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Necessity Retail REIT, Inc. - Quarter Report: 2013 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________
Commission file number: 333-187092
American Realty Capital Trust V, Inc.
(Exact name of registrant as specified in its charter)
Maryland
  
90-0929989
(State or other  jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
405 Park Ave., New York, New York
  
10022
(Address of principal executive offices)
  
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)

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

As of October 31, 2013, the registrant had 62,386,235 shares of common stock outstanding.


AMERICAN REALTY CAPITAL TRUST V, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements



AMERICAN REALTY CAPITAL TRUST V, INC.

CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share data)
(Unaudited)

 
September 30, 2013
ASSETS
 
Real estate investments, at cost:
 
Land
$
123,176

Buildings, fixtures and improvements
669,311

Acquired intangible lease assets
101,567

Total real estate investments, at cost
894,054

Less: accumulated depreciation and amortization
(789
)
Total real estate investments, net
893,265

Cash and cash equivalents
163,056

Investment securities, at fair value
93,071

Prepaid expenses and other assets
117,231

Receivable for issuances of common stock
12,514

Deferred costs, net
3,217

Total assets
$
1,282,354

 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accounts payable and accrued expenses
$
16,898

Distributions payable
7,349

Deferred rent
2,279

Below-market lease liabilities, net
926

Total liabilities
27,452

Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, none issued and outstanding
—

Common stock, $0.01 par value per share, 300,000,000 shares authorized, 59,025,914 shares issued and outstanding as of September 30, 2013
590

Additional paid-in capital
1,294,059

Accumulated other comprehensive loss
(4,317
)
Accumulated deficit
(35,430
)
Total stockholders' equity
1,254,902

Total liabilities and stockholders' equity
$
1,282,354


The accompanying notes are an integral part of this statement.

3
AMERICAN REALTY CAPITAL TRUST V, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
(Unaudited)

 
Three Months Ended September 30, 2013
 
For the Period from January 22, 2013 (date of inception) to September 30, 2013
Revenues:
 
 
 
Rental income
$
2,042

 
$
2,071

Operating expense reimbursements
51

 
57

Total revenues
2,093

 
2,128

 
 
 
 
Operating expenses:
 
 
 
Property operating
149

 
155

Acquisition and transaction related
18,159

 
18,271

General and administrative
1,171

 
1,314

Depreciation and amortization
770

 
789

Total operating expenses
20,249

 
20,529

Operating loss
(18,156
)
 
(18,401
)
Other income (expense):
 
 
 
Interest expense
(28
)
 
(28
)
Income from investments
1,108

 
1,108

Other income
62

 
62

Total other income
1,142

 
1,142

Net loss
$
(17,014
)
 
$
(17,259
)
 
 
 
 
Other comprehensive loss:
 
 
 
Unrealized loss on investment securities
(4,317
)
 
(4,317
)
Comprehensive loss attributable to stockholders
$
(21,331
)
 
$
(21,576
)
 
 
 
 
Basic and diluted weighted-average shares outstanding
38,295,114

 
16,370,852

Basic and diluted net loss per share
$
(0.44
)
 
$
(1.05
)
 
The accompanying notes are an integral part of these statements.

4
AMERICAN REALTY CAPITAL TRUST V, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period from January 22, 2013 (date of inception) to September 30, 2013
(In thousands, except share data)
(Unaudited)


 
Common Stock
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-in
Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders' Equity
Balance, January 22, 2013
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Issuances of common stock
58,754,940

 
588

 
1,453,139

 
—

 
—

 
1,453,727

Common stock offering costs, commissions and dealer manager fees
—

 
—

 
(165,421
)
 
—

 
—

 
(165,421
)
Common stock issued through distribution reinvestment plan
264,229

 
2

 
6,273

 
—

 
—

 
6,275

Common stock repurchases
(1,400
)
 
—

 
(35
)
 
—

 
—

 
(35
)
Share-based compensation
8,145

 
—

 
103

 
—

 
—

 
103

Distributions declared
—

 
—

 
—

 
—

 
(18,171
)
 
(18,171
)
Net loss
—

 
—

 
—

 
—

 
(17,259
)
 
(17,259
)
Other comprehensive loss
—

 
—

 
—

 
(4,317
)
 
—

 
(4,317
)
Balance, September 30, 2013
59,025,914

 
$
590

 
$
1,294,059

 
$
(4,317
)
 
$
(35,430
)
 
$
1,254,902


The accompanying notes are an integral part of this statement.



5
AMERICAN REALTY CAPITAL TRUST V, INC.
  
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)

 
For the Period from January 22, 2013 (date of inception) to September 30, 2013
Cash flows from operating activities:
 
Net loss
$
(17,259
)
Adjustment to reconcile net loss to net cash used in operating activities:
 
Depreciation
650

Amortization of intangible lease assets
139

Amortization of deferred financing costs
18

Accretion of below-market lease liabilities
(5
)
Share-based compensation
103

Changes in assets and liabilities:
 
Prepaid expenses and other assets
(1,919
)
Accounts payable and accrued expenses
2,500

Deferred rent
2,279

Net cash used in operating activities
(13,494
)
Cash flows from investing activities:
 
Investment in real estate and other assets
(885,646
)
Deposits for real estate acquisitions
(110,005
)
Payments for purchase of investment securities
(116,582
)
Proceeds from investment securities
19,194

Net cash used in investing activities
(1,093,039
)
Cash flows from financing activities:
 
Payments of deferred financing costs
(3,235
)
Proceeds from issuances of common stock
1,441,213

Payments of offering costs and fees related to stock issuances
(163,835
)
Common stock repurchases
(7
)
Distributions paid
(4,547
)
Net cash provided by financing activities
1,269,589

Net change in cash and cash equivalents
163,056

Cash and cash equivalents, beginning of period
—

Cash and cash equivalents, end of period
$
163,056

 
 
Non-Cash Investing and Financing Activities:
 
Common stock issued through distribution reinvestment plan
$
6,275

Real estate investments financed through accounts payable
10,494


The accompanying notes are an integral part of this statement.

6
AMERICAN REALTY CAPITAL TRUST V, INC.

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


Note 1 — Organization

American Realty Capital Trust V, Inc. (the "Company") was incorporated on January 22, 2013 as a Maryland corporation that intends to qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2013.  On April 4, 2013, the Company commenced its ongoing initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 68.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11, as amended (File No. 333-187092) (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. The Registration Statement also covers up to 14.7 million shares of common stock available pursuant to a distribution reinvestment plan (the "DRIP") under which the Company's common stockholders may elect to have their distributions reinvested in additional shares of the Company's common stock.

On April 25, 2013, the Company received and accepted aggregate subscriptions in excess of the minimum of $2.0 million in shares of common stock, broke escrow and issued shares of common stock to its initial investors who were admitted as stockholders. As of September 30, 2013, the Company had 59.0 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO of $1.5 billion, including proceeds from shares issued pursuant to the DRIP. As permitted under the Company's Registration Statement, the Company reallocated the remaining 14.5 million DRIP shares available under the Registration Statement to the primary offering. Concurrent with such reallocation, the Company registered an additional 14.7 million shares to be issued under the DRIP pursuant to a registration statement on Form S-11, as amended (File No. 333-191255), which became effective on October 5, 2013.

As of September 30, 2013, the aggregate value of all share issuances and subscriptions of common stock outstanding was $1.5 billion, based on a per share value of $25.00 (or $23.75 for shares issued pursuant to the DRIP). Until the filing of the Company's second quarterly financial filing with the SEC, pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), following the earlier to occur of (i) Company's acquisition of at least $1.4 billion in total portfolio assets and (ii) April 4, 2015, the per share purchase price in the IPO will be up to $25.00 per share (including the maximum allowed to be charged for commissions and fees), and shares issued pursuant to the DRIP will initially be equal to $23.75 per share, or 95.0% of the estimated value of a share of common stock. Thereafter, the per share purchase price will vary quarterly and will be equal to the Company's net asset value ("NAV") divided by the number of shares outstanding as of the end of business on the first day of each fiscal quarter after giving effect to any share purchases or repurchases effected in the prior quarter or per share NAV. Applicable commissions and fees will be added to the per share price for shares offered in the IPO but not for shares pursuant to the DRIP.

The Company was formed to acquire a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant retail properties that are net leased to investment grade and other creditworthy tenants. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire first mortgage loans secured by real estate. The Company purchased its first property and commenced active operations on April 29, 2013. As of September 30, 2013, the Company owned 158 properties with an aggregate purchase price of $896.1 million, comprised of 6.3 million rentable square feet which were 100.0% leased with a weighted-average remaining lease term of 12.3 years.

Substantially all of the Company's business is conducted through American Realty Capital Operating Partnership V, L.P. (the "OP"), a Delaware limited partnership. The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP ("OP Units"). American Realty Capital Trust V Special Limited Partner, LLC (the "Special Limited Partner"), an entity wholly owned by AR Capital, LLC (the "Sponsor"), contributed $2,020 to the OP in exchange for 90 OP Units, which represents a nominal percentage of the aggregate OP ownership. After holding the OP Units for a period of one year, or upon liquidation of the OP or sale of substantially all of the assets of the OP, holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests 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.


7
AMERICAN REALTY CAPITAL TRUST V, INC.

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

The Company has no employees. American Realty Capital Advisors V, LLC (the "Advisor") has been retained to manage the Company's affairs on a day-to-day basis. American Realty Capital Properties V, LLC (the "Property Manager") serves as the Company's property manager. Realty Capital Securities, LLC (the "Dealer Manager") serves as the dealer manager of the IPO. The Advisor and the Property Manager are wholly owned subsidiaries of, and the Dealer Manager is under common ownership with, the Sponsor, as a result of which they are related parties and each of which has received and may receive compensation, fees and other expense reimbursements for services related to the IPO and the investment and management of the Company's assets. Such entities may receive fees during the offering, acquisition, operational and liquidation stages.

Note 2 — Summary of Significant Accounting Policies

The accompanying consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended September 30, 2013 and the period from January 22, 2013 (date of inception) to September 30, 2013 are not necessarily indicative of the results for the entire year or any subsequent interim period.

These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of January 31, 2013, and for the period from January 22, 2013 (date of inception) to January 31, 2013, which are included in the Registration Statement. There have been no significant changes to the Company's significant accounting policies during the period from January 22, 2013 (date of inception) to September 30, 2013 other than the updates described below.

