Necessity Retail REIT, Inc. - Quarter Report: 2016 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, 2016



	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: 000-55197

American Finance Trust, 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., 14th Floor, 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 has 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 (§232.405 of this chapter) 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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of October 31, 2016, the registrant had 65,805,176 shares of common stock outstanding.

AMERICAN FINANCE TRUST, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



	Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015	3
Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)	4
Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2016 (Unaudited)	5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	46

Item 4. Controls and Procedures.	46

PART II - OTHER INFORMATION	47

Item 1. Legal Proceedings.	47

Item 1A. Risk Factors.	47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	52

Item 3. Defaults Upon Senior Securities.	53

Item 4. Mine Safety Disclosures.	53

Item 5. Other Information.	53

Item 6. Exhibits.	53

Signatures	54

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICAN FINANCE TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



	September 30, 2016			December 31, 2015
	(Unaudited)
ASSETS
Real estate investments, at cost:
Land	$	345,221		$	358,278
Buildings, fixtures and improvements	1,555,548			1,540,821
Acquired intangible lease assets	319,268			319,028
Total real estate investments, at cost	2,220,037			2,218,127
Less: accumulated depreciation and amortization	(291,207		)	(215,427		)
Total real estate investments, net	1,928,830			2,002,700
Cash and cash equivalents	143,386			130,500
Restricted cash	7,890			7,887
Commercial mortgage loan, held for investment, net	17,163			17,135
Prepaid expenses and other assets	27,273			21,982
Deferred costs, net	4,859			—
Assets held for sale	—			56,884
Total assets	$	2,129,401		$	2,237,088

LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable, net of deferred financing costs	$	1,022,344		$	1,033,582
Mortgage premiums, net	11,671			14,892
Market lease liabilities, net	15,460			18,133
Accounts payable and accrued expenses (including $676 and $541 due to related parties as of September 30, 2016 and December 31, 2015, respectively)	15,581			24,964
Deferred rent and other liabilities	7,704			9,569
Distributions payable	8,902			9,199
Total liabilities	1,081,662			1,110,339
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, 65,805,432 and 64,961,256 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	658			650
Additional paid-in capital	1,449,647			1,429,294
Accumulated deficit	(402,566		)	(303,195		)
Total stockholders' equity	1,047,739			1,126,749
Total liabilities and stockholders' equity	$	2,129,401		$	2,237,088

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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AMERICAN FINANCE TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues:
Rental income	$	41,357		$	40,218		$	123,033		$	120,649
Operating expense reimbursements	3,162			3,105			8,979			8,809
Interest income from debt investments	239			728			809			728
Total revenues	44,758			44,051			132,821			130,186

Operating expenses:
Asset management fees to related party	4,500			4,413			13,500			8,509
Property operating	3,511			3,525			10,131			10,051
Impairment charges	117			—			117			—
Acquisition and transaction related	4,381			946			5,458			1,452
General and administrative	2,998			2,607			8,840			8,106
Depreciation and amortization	25,446			25,387			76,477			76,160
Total operating expenses	40,953			36,878			114,523			104,278
Operating income	3,805			7,173			18,298			25,908
Other (expense) income:
Interest expense	(12,574		)	(11,297		)	(37,533		)	(27,696		)
Loss on extinguishment of debt	—			(7,564		)	—			(7,564		)
Distribution income from other real estate securities	—			25			—			363
Gain on sale of other real estate securities	—			192			—			738
Gain on sale of real estate investments	—			—			454			—
Other income	40			43			121			100
Total other expense, net	(12,534		)	(18,601		)	(36,958		)	(34,059		)
Net loss	$	(8,729	)	$	(11,428	)	$	(18,660	)	$	(8,151	)

Other comprehensive loss:
Change in unrealized income on investment securities	—			(562		)	—			(746		)
Comprehensive loss	$	(8,729	)	$	(11,990	)	$	(18,660	)	$	(8,897	)

Basic net loss per share	$	(0.13	)	$	(0.17	)	$	(0.29	)	$	(0.12	)
Diluted net loss per share	$	(0.13	)	$	(0.17	)	$	(0.29	)	$	(0.12	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

AMERICAN FINANCE TRUST, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

For the Nine Months Ended September 30, 2016

(In thousands, except share data)

(Unaudited)



	Common Stock
	Number of Shares		Par Value		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Equity
Balance, December 31, 2015	64,961,256		$	650	$	1,429,294		$	(303,195	)	$	1,126,749
Common stock issued through distribution reinvestment plan	848,307		8		20,491			—			20,499
Common stock repurchases	(7,854	)	—		(190		)	—			(190		)
Share-based compensation	3,723		—		52			—			52
Distributions declared	—		—		—			(80,711		)	(80,711		)
Net loss	—		—		—			(18,660		)	(18,660		)
Balance, September 30, 2016	65,805,432		$	658	$	1,449,647		$	(402,566	)	$	1,047,739

The accompanying notes are an integral part of this unaudited consolidated financial statement.

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AMERICAN FINANCE TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net loss	$	(18,660	)	$	(8,151	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation	50,595			50,210
Amortization of in-place lease assets	25,841			25,950
Amortization (including accelerated write-off) of deferred costs	3,408			11,497
Amortization of mortgage premiums on borrowings	(3,221		)	(5,624		)
Discount accretion and premium amortization on investments, net	(28		)	(18		)
Amortization of market lease intangibles, net	506			1,249
Share-based compensation	52			40
Gain on sale of real estate investments	(454		)	—
Impairment charges	117			—
Gain on sale of other real estate securities	—			(738		)
Changes in assets and liabilities:
Prepaid expenses and other assets	(6,638		)	(6,560		)
Accounts payable and accrued expenses	6,101			2,188
Deferred rent and other liabilities	(1,865		)	(245		)
Net cash provided by operating activities	55,754			69,798
Cash flows from investing activities:
Origination of commercial mortgage loans	—			(79,410		)
Proceeds from sale of commercial mortgage loans	56,884			—
Purchase of commercial mortgage-backed securities	—			(30,198		)
Investments in real estate and other assets	(34,244		)	—
Proceeds from sale of real estate investments	15,521			—
Proceeds from sale of other real estate securities	—			19,266
Net cash provided by (used in) investing activities	38,161			(90,342		)
Cash flows from financing activities:
Proceeds from mortgage notes payable	—			655,000
Payments on mortgage notes payable	(752		)	(716		)
Payments on credit facility	—			(423,000		)
Payments of financing costs	(3,512		)	(17,078		)
Common stock repurchases	(16,253		)	(11,649		)
Distributions paid	(60,509		)	(46,905		)
Restricted cash	(3		)	(37,947		)
Net cash (used in) provided by financing activities	(81,029		)	117,705
Net change in cash and cash equivalents	12,886			97,161
Cash and cash equivalents, beginning of period	130,500			74,760
Cash and cash equivalents, end of period	$	143,386		$	171,921

Supplemental Disclosures:
Cash paid for interest	$	36,901		$	27,506
Cash paid for income taxes	$	738		$	810

Non-Cash Financing Activities:
Mortgage notes payable released in connection with disposition of real estate	$	13,941		$	—
Common stock issued through distribution reinvestment plan	$	20,499		$	34,806

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

Note 1 — Organization

American Finance Trust, Inc. (the "Company"), formerly known as American Realty Capital Trust V, Inc., has acquired a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants. The Company manages and optimizes its investments in its existing portfolio of net leased commercial real estate properties (the "Net Lease Portfolio") and selectively invests in additional net lease properties. As of September 30, 2016, the Company owned 458 properties with an aggregate purchase price of $2.2 billion, comprised of 13.3 million rentable square feet, which were 100.0% leased. To a lesser extent, the Company invests in commercial real estate mortgage loans and other commercial real estate-related debt investments (such investments collectively, "CRE Debt Investments"). The Company has financed its CRE Debt Investments primarily through mortgage financing secured by its Net Lease Portfolio, and it may use mortgage specific repurchase agreement facilities and collateralized debt obligations to finance future CRE Debt Investments.

The Company, incorporated on January 22, 2013, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ended December 31, 2013. Substantially all of the Company's business is conducted through American Finance Operating Partnership, L.P. (the "OP"), a Delaware limited partnership, and its wholly-owned subsidiaries.

On April 4, 2013, the Company commenced its 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. The IPO closed in October 2013. As of September 30, 2016, the Company had 65.8 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the Company's distribution reinvestment plan (the "DRIP"), and had received total proceeds from the IPO and the DRIP, net of share repurchases, of $1.6 billion.

The Company has no employees. The Company has retained American Finance Advisors, LLC (the "Advisor") to manage the Company's affairs on a day-to-day basis. American Finance Properties, LLC (the "Property Manager") serves as the Company's property manager. The Advisor and the Property Manager are wholly owned subsidiaries of AR Global Investments, LLC (the successor business to AR Capital, LLC, the "Sponsor" or "AR Global"), as a result of which, they are related parties of the Company, and each have received or may receive, as applicable, compensation, fees and expense reimbursements for services related to managing the Company's business.

Note 2 — Pending Merger Agreement

On September 6, 2016, the Company and the OP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with American Realty Capital — Retail Centers of America, Inc. (“RCA”), American Realty Capital Retail Operating Partnership, L.P. (the “RCA OP”) and Genie Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (the “Merger Sub”). The Merger Agreement provides for (a) the merger of RCA with and into the Merger Sub (the “Merger”), with the Merger Sub surviving as a wholly owned subsidiary of the Company and (b) the merger of the Target OP with and into the OP, with the OP as the surviving entity (the “Partnership Merger”, and together with the Merger, the “Mergers”).

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Mergers (the “Effective Time”), each outstanding share of common stock of RCA, $0.01 par value per share (“RCA Common Stock”) (including any restricted shares of RCA Common Stock and fractional shares), will be converted into the right to receive (x) a number of shares of common stock of the Company, $0.01 par value per share (the “Company Common Stock”) equal to 0.385 shares of Company Common Stock (the “Stock Consideration”) and (y) cash from the Company, in an amount equal to $0.95 per share (the “Cash Consideration,” and together with the Stock Consideration, the “Merger Consideration”).

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

In addition, at the Effective Time, (i) each unit of partnership interest of the RCA OP designated as an OP Unit issued and outstanding immediately prior to the Effective Time (other than those held by RCA as described in clause (ii) below) will automatically be converted into 0.424 validly issued units of limited partnership interest of the OP (the “Partnership Merger Consideration”); (ii) each unit of partnership interest of the RCA OP designated as either an OP Unit or a GP Unit held by RCA and issued and outstanding immediately prior to the Effective Time will automatically be converted into 0.385 validly issued units of limited partnership interest of the OP; (iii) each unit of partnership interest of the RCA OP designated as a Class B Unit held by RCA’s advisor and a sub-advisor issued and outstanding immediately prior to the Effective Time will be converted into the Partnership Merger Consideration (the “Class B Consideration,” and together with the Partnership Merger Consideration and the Merger Consideration, the “Total Merger Consideration”) and (iv) the interest of American Realty Capital Retail Advisor, LLC, the special limited partner of the RCA OP (the “RCA SLP”), in the RCA OP will be redeemed for a cash payment, to be determined in accordance with the existing terms of the RCA OP’s agreement of limited partnership.

The Merger Agreement provided RCA with a go-shop period, during which time RCA had the right to actively solicit superior proposals from third parties for 45 days from the date of the Merger Agreement (the "Go-Shop Period"). The Go-Shop Period ended on October 21, 2016 with no alternative acquisition proposals provided by third parties.

In the event that the Company or RCA terminates the Merger Agreement under specified circumstances, the Company or RCA, as applicable, are required to pay a termination fee of $25.6 million.

In connection with the execution of the Merger Agreement, the OP entered into a binding commitment, pursuant to which UBS Securities LLC, UBS AG, Stamford Branch and Citizens Bank, N.A. have committed to provide a $360.0 million bridge loan facility, subject to customary conditions.

The Company and RCA each are sponsored, directly or indirectly, by AR Global. AR Global and its affiliates provide services to the Company and RCA pursuant to written advisory agreements.

The completion of the Mergers is subject to the approval of the Company's and RCA's shareholders as well as satisfaction of customary closing conditions. A joint preliminary proxy statement/prospectus describing the proposed Mergers was filed on Form S-4 with the Securities and Exchange Commission (the “SEC”) on October 21, 2016. The Mergers are expected to close in the first quarter of 2017. However, as of the filing of this Quarterly Report on Form 10-Q, the consummation of the Mergers has not yet occurred, and the Company cannot assure that the Mergers will be completed based on the terms of the Merger Agreement or at all.

The shares of the Company's common stock have been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "AFIN" (the "Listing"), subject to the Company being in compliance with all applicable listing standards on the date it begins trading on the NYSE. The Company intends to list its common stock on the NYSE at a time yet to be determined following the completion of the Mergers. There can be no assurance that the Company's common stock will be listed or when the Company's common stock will commence trading on the NYSE.

Note 3 — Summary of Significant Accounting Policies

The accompanying unaudited 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 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. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. The interim data includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results for the entire year or any subsequent interim periods.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of, and for the year ended December 31, 2015, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 16, 2016. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2016, other than the updates described below.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

Consolidation

The accompanying consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity ("VIE") for which the Company is the primary beneficiary. The Company has determined the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company's assets and liabilities are held by the OP.

Deferred Costs, Net

Deferred costs, net consists of deferred financing costs net of accumulated amortization and deferred leasing costs net of accumulated amortization.

Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining commitments for financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method and included in interest expense on the accompanying consolidated statements of operations and comprehensive loss. Unamortized deferred financing costs are generally expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.

Deferred leasing costs, consisting primarily of lease commissions and payments made to execute new leases, are deferred and amortized over the term of the lease.

Recently Adopted Accounting Pronouncements

In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are VIEs or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. The Company elected to adopt this guidance effective January 1, 2016. The Company has evaluated the impact of the adoption of the new guidance on its consolidated financial statements and has determined the OP is considered a VIE. However, the Company meets the disclosure exemption criteria as the Company is the primary beneficiary of the VIE and the Company's partnership interest is considered a majority voting interest in a business and the assets of the OP can be used for purposes other than settling its obligations, such as paying distributions. As such, the new guidance did not have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted for financial statements that have not previously been issued. The Company elected to adopt this guidance effective January 1, 2016. As a result, the Company reclassified $16.6 million and $20.1 million of deferred issuance costs related to the Company's mortgage notes payable from deferred costs, net to mortgage notes payable in the Company's consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively.

In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company has adopted the provisions of this guidance beginning January 1, 2016, electing to account for forfeitures when they occur, and determined that there is no impact to the Company’s consolidated financial position, results of operations and cash flows.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. The Company has not yet selected a transition method and is currently evaluating the impact of the new guidance.

In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity's accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. The Company is currently evaluating the impact of the new guidance.

In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance.

In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.

In June 2016, the FASB issued guidance that changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. The amendments may be adopted early for reporting periods beginning after December 15, 2018. The company is currently evaluating the impact of this new guidance.

In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.

In October 2016, the FASB issued guidance relating to interest held through related parties that are under common control, where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

Note 4 — Real Estate Investments

The Company owned 458 properties, which were acquired for investment purposes, as of September 30, 2016. The following table presents the allocation of real estate assets acquired and liabilities assumed during the nine months ended September 30, 2016. There were no real estate assets acquired or liabilities assumed during the nine months ended September 30, 2015:



	Nine Months Ended September 30, 2016
(Dollar amounts in thousands)	Nine Months Ended September 30, 2016
Real estate investments, at cost:
Land	$	1,729
Buildings, fixtures and improvements	29,664
Total tangible assets	31,393
Acquired intangibles:
In-place leases ⁽¹⁾	3,162
Above-market lease assets ⁽¹⁾	548
Above-market ground lease liability ⁽¹⁾	(85		)
Below-market lease liabilities ⁽¹⁾	(774		)
Total intangible assets, net	2,851
Cash paid for acquired real estate investments	$	34,244
Number of properties purchased	4

_____________________________________


(1)	Weighted-average remaining amortization periods for in-place leases, above-market lease assets, above-market ground lease liability and below-market lease liabilities acquired during the nine months ended September 30, 2016 were 9.5 years, 9.6 years, 48.6 years and 9.5 years, respectively, as of each property's respective acquisition date.

