/IIIII//IIII//I//IIIII//IIIIIIII//III//I/J/i//iii/ 12026119 American Realty Capital Properties American Realty Capital Properties Inc 2011 Annual Report THIS IS SHAREHOLDER COMMUNICATION NOT FOR USE AS SALES MATERIAL American Realty Capital Properties Inc American Realty Capital Properties Company may also be refened Inc Maryland corporation which we refer to herein as we us our or like terms to in this Annual Report as the This Aimual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended or the Securities the Exchange Act Our actual results Act and Section could differ materially from those set of the Securities 21 Exchange Act of 1934 forth in each forward-looking statement as amended or Certain factors that might cause such difference are discussed in this Annual Report including in the section entitled Forward-Looking Statements included elsewhere in this Annual Report You should also review the section of this Annual report entitled Risk Factors for discussion of various risks that could adversely affect us On July Form S-Il 5400000 and maximum of 8800000 shares 2011 the Securities and Exchange registration number 333-172205 the Registration Statement effective declared Commission our registration statement on for our offering of minimum of of our common stock which is offered by the dealer manager PURPOSES basis THIS ANNUAL REPORT IS FOR INFORMATIONAL reasonable best efforts on FOR THE COMPANYS EXISTING nor constitute marketing or STOCKHOLDERS ONLY This Annual Report shall not be used as the Companys securities offered sales materials in connection with sale of pursuant to the Registration Statement This Annual Report shall not constitute an offer to sell or the solicitation of an offer to buy the securities offered by the Company pursuant to the Registration Statement The offering of the Companys securities will be made only by means of prospectus which is part of the Registration Statement Financial and Operational Highlights Acquisitions In the fiscal year ended 2011 the Company acquired 88 properties including Home Depot Citizens Bank Community Bank Dollar General Advance Auto and Walgreens The total value of the Companys 2011 acquisitions was $136.9 million The Company acquired total of 996012 square feet with weighted-average remaining lease term of 8.9 years Leverage As of December 31 2011 we had aggregate indebtedness secured by real estate of $72.7 million which collateralized 87 properties For that same period our corporate leverage ratio total mortgage notes payable plus outstanding advances under our senior secured revolving credit facility see bullet below less on-hand cash and cash equivalents divided by base purchase price of acquired properties was 49.7% As of December 31 2011 there was $42.4 million outstanding on our senior secured credit facility which bore an interest rate of 3.17% As of December 31 2011 this facility was collateralized by 59 properties Availability of additional borrowings under this facility is based upon the availability of sufficient collateral among other factors At December 31 2011 based on the collateral available there was $53.0 million of maximum borrowing capacity under this facility with $10.6 million available and unused THIS IS SHAREHOLDER COMMUNICATION NOT FOR USE AS SALES MATERIAL Best Practices The Company its board of directors and its advisor believe that the Companys distribution should principally be derived from cash flows generated from real estate operations In order to improve the Companys operating cash flows and its ability to pay dividends from operating cash flows the advisor agreed to waive certain fees including asset management and property management fees as well as absorb certain other costs Directors and Officers Directors Nicholas Schorsch Chairman of the Board and Chief Executive Officer American Realty Capital Properties Company Chief Executive Officer ARC Properties Advisors LLC ARCP advisor Chairman of the Board of Directors American Realty Capital Trust Inc ARCT Chairman of the Board of Inc the Directors and Chief Executive Officer American Realty Capital New York Recovery REIT Inc NYRR Chief Executive Officer New York Recovery Properties LLC NYRR Property Manager Chief Executive Officer New York Recovery Advisors LLC NYRR Advisor Chairman of the Board and Chief Executive Officer American Realty Capital Healthcare Trust Inc ARC HT Chief Executive Officer American Realty Capital Healthcare Advisors LLC ARC HT advisor Chief Executive Officer American Realty Capital Healthcare Properties LLC ARC HI property manager Chairman of the Board of Directors and Chief Executive Officer American Realty Capital Retail Centers of America Inc ARC RCA Chief Executive Officer American Realty Capital Retail Advisor LLC ARC RCA advisor Chairman of the Board and Chief Executive Officer American Realty Capital Daily Net Asset Value Trust Inc ARC DNAV Chief Executive Officer American Realty Capital Advisors II LLC ARC DNAV Advisor Chief Executive Officer American Realty Capital Properties II LLC ARC DNAV Property Manager Chief Executive Officer AR Capital Advisor LLC PECO Advisor Chairman of the Board and Chief Executive Officer American Realty Capital Trust III Inc ARCT III Chief Executive Officer American Realty Capital Advisors III LLC ARCT III advisor Chief Executive Officer American Realty Capital Properties III LLC ARCT III property manager Chairman of the Board of Directors Capital Global Daily Net Asset Value Trust Inc ARC Global DNAV Chief Executive Officer American Realty Capital Global Advisors LLC ARC Global DNAV Advisor Chief Executive Officer American Realty Capital Global Properties LLC ARC Global DNAV Property Manager Chairman of the Board of Directors and Chief Executive Officer American Realty and Chief Executive Officer American Realty Capital Trust IV Inc ARCT IV Chief Executive Officer American Realty Capital Advisors IV LLC ARCT IV Advisor Chief Executive Officer American Realty Capital Properties IV LLC ARCT IV Property and Chief Executive Officer Business Development Corporation of America and Director Manager Inc BDCA THiS iS SHAREHOLDER COMMUNICATION NOT FOR USE AS SALES MATERIAL Edward Weil Jr President Chief Operating Officer Secretary and Director the Company President Chief Operating Officer Treasurer and Secretary ARCP advisor President Treasurer and Secretary NYRR President and Chief Operating Officer NYRR and Chief Operating Officer NYRR Property Manager President Advisor President Chief Operating Officer and Secretary ARC HT President Chief Operating Officer Treasurer and Secretary ARC HT advisor President Chief Operating Officer Treasurer ARC HT property manager President Chief Operating Officer and Secretary ARC RCA President and Secretary Chief Operating Officer Treasurer and Secretary ARC RCA advisor President Chief Operating Officer and Director ARC DNAV President Chief Operating Officer Treasurer and Treasurer Secretary Secretary ARC DNAV Advisor President Chief Operating Officer Treasurer and Secretary ARC DNAV Property Manager Executive Vice President and Secretary PECO Advisor President Chief Operating Officer Treasurer Secretary and Director ARCT III President Chief Operating Officer Treasurer and Secretary ARCT III advisor President Chief Operating Officer Treasurer and Secretary ARCT III property manager President Chief Operating Officer Treasurer DNAV President Chief Operating Officer Treasurer and Secretary ARC Global DNAV Advisor President Chief Operating Officer Treasurer and Secretary ARC Global and Secretary ARC Global DNAV Property Manager and Secretary ARCT IV President Chief Operating President Chief Operating Officer Treasurer Officer Treasurer and Secretary ARCT IV Advisor President Chief Operating Officer Treasurer and Secretary ARCT IV Property Manager Adviser LLC BDCA Advisor and President Chief Operating Officer and Secretary BDCA Edward Rendell Independent Director the Company Independent Director ARCT III Independent Director BDCA and Independent Director ARC Global DNAV David Gong Independent Director the Company Independent Director ARCT III and Independent Director ARC RCA Walter Lomax Jr Independent Director the Company Independent Director ARC HT and Independent Director ARC DNAV Executive Officers Nicholas Schorsch See positions listed above THIS IS SHAREHOLDER COMMUNICATION NOT FOR USE AS SALES MATERIAL Edward Well Jr See positions listed above Peter Budko Executive Vice President and Chief Investment Officer the Company Executive Vice President and Chief Investment Officer ARCP advisor Executive Vice President Executive Vice President NYRR Property Manager Executive Vice President NYRR Advisor Executive Vice President ARC HT Executive Vice President ARC HI advisor Executive Vice President ARC HI property manager Executive Vice President RCA Executive Vice President and Chief Investment Officer ARC RCA advisor and Chief Investment Officer ARC DNAV Executive Vice President ARC DNAV Advisor and Chief Investment Officer ARC and Chief Operating Officer NYRR Executive Vice President Executive Vice President ARC DNAV Property Manager Executive Vice President and Chief Investment Officer PECO Advisor Executive Vice President ARCI III Executive Vice President ARCI III advisor Executive Vice President ARCI III property manager Executive Vice President Chief Investment Officer ARC Global DNAV Executive Vice President ARC Global DNAV Advisor Executive Vice President DNAV Property Manager Executive Vice President and Chief Investment Officer ARC Global and Chief Investment Officer ARCT IV Executive and Chief Investment Officer and Vice President ARCT IV Advisor Executive Vice President ARCT IV Property Manager President and Chief Operating Officer BDCA and Chief Executive Officer BDCA Advisor Brian Block Executive Vice President and Chief Financial Officer the Company Executive Vice President and Chief Financial Officer ARCP advisor Executive Vice President and Chief Financial Officer NYRR and Chief Financial Officer NYRR Property Manager Executive Vice Executive Vice President President and Chief Financial Officer NYRR Advisor Executive Vice President and Chief Financial Officer ARC HI Executive Vice President and Chief Financial Officer ARC HI advisor Executive Vice President and Chief Financial Officer ARC HI property manager Executive Vice President and Chief Financial Officer ARC RCA Executive Vice President and Chief Financial Officer ARC RCA and Chief Financial Officer ARC DNAV Executive Vice President advisor Executive Vice President and Chief Financial Officer ARC DNAV Advisor Executive Vice President ARC DNAV Property Manager Executive Vice President and Chief Financial Officer PECO Advisor and Chief Financial Officer Executive Vice President and Chief Financial Officer ARCI III Executive Vice President and Chief Financial Officer ARCT III advisor Executive Vice President and Chief Financial Officer ARCI III property manager Executive Vice President and Chief Financial Officer ARC Global DNAV Executive Vice President and Chief Financial Officer ARC Global DNAV Advisor Executive Vice President and Chief Financial Officer ARC Global DNAV Property Manager Executive Vice President Financial Officer ARCT IV Executive Vice President and Chief Financial Officer ARCI IV Advisor and Chief Executive Vice President and Chief Financial Officer ARCT IV Property Manager Chief Financial Officer and Ireasurer BDCA and Chief Financial Officer BDCA Advisor THIS IS SHAREHOLDER COMMUNICATION NOT FOR USE AS SALES MATERIAL SECURITIES UNITED STATES AND EXCHANGE Washington D.C 20549 FORM 10-K Mark One tEJ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES For the fiscal year ended December 31 2011 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission file number 001-35263 AMERICAN REALTY CAPITAL PROPERTIES INC Exact name of registrant as specified in its charter State or other jurisdiction of incorporation or organization Maryland 45-2482685 I.R.S Employer Identification No 405 Park Ave 15th Floor New York NY Address of principal executive offices 10022 Zip Code 212 415-6500 Registrants telephone number including area code Securities registered pursuant to Section 12b of the Securities Exchange Act of 1934 Title of each class Common Stock $0.01 par value per share Name of each exchange on which registered NASDAQ Capital Market Securities registered pursuant to Section 12g of the Securities Exchange Act of 1934 None Indicate by check mark if the registrant is well-known seasoned issuer as defined in Rule 405 of the Securities Act of 1933 YesD No121 Indicate NoIXl by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15d of the Securities Exchange Act of 1934 YesD Indicate by check mark whether the registrant has filed all reports the preceding 12 months or for such shorter period that the registrant the past 90 days Yes No Indicate by check mark whether the registrant submitted electronically submitted and posted pursuant to Rule 405 of Regulation submit and post such files Yes tEl No required was required to file such to be filed by Section 13 or 15d of the Securities Exchange Act of 1934 during reports and has been subject to such filing requirements for S-T during the preceding and posted on its corporate Web Site if any every Interactive or for such period that 12 months shorter the Data File required to be registrant was required to Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein of registrants Form 10-K tEl knowledge in definitive proxy or information statements incorporated by reference in Part and will not be contained III of this Form 10-K or any amendment to the best to this Indicate definition by check mark whether the registrant is of large accelerated filer accelerated large accelerated filer filer and smaller an accelerated filer reporting company non-accelerated filer or l2b-2 of the Exchange in Rule smaller reporting company See Act Large accelerated filer Non-accelerated filer jj Do not check if smaller reporting company Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is shell company as defined in Rule 12b-2 of the Exchange Act YesD NotEl The registrant completed its initial public offering of its shares of common stock to its registration statement 62011 An additional September in connection with the exercise of an underwriters 30 2011 the last business day of the registrants option to purchase additional shares were most recently completed second fiscal quarter 1.6 million shares were sold in connection with pursuant follow-on offering File No.333-176952 on November issued on November 72011 No shares were on Form S-Il File No 333-172205 on and 0.1 million 22011 outstanding as of June The number of outstanding shares of the registrants common stock on March 12012 was 7323434 shares DOCUMENTS INCORPORATED BY REFERENCE Portions ofthe registrantsproxy statement to be delivered to stockholders in connection with the registrants 2012 Annual reference into Part III of this Form 10-K The by registrant intends to file its proxy statement within 120 days after its of Stockholders Meeting fiscal year end are incorporated AMERICAN REALTY CAPITAL PROPERTIES INC FORM 10-K Year Ended December 31 2011 PART Item Item 1A Item Item Item PART II Item Item Item Business RiskEactors Properties Legaroceengs Mine Safety Disclosures Market for Registrants Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities SelectFmancia1 Data Managements Discussion and Analysis of Financial Condition and Results of Operations Jtem 7A Quantitatjsr and Qua tive Disc jes aboi.t Market Risk Item Financial Statements and Sul ementary Data Item 9A Controls and Procedures Itenf 913 OthGInformation PART III Item 10 Directors TEecutive Officers Item 11 Executive Compensation and CorpatQovernane Item 13 Certain Relationships and Related Transactions and Director Independence Item 14 PART IV Item I5 Exhibits Signatures Pnnvia1 Xccountmg Fees Services and Fi1ancia1 Statement Schedules Fage 10 35 38 38 39 42 43 53 54 55 55 55 55 56 58 page intentionally left blank Forward-Looking Statements Certain statements included in this Annual Report on Form 10-K are forward-looking statements Those statements include statements regarding the intent belief or current expectations of American Realty Capital Properties Inc and members of our management team as well as the assumptions on which such statements such as may will seeks anticipates believes estimates results may differ materially from those contemplated expressions Actual are based and generally are identified by the use of words expects plans intends should or similar 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 As used herein the terms we our and us refer corporation partnership of which we are the sole general partner which we refer to American Realty Capital Properties Inc Maryland together with our consolidated subsidiaries including ARC Properties Operating Partnership L.P Delaware limited on Form 10-K as our OP our to ARC Properties Advisors LLC Delaware limited liability company our external manager ARC or our to in this Annual Report Manager refers Sponsor refers to AR Capital LLC formerly hiown as American Realty Capital II LLC and its affiliated companies our sponsor to ARC Real Estate Partners LLC an affiliate of our Sponsor which contributed its 100% indirect refers and the Contributor ownership interests in the properties contributed to our OP in the formation transactions related to our initial public offering or our IPO described elsewhere in this Annual Report on Form 10-K or the formation transactions The following are some of the risks and uncertainties although not all risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements We and our Manager This inexperience makes our future performance have difficult to predict limited operating history and our Manager has limited experience operating public company All of our executive Manager the affiliated officers are also officers managers or holders of controlling interest dealer manager of our IPO Realty Capital Securities LLC RCS or the affiliated As officers our Manager result our executive direct or indirect entities in our Dealer and its Manager and other American Realty Capital-affiliated affiliates face conflicts of interest including significant conflicts created by our Managers compensation arrangements with us and other investors advised by American Realty Capital affiliates and conflicts in allocating time among these investors and us These conflicts could result in unanticipated actions Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital-advised programs or investors our Manager and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor meaning that we could invest in less attractive assets which could reduce the investment return to our stockholders The competition for the type of properties we desire to acquire may cause our dividends and the long-term returns of our investors to be lower than they otherwise would be We may be unable to renew leases lease vacant space or re-lease space as leases expire on favorable terms or at all which could have material adverse effect on our financial condition results of operations cash flow cash available for dividends to our stockholders per share trading price of our common stock and our ability to satisf our debt service obligations We depend on tenants for our revenue and accordingly of our tenants our revenue is dependent upon the success and economic viability Because we lease our properties to limited number of tenants and to the extent we depend on limited number of tenants in the future failure by any major tenant with leases in multiple locations to make rental payments to us because of deterioration of its financial condition or otherwise or the termination or non-renewal of lease by major tenant would have material adverse effect on us We are subject industries to tenant industry concentrations that make us more susceptible to adverse events with respect to certain Increases in interest rates could increase the amount of our debt payments and limit our ability to pay dividends to our stockholders We may be unable to make scheduled payments on our debt obligations We may not generate cash flows sufficient to pay our dividends to stockholders and as such we may be forced to borrow at higher rates or depend on our Manager to waive reimbursement of certain expenses and fees to fund our operations We may be unable to pay or maintain cash dividends or increase dividends over time We are obligated to pay substantial fees to our Manager our Sponsor and their affiliates We are subject to risks associated with the significant dislocations and liquidity disruptions currently existing or occurring in the United States credit markets We may fail to qualify to be treated as real estate investment trust for U.S Federal income tax purposes REIT We may be deemed to be an investment company under the Investment Company Act of 1940 as amended and thus subject to regulation under the Investment Company Act of 1940 as amended All forward-looking statements should be read in light of the risks identified in Part Item IA of this Annual Report on Form 10-K We use certain defined terms throughout this 10-K that have the following meanings We use the term net lease throughout this Form 10-K Under net lease the tenant occupying the leased property usually as single tenant does so in much the same manner as if the tenant were the owner of the property There are various forms of net leases most typically classified as triple net or double net Triple net leases typically require the tenant to pay all costs associated with property including real estate taxes insurance utilities and routine maintenance in addition to the base rent Double net leases typically require the tenant to pay all the costs as triple net leases but hold the landlord responsible for capital expenditures including the repair or replacement the building Accordingly of specific property the owner receives the rent net of these expenses rendering the cash and/or bearing components of structural such as the roof or structure of flow associated with the lease predictable for the term of the lease Under net lease the tenant generally agrees to lease the property for significant term and agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as result of real estate driven events such as casualty condemnation or failure by the landlord to fulfill its obligations under the lease We use the term credit tenant throughout this 10-K When we refer to credit tenant we mean tenant that has entered into lease that we determine is creditworthy and may include tenants with an investment grade or below investment grade credit rating as determined by major credit rating agencies or unrated tenants To the extent we determine that tenant is credit tenant even though it does not have an investment grade credit rating we do so based on our Managers reasonable determination that tenant should have the financial wherewithal to honor its obligations under its lease with us This reasonable determination in on our Managers substantial experience closing net lease transactions and is made after evaluating all tenants due diligence materials that are made available to us including financial statements and operating data We use the term annualized rental income throughout this 10-K When we refer to annualized rental income we mean the rental income under our leases reflecting straight-line rent adjustments associated with contractual rent increases in the leases as required by generally accepted accounting principles or GAAP which includes the effect of tenant concessions such as free rent as applicable When we refer to properties that are net leased on medium-term basis we mean properties originally leased long term 10 years or longer that are currently subject to net leases with remaining lease terms of generally three to eight years on average trust REIT forU.S federal an initial public offering IPO on Item Business Organization PART We were incorporated on December 22010 as Maryland corporation that elected to be qualified as real estate investment income tax purposes forthe taxable year endedDecember 312011 On July 72011 we commenced reasonable best efforts basis through our co-dealer managers RCS and Ladenburg on Form S-il File No 333-172205 statement Thalmann Co Inc together the Dealer Managers pursuant to registration the Registration Statement filed with the U.S Securities and Exchange Commission the SEC under the Securities Act of 1933 as amended of $66.0 million The shares began trading on the NASDAQ Capital Market under The IPO closed on September 62011 We sold total of 5.6 million shares of common stock for net proceeds the symbol ARCP on September 2011 On September 22 2011 we filed registration statement on Form S-Il File No 333-176952 to register an additional 1.3 million shares of common stock which was subsequently increased to 1.5 million shares plus up to an additional 0.2 million shares of common stock registered in respect of the underwriters on offering the Follow-On Offering The Follow-On Offering closed on November net proceeds of $14.4 million In addition on November 2011 the underwriters exercised their option to purchase an additional over-allotment option in connection with an underwritten follow- 2011 We sold 1.5 million shares for 0.1 million shares which closed on November 72011 for net proceeds of $0.7 million Wewere formed to primarily own and acquire single-tenant freestanding commercial real estate that is net leased on medium- term basis primarily to investment grade credit rated and other creditworthy tenants all of our business Substantially is conducted limited partnership We are the sole general partner and holder of 95.9% of the interest limited partner and owner of 4.1% of the interest period of one year holders of OP Units have of our common stock or at the option of the OP corresponding in the OP After holding units of limited partner to convert OP Units for the cash value of number of shares of our common stock the right through ARC Properties Operating Partnership L.P the OP Delaware in the OP The Contributor is the sole interests OP Units for corresponding number of shares as allowed by the limited partnership agreement of the OP The remaining rights of the holders of OP Units are limited however and do not include the ability to replace the general partner or to approve the sale purchase or refinancing of the OPs assets We are managed by our affiliates the Manager and the Sponsor The Sponsor provides certain acquisition and debt capital services to us These related parties including the Manager the Sponsor and RCS have received compensation and fees for services provided to us and will continue to receive compensation and fees and for investing financing and management services provided to us At the completion of the IPO the Contributor an affiliate of the Sponsor contributed to the OP its indirect ownership interests in ARC Income Properties LLC and ARC Income Properties III LLC which include to RBS Citizens Bank N.A and Citizens Bank of Pennsylvania Community Bank N.A or Community Bank or collectively Citizens Bank one property presently leased to one property presently leased to Home Depot U.S.A Inc or Home Depot 59 properties that are presently leased and and two vacant properties in exchange for 310000 OP Units See Note Organization in the accompanying consolidated financial statements for additional information about our formation transactions As of December 31 2011 we owned 90 properties including two vacant properties classified as held for sale with 1.0 million square feet 99.3% leased with committed to diversification weighted average remaining lease term of 8.9 years In constructing our portfolio we are industry tenant and geography As of December 31 2011 rental revenues derived from investment grade tenants as rated by major rating agency approximated 1.0% Our strategy encompasses receiving the majority of our revenue from investment grade tenants as we further acquire properties and enter into or assume medium-term lease arrangements Investment Policies Our primary business objective is to generate dependable monthly cash dividends from consistent and predictable level of funds from operations FF0 per share and capital appreciation associated with extending net lease We believe that tenants upon the expiration of properties for lease to new credit expiring leases or repositioning our the acquisition of properties that are subject to remaining lease durations of three by achieving recurring income and residual to eight value We expect years on average will give us the best opportunity to meet our objectives to achieve these objectives by acquiring net leased properties that either have in-place rental rates below current average asking rents in the applicable submarket and are located in submarkets with stable or improving market fundamentals or provide an essential location or infrastructure that is essential to the business operations of the tenant which we believe will incent the existing tenant or new credit tenant to re-lease the property at higher rental rate upon the expiration of the existing lease ARC has observed that the acquisition opportunities available in the net lease market are predominantly long-term leases Therefore based on our Managers experience we believe that the market for net leased properties that are subject fragmented We believe this creates focus on these types of properties Primwy Investment Focus to leases with credit tenants and medium-term remaining lease duration is both limited and unique buying opportunity for the company given its differentiated strategy to exclusively We focus on investing in properties that are net leased to credit investment grade or below investment grade ratings and ii governmental quasi-governmental tenants which are generally large public companies with entities We and not-for-profit intend to invest in properties with tenants that reflect diversity of industries geographies and sizes significant majority of our net lease investments have been and will continue to be in properties net leased to investment grade tenants although at any particular time our portfolio may not reflect this Investing in Real Property We expect to invest in primarily freestanding single-tenant retail properties net-leased to investment grade and other creditworthy tenants When evaluating prospective investments in real property our management and our Manager will consider relevant real estate and financial factors including the location of the property the leases and other agreements affecting the property the creditworthiness ofmajor tenants its income-producing its prospects tax considerations and other factors In this regard our Manager will have substantial capacity its physical condition for appreciation discretion with its prospects for liquidity respect to the selection of specific investments subject to approval of our Board of Directors The following table lists the tenants whose annualized rental income represented greater than 10% of consolidated revenues as of December31 2011 Tenant cthnsBa 1-TiomeDepot 21.1% The following table lists the states where the Company has concentrations of properties where annualized rental income represented greater than 10% of consolidated annualized rental income as of December 31 2011 State Michigan South Carolina Ohio 23.4% 23.4% 16.8% We do not have any specific policy as to the amount or percentage other than the requirements under REIT qualification rules We currently anticipate of our assets which will be invested in any specific property investments will continue that our real estate to be diversified in multiple net leased single tenant properties and in multiple geographic markets Purchase and Sale of Investments We may deliberately and strategically with our strategic objectives Further on dispose of