 
(132,826
)
 
(1
)
 
(1,206
)
 

 

 
(1,207
)
 

 
(1,207
)
Equity-based compensation, net forfeitures
 

 

 
(262,886
)
 
(3
)
 
821

 

 

 
818

 

 
818

Tax shortfall from equity-based compensation
 

 

 

 

 
(510
)
 

 

 
(510
)
 

 
(510
)
Distributions to non-controlling interest holders
 

 

 

 

 

 

 

 

 
(464
)
 
(464
)
Distributions to participating securities
 

 

 

 

 

 

 
(5
)
 
(5
)
 

 
(5
)
Distributions to preferred shareholders
 

 

 

 

 

 

 
(17,973
)
 
(17,973
)
 

 
(17,973
)
Net loss
 

 

 

 

 

 

 
(29,970
)
 
(29,970
)
 
(723
)
 
(30,693
)
Other comprehensive loss
 

 

 

 

 

 
(6,864
)
 

 
(6,864
)
 

 
(6,864
)
Balance, March 31, 2015
 
42,834,138

 
$
428

 
905,134,719

 
$
9,051

 
$
11,919,358

 
$
(4,136
)
 
$
(2,826,524
)
 
$
9,098,177

 
$
227,255

 
$
9,325,432


 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of Shares
 
Par
Value
 
Number
of Shares
 
Par
Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Accumulated
Deficit
 
Total Stock-holders’ Equity
 
Non-Controlling Interests
 
Total Equity
Balance, January 1, 2014
 
42,199,547

 
$
422

 
239,234,725

 
$
2,392

 
$
2,940,907

 
$
7,666

 
$
(877,957
)
 
$
2,073,430

 
$
155,798

 
$
2,229,228

Issuance of common stock
 

 

 
524,305,318

 
5,243

 
7,324,217

 

 

 
7,329,460

 

 
7,329,460

Offering costs (1)
 

 

 

 

 
(1,485
)
 

 

 
(1,485
)
 

 
(1,485
)
Conversion of Common OP Units to common stock
 

 

 
951,708

 
10

 
13,444

 

 

 
13,454

 
(13,454
)
 

Conversion of Preferred OP Units to Series F Preferred Stock
 
455,372

 
5

 

 

 
9,404

 

 

 
9,409

 
(9,409
)
 

Issuance of restricted share awards, net
 

 

 
5,440,187

 
54

 
(1,775
)
 

 

 
(1,721
)
 

 
(1,721
)
Equity-based compensation
 

 

 

 

 
17,456

 

 

 
17,456

 
4,118

 
21,574

Distributions declared on common stock
 

 

 

 

 

 

 
(165,910
)
 
(165,910
)
 

 
(165,910
)
Issuance of OP Units
 

 

 

 

 

 

 

 

 
152,484

 
152,484

Distributions to non-controlling interest holders
 

 

 

 

 

 

 

 

 
(15,781
)
 
(15,781
)
Distributions to participating securities
 

 

 

 

 

 

 
(1,005
)
 
(1,005
)
 

 
(1,005
)
Distributions to preferred shareholders
 

 

 

 

 

 

 
(22,427
)
 
(22,427
)
 

 
(22,427
)
Contributions from non-controlling interest holders
 

 

 

 

 

 

 

 

 
279

 
279

Non-controlling interests retained in Cole Merger
 

 

 

 

 

 

 

 

 
24,766

 
24,766

Net loss
 

 

 

 

 

 

 
(291,444
)
 
(291,444
)
 
(14,396
)
 
(305,840
)
Other comprehensive income
 

 

 

 

 

 
797

 

 
797

 

 
797

Balance, March 31, 2014
 
42,654,919

 
$
427

 
769,931,938

 
$
7,699

 
$
10,302,168

 
$
8,463

 
$
(1,358,743
)
 
$
8,960,014

 
$
284,405

 
$
9,244,419

_______________________________________________
(1) Includes $150,000 to affiliates of the Former Manager (as defined in Note 1) for the three months ended March 31, 2014.

The accompanying notes are an integral part of these statements.


4


Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(30,693
)
 
$
(305,840
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Issuance of OP Units
 

 
92,884

Depreciation and amortization
 
224,111

 
214,040

Loss on disposition of real estate, net
 
31,368

 
17,605

Equity-based compensation
 
818

 
21,574

Equity in income of unconsolidated entities
 
(28
)
 
(251
)
Distributions from unconsolidated entities
 
2,866

 
941

Loss on derivative instruments
 
1,028

 
7,121

Unrealized gain on investments
 
(233
)
 

Gain on extinguishment and forgiveness of debt
 
(5,307
)
 
(19,628
)
Changes in assets and liabilities:
 
 
 
 
Investment in direct financing leases
 
495

 
389

Deferred costs and other assets, net
 
(30,757
)
 
7,945

Due from affiliates
 
27,665

 
(8,318
)
Accounts payable and accrued expenses
 
2,013

 
(73,395
)
Deferred rent, derivative and other liabilities
 
6,798

 
(36,631
)
Due to affiliates
 
(12
)
 
(41,264
)
Net cash provided by (used in) operating activities
 
230,132

 
(122,828
)
Cash flows from investing activities:
 
 
 