Total acquired intangible lease assets and liabilities consist of the following as of the dates presented:



	September 30, 2016						December 31, 2015
(In thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Intangible assets:
In-place leases	$	305,578	$	92,515	$	213,063	$	305,245	$	68,278	$	236,967
Above-market lease assets	13,690		7,410		6,280		13,783		5,555		8,228
Total acquired intangible lease assets	$	319,268	$	99,925	$	219,343	$	319,028	$	73,833	$	245,195
Intangible liabilities:
Above-market ground lease liability	$	85	$	1	$	84	$	—	$	—	$	—
Below-market lease liabilities	19,242		3,866		15,376		20,623		2,490		18,133
Total acquired intangible lease liabilities	$	19,327	$	3,867	$	15,460	$	20,623	$	2,490	$	18,133

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

The following table presents amortization expense and adjustments to revenue and property operating expense for intangible assets and liabilities for the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2016			2015			2016			2015
In-place leases	$	8,550		$	8,650		$	25,841		$	25,950
Total added to depreciation and amortization	$	8,550		$	8,650		$	25,841		$	25,950

Above-market leases	$	(724	)	$	(751	)	$	(2,220	)	$	(2,254	)
Below-market lease liabilities	752			335			1,713			1,005
Total added to (deducted from) rental income	$	28		$	(416	)	$	(507	)	$	(1,249	)

Above-market ground lease liability	$	—		$	—		$	(1	)	$	—
Total deducted from property operating expense	$	—		$	—		$	(1	)	$	—

The following table provides the projected amortization expense and adjustments to revenue and property operating expense for intangible assets and liabilities for the next five years:



(In thousands)	October 1, 2016 to December 31, 2016			2017			2018			2019			2020
In-place leases	$	8,548		$	34,193		$	24,207		$	24,187		$	22,569
Total to be added to depreciation and amortization	$	8,548		$	34,193		$	24,207		$	24,187		$	22,569

Above-market leases	$	(724	)	$	(2,895	)	$	(526	)	$	(526	)	$	(526	)
Below-market lease liabilities	752			3,009			974			974			974
Total to be added to rental income	$	28		$	114		$	448		$	448		$	448

Above-market ground lease liability	$	—		$	(2	)	$	(2	)	$	(2	)	$	(2	)
Total to be deducted from property operating expense	$	—		$	(2	)	$	(2	)	$	(2	)	$	(2	)

The following table presents unaudited pro forma information as if the acquisitions during the nine months ended September 30, 2016 had been consummated on January 1, 2015:



	Nine Months Ended September 30,
(In thousands, except per share data)	2016 ⁽¹⁾			2015
Pro forma revenues	$	133,189		$	132,210
Pro forma net loss	$	(18,533	)	$	(7,240	)
Basic pro forma net loss per share	$	(0.28	)	$	(0.11	)
Diluted pro forma net loss per share	$	(0.28	)	$	(0.11	)

_____________________


(1)	For the nine months ended September 30, 2016, aggregate revenues and net income derived from the Company's 2016 acquisitions (for the Company's period of ownership) were $1.7 million and $0.8 million, respectively.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(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, 2016 to December 31, 2016	$	39,633
2017	160,004
2018	153,784
2019	155,875
2020	150,703
Thereafter	912,235
	$	1,572,234

The following table lists the tenants (including, for this purpose, all affiliates of such tenants) from which the Company derives annualized rental income on a straight-line basis constituting 10.0% or more of the Company's consolidated annualized rental income on a straight-line basis for all portfolio properties as of the dates indicated:



	September 30,
Tenant	2016	2015
SunTrust Bank	17.8%	17.9%
Sanofi US	11.4%	11.6%
C&S Wholesale Grocer	10.2%	10.4%

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 10.0% or greater of consolidated annualized rental income on a straight-line basis as of September 30, 2016 and 2015.

The following table lists the states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of the dates indicated:



	September 30,
State	2016	2015
New Jersey	20.0%	20.3%
Georgia	11.0%	11.2%

The Company did not own properties in any other state that in total represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of September 30, 2016 and 2015.

Real Estate Sales

On May 12, 2016 the Company entered into a purchase and sale agreement with SunTrust Bank, a wholly owned subsidiary of SunTrust Banks, Inc. ("SunTrust"), for, and simultaneously closed on, the sale of eight single-tenant net lease properties operated by SunTrust for an aggregate contract price of $28.9 million, exclusive of closing costs. On September 14, 2016, the Company sold an additional single-tenant net lease property operated by SunTrust for a contract price of $0.7 million, exclusive of closing costs. The sale of these properties resulted in an impairment charge of $0.1 million for the three and nine months ended September 30, 2016 and a gain of $0.5 million for the nine months ended September 30, 2016, which is reflected within gain on sale of real estate investments on the consolidated statements of operations and comprehensive loss. No gain on sale of real estate investments was recognized during the three months ended September 30, 2016. The Company did not sell any properties during the three and nine months ended September 30, 2015.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

The disposal of the properties referenced above did not represent a strategic shift that had a major effect on the Company's operations and financial results. Accordingly, the operating results of the properties sold remain classified within continuing operations for all periods presented until the date of disposal.

Leasing Activity

On May 12, 2016, the Company amended 160 of its leases for single-tenant net lease properties operated by SunTrust, which in general extended the remaining lease terms of theses leases with no modification to the contractual rent increases as set forth in these leases.

Note 5 — Commercial Mortgage Loans

The following table is a summary of the Company's commercial mortgage loan portfolio:



		September 30, 2016					December 31, 2015
Loan Type	Property Type	Par Value			Percentage		Par Value			Percentage
		(In thousands)					(In thousands)
Senior	Student Housing — Multifamily	$	17,200		100.0	%	$	17,200		21.6	%
Senior	Retail	—		⁽¹⁾	—	%	18,150		⁽¹⁾	22.7	%
Senior	Hospitality	—		⁽¹⁾	—	%	44,500		⁽¹⁾	55.7	%
		$	17,200		100.0	%	$	79,850		100.0	%

_____________________________________


(1)	These loans were classified as held for sale as of December 31, 2015 and were sold during the nine months ended September 30, 2016 for $56.9 million.

Credit Characteristics

As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. The loans are scored on a scale of 1 to 5 as follows:



Investment Rating		Summary Description
1		Investment exceeding fundamental performance expectations and/or capital gain expected. Trends and risk factors since time of investment are favorable.
2		Performing consistent with expectations and a full return of principal and interest expected. Trends and risk factors are neutral to favorable.
3		Performing investments requiring closer monitoring. Trends and risk factors show some deterioration.
4		Underperforming investment with some loss of interest expected but still expecting a positive return on investment. Trends and risk factors are negative.
5		Underperforming investment with expected loss of interest and some principal.

All commercial mortgage loans are assigned an initial risk rating of 2. As of September 30, 2016, the risk rating of the Company's commercial loan held for investment was 3. As of September 30, 2016, the Company did not have any loans that were past due on their payments, in non-accrual status or impaired. No allowance for loan losses has been recorded as of September 30, 2016 or December 31, 2015.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

For the nine months ended September 30, 2016 and 2015, the activity on the Company's commercial mortgage loans, held for investment, was as follows:



	Nine Months Ended
(In thousands)	September 30, 2016		September 30, 2015
Beginning balance	$	17,135	$	—
Originations	—		79,410
Discount accretion and premium amortization ⁽¹⁾	28		16
Ending balance	$	17,163	$	79,426

_____________________________________


(1)	Includes amortization of capitalized origination fees and expenses.

Note 6 — Other Real Estate Securities

The following table details the realized gains on sale of the Company's other real estate securities, which consisted of redeemable preferred stock, during the three and nine months ended September 30, 2015. As of September 30, 2016 and December 31, 2015, the Company had no investments in other real estate securities; as such, there were no other real estate securities sold during the nine months ended September 30, 2016:



(In thousands)	Aggregate Cost Basis		Sale Price		Realized Gain
Three Months Ended September 30, 2015	$	9,821	$	10,013	$	192
Nine Months Ended September 30, 2015	$	18,528	$	19,266	$	738

Note 7 — Mortgage Notes Payable

The Company's mortgage notes payable as of September 30, 2016 and December 31, 2015 consisted of the following:



		Outstanding Loan Amount as of						Effective Interest Rate as of
Portfolio	Encumbered Properties	September 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015			Interest Rate	Maturity	Anticipated Repayment
		(In thousands)			(In thousands)
SAAB Sensis I	1	$	7,930		$	8,190		6.01	%		6.01	%		Fixed	Apr. 2025	Apr. 2025
SunTrust Bank II	30	25,000			25,000			5.50	%		5.50	%		Fixed	Jul. 2031	Jul. 2021
C&S Wholesale Grocer I	4	82,313			82,313			5.56	%		5.56	%		Fixed	Apr. 2037	Apr. 2017
SunTrust Bank III	115	89,493			99,677			5.50	%		5.50	%		Fixed	Jul. 2031	Jul. 2021
SunTrust Bank IV	27	21,243			25,000			5.50	%		5.50	%		Fixed	Jul. 2031	Jul. 2021
Sanofi US I	1	125,000			125,000			5.16	%		5.16	%		Fixed	Jul. 2026	Jan. 2021
Stop & Shop I	4	38,444			38,936			5.63	%		5.63	%		Fixed	Jun. 2041	Jun. 2021
Multi-Tenant Mortgage Loan	268	649,532			649,532			4.36	%		4.36	%		Fixed	Sep. 2020	Sep. 2020
Gross mortgage notes payable	450	1,038,955			1,053,648			4.76	%	⁽¹⁾	4.77	%	⁽¹⁾
Deferred financing costs, net of accumulated amortization		(16,611		)	(20,066		)
Mortgage notes payable, net of deferred financing costs		$	1,022,344		$	1,033,582

_____________________________________


(1)	Calculated on a weighted-average basis for all mortgages outstanding as of the dates indicated.

As of September 30, 2016 and December 31, 2015, the Company had pledged $2.0 billion in real estate investments as collateral for its mortgage notes payable. This real estate is not available to satisfy other debts and obligations unless first satisfying the mortgage notes payable on the properties.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

During August 2015, certain subsidiaries of the Company entered into a $655.0 million mortgage loan agreement ("Multi-Tenant Mortgage Loan") with Barclays Bank PLC, Column Financial Inc. and UBS Real Estate Securities Inc. (together, the "Lenders"). The Multi-Tenant Mortgage Loan has a stated maturity of September 6, 2020 and a stated annual interest rate of 4.30%. As of September 30, 2016, the Multi-Tenant Mortgage Loan was secured by mortgage interests in 268 of the Company's properties. As of September 30, 2016, the outstanding balance under the Multi-Tenant Mortgage Loan was $649.5 million.

At the closing of the Multi-Tenant Mortgage Loan, the Lenders placed $42.5 million of the proceeds from the Multi-Tenant Mortgage Loan in escrow, to be released to the Company upon certain conditions, including the receipt of ground lease estoppels, performance of certain repairs and receipt of environmental insurance. As of September 30, 2016, the Lenders had released $34.6 million of the amount originally placed in escrow to the Company. As of September 30, 2016, $7.9 million of the proceeds from the Multi-Tenant Mortgage Loan remained in escrow and is included in restricted cash on the unaudited consolidated balance sheet as of September 30, 2016.

The following table summarizes the scheduled aggregate principal payments on mortgage notes payable based on stated maturity dates for the five years subsequent to September 30, 2016 and thereafter:



(In thousands)	Future Principal Payments
October 1, 2016 to December 31, 2016	$	262
2017	1,080
2018	1,143
2019	1,211
2020	650,808
Thereafter	384,451
	$	1,038,955

The Company's mortgage notes payable agreements require the compliance of certain property-level financial covenants including debt service coverage ratios. As of September 30, 2016, the Company was in compliance with financial covenants under its mortgage notes payable agreements.

Note 8 — Fair Value of Financial Instruments

GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair value. GAAP establishes market-based or observable inputs as the preferred sources of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:

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 had commercial mortgage loans held for sale, which were carried at fair value on the consolidated balance sheet as of December 31, 2015. Commercial mortgage loans held for sale were valued using the sale price from the term sheet, which is an observable input. As a result, the Company's commercial mortgage loans held for sale were classified in Level 2 of the fair value hierarchy. There were no commercial mortgage loans held for sale as of September 30, 2016.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

The following table presents information about the Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2015, aggregated by the level in the fair value hierarchy within which those instruments fall. There were no financial instruments measured at fair value on a recurring basis as of September 30, 2016. Additionally, there were no financial instruments measured at fair value on a non recurring basis as of September 30, 2016 or December 31, 2015:



(In thousands)	Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
December 31, 2015
Commercial mortgage-backed securities	$	—	$	56,884	$	—	$	56,884

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 and liabilities. The Company's policy with respect to transfers between levels of the fair value hierarchy is to recognize transfers into and out of each level as of the end of the reporting period. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2016 and 2015. There were no transfers into or out of Level 3 of the fair value hierarchy during the nine months ended September 30, 2016 and 2015.

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, restricted cash, prepaid expenses and other assets, accounts payable and accrued expenses and distributions payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets as of September 30, 2016 and December 31, 2015 are reported in the following table:



		Carrying Amount at		Fair Value at		Carrying Amount at		Fair Value at
(In thousands)	Level	September 30, 2016		September 30, 2016		December 31, 2015		December 31, 2015
Commercial mortgage loan, held for investment	3	$	17,163	$	16,572	$	17,135	$	17,200
Gross mortgage notes payable and mortgage premiums, net	3	$	1,050,626	$	1,099,346	$	1,068,540	$	1,103,352

The fair value of the commercial mortgage loan is estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of investments. The fair value of gross mortgage notes payable is based on combinations of independent third party estimates and management's estimates of market interest rates.

Note 9 — Common Stock

As of September 30, 2016 and December 31, 2015, the Company had 65.8 million and 65.0 million shares of common stock outstanding, respectively, including unvested restricted shares and shares issued pursuant to the DRIP.

In April 2013, the Company's board of directors authorized, and the Company declared, a distribution payable on a monthly basis to stockholders of record on each day at a rate equal to $0.00452054795 per day, which is equivalent to $1.65 per annum, per share of common stock. In March 2016, the Company’s board of directors ratified the existing distribution amount equivalent to $1.65 per annum, and, for calendar year 2016, affirmed a change to the daily distribution amount to $0.00450819672 per day per share of common stock, effective January 1, 2016, to reflect that 2016 is a leap year. Distributions are payable by the fifth 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.

On March 17, 2016, the Company's board of directors approved an estimated net asset value per share of the Company's common stock ("Estimated Per-Share NAV) as of December 31, 2015, which was published on March 18, 2016. The Company intends to publish subsequent valuations of Estimated Per-Share NAV periodically at the discretion of the Company's board of directors, provided that such valuations will be made at least once annually. The Estimated Per-Share NAV does not represent: (1) the amount at which the Company's shares would trade on a national securities exchange, (2) the amount a stockholder would obtain if he or she tried to sell his or her shares or (3) the amount stockholders would receive if the Company liquidated its assets and distributed the proceeds after paying all of its expenses and liabilities. In addition, the Estimated Per-Share NAV does not reflect events subsequent to December 31, 2015 that would have affected the Company's net asset value.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

Share Repurchase Program

The Company's board of directors has adopted the share repurchase program (as amended and restated, the "SRP"), which permits investors to sell their shares back to the Company after they have held them for at least one year, subject to certain conditions and limitations. The Company may repurchase shares on a semiannual basis, at each six-month period ending June 30 and December 31.