properties in the future limited and opportunistic basis we intend to acquire and promptly resell medium-term and redeploy funds into new acquisitions that align net lease assets for immediate consequences we generally must do so through corporation and therefore must pay corporate-level taxes borne by the TRS Depending on the strategic by such by our TRS may be an example of the execution of this strategy gain To the extent we engage in these activities to avoid taxable REIT subsidiary TRS In general adverse U.S federal income tax TRS is treated as regular taxes on its taxable income Thus our yield on such activities will be reduced we ultimately decide to pursue our two properties held alternative Investments in Real Estate Mortgages While our current portfolio consists of and our business objectives emphasize equity investments in real estate we may at the discretion of our Board of Directors and without vote of our stockholders invest in mortgages and other types of real estate interests consistent with our qualification as REIT We do not presently intend to invest in mortgages or deeds of trust other than in manner that is ancillary to an equity investment Investments in real estate mortgages run the risk that one or more borrowers may default under the mortgages and that the collateral securing those mortgages may not be sufficient to enable us to recoup our full investment Investments under the Investment Company Act in mortgages are also subject to our policy not to be treated as an investment company Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers Subject to the asset tests and income tests necessary for REIT qualification we may invest in securities of other REITs other entities engaged in real estate activities or securities of other issuers including partnership interests limited liability company interests common stock and preferred stock where such investment would be consistent with our investment objectives including for the purpose of exercising control over such entities We have no current plans to invest in entities that are not engaged in real estate activities There are no limitations on the amount or percentage of our total assets other than those imposed by the gross income and asset tests we must meet in order to qualify as that may be invested in any one issuer the Code We do REIT under not intend that our investments in securities will require us to register as an investment company under the Investment Company Act and we would generally divest appropriate securities before any such registration would be required Joint Ventures We may enter into joint ventures from time to time if we determine that doing so would be the most cost-effective and efficient means ofraising capital Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness may be incurred in connection with acquiring investments Any such financing or indebtedness will have priority over our equity interest in such property Financing Policies We rely on leverage to allow us to invest in greater levels to decrease overtime as result of one or more of the following number of assets and enhance returns We expect our leverage factors scheduled principal amortization on our debt and our asset lower leverage repurchase on new asset acquisitions We expect and also opportunistically grow our portfolio to continue to strengthen our balance sheet through debt repayment or through new property acquisitions We intend to finance future acquisitions with the most advantageous source of capital available to us at the time of the transaction which may include combination of public and private offerings of our equity and debt securities secured and unsecured corporate-level debt property-level debt and mortgage financing and other public private or bank debt In addition we may acquire properties in exchange for the issuance of common stock or OP units and in many cases we may acquire properties subject to existing mortgage indebtedness We generally seek to finance our properties with or acquire properties subject to long-term fixed-rate non-recourse debt effectively locking in the spread we expect to generate on our properties and isolating the default risk to solely the properties financed Through non-recourse debt we seek to limit the overall company exposure in the event we default on the debt to the amount we have invested in the asset or assets financed We seek to finance our assets with match-funded or substantially match- funded debt meaning that we seek financed We expect the leverage that to obtain debt whose maturity matches as closely as possible the lease maturity of the asset available on net leased properties with medium-term remaining lease durations will be approximately 45% to 55% of the property value At December 31 2011 our corporate leverage ratio total mortgage notes payable plus outstanding advances by base purchase price of acquired under our senior secured revolving credit properties was 49.7% facility less on-hand cash and cash equivalents divided We also may obtain secured debt to acquire properties and we expect that our financing sources will include banks and life insurance companies Although we intend to maintain conservative capital structure with limited reliance on debt financing our charter does not contain specific limitation on the amount of debt we may incur and our Board of Directors may implement or change target debt levels at any time without the approval of our stockholders Lending Policies We do not have such as the Sarbanes-Oxley policy limiting our ability to make loans to other persons to REIT qualification Act Subject rules we may make loans to unaffiliated third parties For example although we may be so limited by applicable law we may consider offering purchase money financing in coimection with the disposition of properties in instances where the provision of that financing would increase the value to be received by us for the property sold We have not engaged in any lending activities the past We do not expect to engage in any significant lending in the future We may choose to guarantee debt of certain joint ventures with third parties Consideration for those guarantees may include but is not limited to fees long-term management contracts options to acquire additional ownership interests and promoted equity positions Our Board of Directors may in the future adopt formal lending policy without notice to or consent of our stockholders Dividend Policy We intend to pay regular monthly dividends to holders of our common stock and make regular monthly dividends to holders of OP units in our operating partnership U.S federal income tax law generally requires that REIT distribute annually at least 90% of its taxable income without regard to the deduction at regular corporate rates to the extent that it annually distributes for dividends paid and excluding net capital gains and that it pay tax less than 100% of its taxable income Our ability to make dividends may be limited by our senior secured revolving 95.0% of our adjusted funds from operations AFFO or ii the amount required for us to qualify and maintain our status REIT to which our dividends may not exceed pursuant facility greater credit the of as On September based on the sales 2011 our Board of Directors authorized an annual dividend rate of $0.875 per share or approximately 7.0% price of $12.50 per share at the time of our IPO which equaled monthly dividend rate of $0.0729 per share The dividends are payable monthly and began in October day of each month to stockholders of record at the close of business on the eighth day of such month On February 27 2012 our Board of Directors authorized and we declared an annual dividend rate of $0.880 per share Accordingly on March 15 2012 the Company paid on the fifteenth of $0.0733 distribution 2011 per share to stockholders of record at the close of business on March including borrowing funds and using the proceeds of our IPO or future offerings Dividends 2012 We have the ability to fund dividends from any source made by us will be authorized by our Board of Directors in its sole discretion out of funds legally available therefor and will be dependent upon number of factors including restrictions under applicable law and our capital requirements We our Board of Directors and ARC share similarphilosophy with respect to paying our dividend The dividend should principally be derived from cash flows generated from real estate operations The management agreement with our Manager provides for payment of the asset management units for the six immediately preceding months is equal fee only if the full amount of the dividends declared by us in respect of our OP to or greater than the amount of our AFFO Our Manager will waive such portion of its management our AFFO so that fee that when added to our AFFO without regard to the waiver of the management fee would increase it equals the dividends declared by us in respect of our OP units for the prior six months Our Manager is entitled to receive base management fee equal to 0.50% of the unadjusted book value of our assets For the year ended December 31 2011 $0.2 million in fees were waived by our Manager Pursuant to our administrative support agreement with our Sponsor our Sponsor has agreed to pay or reimburse us for certain of our general and administrative costs to the extent that the amount of our AFFO in order that such dividends do not exceed the amount of our dividends declared during the one-year period following the amount of our AFFO offering regard to such general and administrative costs paid for or reimbursed by our Sponsor To the extent these exceeds the closing of this computed without amounts are paid by ARC they would not be subject to reimbursement by us To the extent general and administrative expenses exceed historical amounts as result of becoming public company these additional amounts would also be subject to payment by our Sponsor as set forth above For the year ended December 31 2011 none of our general and administrative expenses were paid or reimbursed to our Sponsor pursuant to our administrative support agreement As our real estate portfolio matures and one-time acquisition and transaction expenses are significantly reduced we expect cash flows from operations to cover more significant portion of our dividends and over time to cover dividends As the cash flows from operations become more significant our Manager and ARC may discontinue its past practice of forgiving fees or providing financial support and may charge the entire fee in accordance with our agreements There can be no assurance that the Manager will continue to waive asset management or that ARC will continue to provide support beyond the agreed upon limits in the future Tax Status We elected to be taxed as REIT under Sections 856 through 860 of the Code effective for our taxable year ended December 31 2011 We believe that we are organized intend to continue to operate in such and operate in such manner as to qualify for taxation as manner to qualify for taxation as REIT but no assurance can be given that we will operate REIT under the Code We in manner so as to qualify or remain qualified as REIT Pursuant to our charter our Board of Directors has the authority to make any tax elections not to qualify as REIT for federal on our behalf that in their sole judgment are in our best interest This authority includes the ability to elect income tax purposes or after qualifying as REIT to revoke or otherwise terminate our status as REIT Our Board of Directors has the authority under our charter to make these elections without the necessity of obtaining the approval of our stockholders In addition our Board of Directors has the authority to waive any restrictions and limitations contained in our charter that are intended to preserve our status as REIT during any period in which our Board of Directors has determined not to pursue or preserve our status as REIT Competition We are subject to competition in the acquisition of properties and intense competition in the leasing of our properties We compete with number of developers owners and operators ofretail industrial and office real estate many ofwhich own properties similar to ours in the same markets competitors and due to our focus in which our properties are located in the leasing of our properties We also may face new because many of our on single-tenant properties located throughout States and the United competitors are locally or regionally focused we will not encounter the same competitors in each region of the United States Many of our competitors have greater financial and other resources lower returns on their investments and may have other advantages and may succeed in buying over our company the properties that we have Our incur costs on unsuccessful acquisitions that we will not be able to recover competitors may be willing to accept targeted for acquisition We may also Regulations Our investments are subject to various federal state local and foreign laws ordinances and regulations including among other things zoning indirect environmental regulations land use controls environmental controls relating to air and water quality noise pollution and impacts such as increased motor vehicle activity We believe that we have all permits and approvals necessary under current law to operate our investments Environmental Matters Under various federal state and local environmental laws current owner of real estate may be required to investigate and clean up contaminated property Under these laws courts and government agencies have the authority to impose cleanup responsibility and liability even if the owner did not know of and was not responsible for the contamination For example liability can be imposed upon us based on the activities of our tenants or prior owner In addition to the cost of the cleanup environmental contamination on property may adversely affect the value of the property and our ability to sell rent or finance the property and may adversely impact our investment in that property Prior to acquisition of property we will obtain Phase environmental reports These reports will be prepared in accordance with an appropriate level of due diligence based on our standards and generally include physical site inspection review of relevant federal state and local environmental and health agency database records one or more interviews with appropriate site- chain of title and review of historic related personnel uses of the property and nearby or adjoining properties We may also obtain and tests for substances subsurface review of the propertys investigations of concern where the results of Phase II aerial photographs on past investigation which may include limited and other information the Phase environmental reports or other information indicates possible contamination or where our consultants recommend such procedures Employees We have no employees and do not expect to have any employees in the future Our chief executive officer our president our executive vice president and chief investment officer and our other executive officer are executives of ARC Financial Information About Industry Segments Our current business consists of owning managing operating leasing acquiring investing in and disposing of real estate assets All of our consolidated revenues are from our consolidated real estate performance on an individual property level and view all of our real estate assets properties We internally as one industry segment and accordingly evaluate operating all of our properties are aggregated into one reportable segment Please see Part IV Item 15 Exhibits and Financial Statement Schedules included elsewhere in this annual report for more detailed financial information Available Information We electronically file annual reports on Form 10-K quarterly reports on Form 10-Q current reports on Form 8-K and all amendments to those reports and proxy statements with the SEC We also filed with the SEC our registration statement in connection with our current offering You may read and copy any materials we file with the SEC at the SECs Public Reference Room at 100 Street NE Washington D.C 20549 or you may obtain information by calling l-800-SEC-0330 The the SEC at SEC maintains an internet address at http//www.sec.gov that contains reports proxy statements and information statements and other information which you may obtain free of charge In addition copies of our filings with the SEC may be obtained from the website maintained for us and our affiliates www.americanrealtycapitalproperties.com or at www.americanrealtycap.com We are not incorporating our website or any information from the website into this Form 10-K Item 1A Risk Factors Risks Related to Our Properties and Operations Our growth will partially depend upon our ability to successfully acquire future properties and we may be unable to enter into and consummate property acquisitions on advantageous terms or our property acquisitions may not perform as we expect We acquire and intend to continue to acquire primarily freestanding single tenant retail properties net leased primarily to investment grade and other credit tenants on medium-term basis The acquisition of properties entails various risks including the risks that our investments may not perform as we expect that we may be unable to quickly and efficiently integrate our new acquisitions into our existing operations and that our cost estimates for bringing an acquired property up to market prove inaccurate Further we face significant competition for attractive investment opportunities estate investors including both publicly-traded REITs and private institutional investment standards may from other well capitalized real funds including ARC and its affiliates and other REITs and funds sponsored or advised by ARC or its affiliates and these competitors may have greater financial resources than us and greater ability to borrow funds and acquire properties Schorsch is the chairman of the board and Mr Kahane is the president and chief executive In particular ARCT an ARC-sponsored REIT for which Mr publicly traded REIT that officer is also invests in net leased properties although not primarily our target assets As of March 2012 ARCT market capitalization was $1.8 billion more than 22 times our market capitalization financial resources and significantly greater access to capital as of such date which means that ARCT is likely to have greater This competition in order to acquire properties than we will have increases as investments in real estate become increasingly attractive relative to other forms of investment As result of competition we may be unable to acquire additional properties as we desire In addition we expect to finance future acquisitions combination through or the purchase price may be significantly elevated of bonowings under our revolving credit facility proceeds by us or our OP or its subsidiaries which may not be available and which could adversely affect our cash from equity or debt offerings and proceeds from property contributions and divestitures flows Any of the above risks could adversely affect our financial condition results of operations cash flows and ability to pay distributions on and the market price of our common stock 10 In addition our growth strategy includes the disciplined acquisition ofproperties as opportunities arise Our ability to acquire properties on satisfactory terms and successfully integrate and operate them is subject to the following significant risks we may be unable to acquire desired properties because including other real estate operating companies REITs of competition from other real estate investors with more capital and investment funds we may acquire properties that are not accretive and lease those properties to meet our expectations to our results upon acquisition and we may not successfully manage competition from other potential acquirers may significantly increase the purchase price of desired property we may be unable consummate to generate sufficient cash from operations or obtain the necessary debt or equity financing to an acquisition or if obtainable financing may not be on satisfactory terms we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties agreements for the acquisition ofproperties are typically subject to customary conditions to closing including satisfactory completion of due diligence investigations and we may spend significant time and money on potential acquisitions that we do not consummate the process of acquiring or pursuing the acquisition of new property may divert the attention of our Manager from our existing business operations we may be unable to quickly and efficiently integrate new acquisitions particularly acquisitions of portfolios of properties into our existing operations market conditions may result in future vacancies and lower-than-expected rental rates and we may acquire properties without any recourse or with only limited recourse for liabilities whether known or unknown such as cleanup of environmental contamination claims by tenants vendors or other persons against the former owners of the properties and claims for indemnification by general partners directors officers and others indemnified by the former owners of the properties If we cannot complete property acquisitions including the proposed property acquisitions on favorable terms or operate acquired properties to meet our goals or expectations results of operations cash flow per share trading price of our common stock and ability to satisfy our debt service obligations and to make dividends to our stockholders our business condition financial could be materially and adversely affected We may be unable to renew leases lease vacant space or re-lease space as leases expire on favorable terms or at all which could have material adverse effect on our financial condition results of operations cash flow cash available for dividend to our stockholders per share trading price of our common stock and our ability to satisfy our debt service obligations Because we compete with number of real estate operators in connection with the leasing of our properties the possibility exists that one or more of our tenants will extend or renew its lease with us when the lease term expires on terms that are less favorable to us than the terms of the then-expiring lease or that such tenant or tenants will not renew at all Because we depend in large part on rental payments from our tenants if one or more tenants renews its lease on terms less favorable to us does not renew its lease or we do not re-lease significant portion of the space made available our financial condition results of operations cash flow cash available for dividend to our stockholders per share trading price of our common stock and ability to satisfy our debt service obligations could be materially adversely affected III We are dependent on single-tenant leases for our revenue and accordingly lease terminations or tenant defaults could have material adverse effect on our results of operations We expect to focus our investment activities on ownership of freestanding single-tenant commercial properties that are net leased to single tenant Therefore the financial failure of or other default in payment by single tenant under its lease is likely to cause significant reduction in our operating cash flows from that property and significant reduction in the value of the property and could cause significant reduction in our revenues If lease is terminated or defaulted on we may experience difficulty or significant delay in re-leasing such property or we may be unable which could result in us incurring loss The current economic conditions and the credit crisis may put financial to find new tenant to re-lease space pressure on and in payment by one or more of the tenants to whom we have the vacated increase the likelihood of the financial failure of or other default exposure Because we lease our properties to limited number of tenants and to the extent we depend on limited number of tenants in the future failure by any major tenant with leases in multiple locations deterioration of its financial condition or the termination or otherwise to make rental payments to us because of or non-renewal of lease by major tenant would have material adverse effect on us As of December 31 2011 we had tenants including for this purpose all affiliates of such tenants in our 90 properties all of which are single-tenant properties We expect to derive substantially all of our revenue from limited number of tenants Therefore our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our tenants While we evaluate the creditworthiness of our tenants by reviewing available financial and other pertinent information there can be no assurance that any tenant will be able to make timely rental payments or avoid defaulting under its lease At any time our tenants may experience already may have adversely affected an adverse change in their business or may in the future adversely affect business experience significant adverse changes they may decline to extend or renew leases For example the recent downturn in the global economy one or more of our tenants If any of our tenants to make rental upon expiration fail payments when due close number of stores exercise early termination rights to the extent such rights are available to the tenant or declare bankruptcy If tenant defaults we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment If any of the foregoing were to occur it could result in the termination of the tenants leases and the loss of rental income attributable to the terminated leases If lease is terminated or defaulted on we may be unable to find new tenant to re-lease the vacated space at attractive rents or at all which would have material adverse effect on our results of operations and our financial condition Furthermore the consequences to us would be exacerbated if one of our major tenants were to experience an adverse development in their business that resulted in them being unable to make timely rental payments or to default under their lease The occurrence of any of the situations described above would have material adverse effect on our results of operations and our financial condition We rely sign jficantly on two major tenants includingfor this purpose all affiliates of such tenants and therefore are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants As of December 312011 84% of our annualized rental income is derived from two major tenants including for this purpose all affiliates of such tenants Therefore the financial failure of major tenant is likely to have material adverse effect on our results of operations and our financial condition In addition the value of our investment is historically driven by the credit quality of the underlying tenant and an adverse change in major tenants financial condition or decline in the credit rating of such tenant may result in decline in the value of our investments and have material adverse effect on our results from operations Our net leases may require us to pay property-related expenses that are not the obligations of our tenants Under the terms of all of our net leases in addition to satisfying their rent obligations our tenants are responsible for the payment of real estate taxes insurance and ordinary maintenance and repairs However under the provisions of future leases with our tenants we may be required to pay some expenses such as the costs of environmental liabilities roof and structural repairs insurance certain non-structural repairs and maintenance If our properties incur significant expenses that must be paid by us under the terms of our leases our business financial condition and results of operations will be adversely affected and the amount of cash available to meet expenses and to make dividends to holders of our common stock may be reduced 12 Any of our properties that incurs vacancy could be difficult to sell or re-lease One or more of our properties may incur vacancy either by the continued default of tenant under its lease or the expiration of one of our leases Certain of our properties may be specifically suited to the particular needs of tenant e.g retail bank warehouse and major renovations and expenditures may be required in order for us to re-lease vacant space branch or distribution for other uses We may have difficulty presently vacant properties If the vacancy obtaining new tenant for any vacant space we have in our properties including our two continues for long period of time we may suffer reduced revenues resulting in less cash available to be distributed to stockholders In addition the resale value of property could be diminished because the market value of particular property will depend principally upon the value of the leases of such property We are subject industries to tenant industry concentrations that make us more susceptible to adverse events with respect to certain As of December 31 2011 our tenants operate in five industries Any downturn in one or more of these industries or in any other industry in which we may have significant credit concentration in the future could result in material reduction of our cash flows or material losses to our company Our properties may be subject to impairment charges We periodically evaluate our real estate investments for impairment indicators The judgment regarding the existence of impairment indicators is based on factors such as market conditions tenant performance and legal structure For example the early termination of or default under lease by tenant may lead to an impairment charge Since our investment focus is on properties net leased to single tenant the financial failure of or other default in payment by single tenant under its lease may result in significant impairment loss Ifwe determine that an impairment has occurred we would be required to make an adjustment to the net carrying value of the property which could have material adverse effect on our results of operations and FF0 in the period in which the impairment charge is recorded Our real estate investments are relatively illiquid and therefore we may not be able to dispose ofproperties when appropriate or on favorable terms The real estate investments made and to be made by us are relatively difficult to sell quickly Return of capital and realization of gains if any from an investment the Code ability of REIT to dispose of properties that are not applicable to other types of real estate companies generally will occur upon disposition or refinancing of In addition property imposes restrictions We may be unable given period of time or may otherwise be unable to realize our investment on the objectives by disposition or refinancing of any any exit strategy In particular these risks could arise from weakness property at attractive prices within to complete in or even the lack of an established market for property changes in the financial condition or prospects ofprospective purchasers changes in national or international economic conditions and changes in laws regulations or fiscal policies of jurisdictions in which the property is located Our investments in properties backed by below investment grade credits will have greater risk of default As of December 31 2011 9.0% of our annualized rental income come is derived tenants who do not have credit ratings or are rated below investment tenants credit rating grade by major rating agency We also may invest grade These investments will have is below investment in other properties in the future where the underlying greater risk of default and bankruptcy than investments in properties leased exclusively to investment grade tenants Our investments certain risks in properties where the underlying tenant does not have publicly available credit rating will