 
Investments in real estate and other assets
 
(7,627
)
 
(634,541
)
Acquisition of a real estate business, net of cash acquired
 

 
(683,240
)
Capital expenditures
 
(3,649
)
 
(3,112
)
Real estate developments
 
(15,998
)
 
(13,044
)
Principal repayments received from borrowers
 
3,668

 
3,062

Investments in unconsolidated entities
 

 
(2,500
)
Proceeds from disposition of properties
 
245,548

 
60,785

Investment in intangible assets
 

 
(258
)
Deposits for real estate investments
 
(3,509
)
 
(38,213
)
Uses and refunds of deposits for real estate investments
 
7,939

 
137,688

Line of credit advances to affiliates
 
(10,000
)
 
(1,000
)
Line of credit repayments from affiliates
 
10,000

 
3,900

Change in restricted cash
 
(6,315
)
 
(3,934
)
Net cash provided by (used in) investing activities
 
220,057

 
(1,174,407
)
Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
1,158

 
669,336

Payments on mortgage notes payable and other debt
 
(59,308
)
 
(744,618
)
Proceeds from credit facilities
 

 
2,131,000

Payments on credit facilities
 

 
(2,994,000
)
Proceeds from corporate bonds
 

 
2,545,760

Payments of deferred financing costs
 
(326
)
 
(66,834
)
Repurchases of common stock for tax obligation
 
(1,207
)
 

Payments of offering costs and fees related to stock issuances
 

 
(2,133
)
Contributions from non-controlling interest holders
 

 
279

Distributions to non-controlling interest holders
 
(464
)
 
(9,488
)
Distributions paid
 
(18,014
)
 
(201,576
)
Net cash (used in) provided by financing activities
 
(78,161
)
 
1,327,726

Net change in cash and cash equivalents
 
372,028

 
30,491

Cash and cash equivalents, beginning of period
 
416,711

 
52,725

Cash and cash equivalents, end of period
 
$
788,739

 
$
83,216

 
 
 
 
 
The consolidated statements of cash flows continue onto the next page.

5


Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
109,025

 
$
52,332

Cash paid for income and franchise taxes
 
$
51

 
$
7,616

Non-cash investing and financing activities:
 
 
 
 
Accrued capital expenditures and real estate developments
 
$
4,126

 
$


The accompanying notes are an integral part of these statements.

6


Table of Contents
ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for unit data) (Unaudited)

 
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 
 
 
Land
 
$
3,434,414

 
$
3,472,298

Buildings, fixtures and improvements
 
12,081,061

 
12,307,758

Land and construction in progress
 
83,284

 
77,450

Intangible lease assets
 
2,386,904

 
2,435,054

Total real estate investments, at cost
 
17,985,663

 
18,292,560

Less: accumulated depreciation and amortization
 
1,238,320

 
1,034,122

Total real estate investments, net
 
16,747,343

 
17,258,438

Investment in unconsolidated entities
 
95,390

 
98,053

Investment in direct financing leases, net
 
54,822

 
56,076

Investment securities, at fair value
 
56,493

 
58,646

Loans held for investment, net
 
41,357

 
42,106

Cash and cash equivalents
 
788,739

 
416,711

Restricted cash
 
64,578

 
62,651

Intangible assets, net
 
142,851

 
150,359

Deferred costs and other assets, net
 
400,884

 
389,922

Goodwill
 
1,871,114

 
1,894,794

Due from affiliates
 
58,457

 
86,122

Assets held for sale
 

 
1,261

Total assets
 
$
20,322,028


$
20,515,139

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

Mortgage notes payable and other debt, net
 
$
3,672,496

 
$
3,805,761

Corporate bonds, net
 
2,546,701

 
2,546,499

Convertible debt, net
 
978,769

 
977,521

Credit facility
 
3,184,000

 
3,184,000

Below-market lease liabilities, net
 
304,754

 
317,838

Accounts payable and accrued expenses
 
160,129

 
163,025

Deferred rent, derivative and other liabilities
 
139,241

 
127,611

Distributions payable
 
9,959

 
9,995

Due to affiliates
 
547

 
559

Total liabilities
 
10,996,596


11,132,809

Commitments and contingencies (Note 13)
 


 


General partner’s common equity, 905,134,719 and 905,530,431 General Partner OP Units issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
 
8,119,636

 
8,157,167

General partner’s preferred equity, 42,834,138 General Partner Preferred Units issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
 
979,014

 
996,987

Limited partners’ common equity, 23,763,797 Limited Partner OP Units issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
 
199,992

 
201,102

Limited partners’ preferred equity, 86,874 Limited Partner Preferred Units issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
 
3,375

 
3,375

Total partners’ equity
 
9,302,017


9,358,631

Non-controlling interests
 
23,415

 
23,699

Total equity
 
9,325,432


9,382,330

Total liabilities and equity
 
$
20,322,028


$
20,515,139

The accompanying notes are an integral part of these statements.