Development Stage Company

On April 25, 2013, the Company raised proceeds sufficient to break escrow in connection with its IPO on a reasonable best efforts basis. The Company received and accepted aggregate subscriptions in excess of the minimum $2.0 million, broke escrow and issued shares of common stock to its initial investors who were admitted as stockholders. The Company purchased its first property and commenced active operations on April 29, 2013, and as of such date was no longer considered to be a development stage company.

Recently Issued Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued guidance regarding disclosures about offsetting assets and liabilities, which requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. The adoption of this guidance, which is related to disclosure only, did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets for impairment. The amendments will allow an entity first to assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity will no longer be required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

In February 2013, the FASB issued guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance is effective for annual and interim periods beginning after December 15, 2012 with early adoption permitted. The adoption of this guidance, which is related to disclosure only, did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.


8
AMERICAN REALTY CAPITAL TRUST V, INC.

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

In February 2013, the FASB issued guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Note 3 — Real Estate Investments

The following table presents the allocation of assets acquired during the period from January 22, 2013 (date of inception) to September 30, 2013:

(Dollar amounts in thousands)
 
Period from January 22, 2013 (date of inception) to September 30, 2013
Real estate investments, at cost:
 
 
Land
 
$
123,176

Buildings, fixtures and improvements
 
669,311

Total tangible assets
 
792,487

Acquired intangibles:
 
 
In-place leases
 
101,567

 Below-market lease liabilities
 
(931
)
Total intangibles
 
100,636

Other acquisitions(1)
 
3,017

Total assets acquired, net
 
896,140

Real estate investments financed through accounts payable
 
(10,494
)
Cash paid for acquired real estate investments, at cost
 
$
885,646

Number of properties purchased
 
158

___________________
(1)
Represents the purchase price, including closing costs, for the acquisition of a leasehold interest. A resulting asset of $5.3 million and liability of $2.3 million are recorded in prepaid expenses and other assets and accounts payable and accrued expenses, respectively, on the consolidated balance sheet.
Land, buildings, fixtures and improvements, and in-place lease intangibles include $497.8 million, comprised of $67.7 million, $374.2 million, and $55.9 million, respectively, provisionally assigned to each class of asset, pending receipt of the final appraisals and other information being prepared by a third-party specialist. 

The following table presents unaudited pro forma information as if the acquisitions during the period from January 22, 2013 (date of inception) to September 30, 2013 had been consummated on January 22, 2013 (date of inception):

(In thousands)
 
Period from January 22, 2013 (date of inception) to September 30, 2013
Pro forma revenues
 
$
35,177

Pro forma net loss
 
$
(817
)

As of September 30, 2013, the Company had deposits for potential acquisitions of $110.0 million which are included in prepaid expenses and other assets on the accompanying consolidated balance sheet.

9
AMERICAN REALTY CAPITAL TRUST V, INC.

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

The following table presents future minimum base rent payments on a cash basis due to the Company over the next five years and thereafter.  These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items.

(In thousands)
 
Future Minimum
Base Rent Payments
October 1, 2013 to December 31, 2013
 
$
15,825

2014
 
63,902

2015
 
64,837

2016
 
65,547

2017
 
66,258

Thereafter
 
557,677

 
 
$
834,046


The following table lists the tenants whose annualized rental income on a straight-line basis represented greater than 10% of total annualized rental income on a straight-line basis for all portfolio properties as of September 30, 2013: 

Tenant
 
September 30, 2013
Versacold USA
 
18.7
%
Merrill Lynch, Pierce, Fenner & Smith
 
18.7
%
American Express Travel Related Services Company, Inc.
 
10.9
%

The termination, delinquency or non-renewal of leases by one or more of the above tenants may have a material adverse effect on revenues. No other tenant represented more than 10% of annualized rental income as of September 30, 2013.

The following table lists the states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented greater than 10% of consolidated annualized rental income on a straight-line basis as of September 30, 2013: 

State
 
September 30, 2013
New Jersey
 
18.9
%
Georgia
 
18.3
%
North Carolina
 
11.8
%

Fortress Portfolio Acquisition

On July 24, 2013, AR Capital, LLC and another related entity, on behalf of the Company and certain other entities sponsored directly or indirectly by AR Capital, LLC, entered into a purchase and sale agreement with subsidiaries of Fortress Investment Group LLC ("Fortress") for the purchase and sale of 196 properties owned by Fortress for an aggregate contract purchase price of approximately $972.5 million, subject to adjustments set forth in the purchase and sale agreement and exclusive of closing costs, which was allocated to the Company based on the pro-rata fair value of the properties acquired by the Company relative to the fair value of all 196 properties to be acquired from Fortress. Of the 196 properties, 51 properties are expected to be acquired by the Company from Fortress for a purchase price of approximately $302.2 million, subject to adjustments set forth in the purchase and sale agreement and exclusive of closing costs. As of September 30, 2013, the Company closed on 41 of the 51 properties with a total purchase price of $267.7 million, exclusive of closing costs. The remaining properties are expected to close in the fourth quarter of 2013.

10
AMERICAN REALTY CAPITAL TRUST V, INC.

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

Inland Portfolio Acquisition

On August 8, 2013 the Company's Sponsor entered into an equity interest purchase agreement (the “Agreement”) with Inland American Real Estate Trust, Inc. ("Inland") for the purchase and sale of the equity interests of 67 entities owned by Inland for an aggregate contract purchase price of approximately $2.3 billion, subject to adjustments set forth in the Agreement and exclusive of closing costs. Of the 67 entities, the equity interests of 42 entities (the "Inland Portfolio") will be acquired by the Company from Inland for a purchase price of approximately $1.5 billion, subject to adjustments set forth in the Agreement and exclusive of closing costs, which was allocated to the Company based on the pro-rata fair value of the Inland Portfolio relative to the fair value of all 67 companies to be acquired by the Company and other entities sponsored directly or indirectly by the Company's Sponsor from Inland. The Inland Portfolio is comprised of 244 properties. As of September 30, 2013, the Company has closed on 47 of the 244 properties for a total purchase price of $430.2 million, exclusive of closing costs. The remaining properties are expected to close in the fourth quarter of 2013.

Note 4 — Revolving Credit Facility
On September 23, 2013, the Company, through the OP, entered into a credit agreement (the "Credit Agreement") relating to a new revolving credit facility (the “Credit Facility”) which provides for aggregate revolving loan borrowings of up to $200.0 million (subject to borrowing base availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility. Through an uncommitted “accordion feature,” the OP, subject to certain conditions, may increase commitments under the Credit Facility to up to $750.0 million. J.P. Morgan Securities LLC acted as joint bookrunner and joint lead arranger for the Credit Facility and its affiliate, JPMorgan Chase Bank, N.A., is the administrative agent, letter of credit issuer, swingline lender and a lender thereunder. Regions Capital Markets acted as joint bookrunner, joint lead arranger and syndication agent for the Credit Facility and its affiliate, Regions Bank, is a lender thereunder.
Borrowings under the Credit Facility will bear interest, at the OP’s election, at either (i) base rate (which is defined in the credit agreement as the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) LIBOR for a one month interest period plus 1.0%) plus an applicable spread ranging from 0.60% to 1.20%, depending on the Company’s consolidated leverage ratio, or (ii) LIBOR plus an applicable spread ranging from 1.60% to 2.20%, depending on the Company’s consolidated leverage ratio. The Credit Facility requires an unused fee per annum of 0.25% and 0.15%, if the unused balance of the Credit Facility exceeds or is equal to or less than 50% of the available facility, respectively. As of September 30, 2013, the Company had no outstanding borrowings under the Credit Facility. The Company incurred approximately $11,000 in unused borrowing fees during the three months ended September 30, 2013 and the period from January 22, 2013 (date of inception) to September 30, 2013.
The Credit Facility provides for monthly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Credit Facility will mature on September 23, 2017, provided that the OP, subject to certain conditions, may elect to extend the maturity date one year to September 23, 2018. The Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. Certain of the Company's subsidiaries and certain subsidiaries of the OP will guarantee, and the equity of certain subsidiaries of the OP will be pledged as collateral for, the obligations under the Credit Facility.
As of September 30, 2013, the Company had no outstanding borrowings under the Credit Facility. As of September 30, 2013, the Company was in compliance with the financial covenants under the Credit Agreement.

Note 5 — Investment Securities

As of September 30, 2013, the Company has investments in commercial paper, redeemable preferred stock, senior notes and common stock, with an aggregate fair value of $93.1 million. These investments are considered available-for-sale securities and therefore increases or decreases in the fair value of these investments are recorded in accumulated other comprehensive loss as a component of equity on the consolidated balance sheet unless the securities are considered to be permanently impaired at which time the losses would be reclassified to expense.


11
AMERICAN REALTY CAPITAL TRUST V, INC.

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

The following table details the unrealized gains and losses on investment securities as of September 30, 2013:

 
 
September 30, 2013
(In thousands)
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Investment securities
 
$
97,388

 
$
—

 
$
(4,317
)
 
$
93,071


Unrealized losses as of September 30, 2013 were considered temporary and therefore no impairment was recorded during the three months ended September 30, 2013 and the period from January 22, 2013 (date of inception) to September 30, 2013.

The Company's preferred stock investments are redeemable at the respective issuer's option after five years from issuance. The senior notes have a weighted-average maturity of 29.1 years and a weighted-average interest rate of 5.6% as of September 30, 2013.

Note 6 — Fair Value of Financial Instruments

The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The guidance defines three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.

The Company has investments in commercial paper, redeemable preferred stock, senior notes and common stock that are traded in active markets and therefore, due to the availability of quoted market prices in active markets, classified these investments as Level 1 in the fair value hierarchy.

The following table presents information about the Company's assets measured at fair value on a recurring basis as of September 30, 2013, aggregated by the level in the fair value hierarchy within which those instruments fall:
(In thousands)
 
Quoted Prices
in Active
Markets
Level 1
 
Significant Other
Observable
Inputs
Level 2
 
Significant
Unobservable
Inputs
Level 3
 
Total
Investment securities
 
$
93,071

 
$
—

 
$
—

 
$
93,071



12
AMERICAN REALTY CAPITAL TRUST V, INC.

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

A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended September 30, 2013 and the period from January 22, 2013 (date of inception) to September 30, 2013.

The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, other receivables, accounts payable and distributions payable approximates their carrying value on the consolidated balance sheet due to their short-term nature.

Note 7 — Common Stock

As of September 30, 2013, the Company had 59.0 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds of $1.5 billion, including proceeds from shares issued pursuant to the DRIP.