expose us to When we invest in properties where the underlying tenant does not have publicly available credit rating we will rely on our own estimates of the tenants credit to allow us to finance the property as we had planned If our lender or rating and usually subsequently obtain private rating from reputable credit rating agency credit rating agency disagrees with our ratings estimates or our ratings estimates are inaccurate we may not be able to obtain our desired level of leverage or our financing costs may exceed those that we projected This outcome could have an adverse impact on our returns on that asset and hence our operating results 13 Operating expenses of our properties will reduce our cash flow and funds available for future dividends For certain of our properties we are responsible for operating costs of the property In some of these instances our leases require the tenant to reimburse us for all or portion of these costs either in the form of an expense reimbursement or increased rent Our reimbursement may be limited to fixed amount or specified percentage annually To the extent operating costs exceed our reimbursement our returns and net cash flows from the property and hence our overall operating results and cash flows could be materially adversely affected We have greater exposure to operating costs with respect to properties leased to the United States Government Subsequent to December 31 2011 we acquired property this is leased to the United States Government and may acquire more in the future Any leases with the United States Government generally will be typical Government Services Administration- type leases These leases do not provide that the United States Government is wholly responsible for operating costs of the property but include an operating cost component within the rent we receive that upon the Consumer Price Index or CPI Thus we will have greater exposure United States Government if any because increases annually by an agreed upon percentage based to operating costs on our properties leased to the if the operating costs of the property increase faster than the CPI we will bear those excess costs We would face potential adverse effects from tenant defaults bankruptcies or insolvencies The bankruptcy of our tenants may adversely affect the income generated by our properties If our tenant files for bankruptcy we generally cannot evict the tenant solely because of such bankruptcy In addition bankruptcy court could authorize bankrupt tenant to reject and terminate its lease with us In such case our claim against the tenant for unpaid and future rent would be subject to statutory cap that might be substantially less than the remaining rent actually owed under the lease and it is unlikely that bankrupt tenant would pay in full amounts it owes us under the lease Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our cash flow and results of operations The price wepaidfor an affiliate of our Sponsor may have exceeded their aggregate the assets we acquired in the formation transactions fair market value all of which were purchased from the Contributor The amount of consideration we paid the Contributor an affiliate of our Sponsor for the properties we purchased in our initial formation transaction may have investment because valuation been greater than the value of such properties as determined by recent independent third-party the amount of consideration for such properties was not determined as result of arms-length negotiations Further we have not obtained recent appraisal of the fair market value of the properties nor solicited third-party bids for the properties for purposes transaction in which interests of creating market check on their value Conflicts of interest existed in connection with the in these properties were contributed to our operating partnership There can be no assurance that the values reflected in the independent third-party investment valuation that we obtained reflect the fair market value of the properties were they to be sold in an arms-length transaction As result the price paid by us for the acquisition of the assets transactions may have value of those assets The aggregate the fair market exceeded combined net book historical in the formation value of the real estate assets acquired by us in the formation transactions was $109.5 million We assumed liabilities in connection with the formation transactions including unknown liabilities As part of the formation transactions we assumed existing liabilities of our property subsidiaries including but not limited to liabilities in connection with our properties Unknown transactions were consummated some of which may have been unknown or unquantifiable at the time the formation liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions claims of tenants or other persons dealing with the entities prior to the consummation of the formation transactions tax liabilities employment-related issues and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise If the magnitude of such unknown affect our business financial condition results of operations liabilities is high either singly or in the aggregate they could adversely cash flow per share trading price of our common stock and ability to satisf our debt service obligations and to make dividends to our stockholders 14 We face intense competition which may decrease or prevent increases in the occupancy and rental rates of our properties and office real estate many of which own and vacant We compete with numerous developers owners and operators of retail industrial properties similar to ours in the same markets our competitors which would include ARC or any ARC-sponsored program offer in which our properties are located If one of our properties becomes space at rental rates below current market rates or below the rental rates we currently charge our tenants we may lose existing or potential tenants and we may be pressured to rates below those we currently charge or to offer reduce our rental results of operations cash flow per share trading price of our common stock and ability to satisfy our debt service to make dividends to our stockholders may be adversely affected substantial rent abatements As result our financial condition obligations and Our operating performance and value are subject to risks associated with our real estate assets and with the real estate industry Our real estate investments are subject to various risks and fluctuations beyond our control Certain events may decrease cash available for dividends and cycles in value and demand many of which are as well as the value of our properties These events include but are not limited to adverse changes in international national or local economic and demographic conditions such as the recent global economic downturn vacancies or our inability to rent space on favorable terms including possible market pressures to offer tenants rent abatements tenant improvements early termination rights or tenant-favorable renewal options adverse changes in financial conditions of buyers sellers and tenants of properties inability to collect rent from tenants competition from other real estate investors with significant capital including other real estate operating companies REITs and institutional investment funds reductions in the level of demand for commercial space generally and freestanding net leased properties specifically and changes in the relative popularity of our properties increases in the supply of freestanding single-tenant properties fluctuations in interest rates which could adversely affect our ability or the ability of buyers and tenants of our properties to obtain financing on favorable terms or at all increases in expenses including but not limited to insurance costs labor costs energy prices real estate assessments and other taxes and costs of compliance with laws regulations and governmental policies all of which have an adverse impact on the rent tenant may be willing to pay us in order to lease one or more of our properties and changes in and changes in enforcement of laws regulations and governmental policies including without limitation health safety enviromnental zoning and tax laws governmental fiscal policies and the Americans with Disabilities Act of 1990 In addition periods of economic slowdown or recession such as the recent global economic downturn rising interest rates or declining demand for real estate or the public perception that any of these events may occur could result in general decline in rents or an increased incidence of defaults under existing leases If we cannot operate our properties to meet our financial expectations our business financial condition results of operations cash flow per share trading price of our common stock and ability to satisfy our debt service obligations and to make dividends to our stockholders could be materially and adversely affected We cannot assure you that we will achieve our return objectives 15 potential change in U.S accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants which could reduce overall demand for our leasing services Under current authoritative accounting guidance for leases lease is classified by tenant as capital lease if the significant risks and rewards of ownership are considered to reside with the tenant Under capital lease accounting for tenant both the leased asset and liability are reflected on their balance sheet If the lease does not meet any of the criteria for capital lease the lease is considered an operating lease by the tenant and the obligation does not appear on the tenants balance sheet rather the contractual future minimum payment obligations are only disclosed in the footnotes thereto Thus entering into an operating lease to enhance to direct ownership The Financial Accounting can appear Standards Board or the FASB tenants balance in comparison sheet and the International Accounting Standards Board or the IASB conducted joint project to re-evaluate lease accounting In August 2010 the FASB and the IASB jointly released exposure drafts of proposed accounting model that would significantly change lease accounting The final standards are expected to be issued in 2012 Changes to the accounting guidance could affect both our accounting for leases as well as that of our current and potential tenants These changes may affect how our real estate leasing business is conducted For example ifthe accounting standards regarding the financial statement classification of operating leases are revised then companies may be less willing to enter into leases with us general or desire to enter into leases with us with shorter terms because the apparent benefits to their balance sheets could be reduced or eliminated This in turn could cause delay in investing our offering proceeds and make it more difficult for us to enter into leases on terms we find favorable We will rely on external sources of capital tofundfuture capital needs and we encounter difficulty in obtaining such capital we may not be able to make future acquisitions necessary to grow our business or meet maturing obligations In order to qualify as REIT under at least 90% of our REIT taxable income which does not equal net the Code we will be required among other things to distribute annually to our stockholders income as calculated in accordance with GAAP determined without regard to the deduction for dividends paid and excluding any net capital gain Because of this dividend requirement we may not be able to fund from cash retained from operations all of our future capital needs including capital needed to make investments and to satisfy or refinance maturing obligations We expect to rely on external sources of capital including debt and equity financing to fund future capital needs However the recent U.S and global economic slowdown has resulted in capital environment costs and significant volatility If we are unable to obtain needed capital on satisfactory characterized by limited availability increasing terms or at all we may not be able to make the investments needed to expand our business or to meet our obligations and commitments as they mature Any additional debt we incur will increase our leverage Our access to capital will depend upon number of factors over which we have little or no control including general market conditions the markets perception of our growth potential our current debt levels our current and expected future earnings our cash flow and cash dividends and the market price per share of our common stock We may not be in position to take advantage of attractive investment opportunities for growth if we are unable to access the capital markets on timely basis on favorable terms 16 Our ability to sell equity to expand our business will depend in part on the market price of our common stock and our failure to meet market expectations with respect to our business could negatively affect the market price of our common stock and limit our ability to sell equity The availability of equity capital to us will depend in part on the market price of our common stock which in turn will depend upon various market conditions and other factors that may change from time to time including the extent of investor interest our ability to satisQ the dividend requirements applicable to REITs the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities including securities issued by other real estate-based companies our financial performance and that of our tenants analyst reports about us and the REIT industry general stock and bond market conditions including changes in interest rates on fixed-income securities which may lead prospective purchasers of our common stock to demand higher annual yield from future dividends failure to maintain or increase our dividend which is dependent to large part on FF0 which in turn depends upon increased revenue from additional acquisitions and rental increases and other factors such as governmental regulatory action and changes in REIT tax laws Our failure to meet market expectations with regard to future earnings and cash dividends would likely adversely affect the market price of our common stock and as result the availability of equity capital to us We have substantial amounts of indebtedness outstanding which may afftct our ability to make dividends may expose us to interest rate fluctuation risk and may expose us to the risk of default under our debt obligations As of December 31 2011 our aggregate indebtedness was approximately $72.7 million We may incur significant additional debt for various purposes including without limitation the funding of future acquisitions capital improvements and leasing commissions in connection with the repositioning of property 17 Payments ofprincipal and interest on borrowings may leave us with insufficient to maintain our REIT qualification Our substantial or necessary contemplated cash resources to make the dividends currently outstanding indebtedness and the limitations imposed on us by our debt agreements could have other significant adverse consequences including as follows our cash flow may be insufficient to meet our required principal and interest payments we may be unable adversely affect to borrow additional funds as needed or on satisfactory terms which could among other things our ability to capitalize upon emerging acquisition opportunities or meet needs to fund capital improvements and leasing commissions we may be unable to refinance our indebtedness of our original indebtedness at maturity or the refinancing terms may be less favorable than the terms we may be forced to dispose of one or more of our properties possibly on disadvantageous terms we may violate obligations restrictive covenants in our loan documents which would entitle the lenders to accelerate our debt certain of the property subsidiaries loan documents may include restrictions to us on such subsidiarys ability to make dividends we may be unable agreements these agreements may not effectively hedge agreements we would be exposed to hedge floating-rate debt counterparties may fail to honor their obligations under our hedge hedge interest rate fluctuation risk and upon the expiration of any to then-existing market rates of interest and future interest rate volatility we may default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and of rents and leases and receive an assignment our default under any of our indebtedness with cross-default provisions could result in default on other indebtedness If any one of these events were to occur our business cash flow per share trading price of our common stock and ability to satisfy our debt service obligations and to make dividends to our stockholders could be results of operations condition financial materially and adversely affected In addition any cash proceeds which could adversely affect our ability foreclosure on our properties could create taxable income without accompanying to meet the REIT dividend requirements imposed by the Code Our existing loan agreements contain and future financing arrangements will our operations which could limit our ability to make dividends to our stockholders likely contain restrictive covenants relating to We are subject to certain restrictions pursuant to the restrictive covenants of our outstanding indebtedness which may affect our dividend and operating policies and our ability to incur additional debt Loan documents evidencing our existing indebtedness contain and loan documents entered into in the future will likely contain certain operating covenants that limit our ability to further mortgage the property or discontinue insurance coverage In addition future agreements may contain and any future company credit facilities likely will contain financial covenants including certain coverage ratios and limitations on our ability to incur secured and unsecured debt make dividends sell all or substantially all of our assets and engage in mergers and consolidations credit facility and certain acquisitions Specifically our ability to make dividends may be limited by our senior secured revolving 95.0% of our AFFO or ii the amount required the greater of to which our dividends may not exceed pursuant for us to qualify and maintain our status as REIT Covenants under any future indebtedness may restrict our ability to pursue certain business initiatives or certain acquisition transactions In addition failure to meet any of these covenants including the financial coverage ratios could cause an event of default under or accelerate some or all of our indebtedness which would have material adverse effect on us Increases in interest rates would increase the amount of our variable-rate debt payments and could limit our ability to pay dividends to our stockholders Indebtedness under our senior secured revolving credit facility is subject to and we may incur additional indebtedness in the future subject to floating interest rates and as result increases in interest rates on such indebtedness would reduce our cash flows and our ability to pay dividends to our stockholders In addition if we are required to repay existing debt during periods of higher interest rates we may need to sell one or more of our investments in order to repay the debt which might reduce the realization of the return on such investments 18 Our organizational documents have no limitation on the amount of indebtedness that we may incur As result we may become highly leveraged in the future which could adversely affrct our financial condition Our business strategy contemplates the use of both secured and unsecured debt to finance long-term growth While we intend to limit our indebtedness to maintain an overall net debt exceed this amount for individual properties in select to gross asset value of approximately 45% to 55% provided cases where attractive financing is available our governing that we may documents contain no limitations on the amount of debt and our Board of Directors may change our financing policy at any time without stockholder approval in the future which could result As in an increase in our debt that we may incur result we may be able to incur substantial and harm our financial service additional debt including secured debt condition Adverse global market and economic conditions may continue to adversely affrct us and could cause us to recognize impairment charges or otherwise harm our performance Recent market and economic conditions have been challenging with tighter credit conditions in 2008 through 2011 Continued concerns about the availability and cost of credit the U.S mortgage market inflation unemployment levels geopolitical issues and declining equity and real estate markets U.S economy The commercial These conditions may result real estate have contributed to increased market volatility and diminished expectations for the sector in particular has been adversely affected by these market and economic conditions in our tenants requesting rent reductions declining to extend or renew leases upon expiration or or vacate leased premises at lower rates These renewing We may be unable to re-lease how long these adverse market and economic conditions will persist The continuation or intensification rents or at all We are unable forced tenants in some cases to declare bankruptcy conditions also have vacated space at attractive to predict whether or to what extent or for of these conditions may flow to pay expenses maintain properties make dividends and repay debt impede our ability to generate sufficient operating cash Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and cash flows and there can be no assurance as to future costs and the scope of coverage that may be available under insurance policies We carry comprehensive liability fire extended coverage business interruption and rental loss insurance covering all of the properties in our portfolio under blanket insurance policy with policy specifications limits and deductibles customarily carried liability and directors and officers insurance We have selected policy for similar properties In addition we carry professional specifications and insured limits that we believe are appropriate and adequate given the relative risk ofloss the cost of the coverage and industry practice We do not carry insurance Certain types of losses may be either uninsurable or not economically of war Should an uninsured loss occur we could lose both our investment for certain losses including but not limited to losses caused by riots or war insurable such as losses due to earthquakes riots or acts in and anticipated profits and cash flow from property If any such loss is insured we may be required to pay significant deductible on any claim for recovery of such loss prior to our insurer being obligated to reimburse us for the loss or the amount of the loss may exceed our coverage for the loss In addition future lenders may require such insurance and our failure to obtain such insurance could constitute default under our loan agreements In addition we may reduce or discontinue terrorism earthquake flood or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds in our judgment the value of the coverage discounted for the risk of loss Our title insurance policies may not insure for the current aggregate market and we do not intend to increase our title insurance coverage as the market value of our portfolio value of our portfolio increases As result our business financial condition results of operations cash flow per share trading price of our common stock and ability to satisfy our debt service obligations and to make dividends to our stockholders may be materially and adversely affected If we or one or more of our tenants experiences loss that is uninsured or which exceeds policy limits we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties In addition if the damaged properties are subject to recourse indebtedness we would continue to be liable for the indebtedness even if these properties were irreparably damaged If any of our insurance carriers becomes insolvent we could be adversely affected We carry several different lines of insurance placed with several large insurance carriers If any one of these large insurance carriers were to become insolvent we would be forced to replace the existing insurance coverage with another suitable carrier and any outstanding claims would be at risk for collection In such an event we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms Replacing insurance coverage at unfavorable rates and the potential of uncollectible claims due to carrier insolvency could adversely affect our results of operations and cash flows 19 Terrorism and other factors affecting demand for our properties could harm our operating results The strength and profitability of our business in the United States such as the attacks that occurred of terrorism or war could have negative impact depends on demand for and the value of our properties Future terrorist attacks in New York and Washington D.C on September 11 2001 and other acts on our on our operations Such terrorist attacks an adverse impact could have business even if they are not directed at our properties In addition the terrorist attacks of September 11 2001 have substantially affected the availability coverage for terrorism include large deductibles and co-payments and could have losses of insurance and price to significant negative impact on our operations for certain types of damages or occurrences and our insurance policies The lack of sufficient insurance for these types of acts could expose us We may be required to make sign jficant capital expenditures decline in operating revenue and reducing causing to improve our properties in order to retain and attract tenants cash available for debt service and dividends to stockholders If adverse economic conditions continue in the real estate market and demand for freestanding single tenant properties remains low we expect that upon expiration of leases at our properties we will be required to make rent or other concessions to tenants or accommodate requests for renovations build-to-suit remodeling and other improvements As result we may have to make significant may need to raise capital to make capital or other expenditures in order to retain tenants whose leases expire and to attract new tenants Additionally we is otherwise unavailable we may be leases which by tenants upon expiration of their to make such expenditures the required expenditures to do so or capital If we are unable in non-renewals This could unable result would result in declines in revenue from operations and reduce cash available for debt service and dividends to stockholders Difficult conditions and these conditions may not in the commercial real estate markets may cause improve in the near future us to experience market losses related to our holdings Our results of operations are materially affected by conditions in the real estate markets the financial markets and the economy generally and may cause commercial real estate values including the values of our properties and market rental rates including rental rates that we are able to charge to decline significantly Current economic and credit market conditions have contributed to increased volatility and diminished expectations for real estate markets as well as adversely impacted inflation energy costs geopolitical issues and the availability and cost of credit and will continue to do so going forward The further deterioration of the real estate market may cause us to record losses assets or adversely impact our ability to lease our properties Declines on our assets reduce the proceeds we receive upon sale or refinance of our values of our properties may adversely affect in the market our results of operations and credit availability which may reduce earnings and in turn cash available for dividends to our stockholders Current economic and credit market conditions may also cause in their payment obligations which could to fail or default cause one or more of the tenants to whom we have exposure us to record material losses or material reduction in our cash flows Because we own real property we are subject to extensive environmental regulation which creates uncertainty regarding future environmental expenditures and liabilities Environmental laws regulate and impose liability for releases of hazardous or toxic substances into the environment Under various provisions of these laws an owner or operator of real estate such as us is or may be liable for costs related to soil or groundwater contamination on in or migrating to or from its property In addition persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site Such laws often impose liability regardless ofwhether the person knew of or was responsible for the presence of the hazardous or toxic substances that caused the contamination The presence of or contamination resulting from any of these substances or the failure to properly remediate them may adversely affect our ability to sell or lease our property or to borrow using such property as collateral In addition persons exposed to hazardous or toxic substances may sue us for personal injury damages For example certain laws impose liability for release of or exposure to asbestos-containing materials and contamination from past operations or from off- site sources As result in connection with our current or former ownership operation management and development of real properties we may be potentially liable for investigation and cleanup costs penalties and damages under environmental laws Although all of our properties were at the time they were acquired by our predecessor subjected to preliminary environmental assessments assessments known as Phase assessments by independent environmental consultants that identif certain liabilities Phase are limited in scope and may not include or identify all potential environmental liabilities or risks associated with the property Further any environmental liabilities that arose since the date the studies were done would not be identified in the assessments Unless required by applicable laws or regulations we may not further investigate remedy or ameliorate the liabilities disclosed in the Phase assessments 20 We cannot assure you that these or other environmental studies identified all potential environmental liabilities or that we will not incur material environmental liabilities in the future If we do incur material environmental liabilities in the future we may face significant remediation costs and we may find it difficult to sell any affected properties result of becoming As controls which are applicable to such companies which has increased public company we implemented additional financial and accounting systems procedures our costs and requires substantial management and time and attentionS As public company we have incurred and in the future will continue to incur significant legal accounting and other expenses that our predecessor did not incur as and corporate governance Act As an example in order to comply with such requirements private company including costs under including requirements associated with public company reporting requirements the Sarbanes-Oxley Act of 2002 or the Sarbanes-Oxley reporting requirements we are evaluating our internal control systems in order to allow management to report on and when required our independent control over financial reporting as required by Section 404 of the Sarbanes-Oxley registered public accounting Act If we fail firm to attest to our internal to implement proper overall business controls including as required to integrate the property subsidiaries and support our growth our results of operations could be harmed or we could fail to meet our reporting obligations In addition if we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we