7


Table of Contents
ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for unit data) (Unaudited)

 
Three Months Ended March 31,
 
2015
 
2014
Revenues:
 
 
 
Rental income
$
342,759

 
$
244,415

Direct financing lease income
741

 
1,006

Operating expense reimbursements
22,974

 
21,476

Cole Capital revenue
27,494

 
54,257

Total revenues
393,968


321,154

Operating expenses:
 
 
 
Cole Capital reallowed fees and commissions
2,031

 
34,436

Acquisition related (including $0 and $1,539 to affiliates, respectively)
2,182

 
13,417

Merger and other non-routine transactions (including $0 and $137,738 to affiliates, respectively)
16,423

 
160,298

Property operating
30,999

 
29,755

Management fees to affiliates

 
13,888

General and administrative (including $0 and $15,592 to affiliates, respectively)
33,106

 
55,369

Depreciation and amortization
219,141

 
173,842

Total operating expenses
303,882


481,005

Operating income (loss)
90,086


(159,851
)
Other (expense) income:
 
 
 
Interest expense, net
(95,699
)
 
(120,951
)
Extinguishment of debt, net
429

 
(9,399
)
Other income, net
8,961

 
3,975

Loss on derivative instruments, net
(1,028
)
 
(7,121
)
Loss on disposition of real estate, net
(31,368
)
 
(17,605
)
Total other expenses, net
(118,705
)

(151,101
)
Loss before income and franchise taxes
(28,619
)

(310,952
)
(Provision for) benefit from income and franchise taxes
(2,074
)
 
5,112

Net loss
(30,693
)
 
(305,840
)
Net (income) loss attributable to non-controlling interests
(180
)
 
192

Net loss attributable to the OP
$
(30,873
)

$
(305,648
)
 
 
 
 
 Basic and diluted net loss from continuing operations per unit attributable to common unitholders
$
(0.05
)
 
$
(0.57
)

The accompanying notes are an integral part of these statements.

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ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net loss
 
$
(30,693
)
 
$
(305,840
)
Other comprehensive (loss) income:
 
 
 
 
Designated derivatives, fair value adjustments
 
(7,660
)
 
(2,298
)
Unrealized gain on investment securities, net
 
796

 
3,095

Total other comprehensive (loss) income

(6,864
)

797

 
 
 
 
 
Total comprehensive loss

(37,557
)

(305,043
)
Comprehensive (income) loss attributable to non-controlling interests
 
(180
)
 
192

Total comprehensive loss attributable to the OP

$
(37,737
)

$
(304,851
)

The accompanying notes are an integral part of these statements.


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ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except for unit data) (Unaudited)

 
 
Preferred Units
 
Common Units
 
 
 
 
 
 
 
 
General Partner
 
Limited Partner
 
General Partner
 
Limited Partner
 
 
 
 
 
 
 
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Total Partners' Capital
 
Non-Controlling Interests
 
Total Capital
 Balance, January 1, 2015
 
42,834,138

 
$
996,987

 
86,874

 
$
3,375

 
905,530,431

 
$
8,157,167

 
23,763,797

 
$
201,102

 
$
9,358,631

 
$
23,699

 
$
9,382,330

 Repurchases of common OP Units to settle tax obligation
 

 

 

 

 
(132,826
)
 
(1,207
)
 

 

 
(1,207
)
 

 
(1,207
)
 Equity-based compensation
 

 

 

 

 
(262,886
)
 
818

 

 

 
818

 

 
818

 Tax shortfall from equity-based compensation
 

 

 

 

 

 
(510
)
 

 

 
(510
)
 

 
(510
)
 Distributions to Common OP Units, LTIPs and non-controlling interests
 

 

 

 

 

 
(5
)
 

 

 
(5
)
 
(464
)
 
(469
)
 Distributions to Preferred OP Units
 

 
(17,973
)
 

 

 

 

 

 

 
(17,973
)
 

 
(17,973
)
 Net loss
 

 

 

 

 

 
(29,970
)
 

 
(903
)
 
(30,873
)
 
180

 
(30,693
)
 Other comprehensive loss
 

 

 

 

 

 
(6,657
)
 

 
(207
)
 
(6,864
)
 

 
(6,864
)
Balance, March 31, 2015
 
42,834,138


$
979,014


86,874


$
3,375


905,134,719


$
8,119,636


23,763,797


$
199,992


$
9,302,017


$
23,415


$
9,325,432

 
 
Preferred Units
 
Common Units
 
 
 
 
 
 
 
 
General Partner
 
Limited Partner
 
General Partner
 
Limited Partner
 
 
 
 
 
 
 
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Number of Units
 
Capital
 
Total Partners' Capital
 
Non-Controlling Interests
 
Total Capital
 Balance, January 1, 2014
 
42,199,547

 
$
1,054,989

 
721,465

 
$
16,466

 
239,234,725

 
$
1,018,123

 
17,832,274

 
$
139,083

 
$
2,228,661

 
$
567

 
$
2,229,228

 Issuance of common OP units, net
 

 

 

 

 
524,305,318

 
7,327,975

 
7,956,297

 
152,484

 
7,480,459

 

 
7,480,459

 Conversion of Limited Partners' Common OP Units to General Partner's Common OP Units
 

 

 

 

 
951,708

 
13,454

 
(951,708
)
 
(13,454
)
 

 

 

 Conversion of Limited Partners' Preferred OP Units to General Partner's Preferred OP Units
 
455,372

 
9,409

 
(455,372
)
 