On April 9, 2013, the Company's board of directors authorized, and the Company declared, a distribution rate, which is calculated based on stockholders of record each day during the applicable period at a rate of $0.004520548 per day, based on $25.00 price per share of common stock. Distributions began to accrue on May 13, 2013, 15 days following the Company's initial property acquisition. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distributions payments are not assured.

The Company has a Share Repurchase Program ("SRP") that enables stockholders to sell their shares to the Company under limited circumstances. Under the SRP, stockholders may request that the Company repurchase all or any portion, subject to certain minimum conditions, of their shares on any business day, if such repurchase does not impair the Company's capital or operations. The following table summarizes the number of shares repurchased under the Company's SRP cumulatively through September 30, 2013.

 
 
Number of Requests
 
Number of Shares
 
Weighted Average Price per Share
Cumulative repurchase requests as of September 30, 2013 (1)
 
4

 
1,400

 
$
24.98

_____________________
(1)
Includes three unfulfilled repurchase requests consisting of 1,129 shares at a weighted-average repurchase price per share of $24.97, which were approved for repurchase as of September 30, 2013 and completed during the fourth quarter of 2013. This liability is included in accounts payable and accrued expenses on the Company's consolidated balance sheet.


13
AMERICAN REALTY CAPITAL TRUST V, INC.

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

Note 8 — Commitments and Contingencies

Future Minimum Lease Payments

The Company entered into lease agreements related to certain acquisitions under leasehold interests arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter.  These amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items.
(In thousands)
 
Future Minimum Base Rent Payments
October 1, 2013 to December 31, 2013
 
$
188

2014
 
751

2015
 
754

2016
 
762

2017
 
762

Thereafter
 
5,797

 
 
$
9,014


Litigation

In the ordinary course of business, the Company may become subject to litigation or claims. There are no material legal proceedings pending or known to be contemplated against the Company or its properties.

Environmental Matters

In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. As of September 30, 2013, the Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on its financial position or results of operations.

Note 9 — Related Party Transactions and Arrangements

As of September 30, 2013, the Special Limited Partner, an entity wholly owned by the Sponsor, owned 8,888 shares of the Company's outstanding common stock. In July 2013, the Special Limited Partner contributed $2,020 to the OP in exchange for 90 OP Units.


14
AMERICAN REALTY CAPITAL TRUST V, INC.

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

Fees Paid in Connection with the IPO

The Dealer Manager receives fees and compensation in connection with the sale of the Company's common stock in the IPO. The Dealer Manager receives selling commissions of up to 7.0% of the per share purchase price of the Company's offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Dealer Manager receives up to 3.0% of the gross proceeds from the sale of shares, before reallowance to participating broker-dealers, as a dealer-manager fee. The Dealer Manager may reallow its dealer-manager fee to such participating broker-dealers. A participating broker dealer may elect to receive a fee equal to 7.5% of the gross proceeds from the sale of shares (not including selling commissions and dealer manager fees) by such participating broker dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option is elected, the dealer manager fee will be reduced to 2.5% of gross proceeds (not including selling commissions and dealer manager fees). The following table details total selling commissions and dealer manager fees incurred from and due to the Dealer Manager as of and for the periods presented:

(In thousands)
 
Three Months Ended September 30, 2013
 
Period from January 22, 2013 (date of inception) to September 30, 2013
 
Payable as of
September 30, 2013
Total commissions and fees from the Dealer Manager
 
$
95,562

 
 
$
135,238

 
$
1,164


The Advisor and its affiliates receive compensation and reimbursement for services relating to the IPO, including transfer agent services provided by an affiliate of the Dealer Manager. All offering costs incurred by the Company or its affiliated entities on behalf of the Company are charged to additional paid-in capital on the accompanying consolidated balance sheet as of September 30, 2013. The following table details offering costs and reimbursements incurred from and due to the Advisor and Dealer Manager as of and for the periods presented:

(In thousands)
 
Three Months Ended September 30, 2013
 
Period from January 22, 2013 (date of inception) to September 30, 2013
 
Payable as of
September 30, 2013
Fees and expense reimbursements from the Advisor and Dealer Manager
 
$
22,020

 
$
27,345

 
$
282


The Company is responsible for offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 2.0% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs, excluding commissions and dealer manager fees, in excess of the 2.0% cap as of the end of the IPO are the Advisor's responsibility. As of September 30, 2013, cumulative offering and related costs, excluding commissions and dealer manager fees, were less than the 2.0% threshold.

The Advisor has elected to cap cumulative offering costs incurred by the Company, net of unpaid amounts, to 15.0% of gross common stock proceeds during the offering period. As of September 30, 2013, cumulative offering costs were $165.4 million. Cumulative offering costs, net of unpaid amounts, were less than the 15.0% threshold as of September 30, 2013.

Fees Paid in Connection With the Operations of the Company

The Advisor receives an acquisition fee of 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment. The Advisor is also paid for services provided for which they incur investment-related expenses, or insourced expenses. Such insourced expenses will be fixed initially at, and may not exceed, 0.5% of the contract purchase price and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company pays third party acquisition expenses. Once the proceeds from the IPO have been fully invested, the aggregate amount of acquisition fees and financing coordination fees (as described below) shall not exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees payable with respect to a particular investment or reinvestment exceed 4.5% of the contract purchase price to be measured at the close of the acquisition phase or 4.5% of the amount advanced for a loan or other investment.


15
AMERICAN REALTY CAPITAL TRUST V, INC.

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

If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations.

In connection with providing strategic advisory services related to certain portfolio acquisitions, the Company has entered into arrangements in which the investment banking division of the Dealer Manager receives a transaction fee of 0.25% of the Transaction Value for certain portfolio acquisition transactions. Pursuant to such arrangements to date, Transaction Value has been defined as (i) the value of the consideration paid or to be paid for all the equity securities or assets in connection with the sale transaction or acquisition transaction (including consideration payable with respect to convertible or exchangeable securities and option, warrants or other exercisable securities and including dividends or distributions and equity security repurchases made in anticipation of or in connection with the sale transaction or acquisition transaction), or the implied value for all the equity securities or assets of the Company or acquisition target, as applicable, if a partial sale or purchase is undertaken, plus (ii) the aggregate value of any debt, capital lease and preferred equity security obligations (whether consolidated, off-balance sheet or otherwise) of the Company or acquisition target, as applicable, outstanding at the closing of the sale transaction or acquisition transaction), plus (iii) the amount of any fees, expenses and promote paid by the buyer(s) on behalf of the Company or the acquisition target, as applicable. Should the Dealer Manager provide strategic advisory services related to additional portfolio acquisition transactions, the Company will enter into new arrangements with the Dealer Manager on such terms as may be agreed upon between the two parties.

In connection with the Advisor's asset management services, the Company expects to issue (subject to periodic approval by the board of directors) performance-based restricted Class B units in the OP ("Class B Units") to the Advisor on a quarterly basis. The Class B Units are subject to forfeiture until such time as: (a) the value of the operating partnership's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pretax, non-compounded annual return thereon (the “economic hurdle”); (b) any one of the following events occurs concurrently with or subsequently to the achievement of the economic hurdle described above: (i) a listing; (ii) a transaction to which the Company, or the OP, shall be a party, as a result of which OP Units or the Company's common stock shall be exchanged for, or converted into, the right, or the holders of such securities shall otherwise be entitled, to receive cash, securities or other property or any combination thereof; or (iii) the termination of the advisory agreement without cause; and (c) the Advisor pursuant to the advisory agreement is providing services to the Company immediately prior to the occurrence of an event of the type described in clause (b) above, unless the failure to provide such services is attributable to the termination without cause of the advisory agreement by an affirmative vote of a majority of the Company's independent directors after the economic hurdle described above has been met. Any outstanding Class B Units will be forfeited immediately if the advisory agreement is terminated for any reason other than a termination without cause. Any outstanding Class B Units will be forfeited immediately if the advisory agreement is terminated without cause by an affirmative vote of a majority of our board of directors before the economic hurdle described above has been met.

The Class B Units will be issued in an amount equal to the cost of the Company's assets multiplied by 0.1875%, divided by the value of one share of common stock as of the last day of such calendar quarter, which is equal initially to $22.50 (the initial offering price in the IPO minus selling commissions and dealer manager fees) and, at such time as the Company calculates NAV, to per share NAV. When and if approved by the board of directors, the Class B units are expected to be issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. As of September 30, 2013, the Company cannot determine the probability of achieving the performance condition. The value of issued Class B units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. The Advisor receives distributions on the vested and unvested Class B Units it receives in connection with its asset management subordinated participation at the same rate as distributions received on the Company's common stock. Such distributions on issued Class B units are included in general and administrative expenses in the consolidated statement of operations and comprehensive loss until the performance condition is considered probable to occur. During the three months ended September 30, 2013 and for the period from January 22, 2013 (date of inception) to September 30, 2013, the board of directors approved the issuance of 192 Class B units to the Advisor in connection with this arrangement.

16
AMERICAN REALTY CAPITAL TRUST V, INC.

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

Effective August 1, 2013, the Company entered into an agreement with the Dealer Manager to provide strategic advisory services and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. Strategic advisory fees are amortized over the term of the IPO and are included in acquisition and transaction related expense on the consolidated statements of operations and comprehensive loss.
The following table details amounts incurred, forgiven and payable as of and for the periods presented:

 
 
Three Months Ended September 30, 2013
 
Period from January 22, 2013 (date of inception) to September 30, 2013
 
Payable as of
(In thousands)
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
September 30, 2013
One-time fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
Acquisition fees and related cost reimbursements
 
$
9,758

 
$
—

 
$
9,806

 
$
—

 
$
—

Financing coordination fees
 
1,500

 
—

 
1,500

 
—

 
—

Transaction fees
 
1,745

 
—

 
1,745

 
—

 
1,745

Ongoing fees:
 
 
 
 
 
 
 
 
 
 
Strategic advisory fees
 
613

 
—

 
613

 
—

 
—

Distributions on Class B Units
 
—

 
—

 
—

 
—

 
—

Total related party operation fees and reimbursements
 
$
13,616

 
$
—

 
$
13,664

 
$
—

 
$
1,745


The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company's operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period. The Company may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or real estate commissions. No reimbursements were incurred from the Advisor for providing services during the period from January 22, 2013 (date of inception) to September 30, 2013.

In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flows from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that are forgiven are not deferrals and, accordingly, will not be paid to the Advisor. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs and/or property operating costs. No general and administrative costs were absorbed by the Advisor during the three months ended September 30, 2013. The Advisor absorbed $0.1 million of general and administrative costs during the period from January 22, 2013 (date of inception) to September 30, 2013. General and administrative expenses are presented net of costs absorbed by the Advisor, where applicable, on the consolidated statement of operations and comprehensive loss.