Under the SRP, the repurchase price per share for requests other than for death or disability are as follows:


•	after one year from the purchase date — 92.5% of the then-current estimated net asset value per share of the Company's common stock, approved by the Company's board of directors ("Estimated Per-Share NAV");


•	after two years from the purchase date — 95.0% of Estimated Per-Share NAV;


•	after three years from the purchase date — 97.5% of Estimated Per-Share NAV; and


•	after four years from the purchase date — 100.0% of Estimated Per-Share NAV.

In the case of requests for death or disability, the repurchase price per share will be equal to Estimated Per-Share NAV at the time of repurchase.

Under the SRP, repurchases at each semiannual period are limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding during the previous fiscal year. Repurchases pursuant to the SRP for any given semiannual period are funded from proceeds received during that same semiannual period through the issuance of common stock pursuant to the DRIP, as well as any reservation of funds the board of directors may, in its sole discretion, make available for this purpose. If the establishment of an Estimated Per-Share NAV occurs during any semiannual period, any repurchase requests received during such semiannual period are paid at a price based on Estimated Per-Share NAV applicable on the last day of the semiannual period, as described above.

On June 28, 2016, in consideration of the strategic review process, the board of directors of the Company determined to amend the SRP to provide for one twelve-month repurchase period for calendar year 2016 instead of two semi-annual periods ending June 30 and December 31. The annual limit on repurchases under the SRP remains unchanged and continues to be limited to a maximum of 5.0% of the weighted average number of shares of common stock of the Company outstanding during its prior fiscal year and is subject to the terms and limitations set forth in the SRP. Following calendar year 2016, the repurchase periods will return to two semi-annual periods and applicable limitations set forth in the SRP.

The Company's board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase, change the purchase price for repurchases or otherwise amend the terms of, suspend or terminate the SRP pursuant to any applicable notice requirements under the SRP. Due to these limitations, the Company cannot guarantee that it will be able to accommodate all repurchase requests.

When a stockholder requests repurchases and the repurchases are approved, the Company reclassifies such an obligation from equity to a liability based on the settlement value of the obligation. Shares repurchased have the status of authorized but unissued shares.

The following table summarizes the repurchases of shares under the SRP cumulatively through September 30, 2016:



	Number of Shares	Weighted-Average Price per Share
Cumulative repurchases as of December 31, 2015	2,073,645	$	24.12
Nine months ended September 30, 2016	7,854	24.17
Cumulative repurchases as of September 30, 2016	2,081,499	$	24.12

During the nine months ended September 30, 2016, 5.8 million shares have been requested for repurchase and are not yet fulfilled. These shares, and all additional shares requested prior to December 31, 2016 will be considered for repurchase, to the extent the requests are not withdrawn by December 31, 2016. All requested shares will be subject to the annual limitations set forth in the SRP.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

Distribution Reinvestment Plan

Pursuant to the DRIP, the Company's stockholders could elect to reinvest distributions by purchasing shares of common stock. Until November 14, 2014, the Company offered shares pursuant to the DRIP at $23.75, which was 95.0% of the initial offering price of shares of common stock in the IPO. Effective November 14, 2014, the Company began offering shares pursuant to the DRIP at the then-current Estimated Per-Share NAV. The DRIP was suspended following the payment of the Company's June 2015 distribution on July 1, 2015.

On April 1, 2016, the Company reinstated the DRIP and registered an additional 7.7 million shares of common stock, offered at the then-current Estimated Per-Share NAV, for use under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-210532). On August 30, 2016, in consideration of the Merger, the Company's board of directors determined to suspend the DRIP effective immediately. Accordingly, the final issuance of shares of common stock pursuant to the DRIP prior to the suspension occurred in connection with the Company's July 2016 distribution, paid in August 2016.

No dealer manager fees or selling commissions were paid with respect to shares purchased pursuant to the DRIP. Shares issued pursuant to the DRIP are recorded within stockholders' equity in the accompanying consolidated balance sheets in the period distributions are declared. During the nine months ended September 30, 2016, 0.8 million shares of common stock were issued pursuant to the DRIP.

Note 10 — Commitments and Contingencies

Future Minimum Ground Lease Payments

The Company entered into ground lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter:



(In thousands)	Future Minimum Base Rent Payments
October 1, 2016 to December 31, 2016	$	229
2017	921
2018	903
2019	902
2020	674
Thereafter	4,975
	$	8,604

Unfunded Commitments Under Commercial Mortgage Loans

As of September 30, 2016, the Company had unfunded commitments which will generally be funded to finance capital expenditures by the borrowers under the Company's commercial mortgage loan. The following table reflects the expiration of these commitments over the next five years and thereafter:



(In thousands)	Funding Expiration
October 1, 2016 to December 31, 2016	$	—
2017	2,450
2018	—
2019	—
2020	—
Thereafter	—
	$	2,450

Litigation and Regulatory Matters

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

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

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. The Company maintains environmental insurance for its properties that provides coverage for potential environmental liabilities, subject to the policy's coverage conditions and limitations. 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 11 — Related Party Transactions and Arrangements

As of September 30, 2016 and December 31, 2015, American Finance Special Limited Partner, LLC (the "Special Limited Partner"), an entity controlled by the Sponsor, owned 8,888 shares of the Company's outstanding common stock and 90 units of limited partner interests in the OP ("OP Units"). 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.

Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO. American National Stock Transfer, LLC ("ANST"), a subsidiary of the parent company of the Former Dealer Manager, provided other general professional services through January 2016. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was under common control with the Sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name, Aretec Group, Inc.

Fees and Participations Incurred in Connection With the Operations of the Company

On April 29, 2015, the independent directors of the board of directors unanimously approved certain amendments to the Amended and Restated Advisory Agreement, as amended (the "Original A&R Advisory Agreement"), by and among the Company, the OP and the Advisor (the "Second A&R Advisory Agreement"). The Second A&R Advisory Agreement, which superseded the Original A&R Advisory Agreement, took effect on July 20, 2015, the date on which the Company filed certain changes to the Company's Articles of Amendment and Restatement, which were approved by the Company's stockholders on June 23, 2015. The initial term of the Second A&R Advisory Agreement is 20 years beginning on April 29, 2015, and is automatically renewable for another 20-year term upon each 20-year anniversary unless terminated by the board of directors for cause.

Prior to January 16, 2016, the Advisor was paid an acquisition fee equal to 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 also has been and may continue to be reimbursed for costs it incurs in providing investment-related services, or "insourced expenses." These insourced expenses may not exceed, 0.5% of the contract purchase price of each acquired property and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company has paid and may continue to pay third party acquisition expenses. The aggregate amount of acquisition fees and financing coordination fees (as described below) were not to exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. The Second A&R Advisory Agreement terminated the acquisition fee and financing coordination fee (both as defined in the Second A&R Advisory Agreement) effective January 16, 2016. As of January 16, 2016, aggregate acquisition fees and financing coordination fees did not exceed the 1.5% threshold. Further, the total of all acquisition fees, acquisition expenses and any financing coordination fees payable was not to exceed 4.5% of the Company's total portfolio contract purchase price or 4.5% of the amount advanced for the Company's total portfolio of loans or other investments. As of January 16, 2016, the total of all cumulative acquisition fees, acquisition expenses and financing coordination fees did not exceed the 4.5% threshold.

Additionally, prior to January 16, 2016, if the Advisor provided services in connection with the origination or refinancing of any debt that the Company obtained and used to acquire properties or to make other permitted investments, or that was assumed, directly or indirectly, in connection with the acquisition of properties, the Company paid the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

Prior to April 15, 2015, in connection with asset management services provided by the Advisor, the Company issued to the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted, forfeitable partnership units of the OP designated as "Class B Units." The Class B Units were intended to be profit interests and will vest, and no longer be subject to forfeiture, at such time as: (a) the value of the OP'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 is a party, as a result of which OP Units or the Company's common stock are exchanged for, or converted into, the right, or the holders of such securities are otherwise 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. Unvested Class B Units will be forfeited immediately if: (x) the advisory agreement is terminated for any reason other than a termination without cause; or (y) the advisory agreement is terminated without cause by an affirmative vote of a majority of the board of directors before the economic hurdle described above has been met.

The Class B Units were issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. The number of Class B Units issued in any quarter was 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 was initially equal to $22.50 (the initial offering price in the IPO minus selling commissions and dealer manager fees) and, as of the Initial NAV Pricing Date, to Estimated Per-Share NAV. On April 15, 2015, the Company's board of directors approved an amendment (the "Amendment") to the Original A&R Advisory Agreement, which, among other things, provided that, effective as of April 15, 2015 until July 20, 2015:


(i)	for any period commencing on or after April 1, 2015, the Company paid the Advisor or its assignees as compensation for services rendered in connection with the management of the Company’s assets an Asset Management Fee (as defined in the Original A&R Advisory Agreement) equal to 0.75% per annum of the Cost of Assets (as defined in the Original A&R Advisory Agreement);


(ii)	such Asset Management Fee was payable monthly in arrears in cash, in shares of common stock, or a combination of both, the form of payment determined in the sole discretion of the Advisor; and


(iii)	the Company would not cause the OP to issue any Class B Units in respect of periods subsequent to March 31, 2015.

As of September 30, 2016, in aggregate, the Company's board of directors had approved the issuance of 1,052,420 Class B Units to the Advisor in connection with the arrangement described above. As of September 30, 2016, the Company could not determine the probability of achieving the performance condition, as such, no expense was recognized in connection with this arrangement during the three and nine months ended September 30, 2016 and 2015. The Advisor receives distributions on unvested Class B Units equal to the distribution amount received on the same number of shares of the Company's common stock. Such distributions on issued Class B Units are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss. As stated above, pursuant to the Amendment, the OP will not issue any further Class B Units. The changes made pursuant to the Amendment were incorporated into the Agreement of Limited Partnership of the OP (the "OP Agreement") through a Third Amendment to the OP Agreement, which was approved by the board of directors and entered into on April 29, 2015.

Effective July 20, 2015, the Second A&R Advisory Agreement requires the Company to pay the Advisor a base management fee. Effective October 1, 2015, the fixed portion of the base management fee, which is equal to $1.5 million per month, is payable on the first business day of each month, while the variable portion of the base management fee, which is equal to 0.375% of the cumulative net proceeds of any equity raised subsequent to the potential Listing, is payable quarterly in arrears. Base management fees are included in asset management fees to related party on the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2016 and 2015.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

In addition, the Second A&R Advisory Agreement requires the Company to pay the Advisor a variable management fee equal to (x) 15.0% of the applicable quarter's Core Earnings (as defined below) per share in excess of $0.375 per share plus (y) 10.0% of the applicable quarter's Core Earnings per share in excess of $0.50 per share, in each case as adjusted for changes in the number of shares of common stock outstanding. Core Earnings are defined as, for the applicable period, GAAP net income or loss excluding non-cash equity compensation expense, the variable management fee, acquisition and transaction related fees and expenses, financing related fees and expenses, depreciation and amortization, realized gains and losses on the sale of assets, any unrealized gains, losses or other non-cash items recorded in net loss for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income, one-time events pursuant to changes in GAAP and certain non-cash charges, impairment losses on real estate related investments and other than temporary impairment of securities, amortization of deferred financing costs, amortization of tenant inducements, amortization of straight-line rent, amortization of market lease intangibles, provision for loss loans, and other non-recurring revenue and expenses. The Company did not incur a variable management fee during the three and nine months ended September 30, 2016 and 2015.

The Company reimburses the Advisor's costs of providing administrative services, but may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions. During the three and nine months ended September 30, 2016, the Company incurred $0.8 million and $2.2 million of reimbursement expenses from the Advisor for providing administrative services. During the three and nine months ended September 30, 2015, the Company incurred $0.4 million of reimbursements from the Advisor for providing administrative services. These reimbursements are included in general and administrative expense on the consolidated statements of operations and comprehensive loss.

In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to forgive certain fees. Because the Advisor may forgive 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 or property operating costs. No such fees were forgiven or costs were absorbed by the Advisor during the three and nine months ended September 30, 2016 and 2015.

The following table details amounts incurred and payable to related parties in connection with the operations-related services described above as of and for the periods presented:



	Three Months Ended September 30,				Nine Months Ended September 30,				Payable as of
(In thousands)	2016		2015		2016		2015		September 30, 2016		December 31, 2015
One-time fees and reimbursements:
Acquisition fees and related cost reimbursements ⁽¹⁾	$	—	$	1,330	$	—	$	1,330	$	—	$	—
Financing coordination fees	—		4,913		—		4,913		—		—
Ongoing fees:
Asset management fees	4,500		4,413		13,500		8,509		—		—
Professional fees and other reimbursements ⁽²⁾	780		1,007		2,303		2,555		534		541
Distributions on Class B Units ⁽²⁾	436		438		1,300		1,135		142		—
Total related party operation fees and reimbursements	$	5,716	$	12,101	$	17,103	$	18,442	$	676	$	541

_________________________________

(1)

Acquisition fees and expenses from related parties of $0.9 million were recognized in acquisition and transaction related expense on the consolidated statement of operations and comprehensive loss for three and nine months ended September 30, 2015. In addition, over the same periods, the Company capitalized $0.4 million of acquisition expenses to the Company's consolidated balance sheet, which are amortized over the life of each investment using the effective interest method. No acquisition expenses were capitalized during the three and nine months ended September 30, 2016.


(2)	These costs are included in general and administrative expense on the consolidated statements of operations and comprehensive loss.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

During the nine months ended September 30, 2016, the Company incurred $1.3 million of cost reimbursements from the Advisor for lease commissions relating to the execution of new SunTrust leases. The lease commissions are included in deferred costs, net on the consolidated balance sheet as of September 30, 2016, and are amortized over the terms of the respective leases. No such costs were incurred during the three months ended September 30, 2016 or the three and nine months ended September 30, 2015.

The predecessor to the Sponsor was party to a services agreement with RCS Advisory Services, LLC, a subsidiary of the parent company of the Former Dealer Manager ("RCS Advisory"), pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by AR Global with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to AR Global instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory.

The Company was also party to a transfer agency agreement with ANST, pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services), and supervisory services overseeing the transfer agency services performed by DST Systems, Inc., a third-party transfer agent ("DST"). The Sponsor received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. On February 26, 2016, the Company entered into a definitive agreement with DST to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services).

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

In connection with the Listing, the Company, as the general partner of the OP, would cause the OP to issue a note (the "Listing Note") to the Special Limited Partner to evidence the OP's obligation to distribute to the Special Limited Partner an aggregate amount (the "Listing Amount") equal to 15.0% of the difference (to the extent the result is a positive number) between:


•	the sum of (i) the "market value" (as defined in the Listing Note) of the Company's common stock plus (ii) the sum of all distributions or dividends (from any source) paid by the Company to its stockholders prior to the Listing; and


•	the sum of (i) the total raised in the IPO and under the DRIP prior to the Listing ("Gross Proceeds") plus (ii) the total amount of cash that, if distributed to those stockholders who purchased shares of common stock in the IPO and under the DRIP, would have provided those stockholders a 6.0% cumulative, non-compounded, pre-tax annual return (based on a 365-day year) on the gross proceeds.

The "market value" used to calculate the Listing Amount will not be determinable until the end of a measurement period, the period of 30 consecutive trading days, commencing on the 180th day following the Listing, unless another liquidity event, such as a merger, occurs prior to the end of the measurement period. If another liquidity event occurs prior to the end of the measurement period, the Listing Note provides for appropriate adjustment to the calculation of the Listing Amount.