cannot remediate in timely manner or if we are unable to receive an unqualified report from our independent registered public accounting firm with respect to our internal control over financial reporting investors and others may lose confidence in the reliability of our financial statements and the trading price of our common stock and our ability to obtain any necessary equity or debt financing could suffer Furthermore the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors misstatements or misrepresentations Although management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time Deficiencies including any material weaknesses in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations restatements ofour financial statements decline in the trading price of our common stock or otherwise materially adversely affect our business reputation results of operations financial condition or liquidity Payment of fees to our Manager and ARC reduces cash available for investment and dividend Our Manager and ARC will perform services for us in connection with the selection acquisition financing leasing and management of us and our properties Our Manager and ARC will be paid substantial fees for these services which reduce the amount of cash available for investment in properties or dividend to stockholders Such fees and reimbursements include management fee payable to our Manager equal calculated and payable monthly in advance provided that to 0.50% per annum of our average unadjusted book value of our real estate assets the full amount of the dividends declared by us in respect of our OP units for the six immediately preceding months is equal to or greater than the amount of our AFFO ii incentive fees equal to the difference between the product of 20% and the difference between previous 12-month period and II the product of the weighted our Core Earnings as defined below for the average of the issue price per share of our common stock of all of our public offerings multiplied by the weighted average number of all shares of common stock outstanding including any restricted shares of common stock and other shares of common stock underlying awards granted under our equity incentive plans in the previous 12-month period and three calendar quarters of such previous 12-month period provided 8.00% and the sum of any incentive fee paid to our Manager with respect to the first however that no incentive fee is payable with respect to any quarter unless Core Earnings calendar fee payable to ARC equal which is originated by ARC iv financing for the 12 most recently completed calendar quarters is greater to 1.0% of the contract purchase price including assumed indebtedness fee payable to ARC equal to 0.75% of the amount available under mortgage financing or refinancing that we obtain and use for the acquisition of properties that is arranged reimbursement for all out of pocket costs actually incurred by ARC in connection with the performance than zero iiian acquisition of each property that we acquire any secured by ARC and of services under the acquisition and capital other third party fees and expenses costs of appraisals travel expenses nonrefundable services agreement including without limitation legal fees and expenses due diligence fees and expenses option payments and deposits on properties not acquired accounting fees and expenses title insurance expenses relating to the selection acquisition and premiums and other closing costs personnel due diligence of properties Also in the future we may contract costs and miscellaneous with ARC to perform property management and leasing services with respect to our properties in respect of which we will pay fees equal to 1.5% of gross revenues from such properties plus certain expense reimbursements 21 We used some of the proceeds from future equity offerings to repay affiliated debt programs indebtedness owed to affiliates or incurred pursuant to To the extent we borrow money from future equity offerings to repay from affiliates or pursuant such indebtedness to affiliated debt programs in the future we may use proceeds Risks Related to Our Relationship with Our Manager and ARC We are dependent on ARC and its key personnel especially Messrs Schorsch Budko Block and Well who provide services to us through the management agreement and the acquisition and we may not find suitable and capital services agreement replacement terminated for our Manager and ARC if the management or for these key personnel if they leave ARC or otherwise become agreement and the acquisition unavailable to us and capital services agreement is We have no separate facilities and are completely reliant on our Manager our executive vice president and chief investment officer and do not expect to have any employees Our Manager and our other executive and ARC have significant and ARC Our chief executive officer our president of ARC We do not have are executives officer discretion as to the implementation of our investment and operating policies the efforts experience ARC The officers diligence and strategies Accordingly we believe that our success will depend to skill and network contacts of the officers of business and key personnel significant extent upon of our Manager and and key personnel of our Manager and ARC will evaluate negotiate close and monitor our investments therefore our success will depend on their continued service The departure of any of the officers or key personnel of our Manager could have material adverse effect on our performance and slow our future growth We have not obtained and do not expect to obtain key person life insurance on any of our key personnel Neither our Manager nor ARC is obligated to dedicate any specific personnel exclusively to us In addition none of our officers or the officers of our Manager or ARC are obligated to dedicate any specific of them has significant responsibilities for other investment time to our business vehicles currently managed by affiliates of ARC including as as of December portion of their Each result of being part of the senior management investment or key personnel of including our business programs and their advisors including eight REITS and two Registered Investment ARC-sponsored REITs and one RIC have registration statements that are not yet effective result such REITs and RICs will have concurrent or overlapping fundraising acquisition 31 2011 10 ARC-sponsored Companies RIC One of the phase As and operational phases as us which and are in the development may cause conflicts of interest to arise throughout the life of our company Additionally based on our Sponsors experience significantly greater time commitment is required of senior management during the development stage when entity is being organized raised and funds are initially being raised and funds are initially being the offering matures As of our business Further when there result these individuals may not always time to the management are turbulent conditions in the real estate markets or distress in the credit markets the attention be able to devote sufficient of our Managers and ARCs personnel and our executive officers and the resources of ARC will also be required by the other investment vehicles managed by affiliates of ARC In such situations we may not receive the level of support and assistance that invested and less time is required as additional funds are remain our investment manager or that we will continue to have services following the initial term of the acquisition and capital services agreement with our Manager services agreement 2021 which is the tenth anniversary of the closing of our IPO with automatic agreement and the acquisition and capital and our acquisition and capital services agreement subject to 180- agreement is terminated or the acquisition and capital services to provide the services needed by us under those agreements we we may receive if we were internally managed In addition we offer no assurance that our Manager will access to ARC to provide us with acquisition and capital agreement The initial term of our management between us and ARC extends until September thereafter of our management day prior written notice of termination period If the management agreement is terminated and no suitable renewals one-year replacement is found may not be able to execute our business plan 22 There are various conflicts of interest in our relationship with ARC and our Manager which could result in decisions that are not in the best interests of our stockholders We are subject to conflicts of interest arising out of our relationship with ARC and our Manager Specifically Mr Schorsch our chief executive and one of our Directors Mr Budko our executive and the chairman officer president and chief financial officer are executives of our Board of Directors Mr Weil our president chief operating officer secretary vice president and chief of ARC Our Manager investment officer and Mr Block our executive vice and executive officers may have conflicts between their duties to us and their duties in our is governed by an acquisition and capital services agreement with ARC Our acquisition and capital services agreement in ARC and other ARC-sponsored programs Our ability to make investments to and interests target assets with ARC provides that no entity controlled by ARC or its affiliates public or private U.S investment vehicle that has as its principal including executives of ARC will sponsor or manage any investment strategy to invest in net leased properties that are to leases that have remaining terms of less than 10 years but not less than three subject Mr Schorsch or Mr William in effect However ARC and its affiliates may sponsor or manage another public or private U.S investment generally in real estate assets but not primarily in our target assets including net leased properties affiliated with our Manager or indirectly are directly Kahane years other than us for so long as either and our management agreement is vehicle that invests Our Board of Directors has adopted policy with respect to any proposed investments by our directors or officers or the officers of our Manager which we refer to as the covered persons in our target properties This policy provides that any proposed investment by covered person for his or her own account in any of our target properties will be permitted if the capital required for the investment does not exceed the lesser of $5 million or ii 1% of our total stockholders equity as of the most recent month end or the personal investment limit To the extent that proposed investment exceeds the personal investment limit our Board of Directors will only permit the covered person to make the investment upon the approval of the disinterested directors or ii if the proposed investment may adopt in the future Subject otherwise complies with terms of any other related party transaction policy our Board of Directors for their own with all applicable laws these individuals may make investments to compliance account in our target properties which may present certain conflicts of interest not addressed by our current policies We may acquire properties in geographic areas where ARC or other ARC Funds own competing acquire properties from or sell properties to ARC or other ARC-sponsored for we could suffer tenant that we are competing sponsored programs attracts programs If ARC or any one of properties Also we may the other ARC- loss of revenue due to delays in locating another suitable tenant We will pay our Manager and ARC substantial management in the future pay them property management Managers and ARCs entitlement fees most of which are payable fees incentive fees acquisition fees and financing fees and may of our portfolio Our regardless of the performance to such fees which are not based upon performance metrics or goals might reduce their incentive to devote their time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio Additionally of the payment of acquisition fees and financing fees to ARC with respect to properties acquired and financings obtained because ARC may attempt to cause our ability to make dividends to our stockholders and the market us to acquire properties and incur financings in order to earn these fees This in turn could hurt both price of our common stock Concurrently with the completion of our IPO we granted to our Manager 167400 restricted shares ofManagers Stock which is equal to 3.0% of the number of shares sold in our IPO This award will vest ratably in quarterly installments over three-year period beginning on October 2011 Once vested to the extent our Manager sells some of the shares its interests may be less aligned with our interests Each of the management negotiated on an arm s-length basis and may not be as favorable unaffihiated third party and each agreement may be costly agreement with our Manager and the acquisition and difficult to us as to terminate and capital services agreement with ARC was not each agreement had been negotiated with an Our executive officers and two of our five directors are executives of ARC Each of our management agreement with our Manager and the acquisition and capital services agreement with ARC was negotiated between related parties and their terms including amounts payable under each agreement and the term of each agreement which exceeds the term of most other externally advised REITs may not be as favorable to us as if it had been negotiated with an unaffiliated third party 23 Termination of the management agreement with our Manager and the acquisition and capital services agreement with ARC without cause is difficult During the initial term of the management agreement the management agreement may be terminated by us only for cause Following the initial ten-year term which commenced on September 2011 the management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors based upon our Managers unsatisfactory performance that is materially detrimental to us or determination that the management fees payable to our Manager are not fair subject to our Managers right to prevent termination based on unfair fees by accepting reduction fees agreed to by at of management written notice of any such termination Additionally the acquisition and capital services agreement with ARC has which commenced directors Our Manager will be provided 2011 and then continues of our independent on September yearly basis thereafter two-thirds subject least on 180 days prior ten-year term of any termination These provisions may adversely affect our ability to terminate our Manager to 180 days prior written notice and ARC without cause Both our Manager and ARC are only contractually committed to serve us until September 2021 which is the tenth anniversary of the closing of our IPO Thereafter the management agreement and the acquisition and capital services agreement are each renewable for one-year terms provided however that our Manager may terminate the management agreement annually upon 180 days prior written notice and ARC may terminate the acquisition and capital services agreement annually upon 180 days prior written notice If the management agreement is terminated or the acquisition and capital services agreement is terminated and in each case no suitable replacement is found to manage us or provide acquisition and capital services to us we may not be able to execute our business plan Pursuant to each of the management agreement and the acquisition and capital services agreement neither our Manager nor ARC will assume any responsibility action of our Board of Directors ARC maintains contractual other than to render the services called for thereunder and neither will be responsible for any in following or declining to follow its advice or recommendations Each of our Manager and as opposed to fiduciary relationship with us Under the acquisition and capital services agreement none of our Manager ARC or any oftheir respective officers members or personnel any person controlling or controlled by our Manager ARC will be liable to us any subsidiary of ours our directors our stockholders or any subsidiarys acts or omissions performed or ARC or any person providing in accordance with and pursuant the terms of the management agreement or the acquisition and capital to the management sub-advisory services to our Manager stockholders or partners for agreement services and or agreement except because of acts constituting bad faith willful misconduct gross negligence or reckless disregard of their duties under the management agreement or the acquisition and capital services agreement In addition we have agreed to indemnifi our Manager ARC and each of their respective officers stockholders members managers directors and personnel controlling or controlled by our Manager or ARC and any person providing sub-advisory services to our Manager any person or ARC with respect to all expenses losses damages or ARC not constituting bad faith willful misconduct in accordance with and pursuant to the management agreement liabilities demands charges and claims arising from acts or omissions of our Manager gross negligence or reckless disregard of duties performed or the acquisition and capital services agreement in good faith The incentive fre payable to our Manager under Earnings and therefore may cause ourManager to select the management agreement is payable quarterly and is based on our Core investments in more risky assets to increase its incentive compensation Our Manager is entitled to receive incentive compensation based upon our achievement of targeted levels of Core Earnings In evaluating investments and other management strategies the opportunity to earn incentive compensation based on Core Earnings may lead our Manager to place undue emphasis on the maximization of Core Earnings at the expense of other criteria such as preservation of capital in order to achieve higher incentive compensation Investments with higher yield potential are generally riskier or more speculative This could result in increased risk to the value of our investment portfolio 24 The conflicts of interest policy we have adopted may not adequately address all of the conflicts of interest that may arise with respect to our investment activities and also may limit the allocation of investments to us In order to avoid any actual or perceived conflicts of interest with our Manager ARC or any of the ARC parties we have adopted conflicts of interest policy to specifically address some of the conflicts relating to our investment opportunities Although this policy the approval under by any of the ARC parties of majority of our independent directors will be required to approve and ii any purchase by us of any assets of any of the ARC parties there that may arise or will address conflicts will be adequate to address all of the conflicts any purchase of our assets is no assurance that this policy is favorable to us In provisions applicable to us other ARC Funds may in the future involve in manner that investments will not be the result of arms length negotiations and will such addition as result of the investment opportunity allocation participate in some of our investments Participating potential conflicts between our interests executives these ARC Funds and there can be no assurance that any procedural protections are also executives and those of the other participating of ARC the same personnel may determine ARC Funds in obtaining favorable terms Since our the price and terms for the investments for both us and such as obtaining market prices or other reliable indicators of fair market value will prevent the consideration we pay for these investments from exceeding their fair market value or ensure that we receive terms for particular investment opportunity that are as favorable as those available from an independent third party Risks Related to Our Organization and Structure The supermajority voting requirements applicable to our Board of Directors in connection with our consolidation merger sale of all or substantially all of our assets or our engaging in share exchange will limit our independent directors ability to influence such corporate matters Our charter provides that we may not consolidate merge sell all or substantially all of our assets or engage in share exchange unless such actions are approved by the affirmative vote of at of our directors who is also an executive of ARC will have least two-thirds of our Board of Directors As result at least one to approve such significant corporate transactions This concentrated control limits the ability of our independent directors of control transaction that might otherwise involve to influence such corporate matters and could delay deter or prevent premium for our shares of common stock or otherwise be in the best interests change of our stockholders As result our directors who are also executive of ARC may block certain transactions directors otherwise view as being in the best interests of our stockholders Additionally the market price that our independent of our common stock could be adversely affected because of the such imbalance of control Our Sponsor exercised significant influence with respect to the terms of the formation transactions including transactions in which it determined the compensation our principals ultimately received We did not conduct arms-length negotiations with our Sponsor with respect to the formation transactions In the course of structuring the formation transactions our Sponsor had the ability to influence the type and level of benefits that it its affiliates including our principals and our Manager and our other officers ultimately received from us In addition our principals substantial pre-existing indirect ownership interests in the property subsidiaries that we acquired in the formation transactions had and received substantial economic benefits as result of the formation transactions In addition our principals have certain executive management and director positions with us our Manager profits associated with the fees earned by our Manager and ARC for which they will and ARC and equity-based awards receive certain other benefits such as any Our charter the partnership agreement of our operating partnership and Maryland law contain provisions that may delay or prevent change of control transaction Our charter contains 9.8% ownership limit Our charter subject to certain exceptions limits any person to actual or constructive ownership of no more than 9.8% in value of the aggregate of our outstanding shares of stock and not more than 9.8% in value or in number of shares whichever is more restrictive of any class or series of our shares of stock Our Board of Directors sole in its and upon retroactively from the ownership discretion from the ownership receipt of certain representations and undertakings may exempt person prospectively or limits to any person whose ownership direct or indirect limits However our Board of Directors may not among other limitations grant an exemption limit would cause in excess of the 9.8% ownership us to fail to qualifi as REIT Consistent with our charter our Board of Directors has further limited such ownership of our stock other than by our Sponsor to no more than 5.25% in value of the aggregate of our outstanding shares of stock and not more than 5.25% in value or in number of shares whichever is more restrictive of any class or series of our shares of stock The ownership limits and the other restrictions on ownership and transfer of our stock contained in our charter may delay or prevent transaction or change of control that might involve premium price for our common stock or otherwise be in the best interest of our stockholders 25 Tax protection provisions on certain properties could limit our operating flexibility We have agreed with the Contributor an affiliate of our Sponsor to indemnify it against adverse tax consequences if we were to sell convey transfer the formation transactions or otherwise dispose of all or any portion of the interests taxable transaction However we can sell in in the continuing properties acquired by us in these properties in taxable transaction if we pay the Contributor cash in the amount of its tax liabilities apply until September best interest that we sell from the transaction and tax payments These tax protection provisions 2021 which is the tenth anniversary of the closing of our IPO Although it may be in our stockholders of these obligations We have property it may be economically for us to do so because disadvantageous arising also agreed to make debt available for the Contributor to guarantee We agreed to these provisions in order to assist the Contributor in preserving its tax position after its contribution of its interests in the continuing properties As result we may be required to incur and maintain more debt than we would otherwise We may pursue less vigorous enforcement of certain agreements because of conflicts and officers of interest wit/i certain of our directors Our principals and certain of our other executive officers and employees had indirect interests in all of the property subsidiaries that we acquired in the formation transactions which property subsidiaries entered into the contribution agreement and other agreements with us in connection with such acquisitions We may choose not to enforce or to enforce less vigorously our rights under these agreements due to our ongoing relationship with our principals and our other executive officers Tax consequences to holders of OP units upon sale or refinancing of our properties may cause the interests ofourprincipals to differ from the interests of our other stockholders As result of the unrealized built-in gain that may be attributable the Contributor contribution consequences including disproportionately some holders of OP units including than holders of our common stock upon the sale or refinancing of the properties owned by our operating partnership event As those holders greater allocations of items of taxable income and gain upon an affiliate of our Sponsor may experience realization different tax to one or more of the contributed properties at the time of will not receive correspondingly greater distribution of cash proceeds they may have different objectives regarding the appropriate pricing timing and other material terms of any sale or refinancing of certain properties or whether to sell or refinance such properties at all than those that would be in the best interests of our stockholders taken as whole Our Sponsor the Contributor and our principals will have sign jficant influence over our affairs Our Sponsor and its affiliates hold 31 2011 the an affiliate of our Sponsor owns 310000 OP units which are convertible into 310000 shares of our common stock of the shares of our common stock As of December percentage substantial Contributor our Manager which is wholly owned by our Sponsor owns 167400 shares of Managers Stock which will vest ratably in quarterly three-year period beginning on October 2011 ARCT an ARC-sponsored REIT whose shares are listed on installments over the NASDAQ Global Select Market chief executive officer owns 282000 for which Mr Schorsch is the chairman of the board and Mr Kahane is the president and shares of our common stock and our Sponsor owns 1629669 shares of our common stock As of December 312011 the Contributor owns approximately 4.1% of our outstanding common stock on ii our Manager owns approximately 2.2% of our outstanding common stock on approximately of our outstanding common stock on fully diluted basis If the Contributor exercises its redemption 3.7% of our outstanding common stock on fully diluted basis and iv our Sponsor owns approximately units and we issue common stock in exchange therefor and all of the restricted shares granted to our Manager vest our Sponsor its ownership through with ARCT will own collectively of our common stock affiliation with the Contributor ownership and control of our Manager and together approximately 31.3% for beneficial ownership purposes but not for purposes of the 8.0% ownership limitation of our Sponsor and its affiliates of our common stock on fully diluted basis In such an instance our Sponsor and ARCT will have influence over our affairs and could exercise such influence in manner that is not in the best interests of our other stockholders including by attempting to delay defer or prevent change of control transaction that might otherwise be in the best interests of our stockholders In addition two principals of ARC serve on our Board of Directors These indicia of control are in addition to the control our Sponsor our executive officers who also are members of our Sponsor and our principals will have over our affairs attributable to their direct and indirect ownership interests in our Manager 26 diluted basis fully diluted basis iii ARCT owns fully 1.3% rights with respect to its OP We are holding company with no direct operations As result we will rely on funds received from our operating partners hip to pay liabilities and dividends our stockholders claims will be structurally subordinated to all liabilities of our operating partnership the issuance of additional OP units and our stockholders will not have any voting rights with respect to our operating partnerships activities including We are holding company and will conduct all of our operations through our operating partnership We do not have apart from our ownership operating partnership to pay any dividends we might declare on shares of our common stock We will also from our operating partnership to meet any of our obligations of our operating partnership any independent result we will operations As including tax liability on taxable income allocated to us from our rely on distributions from our rely on distributions operating partnership which might make distributions to the company not equal to the tax on such allocated taxable income In addition because we are holding company stockholders claims will be structurally subordinated to all existing and future liabilities and obligations whether or not for borrowed money of our operating partnership and its subsidiaries Therefore in the event of our bankruptcy liquidation or reorganization claims of our stockholders will be satisfied only after all of our and our operating partnerships and its subsidiaries liabilities and obligations have been paid in full As ofDecember 312011 we owned approximately 95.9% ofthe OP units in our operating partnership However our operating partnership may issue additional OP units in the future Such issuances partnership Because our common stockholders will not directly respect to any such issuances or other partnership-level activities could reduce our ownership own any OP units they will not have of our operating partnership percentage in our operating any voting rights with Our Board of Directors may create and issue class or series of common orprefrrred stock without stockholder approval Our Board of Directors is empowered under our charter to amend our charter from time to time to increase or decrease the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue to and issue or reclassify designate our common stock or preferred stock without stockholder approval Our Board of Directors may determine conversion from time to time one or more classes or series of stock and to classify limitations as or other rights voting powers restrictions any unissued shares of the relative preferences to dividends or other distributions qualifications or terms or conditions of redemption of any class or series of stock issued As result we may issue series or classes of stock with voting rights rights to dividends or other rights senior to the rights of holders of our common stock The issuance of any such stock could also have the effect of delaying or preventing change of control transaction