Fees Paid in Connection with the Liquidation or Listing of the Company's Real Estate Assets

The Company may pay the Advisor a subordinated performance fee calculated on the basis of the Company's total return to stockholders, payable annually in arrears, such that for any year in which the Company's total return on stockholders' capital exceeds 6.0% per annum, the Advisor will be entitled to 15.0% of the excess total return, provided that the annual subordinated performance fee paid to the Advisor does not exceed 10.0% of the aggregate total return for such year. This fee will be payable only upon the sale of assets, distributions or other event which results in the return on stockholders' capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the three months ended September 30, 2013 and the period from January 22, 2013 (date of inception) to September 30, 2013.


17
AMERICAN REALTY CAPITAL TRUST V, INC.

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

The Company will pay a brokerage commission on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and one-half of the total brokerage commission paid, if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such fees were incurred during the three months ended September 30, 2013 and the period from January 22, 2013 (date of inception) to September 30, 2013.

If the Company is not simultaneously listed on an exchange, the Company intends to pay a subordinated participation in the net sales proceeds of the sale of real estate assets of 15.0% of remaining net sales proceeds after return of capital contributions to investors plus payment to investors of an annual 6.0% cumulative, pre-tax, non-compounded return on the capital contributed by investors. The Company cannot assure that it will provide this 6.0% return but the Special Limited Partner will not be entitled to the subordinated participation in net sale proceeds unless the Company's investors have received an annual 6.0% cumulative, pre-tax, non-compounded return on their capital contributions. No such fees were incurred during the three months ended September 30, 2013 and the period from January 22, 2013 (date of inception) to September 30, 2013.

If the common stock of the Company is listed on a national exchange, the Company expects to pay a subordinated incentive listing distribution from the OP of 15.0% of the amount by which the Company's market value plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded annual return to investors. The Company cannot assure that it will provide this 6.0% return but the Special Limited Partner will not be entitled to the subordinated incentive listing fee unless investors have received an annual 6.0% cumulative, pre-tax, non-compounded return on their capital contributions. No such fees were incurred during the three months ended September 30, 2013 and the period from January 22, 2013 (date of inception) to September 30, 2013. Neither the Advisor nor any of its affiliates can earn both the subordination participation in the net proceeds and the subordinated incentive listing distribution.

Upon termination or non-renewal of the advisory agreement with or without cause, the Special Limited Partner will be entitled to receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company's market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded return to investors. The Advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.


18
AMERICAN REALTY CAPITAL TRUST V, INC.

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

Note 10 — Economic Dependency

Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common ownership with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company's common stock available for issue, transfer agency services, as well as other administrative responsibilities for the Company including accounting services, transaction management services and investor relations.

As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.

Note 11 — Share-Based Compensation

Restricted Share Plan

The Company has an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 1,333 restricted shares of common stock to each of the independent directors, without any further action by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholders' meeting. Restricted stock issued to independent directors will vest over a five-year period following the first anniversary or the date of grant in increments of 20.0% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of shares of common stock granted under the RSP shall not exceed 5.0% of the Company's outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 3.4 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).

Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares.

The following table reflects restricted share award activity for the period from January 22, 2013 (date of inception) to September 30, 2013:

 
Number of Shares of Common Stock
 
Weighted-Average Issue Price
Unvested, January 22, 2013
—

 
$
—

Granted
5,333

 
22.50

Vested
(1,333
)
 
22.50

Unvested, September 30, 2013
4,000

 
$
22.50


The fair value of the restricted shares is being expensed over the vesting period of five years. Compensation expense related to restricted stock was approximately $5,000 for the three months ended September 30, 2013 and approximately $39,000 for the period from January 22, 2013 (date of inception) to September 30, 2013.


19
AMERICAN REALTY CAPITAL TRUST V, INC.

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

Other Share-Based Compensation

The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at each director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. The following table reflects the shares of common stock issued to directors in lieu of cash compensation:

(Dollar amounts in thousands)
 
Three Months Ended September 30, 2013
 
Period from January 22, 2013 (date of inception) to September 30, 2013
Value of shares issued in lieu of cash
 
$
56

 
$
64

Shares issued in lieu of cash
 
2,456

 
2,812

Note 12 — Net Loss Per Share

The following is a summary of the basic and diluted net loss per share computation for the three months ended September 30, 2013 and for the period from January 22, 2013 (date of inception) to September 30, 2013:

 
 
Three Months Ended September 30, 2013
 
Period from January 22, 2013 (date of inception) to September 30, 2013
Net loss (in thousands)
 
$
(17,014
)
 
$
(17,259
)
Basic and diluted weighted-average shares outstanding
 
38,295,114

 
16,370,852

Basic and diluted net loss per share
 
$
(0.44
)
 
$
(1.05
)

The following common stock equivalents as of September 30, 2013 were excluded from diluted net loss per share computations as their effect would have been antidilutive:

 
 
September 30, 2013
Unvested restricted stock
 
4,000

OP Units
 
90

Class B units
 
192

Total common stock equivalents
 
4,282



20
AMERICAN REALTY CAPITAL TRUST V, INC.

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

Note 13 — Subsequent Events

The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements except for the following:

Sales of Common Stock

As of October 31, 2013, the Company had 62.4 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, from total proceeds from the IPO of $1.5 billion. As of October 31, 2013, the aggregate value of all share issuances was $1.6 billion, based on a per share value of $25.00 (or $23.75 for shares issued pursuant to the DRIP).

Total capital raised to date, including proceeds from shares issued pursuant to the DRIP, is as follows:

Source of Capital (In thousands)
 
Period from January 22, 2013 (date of inception) to September 30, 2013
 
October 1 to October 31, 2013
 
Total
Common stock
 
$
1,459,967

 
$
83,192

 
$
1,543,159


Acquisitions

The following table presents certain information about the properties that the Company acquired from October 1, 2013 to November 12, 2013:

(Dollar amounts in thousands)
 
Number of Properties
 
Base Purchase Price (1)
 
Rentable Square Feet
Total portfolio — September 30, 2013
 
158

 
$
896,081

 
6,312,929

Acquisitions
 
16

 
114,471

 
733,328

Total portfolio — November 12, 2013
 
174

 
$
1,010,552

 
7,046,257

_______________________________
(1) Contract purchase price, excluding acquisition related costs.

Amendments to Distribution Reinvestment and Direct Stock Purchase Plan

On October 5, 2013, our amended and restated distribution reinvestment plan and direct stock purchase plan became effective.


21
Table of Contents

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

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of American Realty Capital Trust V, Inc. and the notes thereto. As used herein, the terms "Company," "we," "our" and "us" refer to American Realty Capital Trust V, Inc., a Maryland corporation, including, as required by context, American Realty Capital Operating Partnership V, L.P., a Delaware limited partnership, which we refer to as the "OP," and its subsidiaries. The Company is externally managed by American Realty Capital Advisors V, LLC (our "Advisor"), a Delaware limited liability company.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the Company 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," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such 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.

The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

•
We have a limited operating history and the Advisor has limited experience operating a public company. This inexperience makes our future performance difficult to predict.

•
All of our executive officers are also officers, managers and/or holders of a direct or indirect controlling interest in our Advisor, our dealer manager, Realty Capital Securities, LLC (the "Dealer Manager") and other American Realty Capital affiliated entities. As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by American Realty Capital affiliates and conflicts in allocating time among these investment programs and us. These conflicts could result in unanticipated actions.

•
Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital advised investment programs, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.

•
Commencing with the filing of our second quarterly financial filing with the U.S. Securities and Exchange Commission (the "SEC"), pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), following the earlier to occur of (i) our acquisition of at least $1.4 billion in total portfolio assets and (ii) April 4, 2015, the purchase price and repurchase price for our shares will be based on our net asset value ("NAV"). Our published NAV may not accurately reflect the value of our assets. No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.

•
If we and our Advisor are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay distributions.

•
Our initial public offering of common stock (the "IPO"), which commenced on April 4, 2013, was a blind pool offering and you may not have had the opportunity to evaluate our investments before making a purchase of our common stock. As of September 30, 2013, we owned 158 properties.

•
If we raise substantially less than the maximum offering in our IPO, we may not be able to invest in a diversified portfolio of real estate assets and the value of an investment in us may vary more widely with the performance of specific assets.

•
We may be unable to pay or maintain cash distributions or increase distributions over time.

•
We are obligated to pay substantial fees to our Advisor and its affiliates.


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•
We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants.

•
Increases in interest rates could increase the amount of our debt payments, as applicable, and limit our ability to pay distributions to our stockholders.

•
Our organizational documents permit us to pay distributions from unlimited amounts of any source. Until substantially all the proceeds from our IPO are invested, we may use proceeds from our IPO and financings to fund distributions until we have sufficient cash flow. There are no established limits on the amounts of net proceeds and borrowings that we may use to fund such distribution payments.

•
Any of these distributions may reduce the amount of capital we ultimately invest in properties and other permitted investments and negatively impact the value of your investment.

•
We may not generate cash flows sufficient to pay our distributions to stockholders, as such we may be forced to borrow at higher rates or depend on our Advisor to waive reimbursement of certain expenses and fees to fund our operations.

•
We are subject to risks associated with the significant dislocations and liquidity disruptions that have recently occurred in the credit markets of the United States of America.

•
We may fail to qualify, or continue to qualify, to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes, which would result in higher taxes, may adversely affect operations and would reduce our NAV and cash available for distributions.

•
We may be deemed to be an investment company under the Investment Company Act of 1940, as amended, and thus subject to regulation under the Investment Company Act of 1940, as amended.

Overview

We were incorporated on January 22, 2013 as a Maryland corporation that intends to qualify as a REIT for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2013.  On April 4, 2013, we commenced our IPO on a "reasonable best efforts" basis of up to 68.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11, as amended (File No. 333-187092) (the "Registration Statement"), filed with the SEC under the Securities Act of 1933, as amended. The Registration Statement also covers up to 14.7 million shares of common stock available pursuant to a distribution reinvestment plan (the "DRIP") under which our common stockholders may elect to have their distributions reinvested in additional shares of our common stock.

