Necessity Retail REIT, Inc. - Quarter Report: 2016 March (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 March 31, 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 April 30, 2016, the registrant had 65,132,919 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 March 31, 2016 (Unaudited) and December 31, 2015	3
Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended March 31, 2016 and 2015 (Unaudited)	4
Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended March 31, 2016 (Unaudited)	5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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.	24

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	40

Item 4. Controls and Procedures.	41

PART II - OTHER INFORMATION	42

Item 1. Legal Proceedings.	42

Item 1A. Risk Factors.	42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	42

Item 3. Defaults Upon Senior Securities.	43

Item 4. Mine Safety Disclosures.	43

Item 5. Other Information.	43

Item 6. Exhibits.	43

Signatures	44

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)



	March 31, 2016			December 31, 2015
	(Unaudited)
ASSETS
Real estate investments, at cost:
Land	$	360,007		$	358,278
Buildings, fixtures and improvements	1,570,485			1,540,821
Acquired intangible lease assets	322,738			319,028
Total real estate investments, at cost	2,253,230			2,218,127
Less: accumulated depreciation and amortization	(241,676		)	(215,427		)
Total real estate investments, net	2,011,554			2,002,700
Cash and cash equivalents	130,794			130,500
Restricted cash	7,888			7,887
Commercial mortgage loan, held for investment, net	17,142			17,135
Prepaid expenses and other assets	22,851			21,982
Assets held for sale	—			56,884
Total assets	$	2,190,229		$	2,237,088

LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable, net of deferred financing costs	$	1,034,519		$	1,033,582
Mortgage premiums, net	13,916			14,892
Market lease liabilities, net	18,651			18,133
Accounts payable and accrued expenses (including $897 and $541 due to related parties as of March 31, 2016 and December 31, 2015, respectively)	11,077			24,964
Deferred rent and other liabilities	8,921			9,569
Distributions payable	9,081			9,199
Total liabilities	1,096,165			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, 64,953,314 and 64,961,256 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively	650			650
Additional paid-in capital	1,429,112			1,429,294
Accumulated deficit	(335,698		)	(303,195		)
Total stockholders' equity	1,094,064			1,126,749
Total liabilities and stockholders' equity	$	2,190,229		$	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) INCOME

(In thousands, except per share data)

(Unaudited)



	Three Months Ended March 31,
	2016			2015
Revenues:
Rental income	$	40,500		$	40,215
Operating expense reimbursements	2,946			2,651
Interest income from debt investments	340			—
Total revenues	43,786			42,866

Operating expenses:
Asset management fees to related party	4,500			—
Property operating	3,337			3,087
Acquisition and transaction related	343			129
General and administrative	3,378			1,947
Depreciation and amortization	25,493			25,387
Total operating expenses	37,051			30,550
Operating income	6,735			12,316
Other (expense) income:
Interest expense	(12,631		)	(8,160		)
Distribution income from other real estate securities	—			169
Gain on sale of other real estate securities	—			546
Other income	42			30
Total other expense, net	(12,589		)	(7,415		)
Net (loss) income	$	(5,854	)	$	4,901

Other comprehensive (loss) income:
Change in unrealized income on investment securities	—			(177		)
Comprehensive (loss) income	$	(5,854	)	$	4,724

Basic net (loss) income per share	$	(0.09	)	$	0.07
Diluted net (loss) income per share	$	(0.09	)	$	0.07

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

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AMERICAN FINANCE TRUST, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended March 31, 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 repurchases	(7,942	)	—		(192		)	—			(192		)
Share-based compensation	—		—		10			—			10
Distributions declared	—		—		—			(26,649		)	(26,649		)
Net loss	—		—		—			(5,854		)	(5,854		)
Balance, March 31, 2016	64,953,314		$	650	$	1,429,112		$	(335,698	)	$	1,094,064

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)



	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net (loss) income	$	(5,854	)	$	4,901
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation	16,815			16,737
Amortization of in-place lease assets	8,678			8,650
Amortization of deferred financing costs	1,100			1,302
Amortization of mortgage premiums on borrowings	(976		)	(1,859		)
Discount accretion and premium amortization on investments, net	(7		)	—
Amortization of market lease intangibles, net	415			416
Share-based compensation	10			7
Gain on sale of other real estate securities	—			(546		)
Changes in assets and liabilities:
Prepaid expenses and other assets	(869		)	(2,240		)
Accounts payable and accrued expenses	1,921			1,780
Deferred rent and other liabilities	(648		)	(1,341		)
Net cash provided by operating activities	20,585			27,807
Cash flows from investing activities:
Proceeds from sale of commercial mortgage loans	56,884			—
Investments in real estate and other assets	(34,244		)	—
Proceeds from sale of other real estate securities	—			9,253
Net cash provided by investing activities	22,640			9,253
Cash flows from financing activities:
Payments on mortgage notes payable	(251		)	(243		)
Refunds of deferred financing costs	88			—
Common stock repurchases	(16,000		)	(5,109		)
Distributions paid	(26,767		)	(11,837		)
Restricted cash	(1		)	—
Net cash used in financing activities	(42,931		)	(17,189		)
Net change in cash and cash equivalents	294			19,871
Cash and cash equivalents, beginning of period	130,500			74,760
Cash and cash equivalents, end of period	$	130,794		$	94,631

Supplemental Disclosures:
Cash paid for interest	$	11,229		$	8,186
Cash paid for income taxes	$	270		$	8

Non-Cash Investing and Financing Activities:
Common stock issued through distribution reinvestment plan	$	—		$	14,826
Accrued common stock repurchases	$	255		$	5,388

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

March 31, 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 March 31, 2016, the Company owned 467 properties with an aggregate purchase price of $2.2 billion, comprised of 13.4 million rentable square feet, which were 100.0% leased on a weighted-average basis. In addition, 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.