The Special Limited Partner will have the right to receive distributions of "Net Sales Proceeds," as defined in the Listing Note, until the Listing Note is paid in full; provided that, the Special Limited Partner has the right, but not the obligation, to convert the entire Special Limited Partner interest into OP Units. OP Units are convertible into shares of the Company's common stock in accordance with the terms governing conversion of OP Units into shares of common stock and contained in the Second Amended and Restated Agreement of Limited Partnership of the OP by the Company, as general partner of its OP, with the limited partners party thereto (the "Second A&R OP Agreement"), which will be entered into at Listing.

On April 29, 2015, the board of directors authorized the execution, in conjunction with the potential Listing, the Second A&R OP Agreement to conform more closely with agreements of limited partnership of other operating partnerships controlled by real estate investment trusts whose securities are publicly traded and listed, and to add long term incentive plan units ("LTIP Units") as a new class of units of limited partnership in the OP to the existing common units ("OP Units"). The Company may at any time cause the OP to issue LTIP Units pursuant to an outperformance agreement. On April 29, 2015, the board of directors approved the general terms of a Multi-Year Outperformance Agreement to be entered into with the Company, the OP and the Advisor in connection with the Listing.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

The Advisor was paid 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 was also involved; provided, however, that in no event could 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. During the nine months ended September 30, 2016, the Company incurred $0.6 million of real estate commissions from the Advisor for its services in connection with the sale of real estate investments. The impact of the real estate commissions is included in gain on sale of real estate investments on the consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2016. No such commissions were incurred during the three months ended September 30, 2016 or the three and nine months ended September 30, 2015. The Second A&R Advisory Agreement terminated the brokerage commission to the Advisor.

Related Party Agreements Executed in Connection with the Mergers

On September 6, 2016, the Company entered into an amendment of the Second A&R Advisory Agreement (the "Third A&R Advisory Agreement"), which will become effective upon the Effective Time. Under the Third A&R Advisory Agreement, the fixed portion of the base management fee will increase from $18.0 million annually to (i) $21.0 million annually for the first year following the Effective Time; (ii) $22.5 million annually for the second year following the Effective Time; and (iii) $24.0 million annually for the remainder of the term. If the Company acquires (whether by merger, consolidation or otherwise) any REIT, other than RCA, that is advised by an entity that is wholly-owned, directly or indirectly, by AR Global, other than any joint ventures, (a "Specified Transaction") the fixed portion of the base management fee will be increased by an amount equal to the consideration paid for the acquired company's equity multiplied by 0.0031, 0.0047 and 0.0062 for years one, two and three and thereafter, respectively, following the Specified Transaction. The variable portion of the base management fee will change from a quarterly fee equal to 0.375% of the cumulative net proceeds of any equity raised after the Company lists its common stock on a national securities exchange to a monthly fee equal to one-twelfth of 1.25% of the cumulative net proceeds of any equity raised by the Company or its subsidiaries from and after the Effective Time.

Under the Third A&R Advisory Agreement, the Company will have the right to internalize the services and terminate the Advisory Agreement, referred to as an “internalization,” after January 1, 2018 as long as (1) more than 67% of the Company’s independent directors approve the internalization; (2) the Company provides written notice to the Advisor; and (3) the Company pays the Advisor a fee equal to (a) $15.0 million plus (b) either (x) if the internalization occurs on or before December 31, 2028, the Subject Fees (defined below) multiplied by 4.5 or (y) if the internalization occurs on or after January 1, 2029, the Subject Fees multiplied by 3.5 plus (c)(x) 1% of the purchase price (excluding the portion of the purchase price funded with equity proceeds raised prior to the end of the fiscal quarter in which the notice of election occurs) of each acquisition or merger that occurs between the end of the fiscal quarter in which notice is given and the internalization and (y) without duplication, 1% of the amount of new equity raised by the Company between the end of the fiscal quarter in which notice is given and the internalization. Subject Fees means (I) (A) all amounts payable pursuant to the Advisory Agreement and the Property Management Agreement for the fiscal quarter in which notice occurs multiplied by (B) four plus (II) without duplication, the annual increase in the base management fee resulting from the amount of new equity raised by the Company within the fiscal quarter in which notice occurs, as described above.

On September 6, 2016, the Company entered into an amendment to the agreement of limited partnership of the OP (the “A&R OP Agreement”), which will become effective upon the Effective Time. The A&R OP Agreement makes certain changes to the provisions of the partnership agreement relating to (a) distributions of net sales proceeds and the Termination Note (as defined in the A&R OP Agreement) issuable on termination of the Third A&R Advisory Agreement to address the issuance of shares of the Company’s common stock pursuant to the Merger and in future transactions; (b) internalization of the Advisor’s services after the Effective Time pursuant to the conditions in the Third A&R Advisory Agreement; and (c) certain matters related to changes in the Third A&R Advisory Agreement.

On September 6, 2016, the Company entered into an amended and restated property management and leasing agreement (the “Property Management Agreement”) with the Property Manager in respect of (1) the properties owned by the Company prior to the Merger and (2) any double- and triple-net leased single tenant properties acquired by the Company after the Effective Time and during the term of the Property Management Agreement (collectively, the “Company Properties” and together with the Target Properties, the “Properties”). The Property Management Agreement will become effective at the Effective Time and will be of no force or effect in the event the Merger Agreement is terminated prior to the Merger being consummated.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

The Property Management Agreement provides that the Property Manager will be entitled to a management fee equal to 4% of the gross rental receipts from properties currently owned by RCA (“Target Properties”), including common area maintenance reimbursements, tax and insurance reimbursements, percentage rental payments, utility reimbursements, late fees, vending machine collections, service charges, rental interruption insurance, and a 15% administrative charge for common area expenses.

In addition, the Property Manager will be entitled to transition fees of up to $2,500 for each Target Property managed, a construction fee equal to 6% of construction costs incurred, if any, and reimbursement of all expenses specifically related to the operation of a Target Property, including compensation and benefits of property management, accounting, lease administration, executive and supervisory personnel of the Property Manager, and excluding expenses of the Property Manager’s corporate and general management office and excluding compensation and other expenses applicable to time spent on matters other than the Target Properties.

The Property Management Agreement has an initial term ending October 1, 2018, with automatic renewal for successive one-year terms unless terminated 60 days prior to the end of a term or terminated for cause due to material breach of the agreement, fraud, criminal conduct or willful misconduct, insolvency or bankruptcy of the Property Manager.

Note 12 — Economic Dependency

Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control 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, as well as other administrative responsibilities for the Company including accounting and legal services, human resources and information technology.

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 13 — Share-Based Compensation

Restricted Share Plan

The Company had an employee and director incentive restricted share plan (the "Original RSP"), which provided 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 vests over a five-year period following the date of grant in increments of 20.0% per annum. The Original RSP provided 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 other entities that provide services to the Company. The total number of shares of common stock granted under the Original RSP could not exceed 5.0% of the Company's shares of common stock on a fully diluted basis at any time, and in any event could 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. For restricted share awards granted prior to 2015, 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 share awards granted during or after 2015 provide for accelerated vesting of the portion of the unvested shares scheduled to vest in the year of the recipient's voluntary termination or the failure to be re-elected to the board. The Company accounts for forfeitures when they occur. 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 are subject to the same restrictions as the underlying restricted shares.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

In April 2015, the board of directors adopted an Amended and Restated RSP (the "A&R RSP") that replaces in its entirety the Original RSP. The A&R RSP amends the terms of the Original RSP as follows:


•	it increases the number of shares of Company capital stock, par value $0.01 per share (the "Capital Stock"), available for awards thereunder from 5.0% of the Company's outstanding shares of Capital Stock on a fully diluted basis at any time, not to exceed 3.4 million shares of Capital Stock, to 10.0% of the Company's outstanding shares of Capital Stock on a fully diluted basis at any time;


•	it removes the fixed amount of shares that were automatically granted to the Company's independent directors; and


•	it adds restricted stock units (including dividend equivalent rights thereon) as a permitted form of award.

The following table reflects restricted share award activity for the nine months ended September 30, 2016:



	Number of Shares of Common Stock		Weighted-Average Issue Price
Unvested, December 31, 2015	7,455		$	23.34
Granted	3,723		24.17
Vested	(1,811	)	23.19
Unvested, September 30, 2016	9,367		$	23.70

As of September 30, 2016, the Company had $0.2 million of unrecognized compensation cost related to unvested restricted share awards granted. That cost is expected to be recognized over a weighted-average period of 3.4 years.

The fair value of the restricted shares is being expensed in accordance with the service period required. Compensation expense related to restricted stock was approximately $31,000 and $26,000 for the three months ended September 30, 2016 and 2015, respectively. Compensation expense related to restricted stock was $0.1 million and approximately $40,000 for the nine months ended September 30, 2016 and 2015, respectively. Compensation expense related to restricted stock is included in general and administrative expense on the accompanying consolidated statements of operations and comprehensive loss.

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. There were no shares of common stock issued to directors in lieu of cash compensation during the three and nine months ended September 30, 2016 and 2015.

Note 14 — Net Loss Per Share

The following table sets forth the basic and diluted net loss per share computations for the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except share and per share amounts)	2016			2015			2016			2015
Basic and diluted net loss	$	(8,729	)	$	(11,428	)	$	(18,660	)	$	(8,151	)
Basic and diluted weighted-average shares outstanding	65,741,735			66,450,057			65,334,465			66,058,803
Basic and diluted net loss per share	$	(0.13	)	$	(0.17	)	$	(0.29	)	$	(0.12	)

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

Diluted net loss per share assumes the conversion of certain common share equivalents into an equivalent number of common shares, unless the effect is antidilutive. The Company considers unvested restricted stock, OP Units and Class B Units to be common share equivalents. The Company had the following common share equivalents on a weighted-average basis that were excluded from the calculation of diluted net loss per share as their effect would have been antidilutive for the periods presented:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Unvested restricted stock ⁽¹⁾	8,381	7,319	7,521	5,975
OP Units	90	90	90	90
Class B Units	1,052,420	1,052,420	1,052,420	919,611
Total weighted-average antidilutive common share equivalents	1,060,891	1,059,829	1,060,031	925,676

_____________________________________


(1)	Weighted-average number of shares of unvested restricted stock outstanding for the period presented. There were 9,367 and 7,455 shares of unvested restricted stock outstanding as of September 30, 2016 and 2015, respectively.

Note 15 — 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, or disclosures in, the consolidated financial statements except for the following disclosures:

SRP Amendment

On November 7, 2016, the board of directors of the Company determined to amend the Company’s existing SRP to provide that for purposes of the SRP, shares received from the Company in exchange for shares of RCA pursuant to the Merger, if the Merger is completed, will be deemed to have been acquired from the Company on the date that the holder acquired the shares of RCA, provided the holder of RCA shares purchased the RCA shares from RCA or received their shares from RCA (directly or indirectly) through one or more non-cash transactions and any holding period under the SRP shall be deemed to include the period that shares of RCA were held by the holder.

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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 unaudited consolidated financial statements of American Finance Trust, Inc. and the notes thereto. As used herein, the terms "Company," "we," "our" and "us" refer to American Finance Trust, Inc., a Maryland corporation, including, as required by context, American Finance Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and its subsidiaries. The Company is externally managed by American Finance Advisors, LLC (our "Advisor"), a Delaware limited liability company. Capitalized terms used herein but not otherwise defined have the meaning ascribed to those terms in "Part I — Financial Information" included in the notes to the unaudited consolidated financial statements contained herein.

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 American Finance Trust, Inc. (the "Company," "we" "our" or "us"), our Advisor 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 may not be able to consummate the Mergers (as defined below) with American Realty Capital — Retail Centers of America, Inc. ("RCA") within the expected time period, or at all, due to various reasons, including, but not limited to, the failure to obtain approval by our stockholders and the stockholders of RCA.


•	We and RCA expect to incur substantial expenses related to the Mergers, whether or not consummated, and may be unable to realize the anticipated benefits of the Mergers or do so within the anticipated timeframe.

•

All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in American Finance Advisors, LLC (our "Advisor") or other entities under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global" or our "Sponsor"). 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 affiliates of our Sponsor and conflicts in allocating time among these entities and us, which could negatively impact our operating results.

•

Although we have announced our intention to list our shares of common stock on the New York Stock Exchange ("NYSE") at a time yet to be determined following the completion of the Mergers, there can be no assurance that our shares of common stock will be listed. 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.


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


•	Our tenants may not achieve our rental rate incentives and our expenses could be greater, which may impact our results of operations.


•	We have not generated, and in the future may not generate, operating cash flows sufficient to cover 100% of our distributions, and, as such, we may be forced to source distributions from borrowings, which may be at unfavorable rates, or depend on our Advisor to waive reimbursement of certain expenses or fees. There is no assurance that our Advisor will waive reimbursement of expenses or fees.


•	We may be unable to pay or maintain cash distributions at the current rate or increase distributions over time.


•	We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates.


•	We are subject to risks associated with any dislocation or liquidity disruptions that may exist or occur in the credit markets of the United States of America.


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


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

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Overview

We have acquired a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants. We manage and optimize our investments in our existing portfolio of net leased commercial real estate properties (the "Net Lease Portfolio") and selectively invest in additional net lease properties. As of September 30, 2016, we owned 458 properties with an aggregate purchase price of $2.2 billion, comprised of 13.3 million rentable square feet, which were 100.0% leased. To a lesser extent, we invest in commercial real estate mortgage loans and other commercial real estate-related debt investments (such investments collectively, "CRE Debt Investments"). We have financed our CRE Debt Investments primarily through mortgage financing secured by our Net Lease Portfolio, and we may use mortgage specific repurchase agreement facilities and collateralized debt obligations to finance future CRE Debt Investments.

Incorporated on January 22, 2013, we are a Maryland corporation that elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ended December 31, 2013. Substantially all of our business is conducted through the OP and its wholly-owned subsidiaries.

On April 4, 2013, we commenced our 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. The IPO closed in October 2013. As of September 30, 2016, we had 65.8 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to our distribution reinvestment plan (the "DRIP"), and had received total proceeds from the IPO and the DRIP, net of share repurchases, of $1.6 billion.

On March 17, 2016, our board of directors approved an estimated net asset value per share of our common stock ("Estimated Per-Share NAV") equal to $24.17 as of December 31, 2015, which was published on March 18, 2016.

We have no employees. We have retained Advisor to manage our affairs on a day-to-day basis. American Finance Properties, LLC (the "Property Manager") serves as our property manager. The Advisor and the Property Manager are wholly owned subsidiaries of AR Global Investments, LLC (the successor business to AR Capital, LLC, the "Sponsor" or "AR Global"), as a result of which, they are related parties of ours, and each have received or may receive, as applicable, compensation, fees and expense reimbursements for services related to managing our business.

Pending Merger Agreement

On September 6, 2016, the Company and the OP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with RCA, American Realty Capital Retail Operating Partnership, L.P. (the “RCA OP”) and Genie Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (the “Merger Sub”). The Merger Agreement provides for (a) the merger of RCA with and into the Merger Sub (the “Merger”), with the Merger Sub surviving as a wholly owned subsidiary of the Company and (b) the merger of the Target OP with and into the OP, with the OP as the surviving entity (the “Partnership Merger”, and together with the Merger, the “Mergers”).

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Mergers (the “Effective Time”), each outstanding share of common stock of RCA, $0.01 par value per share (“RCA Common Stock”) (including any restricted shares of RCA Common Stock and fractional shares), will be converted into the right to receive (x) a number of shares of our common stock, $0.01 par value per share (the “Company Common Stock”) equal to 0.385 shares of Company Common Stock (the “Stock Consideration”) and (y) cash from us, in an amount equal to $0.95 per share (the “Cash Consideration,” and together with the Stock Consideration, the “Merger Consideration”).

In the event that we or RCA terminate the Merger Agreement under specified circumstances, we or RCA, as applicable, are required to pay a termination fee of $25.6 million.