that might otherwise be in the best interests of our stockholders Certain provisions in the partnership agreement of our operating partnership may delay or prevent unsolicited acquisitions of us Provisions in the partnership agreement of our operating partnership may delay or make more difficult unsolicited acquisitions of us or changes in our control These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control although some stockholders might consider such proposals if made desirable These provisions include among others redemption rights of qualifying parties transfer restrictions on the OP units the ability of the general partner in some cases to amend the partnership agreement without the consent of the limited partners the right of the limited partners to consent to transfers of the general partnership interest of the general partner and mergers or consolidations of our company under specified limited circumstances and restrictions relating to our qualification as REIT under the Code Our charter and bylaws and delay defer or prevent transaction or the partnership agreement of our operating partnership also contain other provisions that may for our common stock or otherwise change of control that might involve premium price be in the best interest of our stockholders 27 Certain rights which are reserved to our stockholders may allow third parties to enter into business combinations with us that are not in the best interest of the stockholders without negotiating with our Board of Directors Certain provisions of the Maryland General Corporation Law or the MGCL may have the effect of requiring third party seeking to acquire us to negotiate with our Board of Directors including interested stockholder business combination provisions that subject between us and an defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of our company who at any time within the two-year period prior to the date in question was the beneficial owner of 10% or more of the voting power of our then outstanding stock or an affiliate of an interested an the most recent date on which the stockholder becomes to limitations prohibit certain business combinations stockholder for five years after interested stockholder and thereafter imposes special appraisal rights and stockholder supermajority voting requirements on these combinations and control share provisions that provide that control shares of our company with other shares controlled by the stockholder except solely by virtue of exercise one three of increasing ranges of voting defined as shares which when aggregated revocable proxy entitle the stockholder to power in electing directors acquired in control share acquisition defined as the direct or indirect acquisition of ownership or control of issued and outstanding control shares have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two- thirds of all the votes entitled to be cast on the matter excluding all interested shares As permitted by the MGCL our Board of Directors has by resolution exempted business combinations between us and any person provided who are not affiliates or associates of such person and that such business combination is first approved by our Board of Directors including majority of directors between us and our Sponsor our Manager our operating partnership or any of their respective affiliates Consequently the five-year prohibition and the supermajority vote requirements will not apply to such business combinations As result any person described above may be able to enter into business combinations with us that may not be in the best interest of our stockholders without compliance by us with the supermajority vote requirements and other provisions of the statute This resolution however may be altered or repealed in whole or in part at any time by our Board of Directors If this resolution is repealed or our Board of Directors does not otherwise approve business combination with other than our Sponsor our Manager person others from trying to acquire control of us and increase the difficulty our operating partnership or any oftheir respective affiliates the statute may discourage of consummating any offer Pursuant to provision in our bylaws we have opted out of the control share provisions of the MGCL However we may by amendment to our bylaws opt in to the control shares provisions of the MGCL in the future Additionally Title Subtitle of the MGCL permits our Board of Directors without stockholder approval and regardless of what is currently provided in our charter or bylaws to implement certain takeover defenses such as classified board some of which we do not yet have These provisions may have the effect of inhibiting for us or of delaying deferring or preventing in control of us under change third-party from making an acquisition proposal the circumstances that otherwise could provide our common stockholders with the opportunity to realize premium over the then current market price Our fiduciary duties as sole general partner of our operating partnership could create conflicts of interest We are the sole general partner of our operating partnership and as such will have fiduciary duties to our operating partnership and the limited partners in the operating partnership the discharge of which may conflict with the interests of our stockholders The limited partnership agreement by our directors to our company and the duties of our operating partnership provides that owed in the event of that we owe in our capacity as the sole general partner of our operating partnership between the duties conflict to such limited partners our directors are under no obligation to give priority to the interests of such limited partners In addition those persons holding OP units will have the right to vote on certain amendments to the limited partnership agreement which require approval by majority in interest of the limited partners including us and individually to approve certain amendments that would adversely affect their rights as well as the right to vote on mergers and consolidations of us in our capacity as sole general partner of the operating partnership in certain limited circumstances These voting rights may be exercised in manner that conflicts with the interests of our stockholders For example we cannot adversely affect the limited partners rights to receive distributions as set forth in the limited partnership agreement without their consent even though modifying such rights might be in the best interest of our stockholders generally 28 We have never operated as REIT and have only recently begun operating as public company and therefore we cannot assure you that we will successfully applicable to REITs and to public companies and profitably operate our business in compliance with the regulatory requirements We have not previously operated as REIT and have only operated as public company beginning the date of the closing of our IPO on September 2011 In addition certain members of our Board of Directors and certain of our executive officers have no experience in operating publicly-traded REIT that is traded on securities exchange We cannot assure you that we will be REIT or publicly-traded able to successfully operate our company meet disclosure requirements and complying with the Sarbanes-Oxley as company including satisfying the requirements to timely Act including implementing effective internal controls Failure to maintain our qualification as REIT or comply with other regulatory requirements would have an adverse effect on our business financial condition results of operations cash flow per share trading price of our common stock and ability to satisfy our debt service obligations and to make dividends to our stockholders Our Board of Directors may change sign jficant corporate policies without stockholder approvaL Our investment financing borrowing and dividend policies and our policies with respect to other activities debt capitalization and operations will be determined by our Board of Directors including growth These policies may be amended or revised at any time and from time to time at the discretion of the Board of Directors without vote of our stockholders In addition the Board of Directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements change in these policies could have an adverse effect on our business financial condition results of operations cash flow per share trading price of our common stock and ability to satisfy our debt service obligations and to make distributions to our stockholders We are highly dependent on information may in turn negatively affrct the market price of our common stock and our ability to pay dividends systems ofARC and systems failures could significantly disrupt our business which Our business is highly dependent on communications and information systems of ARC Any failure or interruption of ARCs systems could cause delays or other problems in our securities trading activities which could have material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders U.S Federal Income Tax Risks Ourfailure tax and would adversely affect our operations and the market price of our common stock to qualijj or remain qualified as REIT would subject us to U.S.frderal income tax and potentially state and local We elected to be qualified REIT commencing may terminate our REIT qualification if our Board of Directors to be taxed as with our taxable year ended December31 2011 However we REIT is in the best interests determines that not qualifying as of our stockholders or inadvertently Our qualification as REIT depends organizational dividend stockholder ownership and other requirements on upon our satisfaction income continuing basis We currently intend to structure of certain asset our activities in manner designed to satisfy all of the requirements for qualification as REIT However the REIT qualification requirements are extremely complex and interpretation of the U.S federal income tax laws governing qualification as REIT is limited Accordingly we cannot be certain that we will be successful in operating so we can qualify or remain qualified as REIT Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets some of which are not susceptible to with the REIT income or quarterly asset precise determination and for which we will not obtain independent appraisals Our compliance requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis Accordingly if certain of our operations were to be recharacterized by the Internal Revenue Service or IRS such recharacterization could jeopardize our ability to satisfy all of the requirements for qualification as REIT Furthermore future legislative judicial or administrative change to the U.S federal income tax laws could be applied retroactively which could result in our disqualification as REIT If we fail to qualify as REIT for any taxable year and we do not qualify for certain statutory relief provisions we will be subject to U.S federal income tax on our taxable income at corporate rates In addition we would generally be disqualified from treatment as REIT for the four taxable years following the year of losing our REIT qualification Losing our REIT qualification would reduce our net earnings available for investment or dividends to stockholders because of the additional tax liability In addition dividends to stockholders would no longer qualify for the dividends paid deduction and we would no longer be required to make dividends If this occurs we might be required to borrow funds or liquidate some investments in order to pay the applicable tax 29 Even we qualify as REIT in certain circumstances we may incur tax liabilities that would reduce our cash available for distribution to you Even if we qualify as REIT we may be subject to U.S federal state and local income taxes For example net income from the sale of properties that are dealer properties sold by REIT 100% tax We may not make sufficient capital gain we earn from the sale or other disposition of our property and pay U.S federal In that event our stockholders would be treated as if they earned that transaction prohibited income and paid the tax on it directly However stockholders income tax directly on such income dividends to avoid excise taxes applicable to REITs We also may decide to retain net under the Code will be subject to that are tax-exempt such as charities liability unless they file U.S federal or qualified pension plans would have no benefit income tax returns and thereon seek refund of such from their deemed payment of such tax We also may be subject to state tax and local taxes on our income or property including franchise payroll and transfer taxes either directly or at the level of our operating partnership or at the level of the other companies through which we indirectly own our assets such as TRSs which are subject to full U.S federal state local and foreign corporate-level income taxes Any taxes we pay directly or indirectly will reduce our cash available for distribution to you To qualify as REIT we must meet annual dividend requirements which mayforce or borrowfunds during unfavorable market conditions and reduce your overall return This could delay or hinder our ability to meet our investment objectives us to forgo otherwise attractive opportunities In order to qualify as REIT we must distribute annually to our stockholders does not equal net income as calculated in accordance with GAAP determined paid and excluding any net capital gain We will be subject to 4% nondeductible net capital gain and are less than the sum ofa 85% of our ordinary income income from prior years These requirements could cause to U.S federal us to distribute excise tax on any amount by which dividends we pay with respect to any calendar year 95% of our capital gain net income and 100% of our undistributed amounts that otherwise would be spent on investments at least 90% of our REIT taxable income which without regard to the deduction for dividends income tax on our undistributed taxable income and in real estate assets and it is possible that we might be required to borrow funds possibly at unfavorable rates or sell assets to fund these dividends Although we intend to make dividends sufficient U.S federal income and excise taxes on our earnings while we qualify as to meet the annual dividend requirements and to avoid REIT it is possible that we might not always be able to do so Certain of our business activities are potentially subject to the prohibited transaction tax which could reduce the return on your investment For so long as we qualify as REIT our ability to dispose of property during the first be restricted to substantial extent as result of our REIT qualification Under applicable provisions of few years following acquisition may the Code regarding prohibited transactions by REITs while we qualify as REIT we will be subject to 100% penalty tax on any gain recognized on the sale or other disposition of any property other than foreclosure property entity including our operating partnership but generally excluding our TRSs that that we own directly any subsidiary is deemed to be inventory or property held or through primarily for sale to customers in the ordinary course of trade or business Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of trade or business depends on the particular facts and circumstances surrounding each property While we qualify as that may otherwise be considered REIT we intend to avoid the 100% prohibited transaction tax by conducting activities prohibited transactions through TRS but such TRS will incur income taxes conducting our operations in such manner so that no sale or other disposition of an asset we own directly or through any subsidiary will be treated as prohibited transaction or structuring certain dispositions of our properties to comply with prohibited transaction safe harbor available under the Code for properties held for at least two years However despite our present intention no assurance can be given that any particular property we own directly or through any subsidiary entity including our operating partnership but generally excluding our TRSs will not be treated as inventory or property held primarily for sale to customers in the ordinary course of trade or business Our two vacant properties will be held in TRS because we are contemplating various strategies including selling them as means of maximizing our value from those properties Our TRSs are subject to corporate-level taxes and our dealings with our TRSs may be subject to 100% excise tax REIT may own up to 100% of the stock of one or more TRSs Both the subsidiary and the REIT must jointly elect to treat the subsidiary as TRS corporation of which TRS directly of the stock will automatically be treated as TRS Overall or securities of one or more TRSs or indirectly owns more than 35% of the voting power or value no more than 25% of the value of REITs assets may consist of stock 30 TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly including gross income from operations pursuant to management sale in the ordinary course of business or to hold assets or conduct by REIT contracts We may use TRSs generally to hold properties for REIT Our TRSs that we cannot conduct directly as activities will be subject to applicable U.S federal state local and foreign income tax on its taxable income In addition the rules which are applicable to us also impose on an arms-length basis 100% excise tax on certain transactions between TRS and its parent REIT that are not conducted If our operating partnership failed to qualify as partnership or was not otherwise disregarded for U.S ftderal income tax purposes we would cease to qualify as REIT We intend to maintain the status of our operating partnership as partnership or disregarded entity for U.S federal income tax purposes However if the IRS were to successfully challenge the status of our operating partnership as partnership or disregarded entity for such purposes it would be taxable as that our operating partnership could make to us This also would also result corporation In such event this would reduce the amount of dividends in our failing to qualify as REJT and becoming subject to corporate level tax on our income This substantially would reduce our cash available to pay dividends and the yield on your investment In addition owns its properties in whole or in part if any of the partnerships or limited liability companies through which our operating partnership partnership and is otherwise not disregarded for U.S federal loses its characterization as income tax purposes it would be subject to taxation as corporation thereby reducing Such recharacterization of an underlying property owner could also threaten our ability dividends to the operating partnership to maintain our REIT qualification We may choose to make dividends in our own stock excess of the cash dividends you receive in which case you may be required to pay U.S frderal income taxes in In connection with our qualification as REIT we are required to distribute REIT taxable income which does not equal net income as calculated in accordance with GAAP determined without this requirement we may distribute the deduction of each stockholder Under for dividends paid and excluding any net capital gain In order to satisfy and shares of our common stock at dividends that are payable the election in cash annually to our stockholders at least 90% of our regard to taxable IRS Revenue Procedure 2010-12 up to 90% of any such taxable dividend with respect to the taxable years ended on or before December 31 2011 could be payable in our common stock Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current or accumulated earnings and profits for U.S federal income tax purposes As excess of the cash dividends received Accordingly U.S stockholders result U.S stockholders may be required to pay U.S federal receiving shares received in such dividend or may be required to sell other stock or assets income taxes with respect to such dividends in dividend of our shares may be required to sell time that may be by them at owned disadvantageous in order to satisfy any tax imposed on such dividend If U.S stockholder sells the stock that it receives as dividend in order to pay this tax the sales proceeds may be less than the amount included in income with respect to the dividend on the market price of our stock at the time of the sale Furthermore with respect to certain non-U.S stockholders we depending may be required to withhold U.S tax with respect to such dividends including in respect of all or portion of such dividend that is payable in stock by withholding or disposing of part of the shares in such dividend and using the proceeds of such disposition to satisfy the withholding tax imposed In addition if significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends such sale may put downward pressure on the trading price of our common stock Further while Revenue Procedure 2010-12 applies only to taxable dividends payable by us in combination of cash and stock with respect to the taxable years ended on or before December 31 2011 and it is unclear whether and to what extent we will be able to pay taxable dividends in cash and stock in later years Moreover various tax aspects of such taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends including on retroactive basis or assert that the requirements for such taxable cash/stock dividends have not been met 31 The taxation of dividends to our stockholders can be complex however dividends that we make to our stockholders generally will be taxable as ordinary income Dividends that we make to our taxable stockholders out of current and accumulated earnings and profits and not designated as capital gain dividends or for tax years beginning before January 2013 qualified dividend income generally will be taxable as ordinary income However portion of our dividends may be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us be designated by us for before January taxable years beginning dividends we receive from our TRSs or 2013 as qualified dividend income generally to the extent they are attributable to constitute return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S federal income tax purposes return of capital is not taxable but has the effect of reducing the basis of stockholders investment in our common stock Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends The maximum tax rate applicable to qualified dividend income payable to U.S stockholders that are individuals trusts and estates has been reduced to 15% for tax years beginning before January 2013 Dividends payable by REITs however generally are not eligible for the reduced rates Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends which could adversely affect the value of the shares of REITs including our common stock If we were considered to actually or constructively pay preftrential dividend to certain of our stockholders our status as REIT could be adversely affected In order to qualify as REIT we must distribute annually to our stockholders at least 90% of our REIT taxable income which does not equal net income as calculated in accordance with GAAP determined paid and excluding net capital gain In order for dividends to be counted as satisfying without regard to the deduction for dividends the annual dividend requirements for REITs and to provide us with REIT-level tax deduction dividend if the dividend is pro rata among preferences among different classes of stock as set the dividends must not be preferential dividends Adividend is not apreferential class and in accordance with the all outstanding shares of stock within particular forth in our organizational documents Currently there is uncertainty as to the that REITs have with their stockholders could give rise to the inadvertent IRSs position regarding whether certain payment of preferential inadvertently causing arrangements dividend e.g the pricing methodology greater than 5% discount on the price of such for stock purchased under dividend reinvestment plan stock purchased There is no de minimis exception with respect to preferential we may be deemed to have determination is made if we were unable therefore if the IRS were to take the position that we inadvertently paid the 90% dividend test and our status dividend as REIT could be terminated for the year in which such failure While we believe that our operations have been structured in such to cure such dividends preferential failed manner that we will not be treated as inadvertently paying preferential dividends we can provide no assurance to this effect Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities The REIT provisions of the Code may limit our ability to hedge our liabilities Any income from hedging transaction we enter into to manage risk of interest rate changes price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets if properly gross income for purposes transactions the income from those transactions will income tests As of as non-qualifying result of these rules we may need to limit our use of advantageous likely be treated the 75% or 95% gross income tests To the extent that we enter into other types of hedging income for purposes of both of the gross hedging techniques or implement those identified under applicable Treasury Regulations does not constitute hedges through TRS This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains than we would otherwise want to bear In addition losses future taxable income of such TRS in or expose us to greater risks associated with changes in interest rates TRS generally will not provide any tax benefit except for being carried forward against 32 Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities To qualify as REIT we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter at least 75% of the value of our assets assets including certain mortgage loans and certain consists of cash cash items government securities and qualified REIT real estate kinds of mortgage-related securities The remainder of our investment in securities other than government securities and qualified real estate assets generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer In addition in general no more than 5% of the value of our assets other than government securities and qualified real estate assets can consist by securities of one or more TRSs If we fail of the securities of any one issuer and no more than 25% of the value of our total securities can be represented to comply with these requirements at the end of any calendar quarter we must correct the failure within 30 days after REIT qualification the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our and suffering adverse tax consequences As result we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as REIT These actions could have the effect of reducing our income and amounts available for dividend to our stockholders The ability of our Board of Directors to revoke our REIT qualification without stockholder approval may subject us to U.S federal income tax and reduce dividends to our stockholders Our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election without the approval of our stockholders if it determines that it is no longer in our best interest to continue to qualify as REIT While we elected to to be taxed as be qualified that qualifying as REIT is no longer in the best interests of our stockholders to U.S federal REIT we may not elect to be treated as REIT or may terminate our REIT election if we determine If we cease to be REIT we would become subject income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders which may have adverse consequences on our total return to our stockholders and on the market price of our common stock We may be subject flexibility and reduce the market price of our common stock to adverse legislative or regulatory tax changes that could increase our tax liability reduce our operating In recent years numerous legislative judicial and administrative changes have been made in the provisions of U.S federal income tax laws applicable to investments similarto an investment in shares of our common stock Additional changes to the tax laws are likely to continue to occur and we cannot assure you that any such changes will not adversely affect the taxation of stockholder Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets You are urged to consult with your tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative regulatory or administrative developments and proposals and their potential effect on an investment in our shares You also should note that our counsels tax opinion is based upon existing law applicable as of the date of its opinion all of which will be subject to change either prospectively or retroactively Although legislation would result REITs generally receive better in REIT having fewer tax treatment than entities taxed as regular corporations it is possible that future tax advantages and it could become more advantageous for company that invests in real estate to elect to be treated for U.S federal income tax purposes of Directors with the power under certain circumstances to revoke as corporation result our charter or otherwise terminate our REIT election As provides our Board and cause us to be taxed as regular corporation without the vote of our stockholders Our Board of Directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders 33 The share ownership restrictions of the Codefor REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities In order to qualify as REIT five or fewer individuals than 50% in value of our issued and outstanding shares of stock at any time during the last half of as defined in the Code may not own actually or constructively more taxable year other than the first year for which REIT election is made Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement Additionally at least 100 persons must beneficially own our shares of stock during at least 335 days of taxable year for each taxable year after December these tests among other purposes our charter restricts the acquisition and ownership 31 2011 To help insure that we meet of our shares of stock Our charter with certain exceptions authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as REIT while we so qualify Unless exempted by our Board of Directors for so long as we qualify as REIT our charter prohibits among other limitations on ownership and transfer of shares of our stock any person from beneficially or constructively owning applying certain attribution rules under the Code more than 9.8% in value of the aggregate of our outstanding shares of stock and not more than 9.8% in value or in number of shares whichever is more restrictive of any class or series of our shares of stock Our Board of Directors may not grant an exemption excess of the 9.8% ownership limit would result from these restrictions to any proposed transferee whose ownership in in the termination of our qualification as REIT Consistent with our charter our Board of Directors has further limited such ownership of our stock other than by our Sponsor to no more than 5.25% in value of the aggregate of our outstanding shares of stock and not more than 5.25% in value or in number of shares whichever is more restrictive of any class or series of our shares of stock These restrictions on transferability and ownership will not apply however if our Board of Directors determines it is no longer is no longer required in order for us to qualify as REIT in our best interest that with the restrictions to continue to qualify as REIT or that compliance These ownership limits could delay or prevent transaction or change in control that might involve premium price for our common stock or otherwise be in the best interest of the stockholders Non-U.S stockholders will be subject to U.S.federul withholding