Pursuant to the distribution reinvestment plan (the "DRIP"), the Company's stockholders can elect to reinvest distributions by purchasing shares of the Company's common stock at a price equal to 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"). See Note 8 — Common Stock.

The Company previously announced its intention to list on the New York Stock Exchange ("NYSE") under the symbol "AFIN" (the "Listing") during the third quarter of 2015. In September 2015, the Company announced that in light of market conditions, the Company's board of directors, in consultation with the Company's advisor, American Finance Advisors, LLC (the "Advisor") determined it was in the best interest of the Company to not pursue the Listing during the third quarter of 2015. The Company's board of directors continues to monitor market conditions and other factors with a view toward reevaluating the decision when market conditions are more favorable for a successful liquidity event. There can be no assurance that the Company's shares of common stock will be listed.

The Company has no employees. The Company has retained 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"), as a result of which, they are related parties of the Company, and each have received or may receive compensation, as applicable, fees and expense reimbursements for services related to managing the Company's business.

Note 2 — Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements of the Company included here 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. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results for the entire year or any subsequent interim periods.

These 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 Securities and Exchange Commission ("SEC") on March 16, 2016. There have been no significant changes to the Company's significant accounting policies during the three months ended March 31, 2016, other than the updates described below.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 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.

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 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 $18.9 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 March 31, 2016 and December 31, 2015, respectively.

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.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

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 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.

Note 3 — Real Estate Investments

The Company owned 467 properties, which were acquired for investment purposes, as of March 31, 2016. The following table presents the allocation of real estate assets acquired and liabilities assumed during the three months ended March 31, 2016. There were no real estate assets acquired or liabilities assumed during the three months ended March 31, 2015:



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

_____________________________________


(1)	Real estate investments, at cost, of $6.3 million relating to one property acquired during the three months ended March 31, 2016 have been provisionally allocated pending receipt and review of final appraisals and/or other information on such assets prepared by third party specialists.


(2)	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 three months ended March 31, 2016 were 9.5 years, 9.6 years 48.6 years and 9.5 years, respectively, as of each property's respective acquisition date.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

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



	March 31, 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	$	308,407	$	76,956	$	231,451	$	305,245	$	68,278	$	236,967
Above-market lease assets	14,331		6,311		8,020		13,783		5,555		8,228
Total acquired intangible lease assets	$	322,738	$	83,267	$	239,471	$	319,028	$	73,833	$	245,195
Intangible liabilities:
Above-market ground lease liability	$	85	$	—	$	85	$	—	$	—	$	—
Below-market lease liabilities	21,397		2,831		18,566		20,623		2,490		18,133
Total acquired intangible lease liabilities	$	21,482	$	2,831	$	18,651	$	20,623	$	2,490	$	18,133

For the three months ended March 31, 2016 and 2015, amortization of in-place leases of $8.7 million is included in depreciation and amortization on the consolidated statements of operations and comprehensive (loss) income. For the three months ended March 31, 2016 and 2015, net (amortization) accretion of market lease intangibles of $(0.4) million is included in rental income on the consolidated statements of operations and comprehensive (loss) income. No amortization of the above-market ground lease liability was recognized in property operating expense for the three months ended March 31, 2016 and 2015.

The following table provides the projected amortization expense and adjustments to revenue for the next five years:



(In thousands)	April 1, 2016 to December 31, 2016			2017			2018			2019			2020
In-place leases	$	26,199		$	34,931		$	24,207		$	24,187		$	22,569
Total to be added to depreciation and amortization	$	26,199		$	34,931		$	24,207		$	24,187		$	22,569

Above-market leases	$	(2,297	)	$	(3,063	)	$	(526	)	$	(526	)	$	(526	)
Below-market lease liabilities	1,065			1,421			1,421			1,421			1,421
Total to be (deducted from) added to rental income	$	(1,232	)	$	(1,642	)	$	895		$	895		$	895

Above-market ground lease liability	$	1		$	2		$	2		$	2		$	2
Total to be added to property operating expense	$	1		$	2		$	2		$	2		$	2

The following table presents unaudited pro forma information as if the acquisitions during the three months ended March 31, 2016 had been consummated on January 1, 2015.



(In thousands)	Three Months Ended March 31, 2016 ⁽¹⁾			Three Months Ended March 31, 2015
Pro forma revenues	$	44,148		$	43,528
Pro forma net (loss) income	$	(5,728	)	$	5,200
Basic pro forma net (loss) income per share	$	(0.09	)	$	0.08
Diluted pro forma net (loss) income per share	$	(0.09	)	$	0.08

_____________________


(1)	For the three months ended March 31, 2016, aggregate revenues and net income derived from the Company's 2016 acquisitions (for the Company's period of ownership) were $0.3 million and $0.2 million, respectively.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 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
April 1, 2016 to December 31, 2016	$	119,996
2017	161,922
2018	133,490
2019	135,211
2020	129,730
Thereafter	720,807
	$	1,401,156

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:



	March 31,
Tenant	2016	2015
SunTrust Bank	17.7%	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 March 31, 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 March 31, 2016 and 2015:



	March 31,
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 March 31, 2016 and 2015.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

Note 4 — Commercial Mortgage Loans

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



			March 31, 2016					December 31, 2015
Balance sheet classification	Loan Type	Property Type	Par Value			Percentage		Par Value			Percentage
			(In thousands)
Commercial mortgage loan held for investment, net	Senior	Student Housing — Multifamily	$	17,200		100	%	$	17,200		21.6	%
Assets held for sale	Senior	Retail	—		⁽¹⁾	—	%	18,150		⁽¹⁾	22.7	%
Assets held for sale	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 three months ended March 31, 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 March 31, 2016, the risk rating of the Company's commercial loan held for investment was 2. As of March 31, 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 March 31, 2016 or December 31, 2015.