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The Company and RCA each are sponsored, directly or indirectly, by AR Global. AR Global and its affiliates provide services to us and RCA pursuant to written advisory agreements.

The completion of the Mergers is subject to the approval of our and RCA's shareholders as well as satisfaction of customary closing conditions. A preliminary joint proxy statement/prospectus describing the proposed Mergers was filed on Form S-4 with the Securities and Exchange Commission (the “SEC”) in October 2016. The Mergers are expected to close in the first quarter of 2017. However, as of the filing of this Quarterly Report on Form 10-Q, the consummation of the Mergers has not yet occurred, and we cannot assure that the Mergers will be completed based on the terms of the Merger Agreement or at all.

The shares of our common stock have been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "AFIN" (the "Listing"), subject to our being in compliance with all applicable listing standards on the date our common stock begins trading on the NYSE. We intend to list our common stock on the NYSE at a time yet to be determined following the completion of the Mergers. There can be no assurance that our common stock will be listed or when our common stock will commence trading on the NYSE.

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:

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. Because 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 rents receivable that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease is executed. We defer the revenue related to lease payments received from tenants in advance of their due dates.

We own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, we defer the recognition of contingent rental income, until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. Contingent rental income is included in rental income on the consolidated statements of operations and comprehensive (loss) income.

We continually review receivables related to rent and unbilled rents receivable 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 and comprehensive (loss) income.

Cost recoveries from tenants are included in operating expense reimbursements in our consolidated statements of operations and comprehensive (loss) income in the period the related costs are incurred, as applicable.

Real Estate Investments

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.

We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive (loss) income. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.

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In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.

The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.

In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates.

In allocating non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.

In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations, prepared by independent valuation firms. We also consider information and other factors including: market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental rates, tenant credit profile, store profitability and the importance of the location of the real estate to the operations of the tenant's business.

Real estate investments that are intended to be sold are designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on our operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive (loss) income for all applicable periods. There are no real estate investments held for sale as of September 30, 2016 and December 31, 2015.

Depreciation and Amortization

We are required to make subjective assessments as to the useful lives of the components of our real estate investments for purposes of determining the amount of depreciation to record on an annual basis. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our real estate investments, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

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.

Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.

Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.

The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.

Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.

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Impairment of Long-Lived Assets

When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review 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, 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 for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.

Commercial Mortgage Loans

Commercial mortgage loans held for investment purposes are anticipated to be held until maturity, and accordingly, are carried at cost, net of unamortized acquisition fees and expenses capitalized, discounts or premiums and unfunded commitments. Commercial mortgage loans that are deemed to be impaired will be carried at amortized cost less a specific allowance for loan losses. Interest income is recorded on the accrual basis and related discounts, premiums and capitalized acquisition fees and expenses on investments are amortized over the life of the investment using the effective interest method. Amortization is reflected as an adjustment to interest income from debt investments in our consolidated statements of operations and comprehensive (loss) income. Guaranteed loan exit fees payable by the borrower upon maturity are accreted over the life of the investment using the effective interest method. The accretion of guaranteed loan exit fees is recognized in interest income from debt investments in our consolidated statements of operations and comprehensive (loss) income.

Acquisition fees and expenses incurred in connection with the origination and acquisition of commercial mortgage loan investments are evaluated based on the nature of the expense to determine if they should be expensed in the period incurred or capitalized and amortized over the life of the investment.

Commercial mortgage loans held for sale are carried at the lower of cost or fair value. We evaluate fair value on an individual loan basis. The amount by which cost exceeds fair value is accounted for as a valuation allowance, and changes in the valuation allowance are included in net income. Purchase discounts are no longer amortized during the period the loans are held for sale.

Allowance for Loan Losses

The allowance for loan losses reflects management's estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The reserve is increased through the loan loss provision on our consolidated statement of operations and is decreased by charge-offs when losses are confirmed through the receipt of assets, such as cash in a pre-foreclosure sale or upon ownership control of the underlying collateral in full satisfaction of the loan upon foreclosure or when significant collection efforts have ceased. We use a uniform process for determining its allowance for loan losses. The allowance for loan losses includes a general, formula-based component and an asset-specific component.

General reserves are recorded when (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the portfolio and (ii) the amount of the loss can be reasonably estimated. We currently estimate loss rates based on historical realized losses experienced in the industry and takes into account current collateral and economic conditions affecting the probability and severity of losses when establishing the allowance for loan losses. We perform a comprehensive analysis of our loan portfolio and assigns risk ratings to loans that incorporate management's current judgments about their credit quality based on all known and relevant internal and external factors that may affect collectability. We consider, among other things, payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographic location as well as national and regional economic factors. This methodology results in loans being segmented by risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. Ratings range from "1" to "5" with "1" representing the lowest risk of loss and "5" representing the highest risk of loss.

The asset-specific reserve component relates to reserves for losses on individual impaired loans. We consider a loan to be impaired when, based upon current information and events, it believes that it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement. This assessment is made on an individual loan basis each quarter based on such factors as payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional economic factors. A reserve is established for an impaired loan when the present value of payments expected to be received, observable market prices or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) is lower than the carrying value of that loan.

For collateral dependent impaired loans, impairment is measured using the estimated fair value of collateral less the estimated cost to sell. Valuations are performed or obtained at the time a loan is determined to be impaired and designated non-performing, and they are updated if circumstances indicate that a significant change in value has occurred. The Advisor generally will use the income approach through internally developed valuation models to estimate the fair value of the collateral for such loans. In more limited cases, the Advisor will obtain external "as is" appraisals for loan collateral, generally when third party participations exist.

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A loan is also considered impaired if its terms are modified in a troubled debt restructuring ("TDR"). A TDR occurs when a concession is granted and the debtor is experiencing financial difficulties. Impairments on TDR loans are generally measured based on the present value of expected future cash flows discounted at the effective interest rate of the original loans.

We designate non-performing loans at such time as (i) loan payments become 90-days past due; (ii) the loan has a maturity default; or (iii) in our opinion, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan. Income recognition will be suspended when a loan is designated non-performing and resumed only when the suspended loan becomes contractually current and performance is demonstrated to have resumed. A loan will be written off when it is no longer realizable and legally discharged.

Recently Adopted Accounting Pronouncements

In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIE") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. We elected to adopt this guidance effective January 1, 2016. We have evaluated the impact of the adoption of the new guidance on its consolidated financial statements and has determined our OP is considered a VIE. However, we meet the disclosure exemption criteria as we are the primary beneficiary of the VIE and our partnership interest is considered a majority voting interest in a business and the assets of the OP can be used for purposes other than settling its obligations, such as paying distributions. As such, the new guidance did not have a material impact on our consolidated financial statements.

In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We elected to adopt this guidance effective January 1, 2016. As a result, we reclassified $16.6 million and $20.1 million of deferred issuance costs related to our mortgage notes payable from deferred costs, net to mortgage notes payable in our consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively.

In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We have adopted the provisions of this guidance beginning January 1, 2016, electing to account for forfeitures when they occur, and determined that there is no impact to our consolidated financial position, results of operations and cash flows.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. We have not yet selected a transition method and are currently evaluating the impact of the new guidance.

In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity's accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. We are currently evaluating the impact of the new guidance.

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In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance.

In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.

In June 2016, the FASB issued guidance that changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. The amendments may be adopted early for reporting periods beginning after December 15, 2018. We are currently evaluating the impact of this new guidance.

In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.

In October 2016, the FASB issued guidance relating to interest held through related parties that are under common control, where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this new guidance.

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Properties

As of September 30, 2016, we owned 458 properties, which were acquired for investment purposes, comprised of 13.3 million rentable square feet and located in 37 states. All of our properties are freestanding, single-tenant properties, 100.0% leased with a weighted-average remaining lease term of 9.4 years as of September 30, 2016.

The following table represents certain additional information about the properties we own at September 30, 2016:



Portfolio	Acquisition Date	Number of Properties	Rentable Square Feet	Remaining Lease Term⁽¹⁾
Dollar General I	Apr. & May 2013	2	18,126	11.6
Walgreens I	Jul. 2013	1	10,500	21.0
Dollar General II	Jul. 2013	2	18,052	11.7
Auto Zone I	Jul. 2013	1	7,370	10.8
Dollar General III	Jul. 2013	5	45,989	11.6
BSFS I	Jul. 2013	1	8,934	7.3
Dollar General IV	Jul. 2013	2	18,126	9.4
Tractor Supply I	Aug. 2013	1	19,097	11.2
Dollar General V	Aug. 2013	1	12,480	11.3
Mattress Firm I	Aug. & Nov. 2013; Feb., Mar. & Apr. 2014	5	23,612	8.9
Family Dollar I	Aug. 2013	1	8,050	4.8
Lowe's I	Aug. 2013	5	671,313	12.8
O'Reilly Auto Parts I	Aug. 2013	1	10,692	13.8
Food Lion I	Aug. 2013	1	44,549	13.1
Family Dollar II	Aug. 2013	1	8,028	6.8
Walgreens II	Aug. 2013	1	14,490	16.5
Dollar General VI	Aug. 2013	1	9,014	9.4
Dollar General VII	Aug. 2013	1	9,100	11.5
Family Dollar III	Aug. 2013	1	8,000	6.0
Chili's I	Aug. 2013	2	12,700	9.2
CVS I	Aug. 2013	1	10,055	9.3
Joe's Crab Shack I	Aug. 2013	2	16,012	10.5
Dollar General VIII	Sep. 2013	1	9,100	11.8
Tire Kingdom I	Sep. 2013	1	6,635	8.5
Auto Zone II	Sep. 2013	1	7,370	6.7
Family Dollar IV	Sep. 2013	1	8,320	6.8
Fresenius I	Sep. 2013	1	5,800	8.8
Dollar General IX	Sep. 2013	1	9,014	8.6
Advance Auto I	Sep. 2013	1	10,500	6.8
Walgreens III	Sep. 2013	1	15,120	9.5
Walgreens IV	Sep. 2013	1	13,500	8.0
CVS II	Sep. 2013	1	13,905	20.4
Arby's I	Sep. 2013	1	3,000	11.8
Dollar General X	Sep. 2013	1	9,100	11.5
AmeriCold I	Sep. 2013	9	1,407,166	11.0
Home Depot I	Sep. 2013	2	1,315,200	10.3
New Breed Logistics I	Sep. 2013	1	390,486	5.1
American Express Travel Related Services I	Sep. 2013	2	785,164	3.4
L.A. Fitness I	Sep. 2013	1	45,000	7.4
SunTrust Bank I	Sep. 2013	32	182,400	7.0
National Tire & Battery I	Sep. 2013	1	10,795	7.2
Circle K I	Sep. 2013	19	54,521	12.1
Walgreens V	Sep. 2013	1	14,490	10.9
Walgreens VI	Sep. 2013	1	14,560	12.6
FedEx Ground I	Sep. 2013	1	21,662	6.7

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Portfolio	Acquisition Date	Number of Properties	Rentable Square Feet	Remaining Lease Term⁽¹⁾
Walgreens VII	Sep. 2013	10	142,140	13.1
O'Charley's I	Sep. 2013	20	135,973	15.1
Krystal Burgers Corporation I	Sep. 2013	6	12,730	13.0
Merrill Lynch, Pierce, Fenner & Smith I	Sep. 2013	3	553,841	8.2
1st Constitution Bancorp I	Sep. 2013	1	4,500	7.3
American Tire Distributors I	Sep. 2013	1	125,060	7.3
Tractor Supply II	Oct. 2013	1	23,500	7.0
United Healthcare I	Oct. 2013	1	400,000	4.8
National Tire & Battery II	Oct. 2013	1	7,368	15.7
Tractor Supply III	Oct. 2013	1	19,097	11.6
Mattress Firm II	Oct. 2013	1	4,304	6.9
Dollar General XI	Oct. 2013	1	9,026	10.6
Academy Sports I	Oct. 2013	1	71,640	11.8
Talecris Plasma Resources I	Oct. 2013	1	22,262	6.5
Amazon I	Oct. 2013	1	79,105	6.8
Fresenius II	Oct. 2013	2	16,047	10.9
Dollar General XII	Nov. 2013 & Jan. 2014	2	18,126	12.2
Dollar General XIII	Nov. 2013	1	9,169	9.5
Advance Auto II	Nov. 2013	2	13,887	6.6
FedEx Ground II	Nov. 2013	1	48,897	6.8
Burger King I	Nov. 2013	41	168,192	17.2
Dollar General XIV	Nov. 2013	3	27,078	11.7
Dollar General XV	Nov. 2013	1	9,026	12.1
FedEx Ground III	Nov. 2013	1	24,310	6.9
Dollar General XVI	Nov. 2013	1	9,014	9.2
Family Dollar V	Nov. 2013	1	8,400	6.5
Walgreens VIII	Dec. 2013	1	14,490	7.3
CVS III	Dec. 2013	1	10,880	7.3
Mattress Firm III	Dec. 2013	1	5,057	6.8
Arby's II	Dec. 2013	1	3,494	11.6
Family Dollar VI	Dec. 2013	2	17,484	7.3
SAAB Sensis I	Dec. 2013	1	90,822	8.5
Citizens Bank I	Dec. 2013	9	34,777	7.3
Walgreens IX	Jan. 2014	1	14,490	6.3
SunTrust Bank II	Jan. 2014	30	148,233	10.5
Mattress Firm IV	Jan. 2014	1	5,040	7.9
FedEx Ground IV	Jan. 2014	1	59,167	6.8
Mattress Firm V	Jan. 2014	1	5,548	7.1
Family Dollar VII	Feb. 2014	1	8,320	7.8
Aaron's I	Feb. 2014	1	7,964	6.9
Auto Zone III	Feb. 2014	1	6,786	6.5
C&S Wholesale Grocer I	Feb. 2014	5	3,044,685	6.0
Advance Auto III	Feb. 2014	1	6,124	7.9
Family Dollar VIII	Mar. 2014	3	24,960	6.8
Dollar General XVII	Mar. & May 2014	3	27,078	11.5
SunTrust Bank III	Mar. 2014	115	607,664	10.1
SunTrust Bank IV	Mar. 2014	27	142,625	10.6
Dollar General XVIII	Mar. 2014	1	9,026	11.5
Sanofi US I	Mar. 2014	1	736,572	9.8
Family Dollar IX	Apr. 2014	1	8,320	7.5
Stop & Shop I	May 2014	8	544,112	10.1
Bi-Lo I	May 2014	1	55,718	9.3

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Portfolio	Acquisition Date	Number of Properties	Rentable Square Feet	Remaining Lease Term⁽¹⁾
Dollar General XIX	May 2014	1	12,480	11.9
Dollar General XX	May 2014	5	48,584	10.6
Dollar General XXI	May 2014	1	9,238	11.9
Dollar General XXII	May 2014	1	10,566	10.6
FedEx Ground V	Feb. 2016	1	45,755	8.8
FedEx Ground VI	Feb. 2016	1	120,731	8.9
FedEx Ground VII	Feb. 2016	1	42,299	9.0
FedEx Ground VIII	Feb. 2016	1	78,673	9.1
		458	13,327,551	9.4

_____________________


(1)	Remaining lease term in years as of September 30, 2016. If the portfolio has multiple properties with varying lease expirations, remaining lease term is calculated on a weighted-average basis.

CRE Debt Investments

As of September 30, 2016, we had one CRE Debt Investment. The following table shows selected data from our investment portfolio as of September 30, 2016:



Deal Name	Par Value		Carrying Value		Interest Rate	Effective Yield		Loan to Value ⁽¹⁾
	(In thousands)		(In thousands)
Senior Loan	$	17,200	$	17,163	4.50% + 1M LIBOR	5.1	%	66.0	%
	$	17,200	$	17,163		5.1	%	66.0	%

_____________________


(1)	Loan to value percentage is from metrics at origination.