tax and may be subject to U.S.frderal income tax on dividends received from us and upon the disposition of our shares Subject to certain exceptions dividends received from us will be treated current or accumulated earnings and profits Such dividends ordinarily will be subject as dividends of ordinary income to the extent of our 30% rate or to U.S withholding tax at such lower rate as may be specified by an applicable income tax treaty unless the dividends are treated as effectively connected with the conduct by the non-U.S stockholder of U.S trade or business Pursuant Act of 1980 or FIRPTA capital gain dividends attributable to sales or exchanges generally will be taxed to non-U.S stockholder as if such gain were effectively to the Foreign Investment in Real Property Tax of U.S real property interests or USRPIs connected with U.S trade orbusiness However capital gain dividend will not be treated as effectively connected income if the dividend is received with respect to class is regularly traded on an established securities market States and of stock that does not own more than 5% of the class of our stock at any time during the one year period ending received We anticipate that our shares will be regularly traded on an established securities market located in the United the non-U.S stockholder on the date the dividend is for the foreseeable future although no assurance can be given that this will be the case Gain recognized by non-U.S stockholder upon the sale or exchange of our common stock generally will not be subject to U.S federal income taxation unless such stock constitutes USRPI under FIRPTA Our common stock will not constitute USRPI so long as we are domestically-controlled qualified investment entity domestically-controlled qualified investment entity includes indirectly REIT if at all by non-U.S stockholders We believe but cannot times during specified testing period less than 50% in value of such REITs stock is held directly or assure you that we will be domestically-controlled qualified investment entity and because our common stock will be publicly traded no assurance can be given that we will be domestically- controlled qualified investment entity Even if we do not qualify as domestically-controlled qualified investment entity at the time non-U.S stockholder sells or exchanges our common stock gain arising from such sale or exchange would not be subject to U.S taxation under FIRPTA as sale of USRPI if our common stock is regularly traded as defined by applicable Treasury securities market and such non-U.S stockholder owned actually and constructively time during the five-year period ending on the date of the sale See Material U.S Federal regulations on an established 5% or less of our common stock at any Income Tax Considerations Taxation of Non-U.S Stockholders Sale of Shares We encourage you to consult your tax advisor to determine the tax consequences applicable to you if you are non-U.S stockholder 34 Potential characterization of dividends or gain on sale may be treated as unrelated business taxable income to tax-exempt investors If we are pension-held REIT tax-exempt stockholder has incuned debt to purchase or hold our common stock or holder of common stock is certain type of tax-exempt stockholder dividends on and gains recognized on the sale of tax-exempt stockholder may be subject to U.S federal income tax as unrelated business taxable income common stock by such the Code under Item Properties General As of December 31 2011 we owned 90 properties including two vacant properties classified as held for sale located in 13 states 63 of the properties were contributed in conjunction with the completion of the IPO by our Contributor an affiliate of our Sponsor at amortized cost If these properties had been contributed at fair value the total base purchase price of the portfolio would be $148.6 million at December 31 2011 All of these properties are free standing single-tenant properties 99.3% leased with weighted average remaining lease term of 8.9 years as of December 31 2011 In the aggregate these properties represent 1.0 million rentable square feet The following table represents additional information about the properties we own at December 31 2011 dollar amounts in thousands Portfolio Rome Depot Citizens Bank Community Bank Dollar Genera Contribution or Acquisition Date Sep.2011 Sep.2011 Sep.2011 Nov 2011 Number of Properties 59 20 Advance Anto Nov Dcc 2011 Walgreens Total Portfo1io4 Dec 201 Square Feet 465.600 291.920 4.410 177 668 42 0X 14.414 Remaining Lease Term Base Purchase Price Capitalization Rate Annualized Rental Income Annualized Rental Income per Square Foot 17.9 6.2 4.6 7.6 7.8 9.8 8.9 23.398 95.241 705 9981 5122 2.425 136872 9.7% 7.1% 51o 9.7% 8.9% 0.1% 7.8% 2258 729 36 965 457 245 10.690 4.85 23.05 8.16 5.43 10.88 17.00 10.73 88 996012 Remaining lease term as of December 31 2011 in years If the portfolio has multiple locations with varying lease expirations remaining lease term is calculated on weighted-average basis Total remaining lease term is an average of the remaining lease term of the total portfolio Original purchase price of properties contributed excluding acquisition and transaction-related costs Acquisition and transaction-related costs include legal costs and closing costs on property Annualized rental income divided by base purchase price Total portfolio excludes two vacant properties contributed in September 2011 which were classified as held for sale at December 31 2011 The aggregate square footage and base purchase price of these vacant properties was 6800 and $2.9 million respectively 35 The following table details the industry distribution of our portfolio as of December 31 2011 dollars in thousands Industry No of Buildings Square Feet Square Foot Rental Income Rental Income Annualized Annualized 4taiL Home Maintenance Pharmaey Retail Banking coutR4ad Vacant 42000 465600 14414 296330 b77668 6800 0028L2 46.4% 29.5% 17.7% 0.7% 100 457 2258 245 6765 965 21.1% 63.3% 10690 1000% 60 90 The following table details the geographic distribution of our portfolio as of December 31 2011 dollars in thousands State No of Buildings Square Feet Square Foot Income Income Annualized Rental Annualized Rental ARKANSAS CONNECTICUT DELAWARE ILLINOIS MIcHIG MISSOURI EiP1flR NEW YORK OKLAHOMA SOUTH CAROLINA VERMONT Properly Financing .2i 15 11 10 Z72 5592 53255 1Q9914 132386 6872 56375 9030 2344 480014 l2492 90 1002812 7% 0.6% 5.3% 11.0% 13.2% 5.6% 0.9% 47.9% 12% 100.0% 128 124 9V 929 2501 739 i12 1059 48 418 2503 37 10690 2% 1.2% .0.9% 8.7% 23% 6.9% 10% 9.9% 16.8% 0.5% 23.4% 22% 100.0% On September 2011 we closed on $150.0 million senior secured revolving credit facility The OP is the borrower and the Company and the OPs subsidiaries are the guarantors under this facility The proceeds of loans made under the credit agreement may be used to finance the acquisition ofnet leased investment or non-investment grade occupied properties and for other permitted corporate purposes Up to $10.0 million of the facility is available for letter of credits The initial term of the credit agreement is 36 months Any loan made under the credit facility shall bear floating interest at per annum rates equal to the one month London Interbank Offered Rate LIBOR plus 2.15% to 2.90% depending on our loan to value ratio as specified in the agreement In the event of default the lender has the right to terminate its obligations under the credit agreement including the funding of future loans and to accelerate the payment on any unpaid principal amount of all outstanding loans The line of credit requires fee of 0.15% on the unused balance if amounts outstanding under the facility are 50% or more of the total facility amount and 0.25% on the unused balance if amounts outstanding under the facility are 50% or less of the total facility amount As of December 31 2011 there was $42.4 million outstanding on this facility which bore an interest rate of 3.17% As of December 31 2011 this facility was collateralized by 59 properties Availability of additional borrowings under this facility are based upon the availability of sufficient collateral among other factors At December 31 2011 based on the collateral available there was $53.0 million of maximum borrowing capacity under this facility with $10.6 million available and unused 36 Our mortgage notes payable consist of the following as of December 31 2011 dollar amounts in thousands December Encumbered Properties Outstandnig Loan Amount Weighted Effective Average Interest RateW Weighted Average Maturity2 28 30260 467% 432 Mortgage notes payable have fixed rates Effective interest rates range from 3.80% to 5.32% at December31 2011 Weighted average remaining years until maturity as of December 31 2011 Future Minimum Lease Payments The following table presents future minimum base rental cash payments due to us over the next ten years These amounts exclude contingent rent payments as applicable thresholds and increases in annual rent based that may be collected from certain certain economic indexes on exceeding tenants based on provisions related to sales among other items amounts in thousands 2012 2013 2014 2015 ifl6 2017 2018 2019 2021 Thereafter Future Minimum Base Rent Payments 10200 10400 1Q58 10717 10663 8552 6377 3509 3295 2996 98289 Future Lease Expirations The following is summary of lease expirations for the next ten years at the properties we own as of December 31 2011 dollar amounts in thousands Expiration Number of Leases Expiring Annualized Rental Annualized Rental Leased Square Feet Income Expiring Income Expiring Expiring Percent of Portfolio Percent of Portfolio Leased Square Feet Expiring 2013 2015 2016 2017 2019 2020 2021 27 18 24 193 2313 2691 566 .Tota1 .. 83 .. 8144 _________ 0.2 1.8% 1.6% 19.4% 25.2% 2.1% 729% 8169 45392 36504 138930 117775 05000 42414 494184 4.5% 3.6% 13.9% JL7% 10.5% 4.2% 492% The 83 leases listed above are with the following tenants Dollar General Advance Auto Community Bank Citizens Bank and Waigreens 37 Tenant Concentration The following table lists the tenants whose square footage or annualized rental income is greater than 10% of the total portfolio square footage or annualized rental income as of December 31 2011 Number of Properties Occupied by Tenant Square Feet as of Square Total Lease Feet Portfolio Expiration Average Remaining rerni Lease Annualized Income as Rental Renewal Options Rental Income of Total Portfolio Income per Square Foot Annualized Rental Annualized 465600 46.4% Nov 2029 17.9 Jan 2017- five year options Ito to to five 59 20 291.920 29.1o Jan 2019 6.2 year options 177668 17.7% Aug 2025 Mar 2014- Ito five year options 2258 6.729 1.1% 4.85 62.9% 23.05 965 9.0% 5.43 Tenant lome Det i/ens Bank Dollar General Remaining lease term in years as of December 31 2011 If the tenant has multiple leases with varying lease expirations remaining lease term is calculated on weighted-average basis Item Legal Proceedings As of the end of the period covered by this Annual Report on Form 10-K we are not party to and none of our properties are subject to any material pending legal proceedings Item Mine Safety Disclosures Not applicable 38 Item Market for Registrants Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information PART II Our common stock is currently traded on the NASDAQ Capital Markets below is line graph comparing the cumulative total stockholder exchange under return on our common stock the symbol ARCP Set forth based on the market price of the common stock and assuming Equity Index NAREIT and IPO and ending December 31 2011 reinvestment of dividends with the FTSE National Association of Real Estate Investment Trusts the SP 500 Index SP 500 for the period commencing September 2011 the date of our The graph assumes an investment of $100 on September 62011 Comparison to Cumulative Total Return tnvestor Returns ARCP .....5p 000 FT5E EPRA/NARET flee USO $125.00 $120.00 $115.00 $110.80 $105.88 $100.00 $ss.oo $90.00 $95.80 $80.00 $75.00 For each calendar quarter indicated the following table reflects respective high low and closing sales prices for the common stock as quoted by the the NASDAQ Capital Markets exchange and the dividends paid per share in each such period High Low Close third Quarter 2011 Fourth Quarter 2011 12.75 10.10 1.65 12.00 10.05 10.40 The dividends paid per share in the fourth quarter of 2011 is an annualized rate There were no dividends paid prior to the fourth quarter of 2011 The actual dividend paid per share in the fourth quarter of 2011 was $0.219 Holders As of March 2012 we had 7323434 shares of common stock outstanding held by 212 stockholders 39 Dividends On September 2011 we and the Board of Directors approved declared an annual dividend rate of $0.875 per share or an annual dividend rate of 7.00% based on the initial common stock price of $12.50 payable day of each month to stockholders of record at the close of business in cash monthly beginning in October on the eighth day of such month On 2011 on the fifteenth February 27 2012 our Board of Directors authorized and we declared on March 15 2012 we paid dividend of $0.0733 per share to stockholders of record at the close of business an annual dividend rate of $0.880 per share Accordingly 2012 on March Distribution payments are dependent on the availability of funds Our Board of Directors may reduce the amount of dividends paid or suspend dividend payments at any time and therefore dividend payments are not assured There were $1.5 million in dividends declared and $1.4 million in dividends paid in the fourth quarter of 2011 From tax perspective 100% of the dividends paid by us during the year ended December 31 2011 represent return of capital Accordingly such dividends are deferred for the purpose of being subject to income tax In January 2012 we paid monthly dividends of $0.5 million or $00729 March 2012 we paid monthly dividends of $0.5 million or $0.0733 per share of common stock 2012 and February per share of common stock In Share Based Compensation Plans Equity Plan We have adopted of stock options restricted the American Realty Capital Properties Inc Equity Plan the Equity Plan which provides for the grant stock units dividend equivalent rights and other equity-based awards shares of common stock restricted to the Manager non-executive directors officers and other employees and independent contractors including employees or directors of the Manager and its affiliates who are providing services to the Company Under the Equity Plan the Companys compensation committee is authorized to approve grants of equity-based awards to the Manager Concurrently with the closing of the IPO the Company granted equal to 3.0% of the number of shares of common stock sold through to the Manager the IPO This award of restricted 167400 restricted shares which is shares will vest ratably on quarterly basis over athree-year period beginning on October 12011 The Manager is entitled to receive distribution equivalents with respect to this restricted stock whether or not vested at the same time and in the same amounts as dividends are paid to the stockholders commencing on the first anniversary of the date of grant The Manager will defer any distributions payable to it in connection with the restricted stock that it is granted under the Equity Plan until such time as we are able to cover the payment of dividends to the stockholders based on the criteria in the agreement for the six immediately preceding months In addition to the restricted stock that was granted to the Manager concurrently with the completion of the IPO the Company may from time to time grant additional equity incentive awards to the Manager pursuant to the Equity Plan The Manager may in the future allocate portion of these awards or ownership or profits interests in it to officers or any other personnel of the Manager or other personnel of the Manager or its affiliates in order to provide incentive compensation to them The Company authorized and reserved total number of shares equal shares of common stock on fully diluted basis assuming the redemption time under the Equity Plan for equity incentive awards other than the initial to 10.0% of the total number of issued and outstanding of all OP Units for shares of common stock at any to the Manager All such awards of shares will grant vest ratably on an annual basis over three-year period beginning on the first anniversary of the date of grant and shall provide for distribution equivalents with respect to this restricted stock whether or not vested at the same time and in the same amounts as dividends are paid to the stockholders Director Stock Plan Concurrently with the closing of the IPO the Company granted 3000 restricted shares of common stock to each of the Companys three Stock Plan Awards of restricted independent directors each ofwhom is non-executive director pursuant to the Director Stock Plan the Director stock will vest ratably over five-year period following the first anniversary of the date of grant in increments of 20% per annum subject to the directors continued service on the Board of Directors of directors and shall provide for distribution equivalents with respect to this restricted stock whether or not vested at the same time and in the same amounts as dividends are paid to the stockholders At December 31 2011 total of 99000 shares of common stock are reserved for issuance under the Director Stock Plan As of December 31 2011 there were 9000 restricted shares issued to independent directors under the Director Stock Plan at fair value of $12.50 per share 40 Use of Proceeds from Sales of Registered Securities and Unregistered Sales of Equity Securities On July 2011 we commenced our IPO pursuant to registration statement on Form S-Il File No 333-172205 filed with the U.S Securities 2011 We sold share and Exchange Commission under the Securities Act of 1933 as amended Our IPO closed on September total of 5.6 million shares of common stock for net proceeds of $66.0 million at the initial price of $12.50 per On September 22 2011 we filed registration closed on the follow-on offering on November statement on Form S-il File No 333-176952 2011 We sold 1.5 million shares for net proceeds for follow-on offering We of $14.4 million In addition on November 2011 the underwriters exercised their option to purchase an additional 0.1 million shares which closed on November 72011 for net proceeds of $0.7 million The shares began trading on the NASDAQ Capital Market under proceeds of the IPO and the follow-on offering were contributed to our OP in exchange to pay down or retire indebtedness from the IPO to fund dividends to our stockholders to finance the acquisition proceeds and the symbol ARCP on September 2011 All of the net for OP Units Our OP utilized such net of properties We did not use any of the net proceeds Our affiliated Dealer Manager of commissions before reallowance received selling commissions from the sale of the Companys common stock through the IPO earned by participating broker-dealers The affiliated Dealer Manager re-allowed 100% of commissions earned to participating broker-dealers 3% of the gross offering proceeds before reallowance In addition the affiliated Dealer Manager received dealer manager fees of to participating broker-dealers The affiliated Dealer Manager was permitted to re-allow all or portion of its dealer manager fee to participating broker-dealers The following table details the results of such activities related to the affiliated Dealer Manager for the year ended December 31 2011 There were no dealer manager commissions paid during the period from December 2010 date of inception to December 31 2010 amounts in thousands Total commissions paid to affiliated Dealer Manager Less Commissions to participating broker dealers Reallowance to participating broker dealers Net to affiliated Dealer Man agerU Year Ended December 31 2011 4.002 2392 60 The affiliated Dealer Manager was responsible for commission payments due to its employees as well as its general overhead and various selling-related expenses In comiection with the formation transactions in connection with the IPO 310000 OP units with an aggregate value of $3.9 million were issued by the OP to ARC Real Estate Partners LLC in consideration of the transfer of its interests in the property subsidiaries to the OP on September 62011 ARC Real Estate Partners LLC is an accredited investor as defined under Regulation of the Securities Act The issuance of such OP units was effected in reliance upon an exemption Act and Rule 506 thereunder the Securities under certain Section 42 under Except limited circumstances from registration by provided the OP Units are exchangeable beginning September to-one basis The right to exchange 2012 for cash or at the option of the OP shares of the Companys common stock on one the OP Units for cash or at the option of the OP shares of the Companys common stock has no expiration date 41 Item Selected Financial Data The following selected financial data as of and for the year ended December 31 2011 and as of and for the period from December 2010 date of inception to December 31 2010 should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and Item Managements Discussion and Analysis of Financial Condition and Results of Operations below Balance sheet data amounts in thousands Total real estate investments at cost Tota assets Mortgage notes payable Senior secured revolving credit facility Total liabilities Total equity December 31 2011 20i0 136873 131581 30260 42407 74249 57332 279 279 42 Operating data amounts in thousands except share and per share data Period from December 2010 Date of to Inception December 31 2010 Year Ended December 31 2011 Revenues Rental income Operating expense reimbursements Total revenues Operating expenses Acquisition and transaction related Property operating General and administrative Depreciation and amortization Total operating expenses Operating loss Other income expenses Interest expense Other income Total other expenses Loss from continuing operations Net Net loss from continuing operations attributable to non-controlling interest loss from continuing operations attributable to stockholders Discontinued operations Loss from operations of held for sale properties Loss on held for sale properties Loss from discontinued operations Loss from discontinued operations attributable to non-controlling interest Loss from discontinued operations attributable to stockholders Net loss Net Net loss attributable to non-controlling interest loss attributable to stockholders Other data Cash flows provided by operations Cash flows used in investing activities Cash flows provided by financing activities Per share data Basic and diluted net loss per share from continuthg operations attributable to stockholders Basic and diluted net loss per share attributable to stockholders Annualized distributions declared per common share 3.022 153 3175 1875 153 440 1612 4.080 905 924 923 1828 69 .75 37 815 852 36 816 2680 105 575 920 17528 19756 0.86 1.26 0.875 Weighted-average number of common shares outstanding basic and diluted 2045320 1000 NA means not applicable 43 Item Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the accompanying financial statements ofAmerican Realty Capital Properties Inc and the notes thereto As used herein the terms we our and us refer to American Realty to ARC Properties Operating Partnership L.P the Capital Properties Inc Maryland corporation and as required by context Delaware limited partnership and ARC Properties Advisors LLC the Manager LLC formerly American Realty Capital II LLC the Sponsor its subsidiaries American Realty Capital Properties by Delaware limited liability company wholly owned subsidiary of AR Capital Inc is externally managed Overview We were incorporated on December trust REIT for U.S federal an initial public offering IPO on 2010 as Maryland corporation that elected to be qualified income tax purposes for the taxable year ended December reasonable best efforts basis through investment 312011 On July 72011 we commenced real estate as our co-dealer managers RCS and Ladenburg on Form S-Il File No 333-172205 statement Thalmann Co Inc together the Dealer Managers pursuant to registration the Registration Statement filed with the U.S Securities and Exchange Commission the SEC under the Securities Act of as amended 1933 of $66.0 million The shares began trading on the NASDAQ Capital Market under The IPO closed on September 2011 We sold total of 5.6 million shares of common stock for net proceeds the symbol ARCP on September 2011 On September 22 2011 we filed registration statement on Form S-Il File No 333-176952 to register an additional 1.3 million shares of common stock which was subsequently increased to 1.5 million shares plus up to an additional 0.2 million shares ofcommon stock registered in respect of the underwriters on offering the Follow-On Offering The Follow-On Offering closed on November net proceeds of$ 14.4 million In addition on November 2011 the underwriters exercised their option to purchase an additional over-allotment option in connection with an underwritten follow- 2011 We sold 1.5 million shares for 0.1 million shares which closed on November 2011 for net proceeds of $0.7 million We were formed to primarily own and acquire single-tenant freestanding commercial real estate that is net leased on medium- term basis primarily to investment grade credit rated and other creditworthy tenants Substantially all of our business is conducted limited partnership We are the sole general partner and holder of 95.9% of the interest limited partner and owner of 4.1% of the interest period of one year holders of OP Units have of our common stock or at the option of the OP corresponding through ARC Properties Operating right the to convert OP Units for the cash value of in the OP After holding units of limited partner interests OP Units for number of shares of our common stock as allowed by the limited corresponding number of shares Partnership L.P the OP Delaware in the OP The Contributor is the sole partnership agreement of the OP The remaining rights of the holders of OP Units are limited however and do not include the ability to replace the general partner or to approve the sale purchase or refinancing of the OPs assets We are managed by our affiliates ARC Properties Advisors LLC the Manager and AR Capital LLC formerly known as services to us These American Realty Capital II LLC the Sponsor The Sponsor provides certain acquisition and debt capital related parties including the Manager the Sponsor and RCS have received compensation and fees for services provided to us and will continue to receive compensation and fees and for investing financing and management services provided to us At the completion of the IPO ARC Real Estate Partners LLC the Contributor an affiliate of the Sponsor contributed ownership to the OP its indirect 59 properties that are presently leased to RBS Citizens Bank N.A and Citizens Bank of Pennsylvania or collectively Citizens Bank one property presently leased to Community Bank N.A or Community Bank and one property presently leased to Home Depot U.S.A Inc or Home Depot and in ARC Income Properties LLC and ARC Income Properties III LLC which include in exchange for 310000 OP Units See Note two vacant properties Organization interests in the accompanying consolidated financial statements for additional information about our formation transactions As of December 312011 we owned 90 properties including two vacant properties classified as held for sale with 1.0 million square feet 99.3% leased with committed to diversification weighted average remaining lease term of 8.9 years In constructing our portfolio we are industry tenant and geography As of December 31 2011 rental revenues derived from investment grade tenants as rated by major rating agency approximated 91.0% Our strategy encompasses receiving the majority of our revenue from investment grade tenants as we further acquire properties and enter into or assume medium-term lease arrangements 44 Significant Accounting Estimates and Critical Accounting Policies Set forth below is summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our fmancial 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 result these estimates are subject to degree of uncertainty These significant accounting estimates include Revenue Recognition Upon the acquisition of real estate certain properties may have leases where minimum rent payments increase during the term of the lease We will record rental revenue for the full term of each lease on straight-line basis When we acquire property the term of existing leases will be considered to commence as of the acquisition date for the purposes of this calculation Cost recoveries from tenants will be included in tenant reimbursement income in the period the related costs are incurred as applicable Our revenues which will be derived primarily from rental income include rents that each tenant pays in accordance with the terms of each lease reported on straight-line basis over the initial term of the lease Since many leases will provide for rental increases at specified intervals straight-line basis accounting requires us to record receivable and include in revenues unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease We will defer the revenue related to lease payments received from tenants in advance of their due dates We will review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenants 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 as applicable In the event is in doubt we will record an increase in the allowance for uncollectible or record accounts that the collectability of receivable direct write-off of the receivable in the statement of operations Real Estate Investments Upon the real estate depreciable assets We will consider the period of future benefit of the asset of properties we will record acquired acquisition at cost and make assessments as to the useful lives of to determine the appropriate useful lives Depreciation will be computed using the straight-line method over the estimated useful lives of forty years for buildings fifteen years for land improvements seven years for building fixtures and improvements and the lesser of the useful life or remaining lease term for acquired intangible lease assets Allocation of Purchase Price ofAcquiredAssets Upon the acquisition of real properties it is our policy to allocate the purchase price of properties to acquired tangible assets consisting of land building fixtures and tenant and landlord improvements and identified intangible lease assets and liabilities consisting of the value of above-market and below-market leases as applicable the value of in-place leases and the value of tenant relationships based in each case on their fair values We utilize independent appraisals and information management obtains on each property as result of pre-acquisition due diligence as well as subsequent marketing and leasing activities as applicable to determine the fair values of the tangible assets of an acquired property amongst other market data The fair values of above-market and below-market in-place lease values are recorded based on the present value using an interest rate which reflects the risks associated with the leases acquired of the difference between the contractual amounts to be paid pursuant to the in-place leases and an estimate of fair market lease rates for the corresponding in-place leases which is generally obtained from independent appraisals measured over period equal to the remaining non-cancelable term of the lease The above-market and below-market lease values are capitalized as intangible lease assets or liabilities The capitalized above market lease intangibles are amortized as decrease to rental income over the remaining