On April 25, 2013, we received and accepted aggregate subscriptions equal to the minimum of $2.0 million in shares of common stock, broke escrow and issued shares to our initial investors who were admitted as stockholders. As of September 30, 2013, we had 59.0 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds of $1.5 billion, including proceeds from shares issued pursuant to the DRIP. As permitted under our Registration Statement, we reallocated the remaining 14.5 million DRIP shares available under the Registration Statement to the primary offering. Concurrent with such reallocation, we registered an additional 14.7 million shares to be issued under the DRIP pursuant to a registration statement on Form S-11, as amended (File No. 333-191255), which became effective on October 5, 2013.

As of September 30, 2013, the aggregate value of all share issuances and subscriptions of common stock outstanding was $1.5 billion, based on a per share value of $25.00 (or $23.75 for shares issued pursuant to the DRIP). Until the filing of our second quarterly financial filing with the SEC, pursuant to the Exchange Act, following the earlier to occur of (i) our acquisition of at least $1.4 billion in total portfolio assets and (ii) April 4, 2015, the per share purchase price in the IPO will be up to $25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued pursuant to the DRIP will initially be equal to $23.75 per share, or 95.0% of the estimated value of a share of common stock. Thereafter, the per share purchase price will vary quarterly and will be equal to our NAV divided by the number of shares outstanding as of the end of business on the first day of each fiscal quarter after giving effect to any share purchases or repurchases effected in the prior quarter or per share NAV. Applicable commissions and fees will be added to the per share price for shares offered in the IPO but not for shares pursuant to the DRIP.


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We were formed to primarily acquire a diversified portfolio of commercial properties, comprised primarily of freestanding single-tenant retail properties that are net leased to investment grade and other creditworthy tenants. All such properties may be acquired and operated by us alone or jointly with another party. We may also originate or acquire first mortgage loans secured by real estate. We purchased our first property and commenced active operations on April 29, 2013. As of September 30, 2013, we owned 158 properties with an aggregate purchase price of $896.1 million, comprised of 6.3 million rentable square feet which were 100.0% leased with a weighted-average remaining lease term of 12.3 years.

Substantially all of our business is conducted through the OP. We have no employees. We have retained the Advisor to manage our affairs on a day-to-day basis. American Realty Capital Properties V, LLC (the "Property Manager") serves as our property manager. The Dealer Manager serves as the dealer manager of the IPO. The Advisor and the Property Manager are wholly owned subsidiaries of, and the Dealer Manager is under common ownership with, our sponsor AR Capital, LLC (the "Sponsor"), as a result of which they are related parties and each of which has received and may receive compensation, fees and other expense reimbursements for services related to the IPO and the investment and management of our assets. The Advisor, Property Manager and Dealer Manager may receive fees during the offering, acquisition, operational and liquidation stages.

Significant Accounting Estimates and Critical Accounting Policies

Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:

Offering and Related Costs

Offering and related costs include all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the dealer manager fees) include costs that may be paid by the Advisor, the Dealer Manager or their affiliates on our behalf.  These costs include but are not limited to: (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Dealer Manager for amounts it may pay to reimburse the bona fide diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. We are obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor is obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and dealer manager fees) incurred by us in our offering exceed 2.0% of gross offering proceeds in the IPO. As a result, these costs are only our liability to the extent aggregate selling commissions, the dealer manager fee and other organization and offering costs do not exceed 12.0% of the gross proceeds determined at the end of our IPO.

Revenue Recognition

Our 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 our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. We defer the revenue related to lease payments received from tenants in advance of their due dates.

We continually review receivables related to rent and unbilled rent receivables and determine 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, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations.

Investments in Real Estate

Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.


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We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis. We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations at fair value for all periods presented. Properties that are intended to be sold are to be designated as "held for sale" on the balance sheet.

Long-lived assets are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted or when they are designated as held for sale. Valuation of real estate is considered a "critical accounting estimate" because the evaluation of impairment and the determination of fair values involve a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate. Additionally, decisions regarding when a property should be classified as held for sale are also highly subjective and require significant management judgment.

Events or changes in circumstances that could cause an evaluation for impairment include the following:

•
a significant decrease in the market price of a long-lived asset;
•
a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
•
a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator;
•
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; and
•
a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset.

We review our portfolio on an ongoing basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income.

Purchase Price Allocation

We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third-parties or on our analysis of comparable properties in our portfolio. Identifiable intangible assets and liabilities, as applicable, include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.

The aggregate value of intangible assets and liabilities, as applicable, related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by us in our analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 12 months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.


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Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease.  The capitalized below-market lease values are amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, we initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option.  The likelihood that a lessee will execute the renewal option is determined 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.

The aggregate value of intangible assets related to customer relationships is measured based on our evaluation of the specific characteristics of each tenant's lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors.

The value of in-place leases is amortized to expense over the initial term of the respective leases, which range from approximately 10 to 15 years. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.

In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

Derivative Instruments

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.

We record all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  We may enter into derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.

Recently Issued Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued guidance regarding disclosures about offsetting assets and liabilities, which requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. The adoption of this guidance, which is related to disclosure only, did not have a material impact on our consolidated financial position, results of operations or cash flows.


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In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets for impairment. The amendments will allow an entity first to assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity will no longer be required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2013, the FASB issued guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance is effective for annual and interim periods beginning after December 15, 2012 with early adoption permitted. The adoption of this guidance, which is related to disclosure only, did not have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2013, the FASB issued guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We do not expect the adoption of this guidance to have a material impact on our consolidated financial position, results of operations or cash flows.

Properties

We acquire and operate retail properties.  All such properties may be acquired and operated by the Company alone or jointly with another party.  Our portfolio of real estate properties is comprised of the following properties as of September 30, 2013:

Portfolio
 
Acquisition Date
 
Number of
Properties
 
Square
Feet
 
Remaining Lease
Term (1)
 
Base Purchase
Price (2)
 
 
 
 
 
 
 
 
 
 
(In thousands)
Dollar General I
 
Apr. & May 2013
 
2
 
18,126

 
14.6
 
$
2,243

Walgreens I
 
Jul. 2013
 
1
 
10,500

 
24.0
 
3,632

Dollar General II
 
Jul. 2013
 
2
 
18,052

 
14.7
 
2,346

Auto Zone I
 
Jul. 2013
 
1
 
7,370

 
13.8
 
1,519

Dollar General III
 
Jul. 2013
 
5
 
45,989

 
14.6
 
5,783

BSFS I
 
Jul. 2013
 
1
 
8,934

 
10.3
 
3,047

Dollar General IV
 
Jul. 2013
 
2
 
18,126

 
12.4
 
1,989

Tractor Supply I
 
Aug. 2013
 
1
 
19,097

 
14.2
 
4,074

Dollar General V
 
Aug. 2013
 
1
 
12,480

 
14.4
 
2,295

Mattress Firm I
 
Aug. 2013
 
1
 
5,000

 
11.7
 
2,531

Family Dollar I
 
Aug. 2013
 
1
 
8,050

 
7.8
 
955

Lowe's I
 
Aug. 2013
 
5
 
671,313

 
15.8
 
58,695

O'Reilly Auto Parts I
 
Aug. 2013
 
1
 
10,692

 
16.8
 
1,005

Food Lion I
 
Aug. 2013
 
1
 
44,549

 
16.1
 
8,910

Family Dollar II
 
Aug. 2013
 
1
 
8,028

 
9.8
 
969

Walgreens II
 
Aug. 2013
 
1
 
14,490

 
19.5
 
3,200

Dollar General VI
 
Aug. 2013
 
1
 
9,014

 
12.4
 
1,431

Dollar General VII
 
Aug. 2013
 
1
 
9,100

 
14.5
 
1,210

Family Dollar III
 
Aug. 2013
 
1
 
8,000

 
9.0
 
1,004

Chili's I
 
Aug. 2013
 
2
 
12,700

 
12.2
 
5,760

CVS I
 
Aug. 2013
 
1
 
10,055

 
12.4
 
2,640

Joe's Crab Shack I
 
Aug. 2013
 
2
 
16,012

 
13.5
 
7,975

Dollar General VIII
 
Sep. 2013
 
1
 
9,100

 
14.8
 
1,418

Tire Kingdom I
 
Sep. 2013
 
1
 
6,635

 
11.5
 
2,063

Auto Zone II
 
Sep. 2013
 
1
 
7,370

 
9.7
 
1,591

Family Dollar IV
 
Sep. 2013
 
1
 
8,320

 
9.8
 
879

Fresenius I
 
Sep. 2013
 
1
 
5,800

 
11.8
 
2,223

Dollar General IX
 
Sep. 2013
 
1
 
9,014

 
11.6
 
875


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Table of Contents

Portfolio
 
Acquisition Date
 
Number of
Properties
 
Square
Feet
 
Remaining Lease
Term (1)
 
Base Purchase
Price (2)
Advance Auto I
 
Sep. 2013
 
1
 
10,500

 
9.8
 
834

Walgreens III
 
Sep. 2013
 
1
 
15,120

 
12.5
 
4,839

Walgreens IV
 
Sep. 2013
 
1
 
13,500

 
11.0
 
2,796

CVS II (3)
 
Sep. 2013
 
1
 
13,905

 
23.4
 
2,958

Arby's I
 
Sep. 2013
 
1
 
3,000

 
14.8
 
2,320

Dollar General X
 
Sep. 2013
 
1
 
9,100

 
14.5
 
1,305

AmeriCold I
 
Sep. 2013
 
9
 
1,407,166

 
14.0
 
173,939

Home Depot I
 
Sep. 2013
 
2
 
1,315,200

 
13.4
 
79,055

New Breed Logistics I
 
Sep. 2013
 
1
 
390,486

 
8.1
 
24,738

AMEX Travel I
 
Sep. 2013
 
2
 
785,164

 
6.4
 
91,548

L.A. Fitness I
 
Sep. 2013
 
1
 
45,000

 
10.4
 
12,067

Sun Trust Bank I
 
Sep. 2013
 
32
 
182,400

 
4.3
 
59,395

National Tire & Battery I
 
Sep. 2013
 
1
 
10,795

 
10.2
 
1,311

Circle K I
 
Sep. 2013
 
19
 
54,521

 
15.1
 
25,815

Walgreens V
 
Sep. 2013
 
1
 
14,490

 
13.9
 
5,750

Walgreens VI
 
Sep. 2013
 
1
 
14,560

 
15.6
 
4,470

FedEx I
 
Sep. 2013
 
1
 
21,662

 
9.7
 
2,999

Walgreens VII
 
Sep. 2013
 
10
 
142,340

 
16.1
 
42,346

O'Charley's I
 
Sep. 2013
 
20
 
135,973

 
18.1
 
49,765

Krystal I
 
Sep. 2013
 
6
 
12,730

 
16.0
 
8,522

Merrill Lynch Pierce Fenner & Smith I
 
Sep. 2013
 
3
 
553,841

 
11.2
 
156,733

1st Constitution Bancorp I
 
Sep. 2013
 
1
 
4,500

 
10.3
 
1,857

American Tire Distributors I
 
Sep. 2013
 
1
 
125,060

 
10.3
 
8,457

 
 
 
 
158
 
6,312,929

 
12.3
 
$
896,081

_____________________
(1)
Remaining lease term as of September 30, 2013 in years. If the portfolio has multiple locations with varying lease expirations, remaining lease term is calculated on a weighted-average basis.
(2)
Contract purchase price, excluding acquisition related costs.
(3)
Represents the purchase price, excluding closing costs, of a leasehold interest.