Results of Operations

We were incorporated on January 22, 2013 and purchased our first property and commenced active operations on April 29, 2013. As of September 30, 2016, we owned 458 properties with an aggregate base purchase price of $2.2 billion, comprised of 13.3 million rentable square feet that were 100.0% leased.

Comparison of the Three Months Ended September 30, 2016 to the Three Months Ended September 30, 2015

There were 454 properties that we owned for the entirety of the three months ended September 30, 2016 and the three months ended September 30, 2015 (our "Three Month Same Store") with an aggregate base purchase price of $2.1 billion, comprised of 13.0 million rentable square feet that were 100.0% leased. In February 2016, we acquired four properties (our "2016 Acquisitions") for an aggregate base purchase price of $34.4 million, comprised of 0.3 million rentable square feet. During 2016, we sold nine properties (our "2016 Disposals"), which had an aggregate base purchase price of $29.9 million and consisted of 0.1 million rentable square feet, for an aggregate contract price of $29.5 million, inclusive of closing costs. Also during 2016, we amended terms on 160 of our leases with SunTrust Bank (our "2016 Leasing Activity"), which in general extended the remaining lease terms of these leases, increasing our annualized straight-line rent from SunTrust Bank. We did not purchase or sell any properties, or amend any lease terms during 2015.

Rental Income

Rental income increased $1.2 million to $41.4 million for the three months ended September 30, 2016, compared to $40.2 million for the three months ended September 30, 2015. This increase in rental income was primarily due to an increase of $1.0 million in our Three Month Same Store rental income as a result of our 2016 Leasing Activity. Additionally, we had $0.6 million of incremental income from our 2016 Acquisitions. These increases were partially offset by a decrease in rental income of $0.4 million from our 2016 Disposals.

Operating Expense Reimbursements

Operating expense reimbursement revenue increased $0.1 million to $3.2 million for the three months ended September 30, 2016 compared to $3.1 million for the three months ended September 30, 2015. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties.

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Interest Income from Debt Investments

Interest income from debt investments decreased $0.5 million to $0.2 million for the three months ended September 30, 2016 compared to $0.7 million for the three months ended September 30, 2015. Interest income from debt investments relates to our CRE Debt Investments. For the three months ended September 30, 2016, the average carrying value of our commercial mortgage loan was $17.2 million, with a weighted-average yield of 5.11%. For the three months ended September 30, 2015, we had commercial mortgage loans with a weighted-average balance of $28.6 million and a weighted-average yield of 4.85%, as well as commercial mortgage-backed securities with a weighted-average balance of $15.1 million and a weighted-average yield of 6.6%.

Asset Management Fees to Related Party

Asset management fees to related party increased $0.1 million to $4.5 million for the three months ended September 30, 2016, compared to $4.4 million for three months ended September 30, 2015. We pay these fees to our Advisor for managing our day-to-day operations. From April 1, 2015 through July 20, 2015, we paid an asset management fee to our Advisor on a monthly basis based on our cost of assets. Subsequent to July 20, 2015, we pay our Advisor i) a base management fee with a fixed portion of $1.5 million payable monthly and a variable portion, if applicable, payable quarterly in arrears, and ii) a variable management fee, if applicable, payable quarterly in arrears. We did not incur the variable portion of the base management fee or a variable management fee during the three months ended September 30, 2016 and 2015. Please see Note 11 — Related Party Transactions and Arrangements for more information on fees incurred from our Advisor.

Property Operating Expense

Property operating expense remained constant at $3.5 million for the three months ended September 30, 2016 and 2015. Property operating expenses primarily relate to the costs associated with maintaining our properties including real estate taxes, utilities, and repairs and maintenance. Most of these expenses are passed through and reimbursed by our tenants.

Impairment charges

We incurred $0.1 million of impairment charges during the three months ended September 30, 2016. These charges related to the loss on sale of a single-tenant net lease property operated by SunTrust. No impairment charges were incurred during the three months ended September 30, 2015.

Acquisition and Transaction Related Expense

Acquisition and transaction related expense increased $3.5 million to $4.4 million for the three months ended September 30, 2016, compared to $0.9 million for the three months ended September 30, 2015. Acquisition and transaction related expenses for the three months ended September 30, 2016 were primarily due to costs incurred in connection with the pending Merger. These costs include fees to the special committee of the board of directors for their review of the Merger, as well as fees to the special committee's outside financial advisor and legal counsel. Acquisition and transaction related expenses for the three months ended September 30, 2015 primarily related to the origination and acquisition of our CRE Debt Investments. There were no property acquisitions during the three months ended September 30, 2016 and 2015.

General and Administrative Expense

General and administrative expense increased $0.4 million to $3.0 million for the three months ended September 30, 2016, compared to $2.6 million for the three months ended September 30, 2015. This increase primarily related to an increase in fees incurred from related parties for cost reimbursements including personnel costs, as well as an increase in audit fees and proxy fees.

Depreciation and Amortization Expense

Depreciation and amortization expense remained constant at $25.4 million for the three months ended September 30, 2016 and 2015. Depreciation and amortization expense increased $0.3 million as a result of our 2016 Acquisitions, but was offset by a decrease of $0.3 million from our 2016 Disposals. Three Month Same Store depreciation and amortization expense remained constant. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.

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Interest Expense

Interest expense increased $1.3 million to $12.6 million for the three months ended September 30, 2016, compared to $11.3 million for the three months ended September 30, 2015. This increase is primarily related to an increase in our weighted-average mortgage notes payable outstanding, partially offset by a decrease in our weighted-average credit facility outstanding, as we paid down and terminated the credit facility effective August 7, 2015. The following table presents the weighted-average balances of our fixed-rate debt and credit facility borrowings outstanding, associated interest expense and corresponding weighted-average interest rates for the three months ended September 30, 2016 and 2015, as well as the amortization of deferred financing costs and mortgage premiums for such periods:



	Three Months Ended September 30,
	2016							2015
(Dollar amounts in thousands)	Weighted-Average Carrying Value		Interest Expense			Weighted-Average Interest Rate		Weighted-Average Carrying Value		Interest Expense			Weighted-Average Interest Rate
Mortgage notes payable	$	1,039,494	$	12,437		4.76	%	$	796,981	$	10,970		5.12	%
Credit facility	$	—	—			—	%	$	211,500	894			1.94	%
Amortization of deferred financing costs			1,117							1,324
Amortization of mortgage premiums			(980		)					(1,891		)
Interest Expense			$	12,574						$	11,297

Loss on Extinguishment of Debt

During the three months ended September 30, 2015, in connection with the termination of our credit facility, we wrote off $7.6 million of related deferred financing costs as a loss on extinguishment of debt. We did not incur any loss on extinguishment of debt during the three months ended September 30, 2016.

Gain on Sale of Other Real Estate Securities

Gain on sale of other real estate securities of $0.2 million for the three months ended September 30, 2015 resulted from the sale of investments in redeemable preferred stock with an aggregate cost basis of $9.8 million for $10.0 million. No other real estate securities were sold during the nine months ended September 30, 2016.

Comparison of the Nine Months Ended September 30, 2016 to the Nine Months Ended September 30, 2015

There were 454 properties that we owned for the entirety of the nine months ended September 30, 2016 and the nine months ended September 30, 2015 (our "Nine Month Same Store") with an aggregate base purchase price of $2.1 billion, comprised of 13.0 million rentable square feet that were 100.0% leased. In February 2016, we acquired four properties for an aggregate base purchase price of $34.4 million, comprised of 0.3 million rentable square feet. During 2016, we sold nine properties, which had an aggregate base purchase price of $29.9 million and consisted of 0.1 million rentable square feet, for an aggregate contract price of $29.5 million, inclusive of closing costs. Also during 2016, we amended terms on 160 of our leases with SunTrust Bank, which in general extended the remaining lease terms of these leases, increasing our annualized straight-line rent from SunTrust Bank. We did not purchase or sell any properties, or amend any lease terms during 2015.

Rental Income

Rental income increased $2.4 million to $123.0 million for the nine months ended September 30, 2016, compared to $120.6 million for the nine months ended September 30, 2015. This increase in rental income was primarily due to $1.6 million of incremental income from our 2016 Acquisitions, as well as an increase in our Nine Month Same Store rental income of $1.5 million as a result of our 2016 Leasing Activity. These increases were partially offset by a decrease in rental income of $0.7 million due to our 2016 Disposals.

Operating Expense Reimbursements

Operating expense reimbursement revenue increased $0.2 million to $9.0 million for the nine months ended September 30, 2016 compared to $8.8 million for the nine months ended September 30, 2015. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties.

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Interest Income from Debt Investments

Interest income from debt investments increased $0.1 million to $0.8 million for the nine months ended September 30, 2016 compared to $0.7 million for the three months ended September 30, 2015. Interest income from debt investments relates to our CRE Debt Investments. For the nine months ended September 30, 2016, the average carrying value of our commercial mortgage loans was $22.8 million, with a weighted-average yield of 4.44%. For the nine months ended September 30, 2015, we had commercial mortgage loans with a weighted-average balance of $11.5 million and a weighted-average yield of 4.85%, as well as Commercial mortgage-backed securities with a weighted-average balance of $6.0 million and a weighted-average yield of 6.6%.

Asset Management Fees to Related Party

Asset management fees to related party increased $5.0 million to $13.5 million for the nine months ended September 30, 2016, compared to $8.5 million for the nine months ended September 30, 2015. We pay these fees to our Advisor for managing our day-to-day operations. The $5.0 million increase was due to changes in the contractual terms of our advisory agreement. From April 1, 2015 through July 20, 2015, we paid an asset management fee to our Advisor on a monthly basis based on our cost of assets. Subsequent to July 20, 2015, we pay our Advisor i) a base management fee with a fixed portion of $1.5 million payable monthly and a variable portion, if applicable, payable quarterly in arrears, and ii) a variable management fee, if applicable, payable quarterly in arrears. We did not incur the variable portion of the base management fee or a variable management fee during the nine months ended September 30, 2016 and 2015. Please see Note 11 — Related Party Transactions and Arrangements for more information on fees incurred from our Advisor.

Property Operating Expense

Property operating expense remained constant at $10.1 million for the nine months ended September 30, 2016 and 2015. Property operating expenses primarily relate to the costs associated with maintaining our properties including real estate taxes, utilities, and repairs and maintenance. Most of these expenses are passed through and reimbursed by our tenants.

Impairment Charges

We incurred $0.1 million of impairment charges during the nine months ended September 30, 2016. These charges related to the loss on sale of a single-tenant net lease property operated by SunTrust. No impairment charges were incurred during the nine months ended September 30, 2015.

Acquisition and Transaction Related Expense

Acquisition and transaction related expense increased $4.0 million to $5.5 million for the nine months ended September 30, 2016, compared to $1.5 million for the nine months ended September 30, 2015. Acquisition and transaction related expenses for the nine months ended September 30, 2016 were primarily due to costs incurred in connection with the pending Merger of $4.9 million. These costs include fees to the special committee of the board of directors for their review of the Merger, as well as fees to the special committee's financial advisor and legal counsel. Additionally, we incurred costs in connection with our sales of real estate investments and commercial mortgage loans of $0.6 million. Acquisition and transaction related expenses for the nine months ended September 30, 2015 primarily related to the origination and acquisition of our CRE Debt Investments, as well as third party appraisal costs incurred in connection with our purchase price allocation procedures. There were no property acquisitions during the nine months ended September 30, 2015.

General and Administrative Expense

General and administrative expense increased $0.7 million to $8.8 million for the nine months ended September 30, 2016, compared to $8.1 million for the nine months ended September 30, 2015. This increase primarily related to an increase in fees incurred from related parties for cost reimbursements including personnel costs. This increase was partially offset by a decrease in audit and legal fees.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $0.3 million to $76.5 million for the nine months ended September 30, 2016, compared to $76.2 million for the nine months ended September 30, 2015. This increase was driven primarily by depreciation and amortization expense of $0.8 million on our 2016 Acquisitions, partially offset by a decrease in depreciation and amortization expense of $0.5 million on our 2016 Disposals. Nine Month Same Store depreciation and amortization expense remained constant. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.

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Interest Expense

Interest expense increased $9.8 million to $37.5 million for the nine months ended September 30, 2016, compared to $27.7 million for the nine months ended September 30, 2015. This increase is primarily related to an increase in our weighted-average mortgage notes payable outstanding, partially offset by a decrease in our weighted-average credit facility outstanding, as we paid down and terminated the credit facility effective August 7, 2015. The following table presents the weighted-average balances of our fixed-rate debt and credit facility borrowings outstanding, associated interest expense and corresponding weighted-average interest rates for the nine months ended September 30, 2016 and 2015, as well as the amortization of deferred financing costs and mortgage premiums for such periods:



	Nine Months Ended September 30,
	2016							2015
(Dollar amounts in thousands)	Weighted-Average Carrying Value		Interest Expense			Weighted-Average Interest Rate		Weighted-Average Carrying Value		Interest Expense			Weighted-Average Interest Rate
Mortgage notes payable	$	1,047,863	$	37,387		4.77	%	$	600,721	$	24,142		5.38	%
Credit facility	$	—	—			—	%	$	338,400	5,246			1.93	%
Amortization of deferred financing costs			3,367							3,932
Amortization of mortgage premiums			(3,221		)					(5,624		)
Interest Expense			$	37,533						$	27,696

Loss on Extinguishment of Debt

During the nine months ended September 30, 2015, in connection with the termination of our credit facility, we wrote off $7.6 million of related deferred financing costs as a loss on extinguishment of debt. We did not incur any loss on extinguishment of debt during the nine months ended September 30, 2016.

Gain on Sale of Other Real Estate Securities

Gain on sale of other real estate securities of $0.7 million for the nine months ended September 30, 2015 resulted from the sale of investments in redeemable preferred stock with an aggregate cost basis of $18.6 million for $19.3 million. No other real estate securities were sold during the nine months ended September 30, 2016.

Gain on Sale of Real Estate Investments

Gain on sale of real estate investments of $0.5 million for the nine months ended September 30, 2016 resulted from the sale of eight properties with an aggregate cost basis of $27.8 million for an aggregate contract price of $28.3 million, inclusive of closing costs. No real estate investments were sold during the nine months ended September 30, 2015.

Cash Flows for the Nine Months Ended September 30, 2016

Cash flows provided by operating activities of $55.8 million during the nine months ended September 30, 2016 included a net loss adjusted for non-cash items of $58.2 million (net loss of $18.7 million adjusted for non-cash items, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, impairment charges and share-based compensation, partially offset by amortization of mortgage premiums, discount accretion and premium amortization on investments, net and gain on sale of real estate investments of $76.9 million) and an increase in accounts payable and accrued expenses of $6.1 million. These operating cash flows were partially offset by an increase in prepaid expenses and other assets of $6.6 million and a decrease in deferred rent and other liabilities of $1.9 million.

The net cash provided by investing activities during the nine months ended September 30, 2016 of $38.2 million was generated from the proceeds from the sale of commercial mortgage loans of $56.9 million and the sale of real estate investments of $15.5 million, partially offset by amounts invested in real estate and other assets of $34.2 million.

The net cash used in financing activities of $81.0 million during the nine months ended September 30, 2016 consisted primarily of cash distributions of $60.5 million, common stock repurchases of $16.3 million, payments of deferred financing costs of $3.5 million and payments of mortgage notes payable of $0.8 million.

Cash Flows for the Nine Months Ended September 30, 2015

Cash flows provided by operating activities of $69.8 million during the nine months ended September 30, 2015 included a net loss adjusted for non-cash items of $74.4 million (net loss of $8.2 million adjusted for non-cash items, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs and share-based compensation, partially offset by amortization of mortgage premiums, a gain on sale of other real estate securities and discount accretion and premium amortization on investments, net of $82.6 million) and an increase in accounts payable and accrued expenses of $2.2 million. These operating cash flows were partially offset by an increase in prepaid expenses and other assets of $6.6 million and a decrease in deferred rent and other liabilities of $0.2 million.