There were no commercial mortgage loans held for investment during the three months ended March 31, 2015. For the three months ended March 31, 2016, the activity on the Company's commercial mortgage loan, held for investment, was as follows:



(In thousands)	Three Months Ended March 31, 2016
Beginning balance	$	17,135
Discount accretion and premium amortization ⁽¹⁾	7
Ending balance	$	17,142

_____________________________________


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

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

Note 5 — 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 months ended March 31, 2015. As of March 31, 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 three months ended March 31, 2016:



(In thousands)	Aggregate Cost Basis		Sale Price		Realized Gain
Three Months Ended March 31, 2015	$	8,707	$	9,253	$	546

Note 6 — Mortgage Notes Payable

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



		Outstanding Loan Amount as of						Effective Interest Rate as of
Portfolio	Encumbered Properties	March 31, 2016			December 31, 2015			March 31, 2016			December 31, 2015			Interest Rate	Maturity	Anticipated Repayment
		(In thousands)			(In thousands)
SAAB Sensis I	1	$	8,105		$	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	121	99,677			99,677			5.50	%		5.50	%		Fixed	Jul. 2031	Jul. 2021
SunTrust Bank IV	30	25,000			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	38,770			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	459	1,053,397			1,053,648			4.77	%	⁽¹⁾	4.77	%	⁽¹⁾
Deferred financing costs, net of accumulated amortization		(18,878		)	(20,066		)
Mortgage notes payable, net of deferred financing costs		$	1,034,519		$	1,033,582

_____________________________________


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

As of March 31, 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.

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 March 31, 2016, the Multi-Tenant Mortgage Loan was secured by mortgage interests in 268 of the Company's properties. As of March 31, 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 March 31, 2016, the Lenders had released $34.6 million of the amount originally placed in escrow to the Company. As of March 31, 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 March 31, 2016.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

The following table summarizes the scheduled aggregate principal payments on mortgage notes payable based on stated maturity dates for the five years subsequent to March 31, 2016 and thereafter:



(In thousands)	Future Principal Payments
April 1, 2016 to December 31, 2016	$	763
2017	1,080
2018	1,143
2019	1,211
2020	650,808
Thereafter	398,392
	$	1,053,397

The Company's mortgage notes payable agreements require the compliance of certain property-level financial covenants including debt service coverage ratios. As of March 31, 2016, the Company was in compliance with financial covenants under its mortgage notes payable agreements.

Note 7 — 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 March 31, 2016.

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 March 31, 2016. Additionally, there were no financial instruments measured at fair value on a non recurring basis as of March 31, 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

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets 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 three months ended March 31, 2016. There were no transfers into or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2016.

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 March 31, 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	March 31, 2016		March 31, 2016		December 31, 2015		December 31, 2015
Commercial mortgage loans, held for investment	3	$	17,142	$	17,006	$	17,135	$	17,200
Gross mortgage notes payable and mortgage premiums, net	3	$	1,067,313	$	1,118,964	$	1,068,540	$	1,103,352

The fair value of the commercial mortgage loans 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 8 — Common Stock

As of March 31, 2016 and December 31, 2015, the Company had 65.0 million shares of common stock outstanding, 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 accurately 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.

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 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.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

Under the SRP, repurchases at each semiannual period will be 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 will be 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 will be paid at a price based on Estimated Per-Share NAV applicable on the last day of the semiannual period, as described above.

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 March 31, 2016:



	Number of Shares	Weighted-Average Price per Share
Cumulative repurchases as of December 31, 2015	2,073,645	$	24.12
Three months ended March 31, 2016	7,942	24.17
Cumulative repurchases as of March 31, 2016 ⁽¹⁾	2,081,587	$	24.12

____________________

(1) Includes accrued repurchases consisting of 10,564 shares for $0.3 million at a weighted-average repurchase price per share of $24.17, which were completed in April 2016. The accrual for these repurchases is reflected in the accounts payable and accrued expenses line of the accompanying consolidated balance sheet as of March 31, 2016. The additional shares will be deducted from the applicable limits of the SRP when processing share repurchases for the first semiannual period of 2016. There were no other shares requested to be repurchased as of March 31, 2016.

Distribution Reinvestment Plan

Pursuant to the DRIP, stockholders can 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).

No dealer manager fees or selling commissions are 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. No shares of common stock were issued pursuant to the DRIP during the three months ended March 31, 2016.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

Note 9 — 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
April 1, 2016 to December 31, 2016	$	687
2017	921
2018	903
2019	902
2020	674
Thereafter	4,975
	$	9,062

Unfunded Commitments Under Commercial Mortgage Loans

As of March 31, 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
April 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.

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 10 — Related Party Transactions and Arrangements

As of March 31, 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.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

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, 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.

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) may not exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. As of March 31, 2016, aggregate acquisition fees and financing fees did not exceed the 1.5% threshold. Further, the total of all acquisition fees, acquisition expenses and any financing coordination fees payable may not 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 March 31, 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.

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.

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 are 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.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

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 will not cause the OP to issue any Class B Units in respect of periods subsequent to March 31, 2015.

As of March 31, 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 March 31, 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 months ended March 31, 2016. 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) income. 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 statement of operations and comprehensive loss for the three months ended March 31, 2016. No base management fees were incurred during the three months ended March 31, 2015.

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 months ended March 31, 2016.

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 months ended March 31, 2016, the Company incurred $0.8 million of reimbursement expenses from the Advisor for providing administrative services, which is included in general and administrative expense on the consolidated statement of operations and comprehensive loss for the three months ended March 31, 2016. No reimbursement expenses were incurred from the Advisor for providing administrative services during the three months ended March 31, 2015.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

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 months ended March 31, 2016 and 2015.