Results of Operations

We were incorporated on January 22, 2013 and purchased our first property and commenced active operations on April 29, 2013.

Results of Operations for Three Months Ended September 30, 2013

Rental Income

Rental income was $2.0 million for the three months ended September 30, 2013. Rental income was driven by our acquisition and operation of 156 properties during the three months ended September 30, 2013 with an aggregate base purchase price of $893.8 million, comprising 6,294,803 rentable square feet which were 100% leased on a weighted-average basis as of September 30, 2013.

Operating Expense Reimbursements

Operating expense reimbursement revenue was $0.1 million for the three months ended September 30, 2013. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties.


28

Property Operating Expenses

Property operating expenses were $0.1 million for the three months ended September 30, 2013. These costs primarily related to ground lease rent and real estate taxes on our properties.
  
Acquisition and Transaction Related Costs

Acquisition and transaction related costs were $18.2 million for the three months ended September 30, 2013. These expenses related to acquisition fees, legal fees and other closing costs associated with our purchase of 156 properties during the three months ended September 30, 2013 with an aggregate base purchase price of $893.8 million.

General and Administrative Expenses

General and administrative expenses of $1.2 million for the three months ended September 30, 2013 primarily included board member compensation, insurance expense, state taxes and professional fees.

Depreciation and Amortization Expense

Depreciation and amortization expense of $0.8 million for the three months ended September 30, 2013 related to the properties acquired since we commenced active operations on April 29, 2013. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.

Interest Expense

Interest expense for the three months ended September 30, 2013 of approximately $28,000 related to the amortization of deferred financing costs associated with our credit facility and unused fees incurred on our credit facility.

Income from Investments

Income from investments for the three months ended September 30, 2013 of $1.1 million related to income earned on our investments in commercial paper, redeemable preferred stock, senior notes and common stock.

Other Income

Other income of $0.1 million for the three months ended September 30, 2013 related to interest earned on our cash and cash equivalents, which was $163.1 million as of September 30, 2013. We had no other income during the three months ended September 30, 2013.

Results of Operations for Period from January 22, 2013 (date of inception) to September 30, 2013

Rental Income

Rental income was $2.1 million for the period from January 22, 2013 (date of inception) to September 30, 2013. Rental income was driven by our acquisition and operation of 158 properties with an aggregate base purchase price of $896.1 million, comprising 6,312,929 rentable square feet which were 100.0% leased on a weighted-average basis as of September 30, 2013.

Operating Expense Reimbursements

Operating expense reimbursement revenue was $0.1 million for the period from January 22, 2013 (date of inception) to September 30, 2013. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties.

Property Operating Expenses

Property operating expenses were $0.2 million for the period from January 22, 2013 (date of inception) to September 30, 2013. These costs primarily related to ground lease rent and real estate taxes on our properties.
  

29

Acquisition and Transaction Related Costs

Acquisition and transaction related costs for the period from January 22, 2013 (date of inception) to September 30, 2013 were $18.3 million. These expenses related to acquisition fees, legal fees and other closing costs associated with our purchase of 158 properties with an aggregate purchase price of $896.1 million.

General and Administrative Expenses

General and administrative expenses of $1.3 million for the period from January 22, 2013 (date of inception) to September 30, 2013 primarily included board member compensation, insurance expense, state taxes and professional fees. General and administrative expense includes costs absorbed by our Advisor of $0.1 million for the period from January 22, 2013 (date of inception) to September 30, 2013.

Depreciation and Amortization Expense

Depreciation and amortization expense of $0.8 million for the period from January 22, 2013 (date of inception) to September 30, 2013 related to the properties acquired since we commenced active operations on April 29, 2013. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.

Interest Expense

Interest expense for the period from January 22, 2013 (date of inception) to September 30, 2013 of approximately $28,000 related primarily to the amortization of deferred financing costs associated with our credit facility and unused fees incurred on our credit facility.

Income from Investments

Income from investments for the period from January 22, 2013 (date of inception) to September 30, 2013 of $1.1 million related to income earned on our investments in commercial paper, redeemable preferred stock, senior notes and common stock.

Other Income

Other income of $0.1 million for the period from January 22, 2013 (date of inception) to September 30, 2013 related to interest earned on our cash and cash equivalents, which was $163.1 million as of September 30, 2013. We had no other income during the period from January 22, 2013 (date of inception) to September 30, 2013.

Cash Flows for the Period from January 22, 2013 (date of inception) to September 30, 2013

During the period from January 22, 2013 (date of inception) to September 30, 2013, we had cash flows used in operating activities of $13.5 million. The level of cash flows used in or provided by operating activities is affected by the amount of acquisition and transaction related costs incurred, as well as the receipt of scheduled rent payments. Cash flows used in operating activities during the period from January 22, 2013 (date of inception) to September 30, 2013 include $18.3 million of acquisition and transaction related costs. Cash outflows during the period from January 22, 2013 (date of inception) to September 30, 2013 included a net loss adjusted for non-cash items of $16.4 million (net loss of $17.3 million adjusted for non-cash items, including depreciation and amortization of tangible and intangible real estate assets and share based compensation, of $0.9 million) and an increase in prepaid expenses and other assets of $1.9 million due to rent receivables, prepaid insurance, prepaid professional fees and accrued income for real estate tax reimbursements. These cash outflows were partially offset by an increase of $2.5 million in accounts payable and accrued expenses primarily related to accrued professional fees and an increase of $2.3 million in deferred rent.

During the period from January 22, 2013 (date of inception) to September 30, 2013, net cash used in investing activities of $1.1 billion related to the acquisition of 158 properties with an aggregate purchase price of $885.6 million, the purchase of investment securities of $116.6 million and deposits of $110.0 million for potential real estate acquisitions. These cash outflows were partially offset by proceeds from investment securities of $19.2 million.

During the period from January 22, 2013 (date of inception) to September 30, 2013, net cash provided by financing activities of $1.3 billion consisted primarily of proceeds from issuances of common stock of $1.4 billion, net of receivables. These cash inflows were partially offset by $163.8 million of payments related to offering costs, $4.5 million in distributions paid to stockholders, $3.2 million of payments related to deferred financing costs and approximately $7,000 in common stock repurchases.

30


Liquidity and Capital Resources

We are offering and selling to the public in our IPO up to 68.0 million shares of our common stock, $0.01 par value per share, until the filing of our second quarterly financial filing with the SEC, pursuant to the Exchange Act, following the earlier to occur of (i) our acquisition of at least $1.4 billion in total portfolio assets and (ii) April 4, 2015, at a price of $25.00 per share (including the maximum allowed to be charged for commissions and fees). We are also offering up to 14.7 million shares of our common stock to be issued pursuant to our DRIP under which our stockholders may elect to have distributions reinvested in additional shares.

Following the earlier to occur of (i) our acquisition of at least $1.4 billion in total portfolio assets and (ii) April 4, 2015, the per share purchase price in the IPO will be up to $25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued pursuant to the DRIP will initially be equal to $23.75 per share, or 95.0% of the estimated value of a share of common stock. Thereafter, the per share purchase price will vary quarterly and will be equal to our NAV divided by the number of shares outstanding as of the end of business on the first day of each fiscal quarter after giving effect to any share purchases or repurchases effected in the prior quarter or per share NAV. Applicable commissions and fees will be added to the per share price for shares offered in the IPO but not for shares pursuant to the DRIP.

On April 25, 2013, we received and accepted aggregate subscriptions equal to the minimum of $2.0 million in shares of common stock, broke escrow and issued shares of common stock to our initial investors who were admitted as stockholders. We expect to continue to raise capital through the sale of our common stock and to utilize the net proceeds from the sale of our common stock and proceeds from secured financings to complete future property acquisitions. We purchased our first property and commenced active operations on April 29, 2013. As of September 30, 2013, we owned 158 properties with an aggregate purchase price of $896.1 million. As of September 30, 2013, we had 59.0 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds of $1.5 billion, including proceeds from shares issued pursuant to the DRIP.

As of September 30, 2013, we had cash and cash equivalents of $163.1 million. Our principal demands for funds will continue to be for property acquisitions, including the purchase price of any properties, loans and securities we acquire, improvement costs, the payment of our operating and administrative expenses, debt service obligations and distributions to our stockholders. Generally, we will fund our acquisitions from the net proceeds of our IPO. We intend to acquire our assets with cash and mortgage or other debt, but we also may acquire assets free and clear of permanent mortgage or other indebtedness by paying the entire purchase price for the asset in cash or in OP Units.

We expect to meet our future short-term operating liquidity requirements through a combination of net cash provided by our current property operations and the operations of properties to be acquired in the future, proceeds from the sale of common stock and proceeds from secured mortgage debt or unsecured financings. Management expects that in the future, as our portfolio matures, our properties will generate sufficient cash flow to cover operating expenses and the payment of our monthly distributions. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from private offerings and undistributed funds from operations.

We expect to use debt financing as a source of capital. Under our charter, the maximum amount of our total indebtedness shall not exceed 300% of our total "net assets" (as defined by the North American Securities Administrators Association Statement of Policy Regarding Real Estate Investment Trusts, (the "NASAA REIT Guidelines")) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with the justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, it is currently our intention to limit our aggregate borrowings to 45% of the aggregate fair market value of our assets (calculated after the close of the IPO and once we have invested substantially all the proceeds from our IPO), unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with the justification for borrowing such a greater amount. This limitation, however, will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under the NASAA REIT Guidelines. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. As of September 30, 2013, we did not have any debt outstanding.