term of the lease The capitalized below market lease intangibles are amortized as an increase to rental income over the remaining term of the lease In determining the amortization period for below-market lease intangibles we initially consider and periodically evaluate on quarterly basis the likelihood that tenant will execute the renewal option The likelihood that lessee will execute the renewal option is determined by taking into consideration the tenants 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 45 The fair values of in-place leases include direct costs associated with obtaining new tenant opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease and tenant relationships Direct costs associated with obtaining new tenant include commissions tenant improvements and other direct costs and are estimated based on independent appraisals and managements consideration of current market costs to execute similar lease The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over market absorption period for similarlease Customer relationships are valued based on expected renewal of lease or the likelihood of obtaining particular tenant for other locations These intangibles are included in intangible lease assets in the accompanying consolidated balance sheet and are amortized to depreciation and amortization component of operating expense over the remaining term of the lease The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates rental growth rates discount rates and other variables The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations which could impact the amount of our reported net income Initial purchase price allocations are subject to change until all information is finalized which is generally within one year of the acquisition date Derivative Instruments We may use derivative financial instruments to hedge all or portion of the interest rate risk associated with our borrowings Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets The principal objective of such agreements is to minimize the risks or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions We will record all derivatives on the balance depends on the intended use of the derivative sheet at fair value The accounting whether we have elected to designate for changes in the fair value of derivatives derivative in hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting Derivatives designated and qualifying as hedge ofthe exposure to changes in the fair value of an asset liability or firm commitment attributable to particular risk such as interest rate risk are considered fair value hedges Derivatives designated and qualifying as hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges Derivatives may also be designated as hedges of the foreign currency exposure of net investment in foreign operation Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in fair value hedge or the earnings effect of the hedged forecasted transactions in cash flow hedge We may enter into derivative contracts that are intended to economically hedge certain risks even though hedge accounting does not apply or we elect not to apply hedge accounting Recently Issued Accounting Pronouncements Recently issued accounting pronouncements are described in Note to our consolidated financial statements Results of Operations We commenced operations in September 2011 in conjunction with the closing of our IPO Prior to that date we did not hold any real estate properties or have any sources of income or any expenses The only activity of the company was limited to organizational activities Year Ended December 31 2011 As of December 31 2011 we owned 88 properties with an aggregate original base purchase price of $136.9 million and two additional vacant properties that were classified as held for sale In total the properties comprised 1.0 million square feet which were 99.3% leased The annualized rental income per square foot of the properties at December 31 2011 was $10.66 with weighted average remaining lease term of 8.9 years As of December 31 2010 we did not own any properties we were in the developmental state of operations and we had no income or expenses for the period from December 2010 date of inception to December 31 2010 Rental Income Rental income for the year ended of December 31 2011 was approximately $3.0 million Rental income was driven by our acquisitions during the year ended December 31 2011 46 Operating Expense Reimbursements crating expense reimbursements for the year ended of December 31 2011 were $0.2 million Operating expense reimbursements represent reimbursements for taxes property maintenance and other charges contractually due from tenants per their respective lease agreements Acquisition and Transaction Related Costs Acquisition and transaction related costs for the year ended December 312011 were $1.9 million Acquisition and transaction related costs mainly consist of legal costs deed transfer costs and other costs related to real estate purchase transactions Property Expenses Property expenses for the year ended December 31 2011 were $0.2 million and are mainly real estate taxes ground lease rent insurance and repairs and maintenance expenses General and Administrative Expenses General and administrative expenses for the year ended December 312011 of $0.4 million primarily included board member compensation insurance expense and professional fees Depreciation andAmortization Expense Depreciation and amortization expense for the year ended December 31 2011 was $1.6 million The properties acquired were placed into service upon contribution or acquisition and are being depreciated for the period held Interest Expense Interest expense for the year ended December 31 2011 was $0.9 million primarily related to mortgage notes payable of $30.3 million and senior secured revolving line of credit of $42.4 million Our interest expense in future periods will vary based on our level of future borrowings which will depend on the level of proceeds raised the cost of borrowings and the opportunity to acquire real estate assets which meet our investment objectives Other Income Other income for the year ended December 31 2011 was $1000 Other income represents interest earnings from short-term investments Discontinued Operations In November 2011 we decided to pursue strategy to sell two vacant properties As such the properties are classified as held for sale on the balance sheet and the results of operations of these two entities are reported in discontinued operations on the statements of operations Property expenses for the year ended December 31 2011 were $37000 and were primarily utilities landscaping real estate taxes and other costs to maintain the properties Unrealized impairments on held for sale properties for the year ended December 312011 were $0.8 million Unrealized impairments on held for sale properties are the difference between the carrying value of the property at the time the property is classified as held for sale and estimated proceeds from the sale of the properties less estimated selling costs Cash Flows for the Year Ended December 31 2011 During the year ended December 312011 net cash provided by operating activities was $0.9 million The level of cash flows used in or provided by operating activities is affected by acquisition and transaction costs the timing of interest payments and the amount of borrowings outstanding during the period as well as the receipt of scheduled rent payments Cash flows provided by operating activities during the year ended December 31 2011 was mainly due to net loss adjusted for non-cash items of $0.1 million an increase in deferred rent of $0.7 million and an increase of $0.4 million in accounts payable and accrued expenses partially offset by an increase in prepaid and other assets of $0.3 million 47 Net cash used in investing activities for the year ended December 31 2011 was $17.5 million related to properties acquired during the year Net cash provided by financing activities of $19.8 million during the year ended December 31 2011 related to proceeds from the issuance of common stock of $21.8 million $16.4 million of proceeds from mortgage notes payable and $2.1 million of proceeds from our senior secured revolving credit facility These inflows were partially offset by $11.2 million of payments on our senior secured revolving credit facility payments of $5.3 million related to offering costs and payments related to financing costs of $2.5 million Liquidity and Capital Resources In September 2011 we sold total of 5.6 million shares of common stock with our IPO The shares began trading on the NASDAQ Capital Market under obtained our first 63 properties from our Contributor and commenced for net proceeds the symbol ARCP on September 2011 We real estate operations in September2011 As ofDecember 31 base purchase price of$ 136.9 million and two additional vacant properties of $66.0 million in connection 2011 we owned 88 properties with an aggregate original that were classified as held for sale On September 22 2011 we filed registration statement on Form S-il File No 333-176952 to register an additional 1.3 million shares of common stock which was subsequently increased to 1.5 million shares plus up to an additional 0.2 million shares of common stock that registered for an underwriters over-allotment option in connection with an underwritten follow-on offering the Follow-On Offering The Follow-On Offering closed on November 2011 We sold 1.5 million shares for net proceeds of $14.4 million In addition on November 2011 the underwriters exercised their option to purchase an additional 0.1 million shares which closed on November 2011 for net proceeds of $0.7 million Our principal demands for funds will continue to be for property acquisitions either directly or through investment interests for the payment of operating expenses dividends to our investors and for the payment of principal indebtedness for property acquisitions will be met through Generally cash needs on our outstanding from the sale of common stock through and interest proceeds follow-on offerings and through mortgage financing We may also from time to time enter into other agreements with third parties whereby third parties will make equity investments in specific properties or groups of properties that we acquire We expect to meet our future short-term operating liquidity requirements through combination of net cash provided by our current property operations and the operations of properties to be acquired in the future The majority of our long-term triple net leases contain contractual rent escalations during the primary term of the lease Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders proceeds from private offerings proceeds from the sale of properties and undistributed funds from operations Acquisitions Our Manager evaluates potential acquisitions of real estate and real estate-related assets and engages in negotiations with sellers and borrowers on our behalf Investors should be aware that after purchase contract is executed that contains specific terms the property will not be purchased until During this period we may decide to temporarily that could yield lower than the properties returns the successful completion ofdue diligence and negotiation of final binding agreements invest any unused proceeds from common stock offerings in certain investments These lower returns may affect our ability to make distributions Generally capital needs for property acquisitions from the sale of common stock from time to time net proceeds and through borrowings We may also from time to time enter into other agreements with third parties whereby third parties will make equity investments specific properties or groups of properties that we acquire will be met through received in Funds from Operations and Adjusted Funds from Operations Due to certain unique operating characteristics of real estate companies as discussed below the National Association of Real Estate Investment FF0 which we believe to be an appropriate supplemental measure to reflect Trusts Inc NAREIT an industry trade group has promulgated measure known as funds from operations of REIT The use of the operating performance FF0 is recommended by the REIT industry as supplemental performance measure FF0 is not equivalent to our net income or of America GAAP loss as determined under accounting principals generally accepted in the United States 48 We define FF0 Board of Governors non-GAAP measure consistent with the standards established by the White Paper on FF0 approved by the 2004 the White Paper The White Paper defines FF0 as net income revised in February of NAREIT as or loss computed in accordance with GAAP excluding gains or losses writedowns plus depreciation and amortization after adjustments from sales of property but including asset impairment for unconsolidated partnerships and joint ventures Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FF0 Our FF0 calculation complies with NAREITs policy described above The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements which implies that the value of real estate assets diminishes predictably overtime especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed We believe that since real estate values historically rise and fall with market conditions including inflation interest rates the business cycle unemployment and consumer spending presentations of operating results for REIT using historical accounting for depreciation may be less informative Historical accounting for real estate involves the use of GAAP Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies believe that the use of FF0 which excludes the impact of real estate of real estate valuation found in GAAP Nevertheless related depreciation and amortization provides we more complete understanding of our performance to investors and to management and when compared year over year reflects the interest impact on our operations from trends in occupancy costs which may not be immediately AFFO as described below should not be construed calculating net income or in its applicability apparent rates rental rates operating costs general and administrative expenses and from net income However FF0 and adjusted funds from operations to be more relevant or accurate than the current GAAP methodology in in evaluating our operating performance The method utilized to evaluate the value and performance of real estate under GAAP should be construed as more relevant measure of operational performance and considered more prominently and AFFO than the non-GAAP FF0 and AFFO measures and the adjustments to GAAP in calculating FF0 We consider funds from operations or FF0 and FF0 as adjusted to exclude acquisition-related fees and expenses or AFFO useful indicators of the performance of REIT Because FF0 calculations exclude such factors as depreciation and amortization of real estate assets and gains or losses from sales of operating real estate assets which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates they facilitate comparisons of operating performance GAAP implicitly between periods and between other REITs in our peer group Accounting for real estate assets in accordance with assumes that the value of real estate assets diminishes predictably over time Since real estate values have historically risen or fallen with market conditions many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves Additionally we believe that AFFO by excluding acquisition-related managements analysis of the operating performance fees and expenses provides information consistent with of the properties By providing AFFO we believe we are presenting useful of our operating performance Further we believe information that assists investors and analysts to better assess the sustainability AFFO is useful of our operating performance in comparing the sustainability with the sustainability of the operating performance of other real estate companies including exchange-traded and non-traded REITs As result we believe that understanding of our performance the use of FF0 and AFFO together with the required GAAP presentations provide more complete to our peers and more informed and appropriate basis on which to make decisions relative involving operating financing and investing activities FF0 and AFFO are non-GAAP financial measures and do not represent net income as defined by GAAP FF0 and AFFO do not represent cash flows from operations as defined by GAAP are not indicative of cash available to fund all cash flow needs and liquidity including our ability to pay distributions and should not be considered as alternatives to net income as determined in accordance with GAAP for purposes of evaluating our operating performance Other REITs may not define FF0 in accordance with the current National Association of Real Estate Investment Trusts or NAREIT definition as we do or may interpret the calculate AFFO differently than we do Consequently our presentation current NAREIT definition of FF0 and AFFO may not be comparable to other similarly than we do and/or differently titled measures presented by other REITs 49 The below table reflects the items deducted or added to net loss in our calculation of FF0 and AFFO for the three months ended September 30 2011 periods therefore we do not present FF0 or AFFO for prior periods Items are presented net of non-controlling where applicable in thousands We had no significant and December 31 2011 property income or expenses in prior interest portions Net loss attributable to stockholders in accordance with GAAP Loss from discontinued operations Depreciation and amortization FF0 Acquisition fees and transaction related expenses Non-cash equity compensation expense AFFO Dividends Three Months Ended September 30 2011 December 31 2011 634 l925 343 283 570 287 808 1.195 78 1231 182 1491 The amount of dividends payable to our stockholders is determined by our Board of Directors and is dependent on number of factors including funds available for dividends financial condition capital expenditure requirements as applicable and annual dividend requirements needed to qualifr and maintain our status as REIT under the Internal Revenue Code the Code Operating cash flows are expected to increase as additional properties are acquired in our investment portfolio We our Board of Directors and Manager share similar philosophy with respect to paying our dividends The dividends should principally be derived from cash flows generated from real estate operations In order to improve our operating cash flows and our ability to pay dividends from operating cash flows our Manager agreed to waive certain fees including asset management and incentive fees Our Manager has elected to waive its base asset management fee and incentive asset management fee if applicable and will determine if portion or all of such fees will be waived in subsequent periods on quarter-to-quarter basis Base asset management fees waived during the year ended December 31 2011 were $0.2 million there were no incentive asset management fees for the year ended December 31 2011 The fees that were waived relating to the activity during 2011 are not deferrals and accordingly will not be paid Because our Manager waived certain fees that we owed cash flow from operations that would have been paid to our Manager was available to pay dividends to our stockholders See Note Related Party Transactions and Arrangements in the consolidated financial statements elsewhere in this report for further information on fees paid to and forgiven by our Manager The management agreement with our Manager by us in respect of our OP units the dividends declared amount of our AFFO Our Manager will waive such portion of its management for the six immediately to the waiver of the management fee would increase our AFFO so that provides for payment of the asset management fee only if the full amount of preceding months is equal to or greater than the fee that when added to our AFFO without regard it equals the dividends declared by us in respect of our OP of this determination FF0 as adjusted is FF0 as defined by National Association expenses which is deducted in computing FF0 and iii include acquisition fees and related if any which is deducted stock grant amortization units for the prior six months For purposes of Real Estate Investment Trusts or NAREIT adjusted to in computing FF0 ii include non-cash restricted include impairments of real estate related investments if any including properties loans receivable and equity and debt investments which are deducted in computing FF0 Our Manager will determine if such fees will be partially or fully waived in subsequent periods on quarter-to-quarter basis In addition pursuant to our administrative support agreement with our Sponsor our Sponsor has agreed to pay or reimburse us for certain of our general and administrative costs to the extent that the amount of our dividends declared during the one year the amount of our AFFO in order that such dividends to not exceed the amount period following the closing of this offering exceed of our AFFO computed without regard to such general and administrative costs paid for or reimbursed by our Sponsor As our real estate portfolio matures we expect cash flows from operations to continue to cover our dividends As the cash flows from operations become more significant our Manager may discontinue its past practice of forgiving fees and may charge the entire fee in accordance with the agreements with our Manager There can be no assurance that our Manager will continue to waive asset management or incentive fees in the future 50 The following table shows the sources for the payment of dividends to common stockholders for the three months ended December 31 2011 the initial quarter that dividends were paid dollars in thousands Dwdent1aid in ca4 Source of dividends Ca flis rovi byppttons Proceeds from financing 1otal sources of dtviclendsr Net loss attributable to stockholders in accordance with GAAP Dividends Percentage of Dividends 10 677 773 1Du 1925 46 7% 53.3% 400M /a Dividends paid from cash provided by operations are derived from cash flows from operations GAAP basis for the three months ended December 31 2011 Such results include $1.0 million in one-time acquisition and transaction related costs Loan Obligations The payment terms of our loan obligations vary In general only interest amounts are payable monthly with all unpaid principal and interest due at maturity Some of our loan agreements stipulate that we comply with specific reporting and financial covenants mainly related to debt coverage that must be met As of December 31 2011 we were in compliance ratios with the debt covenants under our loan agreements and loan to value ratios Each loan that has these requirements has specific ratio thresholds As of December 31 2011 we had non-recourse mortgage indebtedness secured by real estate of $30.3 million Our mortgage indebtedness bore interest at weighted average rate of 4.67% per annum and had weighted average maturity of 4.32 years We may in the future incur additional mortgage debt on the properties we currently own or use long-term non-recourse financing to acquire additional properties in the future On September 2011 we closed on $150.0 million senior secured revolving credit facility The OP is the borrower and the Company and the OPs subsidiaries are the guarantors under this facility The proceeds of loans made under the credit agreement may be used to finance the acquisition corporate purposes Up to $10.0 million of the ofnet leased investment or non-investment grade occupied properties and for other permitted facility is available for letters of credit The initial term of the credit agreement is 36 months Any loan made under the credit facility shall bear floating interest at per annum rates equal to the one month London Interbank Offered Rate LIBOR plus 2.15% to 2.90% depending on our loan to value ratio as specified in the agreement In the event of default the lender has the right to terminate its obligations under the credit agreement including the funding of future loans and to accelerate the payment on any unpaid principal amount of all outstanding loans The line of credit requires fee of 0.15% on the unused balance if amounts outstanding under unused balance if amounts outstanding under the facility the facility are 50% or more of the are 50% or less of the total facility amount total facility amount and 0.25% on the As of December 31 2011 there was $42.4 million outstanding on this facility which bore an interest rate of 3.17% As of December 31 2011 this facility was collateralized based upon the availability of sufficient collateral by 59 properties Availability among other factors At December of additional borrowings under this facility are 31 2011 based on the collateral available there was $53.0 million of maximum borrowing capacity under this facility with $10.6 million available and unused As of December 31 2011 we had aggregate indebtedness secured by real estate of $72.7 million which collateralized 87 properties At December 31 2011 our corporate leverage ratio total mortgage notes payable plus outstanding advances under our senior secured revolving credit facility less on-hand cash and cash equivalents divided by base purchase price of acquired properties was 49.7% 51 Contractual Obligations The following is summary of our contractual obligations as of December 31 2011 in thousands Ptrncipal payuts duei Iges pyabIe Interest payments due on mortgage notes payable 3O260 5947 27s 255 4470 Total 2012 20132014 20152016 Thereafter Interest payments due on senior secured revolving lines of credit Election as REIT We elected to be qualified to be taxed as REIT under Sections 856 through 860 of the Code effective for our taxable year ended December 31 2011 Shares of our common stock are subject to restrictions on ownership and transfer that are intended among other purposes to assist us in qualifying and maintaining our qualification as REIT Our charter subject to certain exceptions limits ownership to no more than 9.8% in value of the aggregate of our outstanding shares of stock and not more than 9.8% in value or in number of shares whichever is more restrictive of any class or series of our shares of stock Consistent with our charter our Board of Directors has increased such ownership limits as they apply to our Sponsor and its affiliates to no more than 28.0% to be verified with legal and has further limited the ownership limits as they apply to everyone else to no more than 5.25% in value of the aggregate of our outstanding shares of stock and in value or in number of shares whichever is more restrictive of any class or series of our shares of stock We believe that commencing with the taxable year ended December 31 2011 we are organized and operate in such manner as to qualify for taxation as REIT under the Code We intend to continue to operate in such manner to qualify for taxation as REIT but no assurance can be given that we will operate in manner so as to qualify or remain qualified as REIT If we continue to qualify for taxation as REIT we generally will not be subject to federal corporate income tax to the extent we distribute our REIT taxable income to our stockholders and so long as we distribute at least 90% of our REIT taxable income REITs are subject to number of other organizational and operational to certain subject income We believe we are organized state and local taxes on our income and property and operating in such requirements Even if we qualify for taxation as REIT we may be income and excise taxes on our undistributed manner as to qualify to be taxed as REIT for the taxable year ended federal and December31 2011 Inflation We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions In addition our net leases may require the tenant to pay its allocable share of operating expenses including common area maintenance costs real estate taxes and insurance This may reduce our exposure to increases in costs and operating expenses resulting from inflation Related-Party Transactions and Agreements We have entered into agreements with affiliates whereby we pay certain fees or reimbursements to our Manager or its affiliates for acquisition fees and expenses organization and offering costs sales commissions dealer manager fees asset management fees and reimbursement of operating costs See Note Related Party Transactions and Arrangements in our financial statements included in this report for discussion of the various related-party transactions agreements and fees Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have 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 52 as swaps instruments We would Item 7A 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 market risk arises primarily from interest rate risk relating to variable-rate borrowings To meet our short and long-term liquidity requirements we borrow funds at combination of fixed and variable rates Our interest rate risk management objectives are to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs To achieve these objectives from time to time we may enter into interest rate hedge contracts such collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt not hold or issue these derivative contracts for trading or speculative purposes We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations As of December 31 2011 our debt included fixed-rate debt with carrying value of $30.3 million and fair value of $30.6 million Changes in market interest rates on our fixed rate debt impact fair value of the debt but they have no impact on interest 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 debt to decrease the same way the price of 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 December 31 2011 levels with all other variables held constant 100 basis point increase in market interest rates would result in decrease in the fair value of our fixed rate debt by approximately $1.3 million 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $1.3 million As of December 31 2011 our debt included variable-rate debt with carrying value of $42.4 million The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from their December 31 2011 levels with all other variables held constant 100 basis point increase or decrease in variable interest rates on our variable-rate notes payable would increase or decrease our interest expense by $0.4 million annually These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs and assume no other changes in our capital structure Item Financial Statements and Supplementary Data The information required by Item is hereby on page F-i of this Annual Report of Form 10-K incorporated by reference to our Consolidated Financial Statements beginning Item Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None Item 9A Controls and Procedures Disclosure Controls and Procedures In accordance with Rules 3a-i 5b and 5d- 15b of the Exchange Act management with the participation of our Chief Executive Officer and ChiefFinancial Officer has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 3a- 15e and 5d- 15e of the Exchange Act as of the end of the period covered by this Annual Report on Form 10-K Based on such evaluation our Chief Executive Officer and Chief Financial Officer have concluded as of the end of such period that our disclosure controls and procedures are effective in recording processing summarizing and reporting on timely basis information required to be disclosed by us in our reports that we file or submit under the Exchange Act 53 Internal Control Over Financial Reporting Managements AnnualReporting on Internal Controls over Financial Reporting Our management term is defined in Rule is responsible for establishing and maintaining adequate internal control over financial reporting as such 