(9,409
)
 

 

 

 

 

 

 

 Issuance of restricted share awards, net
 

 

 

 

 
5,440,187

 
(1,721
)
 

 

 
(1,721
)
 

 
(1,721
)
 Equity-based compensation, net forfeitures
 

 

 

 

 

 
17,456

 

 
4,118

 
21,574

 

 
21,574

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

 

 

 

 

 
(166,915
)
 

 
(15,781
)
 
(182,696
)
 

 
(182,696
)
 Distributions to Preferred OP Units
 

 
(22,427
)
 

 

 

 

 

 

 
(22,427
)
 

 
(22,427
)
 Contributions from non-controlling interest holders
 

 

 

 

 

 

 

 

 

 
279

 
279

 Non-controlling interests retained in Cole Merger
 

 

 

 

 

 

 

 

 

 
24,766

 
24,766

 Net loss
 

 

 

 

 

 
(291,444
)
 

 
(14,588
)
 
(306,032
)
 
192

 
(305,840
)
 Other comprehensive income
 

 

 

 

 

 
757

 

 
40

 
797

 

 
797

Balance, March 31, 2014
 
42,654,919

 
$
1,041,971

 
266,093

 
$
7,057

 
769,931,938

 
$
7,917,685

 
24,836,863

 
$
251,902

 
$
9,218,615

 
$
25,804

 
$
9,244,419


The accompanying notes are an integral part of these statements.


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ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(30,693
)
 
$
(305,840
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Issuance of common units
 

 
92,884

Depreciation and amortization
 
224,111

 
214,040

Loss on disposition of real estate assets, net
 
31,368

 
17,605

Equity-based compensation
 
818

 
21,574

Equity in income of unconsolidated entities
 
(28
)
 
(251
)
Distributions from unconsolidated entities
 
2,866

 
941

Loss on derivative instruments
 
1,028

 
7,121

Unrealized gain on securities
 
(233
)
 

Gain on extinguishment and forgiveness of debt
 
(5,307
)
 
(19,628
)
Changes in assets and liabilities:
 
 
 


Investment in direct financing leases
 
495

 
389

Deferred costs and other assets, net
 
(30,757
)
 
7,945

Due from affiliates
 
27,665

 
(8,318
)
Accounts payable and accrued expenses
 
2,013

 
(73,395
)
Deferred rent, derivative and other liabilities
 
6,798

 
(36,631
)
Due to affiliates
 
(12
)
 
(41,264
)
Net cash provided by (used in) operating activities
 
230,132


(122,828
)
Cash flows from investing activities:
 
 
 
 
Investments in real estate and other assets
 
(7,627
)
 
(634,541
)
Acquisition of a real estate business, net of cash acquired
 

 
(683,240
)
Capital expenditures
 
(3,649
)
 
(3,112
)
Real estate developments
 
(15,998
)
 
(13,044
)
Principal repayments received from borrowers
 
3,668

 
3,062

Investments in unconsolidated entities
 

 
(2,500
)
Proceeds from disposition of properties
 
245,548

 
60,785

Investment in intangible assets
 

 
(258
)
Deposits for real estate investments
 
(3,509
)
 
(38,213
)
Uses and refunds of deposits for real estate investments
 
7,939

 
137,688

Line of credit advances to affiliates
 
(10,000
)
 
(1,000
)
Line of credit repayments from affiliates
 
10,000

 
3,900

Change in restricted cash
 
(6,315
)
 
(3,934
)
Net cash provided by (used in) investing activities
 
220,057

 
(1,174,407
)
Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
1,158

 
669,336

Payments on mortgage notes payable and other debt
 
(59,308
)
 
(744,618
)
Proceeds from credit facilities
 

 
2,131,000

Payments on credit facilities
 

 
(2,994,000
)
Proceeds from corporate bonds
 

 
2,545,760

Payments of deferred financing costs
 
(326
)
 
(66,834
)
Repurchases of common units to settle tax obligation
 
(1,207
)
 

Payments of offering costs and fees related to stock issuances
 

 
(2,133
)
Contributions from non-controlling interest holders
 

 
279

Distributions to non-controlling interest holders
 
(464
)
 
(9,488
)
Distributions paid
 
(18,014
)
 
(201,576
)
Net cash (used in) provided by financing activities
 
(78,161
)

1,327,726

Net change in cash and cash equivalents
 
372,028

 
30,491

Cash and cash equivalents, beginning of period
 
416,711

 
52,725

Cash and cash equivalents, end of period
 
$
788,739


$
83,216

 
 
 
 
 
The consolidated statements of cash flows continue onto the next page.

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Table of Contents
ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands) (Unaudited)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
109,025

 
$
52,332

Cash paid for income and franchise taxes
 
$
51

 
$
7,616

Non-cash investing and financing activities:
 
 
 
 
Accrued capital expenditures and real estate developments
 
$
4,126

 
$


The accompanying notes are an integral part of these statements.