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



	Three Months Ended March 31,								Payable as of
	2016				2015				Payable as of
(In thousands)	Incurred		Forgiven		Incurred		Forgiven		March 31, 2016		December 31, 2015
Ongoing fees:
Asset management fees	$	4,500	$	—	$	—	$	—	$	—	$	—
Professional fees and other reimbursements ⁽¹⁾	862		—		631		—		750		541
Distributions on Class B Units ⁽¹⁾	432		—		286		—		147		—
Total related party operation fees and reimbursements	$	5,794	$	—	$	917	$	—	$	897	$	541

_________________________________


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

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 Company's initial public offering ("IPO") and under the Company's distribution reinvestment plan ("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.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

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.

The Company will pay the Advisor a brokerage commission on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and one-half of the total brokerage commission paid, if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such fees were incurred during the three months ended March 31, 2016 and 2015.

Note 11 — 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 12 — 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. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 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 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.

No restricted shares were granted, vested, or forfeited during the three months ended March 31, 2016. As of March 31, 2016 and December 31, 2015, there were 7,455 unvested restricted shares outstanding with a weighted-average issue price of $23.34. As of March 31, 2016, the Company had $0.1 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 3.0 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 $11,000 and $7,000 for the three months ended March 31, 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) income.

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 months ended March 31, 2016 and 2015.

Note 13 — Net (Loss) Income Per Share

The following table sets forth the basic and diluted net (loss) income per share computations for the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,
(In thousands, except share and per share amounts)	2016			2015
Computation of Basic Net (Loss) Income Per Share:
Basic net (loss) income	$	(5,854	)	$	4,901
Basic weighted-average shares outstanding	64,955,420			65,672,016
Basic net (loss) income per share	$	(0.09	)	$	0.07

Computation of Diluted Net (Loss) Income Per Share:
Basic net (loss) income	$	(5,854	)	$	4,901
Adjustments to net (loss) income for common share equivalents	—			(116		)
Diluted net (loss) income	$	(5,854	)	$	4,785

Basic weighted-average shares outstanding	64,955,420			65,672,016
Shares of unvested restricted stock ⁽¹⁾	—			5,098
OP Units	—			90
Diluted weighted-average shares outstanding	64,955,420			65,677,204
Diluted net (loss) income per share	$	(0.09	)	$	0.07

_____________________________________


(1)	Weighted-average number of shares of unvested restricted stock outstanding for the period presented. There were 7,455 and 6,077 shares of unvested restricted stock outstanding as of March 31, 2016 and 2015, respectively.

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AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

Diluted net (loss) income 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, and thus were included, as appropriate, in the calculation of diluted net income per share for the three months ended March 31, 2015. The Company had the following common share equivalents on a weighted-average basis for the three months ended March 31, 2016, which were excluded from the calculation of diluted net loss per share as their effect would have been antidilutive:



		Three Months Ended March 31, 2016
Unvested restricted stock		7,455
OP Units		90
Class B Units		1,052,420
Total weighted-average antidilutive common share equivalents		1,059,965

Note 14 — 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:

Distribution Reinvestment Plan

As discussed in Note 8 — Common Stock, on April 1, 2016, the Company reinstated the DRIP and registered an additional 7.7 million shares of common stock for use under the DRIP pursuant to a registration statement on Form S-3.

SunTrust Portfolio

On May 12, 2016, the Company amended 160 of its 213 leases for single-tenant net lease properties operated by SunTrust Bank, a wholly owned subsidiary of SunTrust Banks, Inc. (“SunTrust”), which in general extended the remaining lease terms of these leases with no modification to contractual rent increases as set forth in these leases.

Concurrently, the Company also entered into a purchase and sale agreement with 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. The sale of the eight properties resulted in a nominal gain for the Company. Simultaneously and in connection with the sale, the Company caused the release of the properties from their existing mortgages and paid to the applicable lenders a combined release price of $13.6 million, including interest and prepayment premium.

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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:

•

All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in 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 previously announced our intention to list our shares of common stock on the New York Stock Exchange ("NYSE"), 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 March 31, 2016, we owned 467 properties with an aggregate purchase price of $2.2 billion, comprised of 13.4 million rentable square feet, which were 100.0% leased on a weighted-average basis. In addition, 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 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.

Pursuant to the distribution reinvestment plan (the "DRIP"), our stockholders can elect to reinvest distributions by purchasing shares of our common stock at a price equal to the then-current estimated net asset value per share of our common stock, approved by our board of directors ("Estimated Per-Share NAV").

We previously announced our intention to list on the New York Stock Exchange ("NYSE") under the symbol "AFIN" (the "Listing") during the third quarter of 2015. In September 2015, we announced that in light of market conditions, our board of directors, in consultation with our Advisor determined it was in our best interest to not pursue the Listing during the third quarter of 2015. Our board of directors continues to monitor market conditions and other factors with a view toward reevaluating the decision when market conditions are more favorable for a successful liquidity event. There can be no assurance that our shares of common stock will be listed.

We have no employees. We have retained the 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 our Sponsor, as a result of which, they are related parties of ours, and each have received or may receive compensation, as applicable, fees and expense reimbursements for services related to managing our business.

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. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled 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, acquisition date is considered to be the commencement date for purposes of this calculation. 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.

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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.

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 March 31, 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.

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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.

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.

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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.

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 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 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 Securities and Exchange Commission ("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 $18.9 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 March 31, 2016 and December 31, 2015, respectively.

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 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.

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Properties

As of March 31, 2016, we owned 467 properties, which were acquired for investment purposes, comprised of 13.4 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 8.4 years as of March 31, 2016.