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The net cash used in investing activities during the nine months ended September 30, 2015 of $90.3 million related to origination of commercial mortgage loans of $79.4 million and purchase of CMBS investments of $30.2 million, partially offset by proceeds from the sale of other real estate securities of $19.3 million.

The net cash provided by financing activities of $117.7 million during the nine months ended September 30, 2015 consisted primarily of proceeds from mortgage notes payable of $655.0 million, partially offset by payments on credit facility of $423.0 million, cash distributions of $46.9 million, an increase in restricted cash of $37.9 million, payments of deferred financing costs of $17.1 million, common stock repurchases of $11.7 million and payments of mortgage notes payable of $0.7 million.

Liquidity and Capital Resources

As of September 30, 2016, we had cash and cash equivalents of $143.4 million. Our principal demands for funds are for payment of our operating and administrative expenses, debt service obligations, cash distributions to our stockholders and repurchases of our common stock pursuant to the share repurchase program (as amended and restated, the "SRP").

We expect to fund our future short-term operating liquidity requirements through a combination of cash on hand, net cash provided by our current property operations and proceeds from our secured mortgage financings. We have historically generated some of our working capital by issuing shares through our DRIP. The DRIP was suspended on August 30, 2016.

We use debt financing to fund a portion of our capital needs. As of September 30, 2016, we had $1.0 billion of mortgage notes payable outstanding, with a leverage ratio (total debt divided by total assets) of 48.6%.

On September 6, 2016, in connection with the execution of the Merger Agreement, the OP entered into a binding commitment, pursuant to which UBS Securities LLC, UBS AG, Stamford Branch and Citizens Bank, N.A. have committed to provide a $360.0 million bridge loan facility, subject to customary conditions. If the Merger is completed, we may use the proceeds received from the bridge loan facility to fund the Cash Consideration and any other transaction costs related to the Mergers. Using RCA's share count as of June 30, 2016, the estimated amount of Cash Consideration to be paid in connection with the Merger is $93.7 million.

Our board of directors has adopted the SRP 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. See Note 9 — Common Stock for more information on terms and conditions of the SRP.

Funds from Operations and Modified Funds from Operations

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.

Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards set forth in 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, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and 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.

Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.

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Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisitions fees or other related costs, it 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. MFFO is not equivalent to our net income or loss as determined under GAAP.

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 acquisition and transaction related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (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 and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), 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.

We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, 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 properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.

Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not 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 determined under GAAP 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 other GAAP measurements as an indication of our performance. FFO and MFFO 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 methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.

Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

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The table below reflects the items deducted from or added to net loss in our calculation of FFO and MFFO for the periods presented:



	Three Months Ended									Nine Months Ended September 30, 2016
(In thousands)	March 31, 2016			June 30, 2016			September 30, 2016			Nine Months Ended September 30, 2016
Net loss (in accordance with GAAP)	$	(5,854	)	$	(4,077	)	$	(8,729	)	$	(18,660	)
Gain on sale of real estate investments	—			(454		)	—			(454		)
Impairment charges	—			—			117			117
Depreciation and amortization	25,493			25,538			25,446			76,477
FFO	19,639			21,007			16,834			57,480
Acquisition and transaction related fees and expenses	343			734			4,381			5,458
Amortization of market lease and other intangibles, net	415			119			(28		)	506
Straight-line rent	(1,723		)	(1,682		)	(1,746		)	(5,151		)
Amortization of mortgage premiums on borrowings	(976		)	(1,265		)	(980		)	(3,221		)
Discount accretion on investment	(7		)	(8		)	(13		)	(28		)
MFFO	$	17,691		$	18,905		$	18,448		$	55,044

Distributions

In April 2013, our board of directors authorized, and we declared, a distribution payable on a monthly basis to stockholders of record on each day at a rate equal to $0.00452054795 per day, which is equivalent to $1.65 per annum, per share of common stock. In March 2016, our board of directors ratified the existing distribution amount equivalent to $1.65 per annum, and, for calendar year 2016, affirmed a change to the daily distribution amount to $0.00450819672 per day per share of common stock, effective January 1, 2016, to reflect that 2016 is a leap year. 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 maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). 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.

During the nine months ended September 30, 2016, distributions paid to common stockholders totaled $81.0 million, inclusive of $20.5 million of distributions that were reinvested in additional shares of our common stock through our DRIP. During the nine months ended September 30, 2016, cash used to pay distributions was generated from cash flows provided by operations.

The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock, for the periods indicated:



	Three Months Ended															Nine Months Ended September 30, 2016
	March 31, 2016					June 30, 2016					September 30, 2016					Nine Months Ended September 30, 2016
(In thousands)				Percentage of Distributions					Percentage of Distributions					Percentage of Distributions					Percentage of Distributions
Distributions to stockholders	$	26,767				$	27,004				$	27,237				$	81,008

Source of distribution coverage:
Cash flows provided by operations ⁽¹⁾	$	26,767		100.0	%	$	27,004		100.0	%	$	27,237		100.0	%	$	81,008		100.0	%
Total source of distribution coverage	$	26,767		100.0	%	$	27,004		100.0	%	$	27,237		100.0	%	$	81,008		100.0	%

Cash flows provided by operations (GAAP basis)	$	20,585				$	17,630				$	17,539				$	55,754
Net loss (in accordance with GAAP)	$	(5,854	)			$	(4,077	)			$	(8,729	)			$	(18,660	)

_____________________


(1)	Includes $6.2 million, $9.4 million, $9.7 million and $25.3 million of cash flows provided by operations in prior periods and not previously distributed for the three months ended March 31, 2016, June 30, 2016 and September 30, 2016 and the nine months ended September 30, 2016, respectively.

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Loan Obligations

The payment terms of certain of our mortgage loan obligations require principal and interest payments 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, 2016, we were in compliance with the debt covenants under our loan agreements.

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. As of September 30, 2016, our leverage ratio (total debt divided by total assets) was 48.6%.

Contractual Obligations

The following table reflects contractual debt obligations under our mortgage notes payable based on anticipated repayment dates, as well as minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of September 30, 2016. These minimum base rental cash payments due for leasehold interests 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:



					Years Ended December 31,
(In thousands)	Total		October 1, 2016 to December 31, 2016		2017-2018		2019-2020		Thereafter
Principal on mortgage notes payable	$	1,038,955	$	262	$	84,536	$	652,019	$	302,138
Interest on mortgage notes payable	192,662		12,110		91,035		82,329		7,188
Ground lease rental payments due	8,604		229		1,824		1,576		4,975
	$	1,240,221	$	12,601	$	177,395	$	735,924	$	314,301

Several of the loan agreements on our mortgage notes payable feature anticipated repayment dates in advance of the stated maturity dates. Please see table below:



Portfolio	Maturity	Anticipated Repayment
SAAB Sensis I	Apr. 2025	Apr. 2025
SunTrust Bank II	Jul. 2031	Jul. 2021
C&S Wholesale Grocer I	Apr. 2037	Apr. 2017
SunTrust Bank III	Jul. 2031	Jul. 2021
SunTrust Bank IV	Jul. 2031	Jul. 2021
Sanofi US I - New Loan	Jul. 2026	Jan. 2021
Stop & Shop I	Jun. 2041	Jun. 2021
Multi-Tenant Mortgage Loan	Sep. 2020	Sep. 2020

Election as a REIT

We elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2013. We believe that, commencing with such taxable year, we have been organized and have operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT. In order to continue to qualify for taxation as a REIT, we must distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. 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 with our tenants contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms 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 the leases that do not contain indexed escalation provisions. However, our net leases require the tenant to pay its allocable share of operating expenses, which may include common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.

Related-Party Transactions and Agreements

Please see Note 11 — Related Party Transactions and Arrangements of the accompanying consolidated financial statements.

Off-Balance Sheet Arrangements

We have no 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 interest rates. Our long-term debt, which consists of secured financings, bears interest at fixed rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on 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, collars and treasury lock agreements 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 have any foreign operations and thus are not exposed to foreign currency fluctuations.

As of September 30, 2016, our debt consisted of fixed-rate secured mortgage financings with a gross carrying value and a fair value of $1.1 billion. Changes in market interest rates on our fixed-rate debt impact the fair value of the debt, but it has no impact on interest expense incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed-rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2016 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $37.5 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $37.1 million.

These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and, assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of September 30, 2016 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (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 our disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

No change occurred in our internal control 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, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We are not a party to, and none of our properties are subject to, any material pending legal proceedings.

Item 1A. Risk Factors.

The following risk factors supplement the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015.

The exchange ratio is fixed and will not be adjusted to reflect changes in the value of either the Company’s common stock or RCA common stock.

Upon completing the Merger, each share of RCA’s common stock will be converted into the right to receive 0.385 shares of the Company’s common stock and $0.95 of cash. This exchange ratio is fixed in the Merger Agreement and will not be adjusted to reflect events or circumstances or other developments of which AFIN or RCA become aware or which occur after the date of the Merger Agreement, or any changes in the relative values of AFIN and RCA resulting from a variety of factors (many of which are beyond the control of AFIN or RCA), including the following factors:


•	market reaction to the announcement of the terms of the Merger or the prospects of the combined company;


•	changes in the business, operations, financial position and prospects of either company;


•	interest rates, general market and economic conditions and other factors generally affecting real estate property values and net operating income derived from real estate properties;


•	federal, state and local legislation, governmental regulation and legal developments in the businesses in which the Company operates; and


•	other factors beyond the control of the Company, including those described or referred to elsewhere in this "Risk Factors" section.

Any such changes may materially affect the value of AFIN or RCA. Therefore, if, between the date of the Merger Agreement and the closing of the Merger, the value of RCA common stock decreases or the value of the Company’s common stock increases, the Merger Consideration may be more than the fair value of the RCA common stock. Factors such as operating performance, actual or anticipated differences in operating results, changes in market valuations of similar companies, strategic decisions by the Company or RCA, including the Merger, or strategic decisions by the Company’s or RCA’s competitors, the realization of any of the other risk factors presented herein, and other factors, including factors unrelated to the Company’s or RCA’s performance such as general market conditions and changes in interest rates that may impact other companies, including the Company’s and RCA’s competitors, could impact the value of the Company’s common stock and RCA’s common stock.

The current lack of liquidity for shares of AFIN common stock could adversely affect the market price of AFIN’s common stock upon Listing.

The Company’s stockholders have held shares with no trading market and therefore any stockholders wishing to exit their investment have not had the opportunity to do so. Once the Company’s common stock is listed on the NYSE or another exchange, these stockholders will have the ability to sell their shares of common stock. Sales of substantial amounts of shares of the Company’s common stock, or the perception that such sales might occur could result in downward pressure on the price of the AFIN common stock. There can be no assurance that the trading price of the Company’s common stock will equal or exceed the Company’s published estimated per share NAV as of December 31, 2105 of $24.17.

The Merger and related transactions are subject to certain conditions, including approval by stockholders of the Company, which if not satisfied or waived, would adversely impact AFIN’s ability to complete the transactions.

The Merger is subject to certain conditions, including, among other things (a) the approval of the company Merger by the RCA stockholders, (b) the approval of the certain amendments to RCA’s charter, (c) the approval of the company Merger and the issuance of the Company’s common stock to the RCA stockholders by the Company’s stockholders, (d) the accuracy of the other parties’ representations and warranties and compliance with covenants, subject in each case to materiality standards and certain other conditions. There can be no assurance these conditions will be satisfied or waived, if permitted or the occurrence of any effect, event, development or change will not transpire. If these conditions are not satisfied or waived by March 6, 2017 (or April 21, 2017, if the joint proxy statement/prospectus is not declared effective before January 6, 2017), the Merger may not be completed. Therefore, there can be no assurance with respect to the timing of the closing of the Merger or whether the Merger will be completed.

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The Company’s stockholders’ percentage interest will be diluted by the Merger.

The Merger will dilute the relative ownership position of the current AFIN stockholders. AFIN stockholders are expected to hold approximately 63% of the combined company’s common stock outstanding immediately after the Merger. Consequently, AFIN stockholders, as a general matter, will have less influence over the management and policies of the Company after the Merger than they did immediately prior to the Merger and will own a reduced percentage of the economic interests in the Company.

If the Merger does not occur, the Company may incur payment obligations to RCA.

If the Merger Agreement is terminated under certain circumstances, including following a breach by the non-terminating party or a change in recommendation of the non-terminating party, the Company may be required to pay to RCA a termination fee equal to $25.6 million. Payment of this fee may have an adverse impact on the liquidity and capital resources of the Company.

Failure to complete the Merger could negatively impact the future business and financial results of the Company.

If the Merger is not completed, the ongoing businesses of the Company could be adversely affected and the Company will be subject to several risks, including the following:


•	having to pay certain costs relating to the proposed Merger, such as legal, accounting, financial advisor, filing, printing and mailing fees;


•	having to divert management focus and resources from operational matters and other strategic opportunities while working to implement the Merger; and


•	failing to realize the expected benefits of the Merger.

The pendency of the Merger could adversely affect the Company’s business and operations.

In connection with the pending Merger, some tenants or vendors of the Company may delay or defer decisions because of uncertainty concerning the outcome of the Merger, which could negatively impact the revenues, earnings, cash flows and expenses of the Company, regardless of whether the Merger is completed. In addition, due to operating covenants in the Merger Agreement, the Company may be unable, during the pendency of the Merger, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business, even if these actions would prove beneficial.

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Certain of the directors and executive officers of the Company may have interests in the Merger that are different from, or in addition to, those of the other AFIN stockholders.

Certain of the directors and executive officers of the Company, including in their capacity as executives and members of the Advisor, may have interests in the Merger that are different from, or in addition to, those of the Company’s AFIN stockholders. All of the Company’s executive officers are executive officers of the Advisor. These interests include:


•	the continuing employment and employee benefits by the AFIN Advisor or AFIN Property Manager;

•

while the RCA Advisory Agreement has a one-year renewable term and may be terminated on 60 days’ notice without cause or penalty, the term of the Company’s Advisory Agreement does not expire until April 29, 2035 and automatically renews for consecutive 20-year terms, unless terminated (1) in connection with the Company’s right (which right is contained in amendments to the Advisory Agreement that will become effective only upon closing of the Merger) to internalize the services provided under the Advisory Agreement after January 1, 2018 with payment of a specified internalization fee or (2) (a) by the Company’s independent directors or by the Advisor with cause (as defined in the Advisory Agreement) upon 45 days’ notice, (b) by the Advisor for good reason (as defined in the Advisory Agreement) upon 60 days’ notice or (c) by the Advisor upon a change of control (as defined in the Advisory Agreement) upon 60 days’ notice;


•	all outstanding and unvested restricted shares of RCA owned by RCA’s independent directors will vest upon closing of the Merger;


•	all outstanding RCA OP Units (other than those owned by RCA) and Class B Units, some of which are indirectly owned by the directors and executive officers of RCA, will be converted into the right to receive 0.424 OP Units;


•	all outstanding RCA OP Units and GP Units owned by RCA and its affiliates, some of which are indirectly owned by the directors and executive officers of RCA, will be converted into the right to receive 0.385 OP Units;


•	all outstanding RCA common stock owned by RCA and its affiliates, some of which are indirectly owned by the directors and executive officers of RCA, will be converted into the right to receive 0.385 shares of common stock and $0.95 of cash;


•	two of RCA’s independent directors, Leslie D. Michelson and Governor Edward G. Rendell, will serve as directors of the Company following the consummation of the Merger; and

•

the special limited partnership interest owned by the RCA Special Limited Partner, some of which are indirectly owned by the directors and executive officers of RCA, will be redeemed for a cash payment, to be determined in accordance with the existing terms of the RCA OP’s agreement of limited partnership and the Merger Agreement, which depicts the redemption price as approximately $3.3 million assuming the effective time of the Merger occurred on June 30, 2016.