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AMERICAN REALTY CAPITAL PROPERTIES, INC.
AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015 (Unaudited)


Note 1 – Organization
American Realty Capital Properties, Inc. (the “General Partner” or “ARCP”) is a self-managed Maryland corporation incorporated on December 2, 2010 that qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning in the taxable year ended December 31, 2011. On September 6, 2011, ARCP completed its initial public offering (the “IPO”). ARCP’s common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “ARCP.”
The Company (as defined below) operates through two business segments, Real Estate Investment (“REI”) and its private capital management business, Cole Capital (“Cole Capital”), as further discussed in Note 3 – Segment Reporting. Through the REI segment, the Company acquires, owns and operates primarily single-tenant, freestanding, commercial real estate properties, subject to long-term net leases with high credit quality tenants. The Company primarily seeks 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. Historically, the Company advanced its investment objectives by not only growing its net lease portfolio through granular, self-originated acquisitions, but also through strategic mergers and acquisitions, which included a merger with Cole Real Estate Investments, Inc. (“Cole”) on February 7, 2014 (the “Cole Merger”), as well as a merger with American Realty Capital Trust IV, Inc. (“ARCT IV”) on January 3, 2014 (the “ARCT IV Merger”).
Cole Capital is contractually responsible for raising capital for and managing the affairs of the Managed REITs (as defined in Note 3 – Segment Reporting) 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 board of directors an approach for providing investors with liquidity. Cole Capital receives compensation and reimbursement for performing these services.
ARCP is the sole general partner of ARC Properties Operating Partnership, L.P. (together with its subsidiaries, the “Operating Partnership” or the “OP”), a Delaware limited partnership, which was formed on January 13, 2011 to conduct the primary business of acquiring, owning and operating single-tenant, freestanding commercial real estate properties. The Operating Partnership is the entity through which substantially all of ARCP’s operations are conducted. Together, the General Partner, with the Operating Partnership and their consolidated subsidiaries are known as the “Company.”
The actions of the Operating Partnership and its relationship with ARCP are governed by the Third Amended and Restated Agreement of Limited Partnership, effective as of January 3, 2014, as amended (the “LPA”). The General Partner does not have any significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the General Partner and the Operating Partnership are substantially the same. Additionally, pursuant to the LPA, all administrative expenses and expenses associated with the formation and continuity of existence and operation of the General Partner incurred by the General Partner on the Operating Partnership’s behalf shall be treated as expenses of the Operating Partnership. Further, when the General Partner issues any equity instrument that has been approved by the General Partner’s board of directors, the LPA requires the Operating Partnership to issue to the General Partner equity instruments with substantially similar terms, to protect the integrity of the Company’s umbrella partnership REIT structure, pursuant to which each holder of interests in the Operating Partnership has a proportionate economic interest in the Operating Partnership reflecting its capital contributions thereto. OP Units (as defined below) issued to the General Partner are referred to as General Partner OP Units. OP Units issued to parties other than the General Partner are referred to as Limited Partner OP Units. The LPA also provides that the Operating Partnership issue debt that mirrors debt issued by the General Partner. The LPA will be amended to provide for the issuance of any additional class of equivalent equity instruments to the extent the General Partner’s board of directors authorizes the issuance of any new class of equity securities.
Substantially all of the Company’s REI segment is conducted through the OP. ARCP is the sole general partner and holder of 97.4% of the common equity interests in the OP as of March 31, 2015 with the remaining 2.6% of the common equity interests owned by certain unaffiliated investors. Under the LPA, after holding units of limited partner interests in the OP (“OP Units”) for a period of one year, unless otherwise consented to by ARCP, holders of OP Units have the right to redeem the OP Units for the cash value of a corresponding number of shares of ARCP’s common stock or, at the option of ARCP, a corresponding number of shares of ARCP’s common stock. The remaining rights of the holders of OP Units are limited, however, and do not include the ability to replace the General Partner or to approve the sale, purchase or refinancing of the OP’s assets. Substantially all of 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”).

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AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015 (Unaudited) – (Continued)