The following table represents certain additional information about the properties we own at March 31, 2016:



Portfolio	Acquisition Date	Number of Properties	Rentable Square Feet	Remaining Lease Term⁽¹⁾
Dollar General I	Apr. & May 2013	2	18,126	12.1
Walgreens I	Jul. 2013	1	10,500	21.5
Dollar General II	Jul. 2013	2	18,052	12.2
Auto Zone I	Jul. 2013	1	7,370	11.3
Dollar General III	Jul. 2013	5	45,989	12.1
BSFS I	Jul. 2013	1	8,934	7.8
Dollar General IV	Jul. 2013	2	18,126	9.9
Tractor Supply I	Aug. 2013	1	19,097	11.7
Dollar General V	Aug. 2013	1	12,480	11.8
Mattress Firm I	Aug. & Nov. 2013; Feb., Mar. & Apr. 2014	5	23,612	9.4
Family Dollar I	Aug. 2013	1	8,050	5.3
Lowe's I	Aug. 2013	5	671,313	13.3
O'Reilly Auto Parts I	Aug. 2013	1	10,692	14.3
Food Lion I	Aug. 2013	1	44,549	13.6
Family Dollar II	Aug. 2013	1	8,028	7.3
Walgreens II	Aug. 2013	1	14,490	17.0
Dollar General VI	Aug. 2013	1	9,014	9.9
Dollar General VII	Aug. 2013	1	9,100	12.0
Family Dollar III	Aug. 2013	1	8,000	6.5
Chili's I	Aug. 2013	2	12,700	9.7
CVS I	Aug. 2013	1	10,055	9.8
Joe's Crab Shack I	Aug. 2013	2	16,012	11.0
Dollar General VIII	Sep. 2013	1	9,100	12.3
Tire Kingdom I	Sep. 2013	1	6,635	9.0
Auto Zone II	Sep. 2013	1	7,370	7.2
Family Dollar IV	Sep. 2013	1	8,320	7.3
Fresenius I	Sep. 2013	1	5,800	9.3
Dollar General IX	Sep. 2013	1	9,014	9.1
Advance Auto I	Sep. 2013	1	10,500	7.3
Walgreens III	Sep. 2013	1	15,120	10.0
Walgreens IV	Sep. 2013	1	13,500	8.5
CVS II	Sep. 2013	1	13,905	20.9
Arby's I	Sep. 2013	1	3,000	12.3
Dollar General X	Sep. 2013	1	9,100	12.0
AmeriCold I	Sep. 2013	9	1,407,166	11.5
Home Depot I	Sep. 2013	2	1,315,200	10.8
New Breed Logistics I	Sep. 2013	1	390,486	5.6
American Express Travel Related Services I	Sep. 2013	2	785,164	3.9
L.A. Fitness I	Sep. 2013	1	45,000	7.9
SunTrust Bank I	Sep. 2013	32	182,400	1.8
National Tire & Battery I	Sep. 2013	1	10,795	7.7
Circle K I	Sep. 2013	19	54,521	12.6
Walgreens V	Sep. 2013	1	14,490	11.4
Walgreens VI	Sep. 2013	1	14,560	13.1
FedEx Ground I	Sep. 2013	1	21,662	7.2

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Portfolio	Acquisition Date	Number of Properties	Rentable Square Feet	Remaining Lease Term⁽¹⁾
Walgreens VII	Sep. 2013	10	142,140	13.6
O'Charley's I	Sep. 2013	20	135,973	15.6
Krystal Burgers Corporation I	Sep. 2013	6	12,730	13.5
Merrill Lynch, Pierce, Fenner & Smith I	Sep. 2013	3	553,841	8.7
1st Constitution Bancorp I	Sep. 2013	1	4,500	7.8
American Tire Distributors I	Sep. 2013	1	125,060	7.8
Tractor Supply II	Oct. 2013	1	23,500	7.5
United Healthcare I	Oct. 2013	1	400,000	5.3
National Tire & Battery II	Oct. 2013	1	7,368	16.2
Tractor Supply III	Oct. 2013	1	19,097	12.1
Mattress Firm II	Oct. 2013	1	4,304	7.4
Dollar General XI	Oct. 2013	1	9,026	11.1
Academy Sports I	Oct. 2013	1	71,640	12.3
Talecris Plasma Resources I	Oct. 2013	1	22,262	7.0
Amazon I	Oct. 2013	1	79,105	7.3
Fresenius II	Oct. 2013	2	16,047	11.4
Dollar General XII	Nov. 2013 & Jan. 2014	2	18,126	12.7
Dollar General XIII	Nov. 2013	1	9,169	10.0
Advance Auto II	Nov. 2013	2	13,887	7.1
FedEx Ground II	Nov. 2013	1	48,897	7.3
Burger King I	Nov. 2013	41	168,192	17.7
Dollar General XIV	Nov. 2013	3	27,078	12.2
Dollar General XV	Nov. 2013	1	9,026	12.6
FedEx Ground III	Nov. 2013	1	24,310	7.4
Dollar General XVI	Nov. 2013	1	9,014	9.7
Family Dollar V	Nov. 2013	1	8,400	7.0
Walgreens VIII	Dec. 2013	1	14,490	7.8
CVS III	Dec. 2013	1	10,880	7.8
Mattress Firm III	Dec. 2013	1	5,057	7.3
Arby's II	Dec. 2013	1	3,494	12.1
Family Dollar VI	Dec. 2013	2	17,484	7.8
SAAB Sensis I	Dec. 2013	1	90,822	9.0
Citizens Bank I	Dec. 2013	9	34,777	7.8
Walgreens IX	Jan. 2014	1	14,490	6.8
SunTrust Bank II	Jan. 2014	30	148,233	1.8
Mattress Firm IV	Jan. 2014	1	5,040	8.4
FedEx Ground IV	Jan. 2014	1	59,167	7.3
Mattress Firm V	Jan. 2014	1	5,548	7.6
Family Dollar VII	Feb. 2014	1	8,320	8.3
Aaron's I	Feb. 2014	1	7,964	7.4
Auto Zone III	Feb. 2014	1	6,786	7.0
C&S Wholesale Grocer I	Feb. 2014	5	3,044,685	6.5
Advance Auto III	Feb. 2014	1	6,124	8.4
Family Dollar VIII	Mar. 2014	3	24,960	7.3
Dollar General XVII	Mar. & May 2014	3	27,078	12.0
SunTrust Bank III	Mar. 2014	121	646,535	1.8
SunTrust Bank IV	Mar. 2014	30	171,209	1.8
Dollar General XVIII	Mar. 2014	1	9,026	12.0
Sanofi US I	Mar. 2014	1	736,572	10.3
Family Dollar IX	Apr. 2014	1	8,320	8.0
Stop & Shop I	May 2014	8	544,112	10.6
Bi-Lo I	May 2014	1	55,718	9.8