31

On September 23, 2013, we entered into a credit agreement (the "Credit Agreement") relating to a new revolving credit facility (the “Credit Facility”) which provides for aggregate revolving loan borrowings of up to $200.0 million (subject to borrowing base availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility. Through an uncommitted “accordion feature,” we may increase commitments under the Credit Facility to up to $750.0 million. The Credit Facility will mature on September 23, 2017, provided that we, subject to certain conditions, may elect to extend the maturity date one year to September 23, 2018. As of September 30, 2013, we had no outstanding borrowings under the Credit Facility. As of September 30, 2013, we were in compliance with the financial covenants under the Credit Agreement.


Our board of directors has adopted a share repurchase plan that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we have sufficient funds available to fund such purchase. As of September 30, 2013, 1,400 shares of common stock have been repurchased or requested to be repurchased.

Acquisitions

Our Advisor evaluates potential acquisitions of real estate and real estate related assets and engages in negotiations with sellers and borrowers on our behalf.  Investors should be aware that after a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence and negotiation of final binding agreements. During this period, we may decide to temporarily invest any unused proceeds from common stock offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under accounting principles generally accepted in the United States ("GAAP").

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment writedowns, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT's policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.


32

Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and modified funds from operations ("MFFO"), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities also may experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. As disclosed in the prospectus for our offering (the "Prospectus"), we will use the proceeds raised in the offering to acquire properties, and intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale or another similar transaction) within three to five years of the completion of the offering. Thus, we will not continuously purchase assets and will have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association ("IPA"), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe it is presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our IPO has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our IPO and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.


33

We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, (the "Practice Guideline"), issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations.

Our MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized and may not ultimately be realized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. As disclosed elsewhere in the Prospectus, the purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. Acquisition fees and expenses will not be reimbursed by our Advisor if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisitions costs are funded from the proceeds of our IPO and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.


34

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

The below table reflects the items deducted or added to net loss in our calculation of FFO and MFFO for the periods presented. We did not have FFO and MFFO prior to the quarter ended June 30, 2013, as we did not purchase our first property and commence active operations until April 29, 2013.

 
 
Three Months Ended
(In thousands)
 
June 30, 2013
 
September 30, 2013
Net loss (in accordance with GAAP)
 
$
(215
)
 
$
(17,014
)
Depreciation and amortization
 
19

 
770

FFO
 
(196
)
 
(16,244
)
Acquisition fees and expenses (1)
 
112

 
18,159

Amortization of above or below market leases and liabilities (2)
 
—

 
(5
)
Straight-line rent (3)
 
—

 
(94
)
MFFO
 
$
(84
)
 
$
1,816

______________________________
(1) In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management's analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our Advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property.
(2) Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(3) Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management's analysis of operating performance.

35

Distributions

On April 9, 2013, our board of directors authorized, and we declared, a distribution rate, which is calculated based on stockholders of record each day during the applicable period at a rate of $0.004520548 per day, based on $25.00 price per share of common stock. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.

The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to qualify and maintain our status as a REIT under the Internal Revenue Code (the "Code"). Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.

Distributions began to accrue on May 13, 2013, 15 days following the Company's initial property acquisition. The first distribution was paid in June 2013. During the period from January 22, 2013 (date of inception) to September 30, 2013, distributions paid to common stockholders totaled $10.8 million, inclusive of $6.3 million of distributions for shares of common stock issued pursuant the DRIP.  During the period from January 22, 2013 (date of inception) to September 30, 2013, cash used to pay distributions was generated from proceeds from our IPO and shares issued pursuant to the DRIP.

The following table shows the sources for the payment of distributions to common stockholders for the periods presented:

 
 
Three Months Ended
 
 
June 30, 2013
 
September 30, 2013
(In thousands)
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
Distributions:
 
 
 
 
 
 
 
 
Distributions paid in cash
 
$
173

 
 
 
$
4,373

 
 
Distributions reinvested
 
226

 
 
 
6,049

 
 
Total distributions
 
$
399

 
 
 
$
10,422

 
 
 
 
 
 
 
 
 
 
 
Source of distribution coverage:
 
 
 
 
 
 
 
 
Cash flows used in operations (1)
 
$
—

 
—
%
 
$
—

 
—
%
Proceeds from issuances of common stock
 
173

 
43.4
%
 
4,373

 
42.0
%
Common stock issued pursuant to the DRIP / offering proceeds
 
226

 
56.6
%
 
6,049

 
58.0
%
Proceeds from financings
 
—

 
—
%
 
—

 
—
%
Total source of distribution coverage
 
$
399

 
100.0
%
 
$
10,422

 
100.0
%
 
 
 
 
 
 
 
 
 
Cash flows used in operations (GAAP basis) (1)
 
$
(112
)
 
 
 
$
(13,382
)
 
 
Net loss (in accordance with GAAP)
 
$
(215
)
 
 
 
$
(17,014
)
 
 
_____________________
(1)
Cash flows used in operations for the three months ended June 30, 2013 and September 30, 2013 include acquisition and transaction related expenses of $0.1 million and $18.2 million, respectively.


36

The following table compares cumulative distributions paid to cumulative net loss (in accordance with GAAP) for the period from January 22, 2013 (date of inception) to September 30, 2013:

(In thousands)
 
Period from January 22, 2013 (date of inception) to September 30, 2013
Distributions paid:
 
 
Common stockholders in cash
 
$
4,546

Common stockholders pursuant to DRIP/offering proceeds
 
6,275

Total distributions paid
 
$
10,821

 
 
 
Reconciliation of net loss:
 
 
Revenues
 
$
2,128

Acquisition and transaction related
 
(18,271
)
Depreciation and amortization
 
(789
)
Other operating expenses and other income
 
(327
)
Net loss (in accordance with GAAP) (1)
 
$
(17,259
)
_____________________
(1)
Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions.

Loan Obligations

The payment terms of our loan obligations require interest amounts payable monthly with all unpaid principal and interest due at maturity. Our loan agreements stipulate that we comply with specific reporting covenants. As of September 30, 2013, we were in compliance with the debt covenants under our loan agreements.

As of September 30, 2013, we had no non-recourse mortgage indebtedness. We may in the future incur additional mortgage debt on the properties we currently own or use long-term non-recourse financing to acquire additional properties in the future.

On September 23, 2013, we entered into the Credit Agreement relating to a new revolving credit facility which provides for aggregate revolving loan borrowings of up to $200.0 million (subject to borrowing base availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility. Through an uncommitted “accordion feature,” we may increase commitments under the Credit Facility to up to $750.0 million. The Credit Facility will mature on September 23, 2017, provided that we, subject to certain conditions, may elect to extend the maturity date one year to September 23, 2018. As of September 30, 2013, we had no outstanding borrowings under the Credit Facility.

Our Advisor may, with approval from our board of directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third-parties on a case-by-case basis as acquisition opportunities present themselves simultaneous with our capital raising efforts. We view the use of short-term borrowings, including future advances under our Credit Facility, as an efficient and accretive means of acquiring real estate.

Lease Obligations

The following table reflects the minimum base rental cash payments due from us over the next five years and thereafter for ground lease arrangements:

 
 
 
 
October 1, 2013 to December 31, 2013
 
Years Ended December 31,
 
 
(In thousands)
 
Total
 
 
2014-2015
 
2016-2017
 
Thereafter
Lease rental payments due:
 
$
9,014

 
$
188

 
$
1,505

 
$
1,524

 
$
5,797



37


Election as a REIT

We intend to elect to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ending December 31, 2013. We believe that, commencing with such taxable year, we are organized and operate in such a manner as to qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. If we qualify, and continue to qualify, for taxation as a REIT, we generally will not be subject to federal corporate income tax so long as we distribute at least 90% of our REIT taxable income. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as federal income and excise taxes on our undistributed income.

Inflation

Some of our leases may contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the term of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation.

Related-Party Transactions and Agreements

We have entered into agreements with affiliates of our Sponsor, whereby we have paid or may in the future pay certain fees or reimbursements to our Advisor, its affiliates and entities under common ownership with our Advisor in connection with acquisition and financing activities, sales and maintenance of common stock under our offering, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 9 — Related Party Transactions and Arrangements to our consolidated financial statements included in this report for a discussion of the various related party transactions, agreements and fees.

Off-Balance Sheet Arrangements

On September 23, 2013, we entered into the Credit Agreement relating to a new revolving credit facility which provides for aggregate revolving loan borrowings of up to $200.0 million (subject to borrowing base availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility. Through an uncommitted “accordion feature,” we may increase commitments under the Credit Facility to up to $750.0 million. The Credit Facility will mature on September 23, 2017, provided that we, subject to certain conditions, may elect to extend the maturity date one year to September 23, 2018. As of September 30, 2013, we had no outstanding borrowings under the Credit Facility.

We have no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or rates. As of September 30, 2013, we do not have any long-term debt, but anticipate incurring long-term debt in the future. Our interest rate risk management objectives with respect to our long-term debt will be to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps and collars in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not anticipate having any foreign operations and we do not expect to be exposed to foreign currency fluctuations.


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Item 4. Controls and Procedures

In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that the disclosure controls and procedures are effective.

No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

As of the end of the period covered by this Quarterly Report on Form 10-Q, we are not a party to any material pending legal proceedings.

Item 1A. Risk Factors

Our potential risks and uncertainties are presented in the section entitled "Risk Factors," contained in the prospectus as supplemented and included in our Registration Statement on Form S-11 (File No. 333-187092), as amended (the "Registration Statement"). There have been no material changes from the risk factors set forth in our Registration Statement on Form S-11, except for the items described below:

Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute your interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect your overall return.

Our cash flows used in operations of $13.5 million for the period from January 22, 2013 (date of inception) to September 30, 2013 represented a shortfall of 100% of the distributions paid during such period. During the period from January 22, 2013 (date of inception) to September 30, 2013, we paid distributions of $10.8 million, of which $4.5 million, or 42.0%, was funded from proceeds from the issuance of common stock and $6.3 million, or 58.0%, was funded from proceeds from common stock issued pursuant to the DRIP. Additionally, we may in the future pay distributions from sources other than from our cash flows from operations.

Until we acquire additional properties or other real estate-related investments, we may not generate sufficient cash flows from operations to pay distributions. Our inability to acquire additional properties or other real estate-related investments may result in a lower return on your investment than you expect. If we have not generated sufficient cash flows from our operations and other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, to fund distributions, we may use the proceeds from our IPO. Moreover, our board of directors may change our distribution policy, in its sole discretion, at any time. Distributions made from offering proceeds are a return of capital to stockholders, from which we will have already paid offering expenses in connection with our IPO. We have not established any limit on the amount of proceeds from our IPO that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make 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, if any; or (3) jeopardize our ability to qualify as a REIT.