Prior to January 8, 2014, ARC Properties Advisors, LLC (the “Former Manager”), a wholly owned subsidiary of AR Capital, LLC (“ARC”), managed the Company’s affairs on a day-to-day basis, with the exception of certain acquisition, accounting and portfolio management services performed by employees of the Company. In August 2013, the Company’s board of directors determined that it was in the best interest of the Company and its stockholders to become self-managed, and the Company transitioned to self-management on January 8, 2014. In connection with becoming self-managed, ARCP terminated the management agreement with the Former Manager and ARCP and the OP entered into employment and incentive compensation arrangements with certain former ARCP executives. See Note 16 – Related Party Transactions and Arrangements for further discussion.
On March 2, 2015, ARCP issued restated consolidated financial statements as of and for the three months ended March 31, 2014 to correct errors that were identified as a result of an investigation conducted by the audit committee of the Company’s board of directors (the “Audit Committee”) (the “Audit Committee Investigation”), as well as certain other errors that were identified by the Company’s new management. In addition, the restatement reflected corrections of certain immaterial errors and certain previously identified errors that were identified by the Company in the normal course of business and were determined to be immaterial, both individually and in the aggregate, when the consolidated financial statements were originally issued. The restated and corrected prior period data is reflected in these consolidated financial statements and accompanying notes. See Amendment No. 1 to ARCP’s Quarterly Report on Form 10-Q/A filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 2, 2015 for the quarterly period ended March 31, 2014 for additional information about the Audit Committee Investigation and reconciliations of the amounts as originally reported to the corresponding restated amounts.
On March 10, 2015, the Company’s board of directors appointed Glenn J. Rufrano to serve as the Company’s new Chief Executive Officer and a director, effective April 1, 2015. In addition, on April 1, 2015, Hugh R. Frater was appointed an independent director and the Non-Executive Chairman of the Board and Julie G. Richardson was appointed an independent director. Mr. Frater joined the Audit Committee and the Nominating and Corporate Governance Committee, and Ms. Richardson joined the board of directors’ Compensation Committee and Nominating and Corporate Governance Committee. Effective April 1, 2015, with the departure of two directors and subsequent appointment of two directors, the board of directors consists of Mr. Rufrano, Mr. Frater, William G. Stanley, Thomas A. Andruskevich, Bruce D. Frank and Ms. Richardson.
Note 2 – Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements of the Company included herein include the accounts of ARCP and its consolidated subsidiaries, including the Operating Partnership. All intercompany amounts have been eliminated. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2014 of the Company, which are included in the the Company’s Annual Report on Form 10-K, as amended, filed March 30, 2015. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2015, other than the updates described below. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries and consolidated joint venture arrangements. The portions of the consolidated joint venture arrangements not owned by the Company are presented as non-controlling interests. In addition, as described in Note 1 – Organization, certain third parties have been issued OP Units. Holders of OP Units are considered to be non-controlling interest holders in the OP and their ownership interest is reflected as equity in the consolidated balance sheets. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Upon conversion of OP Units to common stock, any difference between the fair value of common shares issued and the carrying value of the OP Units converted is recorded as a component of equity. As of both March 31, 2015 and December 31, 2014, there were approximately 23.8 million Limited Partner Common OP Units outstanding. All intercompany accounts and transactions have been eliminated in consolidation.
In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual

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AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015 (Unaudited) – (Continued)

and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity of which the Company is the primary beneficiary.
A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of the qualitative and quantitative significance of fees it earns from certain of its relationships and investments. If the Company determines that it holds a variable interest in an entity, it evaluates whether such interest is in a variable interest entity (“VIE”). A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, its form of ownership interest, its representation on the entity’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and to replace the manager of and/or liquidate the entity. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE’s operations and the difference between consolidating the VIE and accounting for it on the equity method would be material to the Company’s consolidated financial statements.
The Company continually evaluates the need to consolidate joint ventures and the managed investment programs based on standards set forth in GAAP as described above.
Reclassification
The other debt balance from prior year has been combined in the consolidated balance sheets and consolidated statements of cash flows into the captions mortgage notes payable and other debt, net and payments on mortgage notes payable and other debt, respectively. Additionally, state property income and franchise taxes previously included in general and administrative expenses and federal and state income taxes previously included in other income, net have been combined into the caption (provision for) benefit from income and franchise taxes in the consolidated statements of operations.
Assets Held for Sale
The Company classifies real estate investments as held for sale in accordance with U.S. GAAP. Assets held for sale are recorded at the lower of carrying value or estimated fair value, less estimated cost to dispose of the assets. As of March 31, 2015, no properties were classified as held for sale. As of December 31, 2014, two properties were classified as held for sale, which were sold during the three months ended March 31, 2015.
If circumstances arise which the Company previously considered unlikely and, as a result, the Company decides not to sell a property previously classified as held for sale, the Company will reclassify the property as held and used. The Company measures and records a property that is reclassified as held and used at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held and used or (ii) the estimated fair value at the date of the subsequent decision not to sell. Upon classifying an asset as held for sale, the Company will no longer recognize depreciation expense related to the depreciable assets of the property.
Goodwill
In the case of a business combination, after identifying all tangible and intangible assets and liabilities, the excess consideration paid over the fair value of the assets and liabilities acquired and assumed, respectively, represents goodwill. Goodwill that arose as a result of the Company’s merger with CapLease Inc. (“CapLease”) and certain subsidiaries of each company on November 5, 2013 (the “CapLease Merger”) and the Cole Merger was recorded in the Company’s consolidated financial statements.
In the event the Company disposes of a property that constitutes a business under U.S. GAAP from a reporting unit with goodwill, the Company will allocate a portion of the reporting unit’s goodwill to that property in determining the gain or loss on the disposal of the property. The amount of goodwill allocated to the property will be based on the relative fair value of the property to the fair value of the reporting unit. The Company generally estimates the relative fair value by utilizing rental income on a straight line basis as an indication of the relative fair value. The REI segment and Cole Capital segment each comprise one reporting unit. Future property acquisitions that constitute a business will be integrated in the REI segment and therefore will also be allocated goodwill upon disposition.