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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	12.4
Dollar General XX	May 2014	5	48,584	11.1
Dollar General XXI	May 2014	1	9,238	12.4
Dollar General XXII	May 2014	1	10,566	11.1
FedEx Ground V	Feb. 2016	1	45,755	9.3
FedEx Ground VI	Feb. 2016	1	120,731	9.4
FedEx Ground VII	Feb. 2016	1	42,299	9.5
FedEx Ground VIII	Feb. 2016	1	78,673	9.6
		467	13,395,006	8.4

_____________________


(1)	Remaining lease term in years as of March 31, 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 March 31, 2016, we had invested in one CRE Debt Investment. The following table shows selected data from our investment portfolio as of March 31, 2016:



Deal Name	Par Value		Carrying Value		Interest Rate	Effective Yield		Loan to Value ⁽¹⁾
	(In thousands)		(In thousands)
Senior Loan	$	17,200	$	17,142	4.50% + 1M LIBOR	5.1	%	66.0	%
	$	17,200	$	17,142		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 March 31, 2016, we owned 467 properties with an aggregate base purchase price of $2.2 billion, comprised of 13.4 million rentable square feet that were 100.0% leased on a weighted-average basis.

Comparison of the Three Months Ended March 31, 2016 to the Three Months Ended March 31, 2015

As of January 1, 2015, we owned 463 properties (our "Three Month Same Store") with an aggregate base purchase price of $2.2 billion, comprised of 13.1 million rentable square feet that were 100.0% leased on a weighted-average basis. We have acquired 4 properties since January 1, 2015 (our "2016 Acquisitions") for an aggregate base purchase price of $34.4 million, comprised of 0.3 million rentable square feet. Accordingly, our results of operations for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 reflect increases in most categories due to our acquisition activity.

Rental Income

Rental income increased $0.3 million to $40.5 million for the three months ended March 31, 2016, compared to $40.2 million for the three months ended March 31, 2015. This increase in rental income was primarily due to our 2016 Acquisitions. Our Three Month Same Store rental income remained constant at $40.2 million.

Operating Expense Reimbursements

Operating expense reimbursement revenue increased $0.2 million to $2.9 million for the three months ended March 31, 2016 compared to $2.7 million for the three months ended March 31, 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. This increase was primarily driven by an increase in our Three Month Same Store operating expense reimbursements, as a result of an increase in Three Month Same Store property operating expense.

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Interest Income from Debt Investments

Interest income from debt investments for the three months ended March 31, 2016 of $0.3 million related to our CRE Debt Investments. For the three months ended March 31, 2016, the average carrying value of our commercial mortgage loans was $31.4 million, and the weighted-average yield of our commercial mortgage loans was 4.17%. We did not have CRE Debt Investments during the three months ended March 31, 2015.

Asset Management Fees to Related Party

Asset management fees to related party for the three months ended March 31, 2016 of $4.5 million were related to services that we received from our Advisor in connection with the management of our assets. 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 incur from 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. Please see Note 10 — Related Party Transactions and Arrangements for more information on fees incurred from our Advisor. There were no asset management fees to related party incurred during the three months ended March 31, 2015.

Property Operating Expense

Property operating expense increased $0.2 million to $3.3 million for the three months ended March 31, 2016, compared to $3.1 million for the three months ended March 31, 2015. This increase was primarily driven by an increase in our Three Month Same Store property operating expense of $0.2 million, as a result of increased maintenance expenses. Property operating expenses primarily relate to the costs associated with maintaining our properties including real estate taxes, utilities, and repairs and maintenance.

Acquisition and Transaction Related Expense

Acquisition and transaction related expense increased $0.2 million to $0.3 million for the three months ended March 31, 2016, compared to $0.1 million for the three months ended March 31, 2015. Acquisition and transaction related expenses for the three months ended March 31, 2016 were primarily due to our sale of two commercial mortgage loans in January 2016, which were sold for $56.9 million. Acquisition and transaction related expenses for the three months ended March 31, 2015 primarily related to third party appraisal costs incurred in connection with our purchase price allocation procedures.

General and Administrative Expense

General and administrative expense increased $1.5 million to $3.4 million for the three months ended March 31, 2016, compared to $1.9 million for the three months ended March 31, 2015. This increase primarily related to $0.9 million incurred from related parties for cost reimbursements including personnel costs, an increase in legal fees of $0.2 million, an increase in consulting fees of $0.2 million in connection with calculating Estimated Per-Share NAV as of December 31, 2015 and an increase in distributions on Class B Units of $0.2 million resulting from increased Class B Units issued as of March 31, 2016 compared to March 31, 2015.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $0.1 million to $25.5 million for the three months ended March 31, 2016, compared to $25.4 million for the three months ended March 31, 2015. This increase was driven primarily by our 2016 Acquisitions. Three Month Same Store depreciation and amortization expense remained constant at $25.4 million. 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 $4.4 million to $12.6 million for the three months ended March 31, 2016, compared to $8.2 million for the three months ended March 31, 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 March 31, 2016 and 2015, as well as the amortization of deferred financing costs and mortgage premiums for such periods:



	Three Months Ended March 31,
	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	$	1,053,526	$	12,507		4.77	%	$	469,963	$	6,559		5.66	%
Credit Facility	$	—	—			—	%	$	423,000	2,158			1.93	%
Amortization of deferred financing costs			1,100							1,302
Amortization of mortgage premiums			(976		)					(1,859		)
Interest Expense			$	12,631						$	8,160

Distribution Income from Other Real Estate Securities

Distribution income from other real estate securities for the three months ended March 31, 2015 of $0.2 million related to investments we held in redeemable preferred stock. As of March 31, 2015, we held other real estate securities, at fair value, of $10.1 million. We did hold other real estate securities at any point during the three months ended March 31, 2016.