These interests, among other things, may influence the directors and executive officers of the Company to support and approve the Merger.

The Merger Agreement contains provisions that grant the Company’s board of directors and RCA’s board of directors a general ability to terminate the Merger Agreement based on the exercise of the directors’ duties.

Either the Company or RCA may terminate the Merger Agreement, subject to the terms thereof, in response to a material event, circumstance, change or development that was not known to the applicable entity’s board of directors prior to signing the Merger Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which event or circumstance, or any material consequence thereof, becomes known to the applicable entity’s board of directors prior to the effective time of the Merger if the applicable entity’s board of directors determines in good faith, after consultation with outside legal counsel, that failure to change its recommendation with respect to the Merger (and to terminate the Merger Agreement) would be inconsistent with the directors’ duties under applicable law. If the Merger is not completed, the Company’s ongoing business of could be adversely affected.

There may be unexpected delays in completing the Merger, which could impact the ability to timely achieve the benefits associated with the Merger.

The Merger Agreement grants either AFIN or RCA the right to terminate the Merger Agreement if the Merger has not occurred by March 6, 2017 (or April 21, 2017, if the joint proxy statement/prospectus is not declared effective before January 6, 2017). Certain events may delay the closing of the Merger. Some of the events that could delay the closing of the Merger include difficulties in obtaining the approval of AFIN stockholders or RCA stockholders or satisfying the other closing conditions to which the Merger is subject.

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The Company will have additional indebtedness following the Merger and may need to incur more in the future.

The Company will have additional indebtedness following completion of the Merger. In addition, the Company may incur additional indebtedness in the future. The amount of this indebtedness could have material adverse consequences for the combined company, including:


•	hindering the Company’s ability to adjust to changing market, industry or economic conditions;


•	limiting the Company’s ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms or to fund acquisitions;


•	limiting the amount of free cash flow available for future operations, acquisitions, distributions, stock repurchases or other uses; and


•	making the combined company more vulnerable to economic or industry downturns, including interest rate increases.

In addition, the bridge loan facility or any additional indebtedness incurred could contain covenants which limit the Company’s ability to incur secured and unsecured debt, sell assets, make restricted payments (including dividends to its stockholders), engage in Mergers and consolidations and take certain other actions.

Moreover, to respond to competitive challenges, the combined company may be required to raise additional capital to execute its business strategy. The Company’s ability to arrange additional financing will depend on, among other factors, the Company’s financial position and performance, as well as prevailing market conditions and other factors beyond the Company’s control.

The Company expects to incur substantial expenses related to the Merger and may be unable to realize the anticipated benefits of the Merger or do so within the anticipated time frame.

The Company expects to incur substantial expenses in connection with completing the Merger, including fees to the financial advisors to the the Company’s special committee and expenses relating to accounting and legal fees and cost reimbursements. There are a number of factors beyond the Company’s control that could affect the total amount or the timing of these transaction expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction expenses associated with the Merger could, particularly in the near term, exceed the savings that the Company expects to achieve following the completion of the Merger.

The Merger involves the combination of two companies that currently operate as independent public companies. Even though the companies are operationally similar, management of the combined company will be required to devote attention and resources to integrating the properties and operations of AFIN and RCA. There is no assurance that the combined company will achieve the anticipated benefits of the Merger, including G&A synergies and eliminating duplicative costs and functions.

An adverse judgment in a lawsuit challenging the Merger may prevent the Merger from becoming effective or from becoming effective within the expected time frame.

There may be lawsuits filed challenging the Merger, which could, among other things, result in the Company incurring costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims. Further, an injunction could be issued, prohibiting the parties from completing the Merger on the agreed-upon terms in the expected time frame, or may prevent it from being completed altogether. This type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect the operation of the Company’s business.

Counterparties to certain significant agreements with RCA have consent rights that may be triggered in connection with the Merger.

Certain of RCA’s debt obligations give the counterparty certain rights, including consent rights, in connection with “change in control” transactions. Under these agreements, the Merger constitutes a “change in control” and, therefore, the counterparty may assert its rights in connection with the Merger. These consent rights have not yet been waived. The Company has obtained a commitment for a $360.0 million bridge loan facility, which, subject to entering into a loan agreement, may be drawn, in addition to cash on hand, to repay such loans if the change in control provisions are invoked at or subsequent to the Merger closing. The Company and RCA are endeavoring to have the change in control provisions waived, however, these waivers are outside of their control. Any such counterparty may request modifications of its agreements as a condition to granting a waiver or consent under those agreements and there can be no assurance that such counterparties will not exercise their rights under the agreements, including termination rights where available. While the Company has a commitment for a bridge loan facility and requires the financing under the bridge loan facility to repay certain indebtedness, the closing of the Merger is not conditioned on closing of the bridge loan facility and there can be no assurance that the bridge loan facility will close. If consent is not obtained and such loans are not prepaid out of the proceeds of the bridge loan facility or otherwise, the failure to obtain consent under one agreement may be a default under agreements and, thereby, trigger rights of the counterparties to such other agreements, including termination rights where available.

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The Company may incur adverse tax consequences if RCA fails to qualify as a REIT for U.S. federal income tax purposes.

If RCA fails to qualify as a REIT for U.S. federal income tax purposes and the Merger is completed, the Company may inherit significant tax liabilities and could lose its REIT status should disqualifying activities continue after the Merger.

If the Merger fails to qualify as a reorganization under the Code, there will be adverse tax consequences.

The parties intend that the Merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and it is a condition to the obligations of both the Company and RCA to complete the Merger that they each receive an opinion from Proskauer Rose LLP to that effect. This tax opinion will be based on factual representations made by the Company and RCA, and on customary assumptions. This tax opinion represents the legal judgment of outside counsel to the Company and RCA and is not binding on the IRS.

If the Merger were to fail to qualify as a reorganization, then an RCA shareholder generally would recognize gain or loss, as applicable, equal to the difference between (1) the sum of the amount of cash received (including cash received in lieu of a fractional AFIN common share) and the fair market value of the AFIN common shares received in the Merger (determined at the effective time of the Merger) and (2) the RCA shareholder’s adjusted tax basis in the RCA shares deemed surrendered in the Merger. Moreover, RCA would be treated as selling, in a taxable transaction, all of its assets to the Company, with the result that RCA would generally recognize gain or loss on the deemed transfer of its assets to AFIN and, unless RCA has made distributions (which would be deemed to include for this purpose the cash and fair market value of the AFIN common shares issued pursuant to the Merger) to RCA shareholders in an amount at least equal to the net income or gain on the deemed sale of its assets to the Company, RCA could incur a significant current tax liability, for which, as a result of the Merger, the Company would be liable.

Following the Merger, the combined company may be unable to integrate the businesses of AFIN and RCA successfully and realize the anticipated economies of scale and other benefits of the Merger or do so within the anticipated time frame.

The Merger involves the combination of two public companies that currently operate independently of one another. The combined company is expected to benefit by eliminating duplicative costs associated with operating a public reporting company. However, the combined company will be required to devote significant management attention and resources to integrating the business practices and operations of AFIN and RCA. Potential difficulties the combined company may encounter in the integration process include the following:


•	the inability to successfully combine the businesses of the Company and RCA in a manner that permits the combined company to achieve the cost savings anticipated to result from the Merger, including the anticipated $10.9 million of annual savings in 2017;


•	the complexities of combining two companies with different property types and tenant bases;


•	potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger; or


•	performance shortfalls as a result of diverting management’s time and attention to integrating each company’s operations.

Each of these may result in the anticipated benefits of the Merger not being realized in the time frame currently anticipated or at all. In addition, the integration process could distract management’s focus, disrupting the combined company’s ongoing business, which could, among other things, adversely affect the ability of the combined company to maintain relationships with tenants and vendors or to achieve the anticipated benefits of the Merger.

The Company’s shares are newly approved for listing on the NYSE and have never been traded on a national securities exchange and as such have no trading history, and there can be no assurance that the trading price of the Company’s common stock will equal or exceed the Company’s published estimated per share NAV as of December 31, 2015 of $24.17.

There is not an active trading market for the Company’s common stock. Although the shares of the Company’s common stock have been approved for listing on the NYSE, subject to the Company being in compliance with all applicable listing standards on the date it begins trading on the NYSE and the Company intends to list its common stock on the NYSE at a time yet to be determined following the completion of the Merger, the shares are not expected to commence trading immediately upon the Merger being completed. The Company’s approval for listing is valid through March 2, 2017, and the Company expects to apply to extend the outside date for listing. The Company’s board of directors has not yet determined when it will request that the common stock be listed and commence trading and any decision with respect to the timing of listing would be based on market conditions and other factors. Following the closing, the AFIN Board plans to meet to consider when it is in AFIN’s best interests to list. There can be no assurance when the Company’s common stock will commence trading on the NYSE or whether the Company’s shares will trade at a price equal to or greater than the estimated NAV per share of the Company’s common stock, which was the value used to estimate the value of the consideration paid by the Company in the Merger to RCA stockholders.

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The aggregate value of the combined company’s common stock may be lower than the combined aggregate value of AFIN and RCA on a standalone basis.

The value of the Company’s common stock may be lower than the combined aggregate value of the Company and RCA on a standalone basis as a result of the Merger if the combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by the management of the Company and the Advisor (“Management”), or if the effect of the Merger on the Company’s financial results is not consistent with the expectations of Management.

In addition, following the effective time of the Merger, the Company’s stockholders and former RCA stockholders will own interests in a combined company operating an expanded business with a different mix of properties, risks and liabilities. Either or both of the Company’s and RCA’s portfolios may have a lower value as part of a diversified company than they would on a standalone basis. There can be no assurance that the trading price of the Company’s common stock will equal or exceed the Company’s published estimated per share NAV as of December 31, 2105 of $24.17.

The future results of the combined company will suffer if the combined company does not effectively manage its expanded portfolio and operations following the Merger.

Following the Merger, the combined company will have an expanded portfolio with new property types and operations and is expected to continue to expand its operations through additional acquisitions and other strategic transactions, some of which may involve complex challenges. The future success of the combined company will depend, in part, upon its ability to manage its expansion opportunities, integrate new operations into its existing business in an efficient and timely manner, successfully monitor its operations, costs, regulatory compliance and service quality, and maintain other necessary internal controls. The combined company cannot assure you that its expansion or acquisition opportunities will be successful, or that the combined company will realize its expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.

The Company may terminate the Advisory Agreement with the Advisor in only limited circumstances.

The Company has and will continue to have limited rights to terminate the Advisor. The initial term of the Advisory Agreement, as currently in effect and as the Advisory Agreement will be amended by the amendments that will take effect upon the closing of the Merger, expires on April 29, 2035, but is automatically renewed for consecutive 20-year terms unless terminated (1) in connection with the Company’s right (which right is contained in amendments to the Advisory Agreement that will become effective only upon closing of the Merger) to internalize the services provided under the Advisory Agreement after January 1, 2018 with payment of a specified internalization fee or (2) (a) by the independent directors or by the Advisor with cause (as defined in the Advisory Agreement) upon 45 days’ notice, (b) by the Advisor for good reason (as defined in the Advisory Agreement) upon 60 days’ notice or (c) by the Advisor upon a change of control (as defined in the Advisory Agreement) upon 60 days’ notice. The limited termination rights of the Advisory Agreement will make it difficult for the Company to renegotiate the terms of the Advisory Agreement or replace the Advisor even if the terms of the agreement are no longer consistent with the terms offered to other externally-managed REITs and may also discourage a third party from making an offer for the company at a premium price.

If the Company internalizes its management functions, the Company may be unable to obtain key personnel, and the Company’s ability to achieve its investment objectives could be delayed or hindered.

The Company may decide to become self-managed after January 1, 2018, according to the terms of the amended Advisory Agreement. If the Company internalizes its management functions, certain key employees of the Advisor may not become employees of the Company but may instead remain employees of the Advisor or its affiliates. An inability to hire certain key employees of the Advisor could result in the Company incurring costs and suffering deficiencies in the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting. An inability to manage an internalization effectively could, among other things, divert management’s attention from most effectively managing the Company’s investments. Additionally, if the Company internalizes its management functions, the Company could have difficulty integrating these functions. Currently, the officers of the Advisor and its affiliates perform asset management and general and administrative functions, including accounting and financial reporting, for multiple entities. In addition, there is no agreement between the Advisor and the Advisor’s employees that provides that such personnel will become employees of the Company if the Company internalizes its management functions. The Company may fail to properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone entity and may have to hire officers that are not familiar with the Company or its investments.

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

Recent Sale of Unregistered Equity Securities

On July 28, 2016, we issued 3,723 shares of restricted stock that vest over a period of five years to our independent directors, pursuant to our employee and director incentive restricted share plan. No selling commissions or other consideration will be paid in connection with such issuances, which were made without registration under the Securities Act in reliance upon the exemption from registration in Section 4(a)(2) of the Securities Act as transactions not involving any public offering.

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Issuer Purchases of Equity Securities

The following table summarizes the repurchases of shares under the SRP cumulatively through September 30, 2016:



	Number of Shares	Weighted-Average Price per Share
Cumulative repurchases as of December 31, 2015	2,073,645	$	24.12
Nine months ended September 30, 2016	7,854	24.17
Cumulative repurchases as of September 30, 2016	2,081,499	$	24.12

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

SRP Amendment

On November 7, 2016, our board of directors determined to amend our existing SRP to provide that for purposes of the SRP, shares received from the Company in exchange for shares of RCA pursuant to the Merger, if the Merger is completed, will be deemed to have been acquired from the Company on the date that the holder acquired the shares of RCA, provided the holder of RCA shares purchased the RCA shares from RCA or received their shares from RCA (directly or indirectly) through one or more non-cash transactions and any holding period under the SRP shall be deemed to include the period that shares of RCA were held by the holder.

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 FINANCE TRUST, INC.

	By:	/s/ Edward M. Weil, Jr.
		Edward M. Weil, Jr.
		Chief Executive Officer and President (Principal Executive Officer)

	By:	/s/ Nicholas Radesca
		Nicholas Radesca
		Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)

Dated: November 10, 2016

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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 quarter ended September 30, 2016 (and are numbered in accordance with Item 601 of Regulation S-K).



Exhibit No.		Description
2.1 ⁽¹⁾		Agreement and Plan of Merger, dated as of September 6, 2016, among American Finance Trust, Inc., American Finance Operating Partnership, L.P., Genie Acquisition, LLC, American Realty Capital — Retail Centers of America, Inc. and American Realty Capital Retail Operating Partnership, L.P.
4.1 ⁽¹⁾		Amended and Restated Agreement of Limited Partnership of American Finance Operating Partnership, L.P.
10.1 ⁽¹⁾		Third Amended and Restated Advisory Agreement by and among American Finance Trust, Inc., American Finance Operating Partnership, L.P. and American Finance Advisors, LLC
10.2 ⁽¹⁾		Amended and Restated Property Management Agreement by and between American Finance Properties, LLC (as assignee of American Realty Capital Retail Advisor, LLC) and American Finance Trust, Inc.
10.3 ⁽¹⁾		Amended and Restated Leasing Agreement, by and among American Finance Trust, Inc. and American Finance Properties, LLC (as assignee of American Realty Capital Retail Advisor, LLC)
10.4 ⁽¹⁾		Amended and Restated Property Management and Leasing Agreement, by and among American Finance Trust, Inc., American Finance Trust Operating Partnership, L.P. and American Finance Properties, LLC
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
99.1 *		Amendment to Amended and Restated Share Repurchase Program
101 *		XBRL (eXtensible Business Reporting Language). The following materials from American Finance Trust, Inc.'s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Stockholders' Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

____________________

* Filed herewith.

(1) Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on September 7, 2016.