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Table of Contents
AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015 (Unaudited) – (Continued)

Impairments
Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to, bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value is determined using a discounted cash flow analysis and recent comparable sales transactions or market rent assumptions. When developing estimates of expected future cash flows, the Company makes certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to release the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in estimating expected future cash flows could result in a different determination of the property’s expected future cash flows and a different conclusion regarding the existence of an impairment, the extent of any loss resulting from such impairment, if any, as well as the fair value of the real estate assets.
The Company identified certain properties during the three months ended March 31, 2015 and 2014 with impairment indicators. However, the undiscounted future cash flows expected as a result of the use and eventual disposition of the real estate and related assets was in excess of the carrying amounts and, as such, no impairment charges were recorded.
Goodwill
The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value, by reporting unit, may not be recoverable. The Company’s annual testing date is during the fourth quarter. The Company tests goodwill for impairment by first comparing the carrying value of net assets to the fair value of each reporting unit. If the fair value is determined to be less than the carrying value or if qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company estimates the fair value of the reporting units using discounted cash flows and relevant competitor multiples. The evaluation of goodwill for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions. The use of different judgments and assumptions could result in different conclusions. During the three months ended March 31, 2015, management monitored the actual performance of the business segments relative to the fair value assumptions used during our annual goodwill impairment test. For the periods presented, no triggering events were identified.
Intangible Assets
The Company evaluates intangible assets, which primarily consist of dealer manager and advisory contracts with the Managed REITs, for impairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company tests intangible assets for impairment by first comparing the carrying value of the asset group to the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the intangible assets to their respective fair values and recognize an impairment loss. The Company will estimate the fair value of the intangible assets using a discounted cash flow model specific to the Managed REITs that were included in the initial value of the intangible assets as of February 7, 2014 (the “Cole Acquisition Date”). The evaluation of intangible assets for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions. The use of different judgments and assumptions could result in different conclusions. There were no events or changes in circumstances that indicated that intangible assets were impaired during the three months ended March 31, 2015 or 2014.
Investment in Unconsolidated Entities
The Company is required to determine whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of any of its investment in the unconsolidated entities. If an event or change in circumstance has occurred, the Company is required to evaluate its investment in the unconsolidated entity for potential impairment and determine if the carrying amount of its investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether an impairment is other-than-temporary, the Company considers whether it has

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AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015 (Unaudited) – (Continued)

the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an unconsolidated entity for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions. The use of different judgments and assumptions could result in different conclusions. No impairments of unconsolidated entities were identified during the three months ended March 31, 2015 or 2014.
Cash and Cash Equivalents
Cash and cash equivalents include cash in bank accounts, as well as investments in highly-liquid money market funds with original maturities of three months or less. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company (“FDIC”) up to an insurance limit. At March 31, 2015 and December 31, 2014, the Company had deposits of $788.7 million and $416.7 million, respectively, of which $784.8 million and $412.7 million, respectively, were in excess of the amount insured by the FDIC. Although the Company bears risk on amounts in excess of those insured by the FDIC, it has not experienced and does not anticipate any losses due to the high quality of the institutions where the deposits are held.
Revenue Recognition
Upon the acquisition of real estate, certain properties have leases where minimum rent payments change during the term of the lease. The Company records rental revenue for the full term of each lease on a straight-line basis. When the Company acquires a property, the term of each existing lease is considered to commence as of the acquisition date for the purposes of this calculation. Cost recoveries from tenants are included in tenant reimbursement income in the period the related costs are incurred, as applicable.
The Company’s revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. Straight-line rent receivables are included in prepaid expenses and other assets on the consolidated balance sheets. See Note 8 – Deferred Costs and Other Assets, Net. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. As of March 31, 2015 and December 31, 2014, the Company had $67.7 million and $57.8 million, respectively, of deferred rental income, which is included in deferred rent and other liabilities on the consolidated balance sheets.
The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company will record an increase in the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statements of operations and comprehensive loss. As of March 31, 2015 and December 31, 2014, the Company recorded an allowance for uncollectible accounts of $3.2 million and $2.5 million, respectively.
Program Development Costs
The Company pays for organization, registration and offering expenses associated with the sale of common stock of the Managed REITs. The reimbursement of these expenses by the Managed REITs is limited to a certain percentage of the proceeds raised from their offerings, in accordance with their respective advisory agreements and charters. Such expenses paid by the Company on behalf of the Managed REITs in excess of these limits that are expected to be collected based on future expected offering proceeds are recorded as program development costs. The Company assesses the collectability of the program development costs, considering the offering period and historical and forecasted sales of shares under the Managed REITs’ respective offerings and reserves for any balances considered not collectible. As of March 31, 2015 and December 31, 2014, the Company had organization and offering costs of $16.3 million and $12.9 million, respectively, which were net of reserves of $15.8 million and $13.1 million, respectively. Such amounts had been paid on behalf of the Managed REITs in excess of the applicable limits and are expected to be collected in future periods and have been included in deferred costs and other assets, net in the accompanying consolidated balance sheets.
Acquisition Related Expenses and Merger and Other Non-routine Transaction Related Expenses
All direct costs incurred as a result of a business combination are classified as acquisition costs or merger and other non-routine transaction costs and expensed as incurred. Acquisition related expenses include legal and other transaction related costs incurred in connection with self-originated acquisitions including purchases of portfolios. In addition, indirect costs, such as internal salaries, that are tracked and documented in a manner that clearly indicates that the activities driving the cost directly relate to activities necessary to complete, or effect, a business combination are classified as acquisition related expenses. Similar costs incurred in relation to mergers (which are not accounted for as acquisitions) are included in the caption “merger and other non-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015 (Unaudited) – (Continued)

routine transactions.” Other non-routine transaction costs are also presented within the line item merger and other non-routine transactions in the consolidated statements of operations and comprehensive loss.
Merger and other non-routine transaction related expenses include the following costs (amounts in thousands):
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Merger related costs:
 