Gain on Sale of Other Real Estate Securities

Gain on sale of other real estate securities of $0.5 million for the three months ended March 31, 2015 resulted from the sale of investments in redeemable preferred stock with an aggregate cost basis of $8.7 million for $9.3 million. No other real estate securities were sold during the three months ended March 31, 2016.

Cash Flows for the Three Months Ended March 31, 2016

During the three months ended March 31, 2016, we had cash flows provided by operating activities of $20.6 million. The level of cash flows used in or provided by operating activities is affected by, among other things, receipt of rental revenue and the amount of acquisition and transaction related costs incurred. Cash flows from operating activities during the three months ended March 31, 2016 include $0.3 million of acquisition and transaction related costs. Cash inflows during the three months ended March 31, 2016 included a net loss adjusted for non-cash items of $20.2 million (net loss of $5.9 million adjusted for non-cash items, including: depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, net amortization of market lease intangibles and share-based compensation, partially offset by amortization of mortgage premiums, discount accretion and net premium amortization on investments of $26.1 million) and an increase in accounts payable and accrued expenses of $1.9 million. These cash inflows were partially offset by an increase in prepaid expenses and other assets of $0.9 million and a decrease in deferred rent and other liabilities of $0.6 million.

The net cash provided by investing activities during the three months ended March 31, 2016 of $22.6 million was generated from the proceeds from the sale of commercial mortgage loans of $56.9 million, partially offset by amounts invested in real estate and other assets of $34.2 million.

The net cash used in financing activities of $42.9 million during the three months ended March 31, 2016 consisted primarily of cash distributions of $26.8 million, common stock repurchases of $16.0 million and payments of mortgage notes payable of $0.3 million.

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Cash Flows for the Three Months Ended March 31, 2015

During the three months ended March 31, 2015, we had cash flows provided by operating activities of $27.8 million. The level of cash flows used in or provided by operating activities is affected by, among other things, the amount of acquisition and transaction related costs incurred, as well as the receipt of scheduled rent payments. Cash flows from operating activities during the three months ended March 31, 2015 include $0.1 million of acquisition and transaction related costs. Cash inflows during the three months ended March 31, 2015 included net income adjusted for non-cash items of $29.6 million (net income of $4.9 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 a gain on sale of investments and amortization of mortgage premiums, of $24.7 million) and an increase in accounts payable and accrued expenses of $1.8 million. These cash inflows were partially offset by an increase in prepaid expenses and other assets of $2.2 million and a decrease in deferred rent and other liabilities of $1.3 million.

The net cash provided by investing activities during the three months ended March 31, 2015 of $9.3 million related to proceeds from the sale of investment securities.

The net cash used in financing activities of $17.2 million during the three months ended March 31, 2015 consisted primarily of cash distributions of $11.8 million, common stock repurchases of $5.1 million and payments of mortgage notes payable of $0.2 million.

Liquidity and Capital Resources

As of March 31, 2016, we had cash and cash equivalents of $130.8 million. Our principal demands for funds are for payment of our operating and administrative expenses, debt service obligations and cash distributions to our stockholders.

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 use debt financing to fund a portion of our capital needs. As of March 31, 2016, we had $1.1 billion of mortgage notes payable outstanding, with a leverage ratio (total debt divided by total assets) of 47.9%.

A portion of our working capital has historically been used to repurchase shares of our common stock. Our board of directors has adopted the share repurchase program (as amended and restated, the "SRP"), which permits investors to sell their shares back to us after they have held them for at least one year, subject to certain conditions and limitations.. We 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 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 will be 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 will be funded from proceeds received during that same semiannual period through the issuance of common stock pursuant to any DRIP in effect from time to time, as well as any reservation of funds the Board 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 will be paid at a price based on Estimated Per-Share NAV applicable on the last day of the semiannual period, as described above.

Our 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, we cannot guarantee that we will be able to accommodate all repurchase requests.

When a stockholder requests repurchases and the repurchases are approved, we reclassify 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.

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The following table summarizes the repurchases of shares under the SRP cumulatively through March 31, 2016:



	Number of Shares	Weighted-Average Price per Share
Cumulative repurchases as of December 31, 2015	2,073,645	$	24.12
Three months ended March 31, 2016	7,942	24.17
Cumulative repurchases as of March 31, 2016 ⁽¹⁾	2,081,587	$	24.12

____________________

We have historically generated some of our working capital by issuing shares through the DRIP. The DRIP was suspended following the payment of our June 2015 distribution on July 1, 2015. On April 1, 2016, we 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.

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, when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

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.

Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, has 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, when compared year over year, 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.

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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, 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.

The table below reflects the items deducted or added to net income (loss) in our calculation of FFO and MFFO for the periods indicated:



	Three Months Ended March 31, 2016
(In thousands)	Three Months Ended March 31, 2016
Net loss (in accordance with GAAP)	$	(5,854	)
Depreciation and amortization	25,493
FFO	19,639
Acquisition fees and expenses	343
Amortization of above-market lease assets and accretion of below-market lease liabilities, net	415
Straight-line rent	(1,723		)
Amortization of mortgage premiums on borrowings	(976		)
Discount accretion on investment	(7		)
MFFO	$	17,691

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 accurately 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.

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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 three months ended March 31, 2016, distributions paid to common stockholders totaled $26.8 million. None of these distributions were reinvested in shares pursuant to the DRIP. During the three months ended March 31, 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 March 31, 2016
(In thousands)				Percentage of Distributions
Distributions to stockholders	$	26,767

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

Cash flows provided by operations (GAAP basis) ⁽²⁾	$	20,585
Net income (loss) (in accordance with GAAP)	$	(5,854	)

_____________________


(1)	Includes $6.2 million of cash flows provided by operations in prior periods.