If we fund distributions from the proceeds of our IPO, 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 distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets or the proceeds of our IPO may affect our ability to generate cash flows. Funding distributions 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 distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the distributions payable to you upon a liquidity event, any or all of which may have an adverse effect on your investment.

American National Stock Transfer, LLC, our affiliated transfer agent, has a limited operating history and a failure by our transfer agent to perform its functions for us effectively may adversely affect our operations.

Our transfer agent is a related party which was recently launched as a new business. The business was formed on November 2, 2012. As of March 1, 2013, our transfer agent began providing certain transfer agent services for programs sponsored directly or indirectly by AR Capital, LLC. Because of its limited experience, there is no assurance that our transfer agent will be able to effectively provide transfer agent and registrar services to us. Furthermore, our transfer agent will be responsible for supervising third party service providers who may, at times, be responsible for executing certain transfer agent and registrar services. If our transfer agent fails to perform its functions for us effectively, our operations may be adversely affected.


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We rely significantly on certain major tenants (including, for this purpose, all affiliates of such tenants) and therefore, are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to these tenants.

As of September 30, 2013, the following major tenants had annualized rental income on a straight-line basis, which represented 5% or more of our total annualized rental income on a straight-line basis including for this purpose, all affiliates of such tenants:

•Versacold USA represented 18.7% of total annualized rental income on a straight-line basis.
•
Merrill Lynch, Pierce, Fenner & Smith represented 18.7% of total annualized rental income on a straight-line basis.
•
American Express Travel Related Services Company, Inc. represented 10.9% of total annualized rental income on a straight-line basis.
•Home Depot U.S.A., Inc. represented 8.8% of total annualized rental income on a straight-line basis.
•Lowe's Home Centers, Inc. represented 6.9% of total annualized rental income on a straight-line basis.
•Walgreen Co. represented 6.9% of total annualized rental income on a straight-line basis.
•Sun Trust Banks, Inc. represented 5.9% of total annualized rental income on a straight-line basis.
•O'Charley's Inc. represented 5.4% of total annualized rental income on a straight-line basis.

Therefore, the financial failure of one or more of the tenants is likely to have a material adverse effect on our results of operations and our financial condition. In addition, the value of our investment is driven by the credit quality of the underlying tenants, and an adverse change in either the tenant's financial condition or a decline in the credit rating of such tenants may result in a decline in the value of our investments and have a material adverse effect on our results from operations.

Our property portfolio has a high concentration of properties in New Jersey, Georgia, North Carolina, South Carolina, Illinois, Alabama and Utah. Our properties may be adversely affected by economic cycles and risks inherent to these states.

As of September 30, 2013, 18.88%, 18.28%, 11.78%, 8.44%, 7.15%, 5.62%, and 5.02% of total annualized rental income on a straight-line basis from our property portfolio comes from properties located in New Jersey, Georgia, North Carolina, South Carolina, Illinois, Alabama and Utah, respectively. Any adverse situation that disproportionately affects these states may have a magnified adverse effect on the portfolio of the Company. Real estate markets are subject to economic downturns, as they have been in the past, and the Company cannot predict how economic conditions will impact these markets in both the short and long term. Declines in the economy or a decline in the real estate market in the states of New Jersey, Georgia, North Carolina, South Carolina, Illinois, Alabama and Utah could hurt our financial performance and the value of our properties. Factors that may negatively affect economic conditions in New Jersey, Georgia, North Carolina, South Carolina, Illinois, Alabama and Utah are:

•business layoffs or downsizing;
•industry slowdowns;
•relocations of businesses;
•changing demographics;
•increased telecommuting and use of alternative work places;
•infrastructure quality;
•any oversupply of, or reduced demand for, real estate;
•concessions or reduced rental rates under new leases for properties where tenants defaulted; and
•increased insurance premiums.

Failure to consummate certain substantial acquisitions could negatively impact our future business and financial results.
 
Our sponsor, AR Capital, LLC, entered into an equity interest purchase agreement on August 8, 2013, with respect to various portfolios with Inland American Real Estate Trust, Inc., including a portfolio of  properties which our board of directors has approved for purchase by us for a substantial purchase price which will require a significant portion of the proceeds of our IPO and other financing sources to consummate. If the acquisition of such remaining properties not acquired as of September 30, 2013 (the "Inland Portfolio Acquisition") is not consummated, our ongoing businesses could be adversely affected and we will be subject to several risks, including the following:

•
our having to pay certain costs, including unanticipated costs, relating to the Inland Portfolio Acquisition, such as legal and accounting fees; and
•
the diversion of management focus and resources from operational matters and other strategic opportunities while working to implement the Inland Portfolio Acquisition.
 

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If the Inland Portfolio Acquisition is not consummated, we will not achieve the expected benefits thereof and will be subject to the risks described above, which could materially affect our business, financial results and stock price.

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

We sold 8,888 shares of common stock to our Special Limited Partner, an entity wholly owned by our Sponsor, under Rule 506 of Regulation D of the Securities Act of 1933, as amended, at a price of $22.50 per share for gross proceeds of $0.2 million during the period from January 22, 2013 (date of inception) to September 30, 2013.

On April 4, 2013, we commenced our IPO on a "reasonable best efforts" basis of up to 68.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to the Registration Statement, filed with the SEC under the Securities Act of 1933, as amended. The Registration Statement also covers up to 14.7 million shares of common stock available pursuant to the DRIP under which our common stockholders may elect to have their distributions reinvested in additional shares of our common stock. On April 25, 2013, we received and accepted aggregate subscriptions equal to the minimum of $2.0 million in shares of common stock, broke escrow and issued shares of common stock to our initial investors who were admitted as stockholders. As of September 30, 2013, we had 59.0 million shares of common stock outstanding and had received total gross proceeds from the IPO of $1.5 billion.

The following table reflects the offering costs associated with the issuance of common stock:

(In thousands)

Period from January 22, 2013 (date of inception) to September 30, 2013
Selling commissions and dealer manager fees
 
$
135,238

Other offering costs
 
30,183

Total offering costs
 
$
165,421


The Dealer Manager may reallow the selling commissions and a portion of the dealer manager fees to participating broker-dealers. The following table details the selling commissions incurred and reallowed related to the sale of shares of common stock:
(In thousands)
 
Period from January 22, 2013 (date of inception) to September 30, 2013
Total commissions paid to the Dealer Manager
 
$
135,238

Less:
 
 
  Commissions to participating brokers
 
(88,086
)
  Reallowance to participating broker dealers
 
(14,114
)
Net to the Dealer Manager
 
$
33,038


The Advisor elected to cap cumulative offering costs incurred by us, net of unpaid amounts, to 15.0% of gross common stock proceeds during the offering period. As of September 30, 2013, cumulative offering costs were $165.4 million. Cumulative offering costs, net of unpaid amounts, were less than the 15.0% threshold as of September 30, 2013. Offering proceeds, including proceeds from shares issued pursuant to the DRIP, of $1.5 billion exceeded cumulative offering costs by $1.3 billion at September 30, 2013.

Cumulative offering costs, excluding commissions and dealer manager fees, included $27.3 million of other offering costs and reimbursements from our Advisor and Dealer Manager. We are responsible for offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 2.0% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs in excess of the 2.0% cap as of the end of the IPO are our Advisor's responsibility.

We expect to use substantially all of the net proceeds from our IPO to primarily acquire a diversified portfolio of income producing real estate properties, focusing predominantly on acquiring freestanding, single-tenant bank branches, convenience stores, office, industrial and retail properties net leased to investment grade and other creditworthy tenants. We may also originate or acquire first mortgage loans secured by real estate. As of September 30, 2013, we have used the net proceeds from our IPO to purchase 158 properties with an aggregate purchase price of $896.1 million.

As of September 30, 2013, 1,400 shares of common stock have been repurchased or requested to be repurchased.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
AMERICAN REALTY CAPITAL TRUST V, INC.
 
By:
/s/ Nicholas S. Schorsch
 
 
Nicholas S. Schorsch
 
 
Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)
 
 
 
 
By:
/s/ Brian S. Block
 
 
Brian S. Block
 
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Dated: November 14, 2013


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EXHIBITS INDEX


The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the three months ended September 30, 2013 (and are numbered in accordance with Item 601 of Regulation S-K).

Exhibit No.
  
Description
2.1 (1)
 
Purchase and Sale Agreement by and among ARC PADRBPA001, LLC and AR Capital, LLC and the sellers described on schedules thereto, dated as of July 24, 2013
2.2 (2)
 
Equity Interest Purchase Agreement by and between Inland American Real Estate Trust, Inc. and AR Capital, LLC dated as of August 8, 2013
2.3 *
 
First Amendment dated as of September 30, 2013 to the Purchase and Sale Agreement dated July 24, 2013, by and among ARC DB5PROP001, LLC, ARC DBPGDYR001, LLC, ARC DBPPROP001, LLC, ARC DB5SAAB001, LLC, ARC DBGWSDG001, LLC and ARC DBGESRG001, LLC and the sellers described on the schedules thereto
2.4 *
 
Second Amendment dated as October 1, 2013 to the Purchase and Sale Agreement dated July 24, 2013, by and among ARC DB5PROP001, LLC, ARC DBPGDYR001, LLC, ARC DBPPROP001, LLC, ARC DB5SAAB001, LLC, ARC DBGWSDG001, LLC and ARC DBGESRG001, LLC and the sellers described on the schedules thereto
2.5 *
 
Third Amendment dated as of October 30, 2013 to the Purchase and Sale Agreement dated July 24, 2013, by and among ARC DB5PROP001, LLC, ARC DBPGDYR001, LLC, ARC DBPPROP001, LLC, ARC DB5SAAB001, LLC, ARC DBGWSDG001, LLC and ARC DBGESRG001, LLC and the sellers described on the schedules thereto
10.20 *
 
Credit Agreement, dated as of September 23, 2013, among American Realty Capital Operating Partnership V, L.P., the lenders party thereto and JPMorgan Chase Bank, N.A.
31.1 *
 
Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *
 
Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 *
 
Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 *
 
XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital Trust V, Inc.'s Quarterly Report on Form 10-Q for the three months ended September 30, 2013, formatted in XBRL: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Stockholders' Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to the Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this information in furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Exchange Act.
____________________
*     Filed herewith.
(1)
Filed as an exhibit to the Company's Amended Current Report on Form 8-K/A filed with the SEC on October 29, 2013.
(2)
Filed as an exhibit to the Company's Amended Current Report on Form 8-K/A filed with the SEC on November 13, 2013.


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