 
 
 
Strategic advisory services
 
$

 
$
34,936

Transfer taxes
 

 
5,109

Legal fees and expenses
 

 
2,984

Personnel costs and other reimbursements
 

 
751

Other fees and expenses
 

 
1,330

Other non-routine costs:
 
 
 
 
Post-transaction support services
 

 
14,251

Subordinated distribution fee
 

 
78,244

Audit Committee Investigation and related litigation
 
15,316

 

Furniture, fixtures and equipment
 

 
14,085

Legal fees and expenses
 
475

 
1,826

Personnel costs and other reimbursements
 

 
2,443

Other fees and expenses
 
632

 
4,339

Total
 
$
16,423


$
160,298

Income Taxes
ARCP currently qualifies and has elected to be taxed as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code. As a REIT, except as discussed below, ARCP generally is not subject to federal income tax on taxable income that it distributes to its stockholders so long as it distributes at least 90% of its annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if ARCP maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, federal income taxes on certain income and excise taxes on its undistributed income.
The Operating Partnership is classified as a partnership for federal income tax purposes. As a partnership, the Operating Partnership is not a taxable entity for federal income tax purposes. Instead, each partner in the Operating Partnership is required to take into account its allocable share of the Operating Partnership’s income, gains, losses, deductions and credits for each taxable year. However, the Operating Partnership may be subject to certain state and local taxes on its income and property.
As of March 31, 2015, the Operating Partnership and ARCP had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended December 31, 2010 remain open to examination by the major taxing jurisdictions to which the Operating Partnership, ARCP, American Realty Capital Trust III, Inc. (“ARCT III”), CapLease, ARCT IV, Cole and Cole Credit Property Trust, Inc. are subject.
Under the LPA, the Operating Partnership is to conduct business in such a manner as to permit ARCP at all times to qualify as a REIT.
The Company conducts substantially all of its Cole Capital business operations through a TRS structure. 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 jurisdiction and various state and local jurisdictions. Certain of the Company’s inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation.
The Company provides for income taxes in accordance with current authoritative accounting and tax guidance. The tax expense or benefit related to significant, unusual or extraordinary items is recognized in the quarter in which those items occur. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the quarter in which the change occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.

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AMERICAN REALTY CAPITAL PROPERTIES, INC. AND ARC PROPERTIES OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015 (Unaudited) – (Continued)

Recent Accounting Pronouncements
In May 2014, the U.S. Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update, (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and requires an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and allows for either full retrospective adoption or modified retrospective adoption, with early application not permitted. The Company is currently evaluating the impact of the new standard on its financial statements.
In February 2015, FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), which eliminates the deferral of FAS 167, modifies the evaluation of whether limited partnerships and similar legal entities are variable or voting interest entities, eliminates the presumption that the general partner should consolidate a limited partnership, modifies the consolidation analysis for reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships, and provides a scope exception for reporting entities with interests in legal entities that operate as registered money market funds. These changes will require re-evaluation of the consolidation conclusion for certain entities and will require the Company to revise its analysis regarding the consolidation or deconsolidation of such entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. Companies may elect to apply the amendments in ASU 2015-02 using a modified retrospective approach or by applying the amendments retrospectively. The Company is currently evaluating the impact of the new standard on its financial statements.
In April 2015, FASB issued ASU 2015-03, Interest Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than presenting as an asset, a deferred charge. The previous requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, “Elements of Financial Statements,” which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. FASB Concepts Statement No. 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. After the update is adopted, debt disclosures will include the face amount of the debt liability and the effective interest rate. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and is to be applied retrospectively, with early adoption permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
Note 3 – Segment Reporting
The Company operates in two segments, REI and Cole Capital, as further discussed below.
REI – Through its REI segment, the Company acquires, owns and operates primarily single-tenant, freestanding commercial real estate properties primarily subject to long term net leases with high credit quality tenants. As of March 31, 2015, the Company owned 4,647 properties comprising 102.1 million square feet of single- and multi-tenant retail and commercial space located in 49 states, the District of Columbia, Puerto Rico and Canada, which include properties owned through consolidated joint ventures. The rentable space at these properties was 98.4% leased with a weighted-average remaining lease term of 11.7 years. In addition, as of March 31, 2015, the Company owned 10 commercial mortgage-backed securities (“CMBS”), 13 loans held for investment and, through six unconsolidated joint ventures, had interests in six properties with aggregate equity investments of $91.7 million, comprising 1.6 million rentable square feet of commercial and retail space (the “Unconsolidated Joint Ventures”).
The Company accounts for the Unconsolidated Joint Ventures using the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over operating and financial policies of these investments. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the joint ventures’ earnings and distributions. The Company records its proportionate share of net income from the Unconsolidated Joint Ventures in other income, net on the accompanying consolidated statements of operations. During the three months ended March 31, 2015 and 2014, the Company recognized $0.1 million and $1.0 million, respectively, of net income from the Unconsolidated Joint Ventures.

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