(2)	Cash flows provided by operations for the three months ended March 31, 2016 include acquisition and transaction related expenses of $0.3 million.

The following table compares cumulative distributions paid, including distributions related to unvested restricted shares, to cumulative net loss and cumulative cash flows provided by operations (in accordance with GAAP) and our cumulative FFO for the period from January 22, 2013 (date of inception) to March 31, 2016:



(In thousands)	Period from January 22, 2013 (date of inception) to March 31, 2016
Total distributions paid	$	276,852

Reconciliation of net loss:
Revenues	$	400,953
Acquisition and transaction related expenses	(52,092		)
Depreciation and amortization	(235,365		)
Other operating expenses	(73,523		)
Other non-operating income, net	(89,738		)
Net loss (in accordance with GAAP) ⁽¹⁾	$	(49,765	)

Cash flows provided by operations	$	196,237

FFO	$	185,600

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(1)	Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions.

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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 March 31, 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 March 31, 2016, our leverage ratio (total debt divided by total assets) approximated 47.9%.

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 March 31, 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		April 1, 2016 to December 31, 2016		2017-2018		2019-2020		Thereafter
Principal on mortgage notes payable	$	1,053,397	$	763	$	84,536	$	652,019	$	316,079
Interest on mortgage notes payable	221,814		37,750		92,567		83,863		7,634
Ground lease rental payments due	9,062		687		1,824		1,576		4,975
	$	1,284,273	$	39,200	$	178,927	$	737,458	$	328,688

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.

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Related-Party Transactions and Agreements

We have entered into agreements with affiliates of our Sponsor, whereby we have paid and/or may in the future pay certain fees or reimbursements to our Advisor, its affiliates and entities under common ownership with our Advisor in connection with items such as acquisition and financing activities, sales and maintenance of common stock under our suspended IPO, asset and property management services and reimbursement of operating and offering related costs. The predecessor to our Sponsor is a 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 us and certain other companies sponsored by our Sponsor 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 our Sponsor instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory. We are also party to a transfer agency agreement with American National Stock Transfer, LLC, a subsidiary of the parent company of the Former Dealer Manager ("ANST"), pursuant to which ANST provided us 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"). Our 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). See Note 12 — Share-Based Compensation to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related party transactions, agreements and fees.

In addition, the limited partnership agreement of the OP provides for a special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to our Advisor, a limited partner of the OP. In connection with this special allocation, our Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP. Our Advisor is directly or indirectly controlled by certain of our officers and directors.

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 March 31, 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 March 31, 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 $42.7 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 $43.3 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 March 31, 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.

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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 March 31, 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.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

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

Recent Sale of Unregistered Equity Securities

There were no recent sales of unregistered equity securities.

Issuer Purchases of Equity Securities

Our common stock is currently not listed on a national securities exchange, and there is no assurance it will ever be listed. In order to provide stockholders with interim liquidity, our board of directors has adopted the SRP, which permits investors to sell their shares back to us after they have held them for at least one year, subject to the significant conditions and limitations described below. We 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 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 will be 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 will be funded from proceeds received during that same semiannual period through the issuance of common stock pursuant to any DRIP in effect from time to time, as well as any reservation of funds the Board 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 will be paid at a price based on Estimated Per-Share NAV applicable on the last day of the semiannual period, as described above.

The following table summarizes the repurchases of shares under the SRP cumulatively through March 31, 2016:



	Number of Shares	Weighted-Average Price per Share
Cumulative repurchases as of December 31, 2015	2,073,645	$	24.12
Three months ended March 31, 2016	7,942	24.17
Cumulative repurchases as of March 31, 2016	2,081,587	$	24.12

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Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

SunTrust Portfolio

On May 12, 2016, the Company entered into an escrow agreement (the “Escrow Agreement”) with SunTrust Bank, a wholly owned subsidiary of SunTrust Banks, Inc. (“SunTrust”), in connection with the exercise by SunTrust of certain of its lease renewal options. Pursuant to the Escrow Agreement, the Company amended 160 of its 213 leases for single-tenant net lease properties operated by SunTrust.

The original leases were to expire on December 31, 2017, with one 10-year renewal option and six subsequent five-year renewal terms. Following SunTrust’s exercise of options and the lease amendments: 61 properties have a lease term expiring December 31, 2027; 75 properties have a lease term expiring December 31, 2029; six properties have a lease term expiring December 31, 2032; 10 properties have a lease term expiring December 31, 2027 subject to SunTrust’s right to terminate on either December 31, 2017 or December 31, 2018 with six months’ prior notice; and 8 properties have a lease term expiring December 31, 2027, subject to SunTrust’s one-time right to terminate on January 7, 2018 with six months’ prior notice. The leases continue to be net and continue to provide for annual fixed rent escalations of 1.5% through the amended terms of the leases.

Concurrently and pursuant to the Escrow Agreement, the Company entered into a purchase and sale agreement with SunTrust for, and simultaneously closed on, the purchase and sale of eight single-tenant net lease properties operated by SunTrust for an aggregate contract purchase price of $28.9 million, exclusive of closing costs. The sale of the eight properties resulted in a nominal gain for the Company. Simultaneously and in connection with the sale, the Company caused the release of the properties from their existing mortgages and paid to the applicable lenders a combined release price of $13.6 million, including interest and prepayment premium.

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: May 13, 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 March 31, 2016 (and are numbered in accordance with Item 601 of Regulation S-K).



Exhibit No.		Description
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 *		Amended and Restated Share Repurchase Program effective February 28, 2016
101 *		XBRL (eXtensible Business Reporting Language). The following materials from American Finance Trust, Inc.'s Quarterly Report on Form 10-Q for the three months ended March 31, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive (Loss) Income, (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.