3a- 151 or 5d-1 5f promulgated under the Exchange Act In connection with the preparation of our Form 10-K our management assessed the effectiveness of our internal control over financial reporting as of December 31 2011 In making that assessment management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission COSO in Internal Control Integrated Framework Based on its assessment our management concluded that as ofDecember 312011 our internal control over financial reporting was effective The rules of the SEC do not require and this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting Changes in Internal Control Over Financial Reporting During the fourth quarter of fiscal year ended December 31 2011 there were no changes 3a- 151 and Sd-I 51 of the Exchange Act that have materially affected or are reasonably control over in our internal financial likely reporting as defined in Rule to materially affect our internal control over financial reporting Item 9B Other Information None 54 Item 10 Directors Executive Officers and Corporate Governance PART III We have adopted Code of Ethics that applies to all of our executive officers and directors including but not limited to our principal executive officer and principal financial officer written request to our executive office 405 Park Avenue copy of our Code of Ethics may be obtained free of charge by sending 15th Floor New York NY 10022 Attention Chief Financial Officer The other information required by this Item is incorporated by reference to our annual proxy statement for the fiscal year ended December 31 2011 the Proxy Statement Item 11 Executive Compensation The information required by this Item is incorporated by reference to our Proxy Statement Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated by reference to our Proxy Statement Item 13 Certain Relationships and Related Transactions and Director Independence The information required by this Item is incorporated by reference to our Proxy Statement Item 14 Principal Accounting Fees and Services The information required by this Item is incorporated by reference to our Proxy Statement 55 Item 15 Exhibits and Financial Statement Schedules PART IV Financial Statement Schedules See the Index to Consolidated Financial Statements at page F-i of this report The following financial statement schedule is included herein at page F-26 of this report Schedule III Real Estate and Accumulated Depreciation The following documents are filed as part of this annual report EXHIBIT INDEX Exhibit No Description i5 Articles of Amendment and Restatement of American Realty Capital Properties Inc 3j 4.1 10.i Bylaws of American Realty Capital Properties Inc Amended and Restated Agreement of Limited Partnership of ARC Properties Operating Partnership Management L.P and ARC Properties Advisors LLC Agreement among American Realty Capital Properties Inc ARC Properties Operating Partnership 0.2 Acquisition and Capital Services Aecment between American Realty Capital Properties Inc and American Really Capital IT LLC American Realty Capital Properties Inc Equity Plan 10.4 American Realty Capital Properties Inc Director Stock Plan Restricted Stock Award Agreement for Non-Exccutvc Directors Restricted Stock Award Agreement for ARC Properties AdvIsors LI 10.7 Registration Rights Agreement among American Realty Capital Properties and ARC Properties Advisors LLC Inc ARC Real Estate Partners LLC Assignment and Assumption of Membership Interests between ARC Real Estate Partners LLC and ARC Properties Operating Partnership L.P Protection Agreement between American Really Capital Properties Partnership L.P and ARC Real Estate Partners LLC Inc ARC Properties Operating Right of Partnership L.P Agreement between ARC Real Estate Partners LLC and ARC Properties Operating Form of Indemnification Agreement between American Realty Capital Properties Inc and its directors executive officers and 10.1 32 10.142 10.152 Triple Net Lease Agreement Home Depot U.S.A Inc dated as of May 15 2009 by and between US Real Estate Limited Partnership and First Amendment to Triple Net Lease Agreement LLC and Home Depot U.S.A Inc dated as of March 12010 by and between ARC HDCOLSC0OI Assignment and Assumption of Lease dated November Partnership and ARC HDCOLSCOOI LLC 2009 by and between US Real Estate Limited 56 10.1 10.172 Mortgage Assignment of Leases and Rents and Security Agreement between ARC HDCOLSCOOI LLC and US Real Fstate Limited Partnership dated as of November 2009 by and Promissoty Note dated November Limited Partnership 2009 made by ARC HDcOLScOO1 LLC for the benefit of US Real Estate 10.1 82 Bill of Sale delivered as of November 2009 by US Real Estate Limited Partnership 10.1921 10.202 Limited Guaranty Real Estate Limited Partnership dated as of November 2009 made by American Realty Capital LLC for the benefit of US Administrative Properties Inc Support Agreement between American Realty Capital II LLC and American Realty Capital Parent Guaranty Agreement RBS Citizens N.A dated as of Environmental indemnity Agreement Inc ARC Properties Operating Partnership L.P and dated as of September each of its subsidiaries 2011 among American Realty Capital Properties and RBS Citizens N.A ication cuthe or 15d-14a as adopted pursuant to Section Company pursuant 302 of the Sarbanes-Oxley to Securities Exchange Act Rule l3a-14 Aet of 2002 filed herewith 1.2 Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14 or l5d-I4a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith 32 101 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 filed herewith XBRL feXtensible Business Reporting Properties Inc.s Annual Report Balance Sheets ii the Consolidated Consolidated hanges in Equity iv the consolidated Statements of Cash Flows and Statements in Rule 406T of Regulation S-T this information As provided on Form 10-K for the year ended December Statements of Operations 31 2011 formatted in XBRL ithe iii the Consolidated the Notes to Consolidated is furnished and not filed for puiose of Financial Statement of Language The following materials from American Realty Capital Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 Filed herewith Previously Securities filed with Form S-il Registration Statement Registration No 333-172205 and Exchange Commission on February 11 2011 filed by the Registrant with the Previously filed with the Pre-effective Amendment No to Form S-il Registration Statement Registration No 333-172205 filed by the Registrant with the Securities and Exchange Commission on March 25 2011 Previously filed with the Pre-effective Amendment No to Form S-Il Registration Statement Registration No 333-172205 filed by the Registrant with the Securities and Exchange Commission on May 27 2011 Previously filed with the Pre-effective Amendment No to Form S-Il Registration Statement Registration No 333-172205 filed by the Registrant with the Securities and Exchange Commission on June 13 2011 Previously filed with the Pre-effective Amendment No to Form S-Il Registration Statement Registration No 333-172205 Previously filed with Form S-Il Registration Statement Registration No 333-176952 filed by the Registrant with the Securities and Exchange Commission on July 52011 filed by the Registrant with the Securities and Exchange Commission on September 22 2011 57 SIGNATURES Pursuant to the requirements of Section 13 or 15d of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized this 19th day of March 2012 AMERICAN REALTY CAPITAL PROPERTIES INC By /s/ NICHOLAS SCHORSCH NICHOLAS CHIEF EXECUTIVE OFFICER AND CHAIRMAN SCHORSCH OF THE BOARD OF DIRECTORS Pursuant to the requirements of the Securities Exchange Act of 1934 as amended this annual report on Form 10- has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated Name Is Nicholas Schorsch Nicholas Schorsch Capacity Chief Executive Officer and Chairman of the Board of Directors and Principal Executive Officer Date March 19 2012 /5/ Edward Weil Jr Chief Operating Officer President and Secretary March 19 2012 Edward Weil Jr Is Brian Block Brian Block Chief Financial Officer and Executive and Principal Financial Officer and Principal Accounting Officer Vice President March 19 2012 Is Dr Walter Lomax Jr Independent Director March 19 2012 Dr Walter Lomax Jr Is David Gong David Gong Independent Director March 19 2012 /sI Edward Rendell Independent Director March 19 2012 Edward Rendell 58 Page F-5 F-7 INDEX TO CONSOLIDATED FiNANCIAL STATEMENTS Financial Statements Report of Jndpendnt Regiered Pune Consolidated Balance Sheets ointing1rm as of December 31 2011 and 2010 Consolidated Statement of Changes in Equity for the Year Ended December 31 2011 and the Period from December 2010 date of inception to December 31 2010 Notes to Consolidated Financial Statements F-i REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors American Realty Capital Properties Inc We have audited the accompanying consolidated balance sheets of American Realty Capital Properties Inc and subsidiaries the Company as of December and cash 31 2011 flows for the year ended December and 2010 and the related consolidated statements of operations changes in equity 31 2011 and the period from December 2010 date of inception to December 31 2010 Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15a These financial statements and the financial statement schedule are the responsibility of the Companys management our audits Our responsibility is to express an opinion on these financial statements and financial statement schedule based on We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board United States Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement The Company is not required to have nor were we engaged to perform an audit of its internal control over financial reporting Our audit included consideration of internal control over financial reporting as basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting Accordingly we express no such opinion An audit also includes examining on test basis evidence supporting the amounts and disclosures in the financial statements assessing the accounting used and significant principles We believe that our audits provide reasonable basis for our opinion estimates made by management as well as evaluating the overall financial statement presentation In our opinion the consolidated financial statements refened to above present fairly in all material respects the financial position of American Realty Capital Properties Inc and subsidiaries as of December 31 2011 and 2010 and the results of their operations and their cash flows for the year ended December 31 2011 and the period from December 2010 date of inception to December 31 2010 in conformity with accounting principles generally accepted in the United States of America Also in our opinion the related financial statement schedule when considered in relation to the basic consolidated financial statements taken as whole presents fairly in all material respects the information set forth therein Is GRANT THORNTON LLP Philadelphia Pennsylvania March 192012 F-2 December 31 2011 2010 18489 107340 11044 136873 14841 122032 3148 1798 2785 1818 131581 30260 42407 858 724 74249 73 57582 4025 53630 3.702 57332 131581 279 279 279 279 __________________ 279 AMERICAN REALTY CAPITAL PROPERTIES INC CONSOLIDATED BALANCE ShEETS In thousands except for share and per share data ASSETS Real estate investments at cost Land Buildings fixtures and improvements Acquired intangible lease assets Total real estate investments at cost Less accumulated depreciation and amortition Total real estate investments net Cash and cash equivalents Prepaid expenses and other assets Deferred costs net Assets held for sale net Total assets LIABILITIES AND EQUITY Mortgage notes payable Senior secured revolving credit facility Accounts payable and accrued expenses Deferred rent Total liabilities Common stock $0.01 par value 240000000 and 10000 shares authorized 7323434 and 1000 shares issued and outstanding at December31 December respectively 31 2010 2011 and Additional paid-in capital Accumulated deficit Total stockholders equity Non-controlling interest Total equity Tolal liabilities and equity The accompanying note.s are an integral part of these statements F-3 AMERICAN REALTY CAPITAL PROPERTIES INC CONSOLIDATED STATEMENTS OF OPERATIONS In thousands except for per share data Period from December 2010 Date Inception December 2010 of to 31 Year Ended December 31 2011 Revenues Rental income Operating expense reimbursements Total revenues Operating expenses Acquisition and transaction related Properly operating General and administrative Depreciation and amortization Total operating expenses Operating loss Other income iexpenses Interest expense Other income Total other expenses Loss from continuing operations Net loss from continuing operations attributable to non-controlling interest Net loss from continuing operations attributable to stockholders Discontinued operations Loss from operations of held for sale properties Loss on held for sale properties Loss from discontinued operations Loss from discontinued operations attributable to noncontrolling interest Loss from discontinued operations attributable to stockholders Net loss Net loss attributable to non-controlling interest Net loss attributable to stockholders Basic and diluted net loss per share from continuing operations attributable to stockholders Basic and diluted net loss per share attributable to stockholders The accompanying notes are an integrcil part of these clcitements F-4 3022 153 3j75 1875 153 440 1612 4080 905 924 923 1828 69 1759 37 815 852 36 816 2.680 105 2.575 0.86 1.26 AMERICAN REALTY CAPITAL PROPERTIES INC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY In thousands except for share data Common Stock Number of Shares Par Value Additional Paid-In Capital Total Stock- Non- Accumulated Deficit holders Equity Confrolling Interests Total Equity Balance December 2010 Issuances of common stock BalanceDecember3L2OlO Issuance of common stock net of 1.000 I3 recissions 7146034 71 83860 Offering COStS commissions and dealer manager fees Share based compensanon 176 400 Distributions declared Contribution transaction Contributions from non-controlling interest holder Distributions to noncontrolling interest holder Net loss 5.812 180 16 771 3875 Balance December 31 2011 7323434 73 57582 S39J 5812 182 1450 16.771 3875 2575 53630 1450 2575 4025 83931 5.812 182 1450 1677 68 2680 57332 3875 68 105 3702 The accompanying notes are an integral part of this statement F-5 AMERICAN REALTY CAPITAL PROPERTIES INC CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands Period from December 22010 Year Ended December 31 2011 Date of Inception to Uccember3l 2010 Cash flows from operating activities Net loss Adlustments to reconcile net loss to net cash provided by operating activities Depreciation Amortization of intangible lease assets Amortization of deferred costs Loss on held for sale properties Share based compensation Changes in assets and liabilities Prepaid expenses and other assets Accounts payable and accrued expenses Deferred rent Net cash provided by operating activities Cash flows from in%esting activities Investments in real estate Net cash used in investing activities Cash flows from financing activities Proceeds om mortgage notes payable Proceeds from senior secured revolving credit facility Payments on senior secured revolving credit facility Proceeds from issuances of common stock Payments of offering costs and fees related to stock issuances Payments of deferred financing costs Distributions to noncontrolling interest holder Distributions paid Net cash provided by financing activities Net change in cash and cash equivalents Cash and cash equialents beginning of period Cash and cash equivalents end of period Supplemental Disclosures Cash paid for interest Non-Cash Investing and Financing Acth4ties Initial proceeds from senior secured revolving credit fiwility used to pay down mortgages assumed in Formation Transactions Mortgage note payable contributed in Formation Transactions Reclassification of deferred offering costs The accompanying notes are an integral part qtthese ctatements F-6 1465 159 195 15 182 314 374 724 920 17528 17528 16410 2066 1159 21766 5346 2.464 68 1449 9756 3148 3148 590 51500 13850 279 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Note Organization American Realty Capital Properties that elected to be qualified as real estate investment Inc the Company incorporated on December 2010 is Maryland corporation trust REIT for U.S federal its initial public offering the IPO on reasonable best income tax purposes for the taxable year ended December 31 2011 On July 2011 the Company commenced efforts basis through Ladenburg Thalmann its co-dealer managers Realty Capital Securities LLC RCS or the affiliated Dealer Manager Co Inc together the Dealer Managers statement registration pursuant to 333-172205 the Registration Statement filed with the U.S Securities and Exchange Commission and on Form S-il File No the SEC under the Securities Act of 1933 as amended The IPO closed on September 2011 The Company sold total of 5.6 million shares of common stock ARCP on September 2011 for net proceeds of $66.0 million The shares began trading on the NASDAQ Capital Market under the symbol On September 22 2011 the Company filed registration statement on Form S-li File No 333-176952 to register additional 1.3 million shares of common stock which was subsequently increased to 1.5 million plus up to an additional an 0.2 million shares ofcommon stock that the Company could issue and sell upon the exercise of the underwriters over-allotment option in connection with an underwritten follow-on offering the Follow-On Offering On November 2011 the Company sold 1.5 million shares for net proceeds of $14.4 million In addition the Company granted the underwriters an additional 0.2 million shares of common stock at the original offering price less underwriting 30 day option to purchase discounts and commissions On November 2011 the underwriters exercised their option to purchase an additional 0.1 million shares which closed on November 2011 for net proceeds of $0.7 million The Company was formed to primarily own and acquire single-tenant freestanding commercial real estate that is net leased on medium-term basis primarily to investment grade credit rated and other creditworthy tenants The Company considers properties that are net leased on medium-term basis to mean properties originally leased long-term ten years or longer that currently have net leases with remaining lease terms of generally three to eight years on average Substantially all of the Companys business is conducted through ARC Properties Operating Delaware limited partnership The Company is the sole general partner and holder of 95.9% of the interest Estate Partners LLC the Contributor is the sole limited partner and owner of 4.1% of the interest of limited partner interests OP Units for period of one year holders of OP Units have the right Partnership L.P the OP in the OP ARC Real in the OP After holding units to convert OP Units for the cash value of corresponding number of shares of the Companys common stock or at the option of the OP corresponding number of shares of the Companys common stock holders of OP Units are limited however purchase or refinancing of the OPs assets as allowed by the limited partnership agreement The remaining rights of the and do not include the ability to replace the general partner or to approve the sale The Company has retained ARC Properties Advisors LLC the Manager formerly American Realty Capital II LLC the Sponsor as well as RCS have compensation received for services provided to manage its affairs on wholly owned subsidiary of AR Capital LLC day to day basis These affiliated parties to the Company and will continue to receive compensation for providing on-going investment oversight and management of the Company Formation Transactions At the completion of the IPO the Contributor an affiliate of the Sponsor contributed to the OP its indirect ownership interests in certain assets of ARC Income Properties LLC and ARC Income Properties III LLC the Contributed Companies Assets contributed included 59 properties that are presently leased to RBS Citizens Bank N.A and Citizens Bank of Pennsylvania or collectively Citizens Bank one property presently leased to Community Bank N.A or Community Bank and leased to Home Depot U.S.A Inc or Home Depot and one property two vacant properties Additionally the OP assumed certain liabilities notes secured and $96.2 million of mortgage including $30.6 million of unsecured notes payable of the Contributed Companies by the contributed properties F-7 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Because the contribution was from an affiliate of the Sponsor and deemed to be transaction between entities under common control the assets and liabilities were recorded by the Company at the Contributors carrying amount or book value at the time of the contribution The assets and liabilities of the Contributed Companies are summarized as follows amounts in thousands Assets and liabilities of Contributed Companies at carrover basis Real estate investments net of accumWated depreciation and amortization of $13453 Other assets Notes payabId Mortgage notes payable Other liabilities Net assets liabilities of Contributed Companies 108759 2402 30626 96472 834 16771 Notes payable were repaid from the proceeds of the IPO concurrently with closing $82.6 million of mortgage notes payable were refinanced with new $51.5 million revolving credit facility and the remaining balance was repaid from the proceeds of the IPO concurrently with closing of the IPO In exchange non-controlling for the net assets of the Contributed Companies in the OP After holding the OP Units for interest the Contributor received 310000 OP Units which represents period of one year the Contributor has the right to convert OP Units for the cash value of corresponding number of shares of common stock or at the option of the OP corresponding number of shares of common stock 310000 OP Units represented as allowed by the limited partnership agreement of the OP As of December 31 2011 the Contributors 4.1% interest in the OP based on 310000 OP Units convertible to common stock as percentage of the 7.6 million of total common shares outstanding on fully diluted basis For the year ended December 31 2011 losses of approximately $0.1 million were allocated to the Contributors non-controlling interest Concurrently with the completion of the IPO and contribution of the net assets of the Contributed Companies the Company closed on $150.0 million senior secured revolving credit facility See Note Senior Secured Revolving Credit Facility The Company refinanced mortgage notes payable of $82.6 million and repaid the unsecured notes payable of $30.6 million along with interest and penalties of $0.4 million owed by the Contributed Companies directly from net proceeds from the IPO and $51.5 million drawn from the senior secured revolving credit facility In addition the Company has issued restricted stock to the Manager and non-executive directors in conjunction with share- based compensation plans See Note 11 Share-Based Compensation Note Summary of Significant Accounting Policies Basis ofAccounting The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America U.S GAAP Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries All intercompany accounts and transactions have been eliminated in consolidation In determining whether the Company has controlling financial interest in 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 variable interest entity for which the Company is the primary beneficiary F-8 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Use of Estin ales The preparation of financial statements in conformity with U.S GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period Actual results could differ from those estimates Management makes significant estimates regarding revenue recognition to record investments in real estate and derivative financial instruments and hedging activities as applicable Formation Transactions Upon the effectiveness of the IPO the Company acquired certain properties from affiliated entities of the Company The contribution of the properties from affiliates in the initial formation of the Company was accounted for as reorganization of entities under common control and therefore all assets and liabilities related to the contributed properties were accounted for on the carryover basis of accounting whereby the real estate and liabilities of the predecessor became assets entities and liabilities of the Company investments were contributed at amortized cost and all assets Real Estate Investments The Company records acquired real estate at cost and makes assessments as to the useful lives of depreciable assets The Company considers the period offuture benefit of the asset to determine the appropriate useful lives Depreciation is computed using straight-line method over the estimated useful life of 40 years for buildings five to 15 years for building fixtures and improvements and the remaining lease term for acquired intangible lease assets Impairment of Long LivedAssets Operations related to properties that have been sold or properties that are intended to be sold are presented as discontinued operations in the statement of operations for all periods presented and properties intended to be sold are designated as held for sale on the balance sheet When circumstances indicate the carrying value of property may not be recoverable the Company reviews the asset for impairment This review is based on an estimate of the future undiscounted cash flows excluding interest charges expected to result from the propertys 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 Jf impairment exists due to the inability to recover the carrying value of 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 assets These assessments have direct impact on net income because recording an unrealized impairment results in an immediate negative adjustment to net income At December 31 2011 the Company had two vacant properties classified as properties held for sale See Note 13 Discontinued Operations and Properties Held for Sale Impairment of $0.8 million was recorded on these properties for the year ended December 31 2011 to mark the assets to their aggregate fair value of $1.8 million Allocation of Purchase Price ofAcquiredAssets The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values Tangible assets include land buildings equipment and tenant improvements on an as- if vacant basis The Company utilizes various estimates processes value Estimates of value are made using customary methods and information to determine the as-if vacant property including data from appraisals comparable sales discounted cash flow analysis and other methods Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates the value of in-place leases and the value of customer relationships Amounts allocated to land buildings equipment and fixtures are based on cost segregation studies performed by independent third-parties or on the Companys analysis of comparable properties in its portfolio Depreciation is computed using the straight-line method over the estimated lives of forty years for buildings five to ten years for building equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements F-9 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant Factors considered by the Company in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property taking into account current market conditions and costs to execute similar leases in estimating carrying costs the Company includes real estate taxes insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period which typically ranges from six to 18 months The Company also estimates costs to execute similar leases including leasing commissions legal and other related expenses Above-market and below-market in-place lease values for owned properties are recorded based On the present value using an interest rate which reflects the risks associated with the leases acquired of the difference between the contractual amounts to be paid pursuant to the in-place leases and managements estimate of fair market lease rates for the corresponding in-place leases measured over period equal to the remaining non-cancelable term of the lease The capitalized above-market lease intangibles are amortized as decrease to rental income over the remaining term of the lease The capitalized below-market lease values will be amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases in determining the amortization period for below-market lease intangibles the Company initially will consider and periodically evaluate on quarterly basis the likelihood that lessee will execute the renewal option The likelihood that lessee will execute the renewal option is determined by taking into consideration the tenants payment history the financial condition of the tenant business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located The aggregate value of intangibles assets related to customer relationship is measured based of the specific characteristics of each tenants lease and the Companys overall relationship on the Companys evaluation with the tenant Characteristics considered by the company in determining these values relationships with the tenant growth prospects for developing include the nature and extent of the Companys existing business and new business with the tenant the tenants credit quality expectations of lease renewals among other factors The value of in-place leases is amortized to expense over the initial term of the respective leases which range primarily from to 20 years The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases but in no event does the amortization period for intangible assets exceed the remaining depreciable life ofthe building If tenant terminates its lease the unamortizedportion of the in-place lease value and customer relationship intangibles is charged to expense In making estimates of fair values for purposes of allocating purchase price The Company utilizes number of sources including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data The Company also considers information obtained about each property as result of its pre acquisition due diligence as well as subsequent marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed The allocations presented in the accompanying consolidated balance sheets are substantially complete however there are certain items that receives additional information Accordingly these allocations are subject the Company will to revision when final finalize once the Company information is available although the Company does not expect future revisions to have significant impact on the Companys financial position or results of operations Intangible assets consist of the following as of December 312011 The Company had no intangible assets at December 31 2010 amounts in thousands Intangible lease assets In-place leases gross Accumulated amortization on in-place leases In-place leases net of accumulated amortization 11044 3197 7847 F-i AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FD4ANCIAL STATEMENTS December 31 2011 The following table provides the weighted-average amortization period as of December 31 2011 for intangible assets and the projected amortization expense for the next five years amounts in thousands Weighted- Average Amortization Period in Years 2012 2013 2014 2015 2016 10.6 937 943 917 860 725 In-place leases Total to be included in depreciation and amortization expense Cash and Cash Equivalents Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less The Company deposits cash with high quality Insurance Company FDIC up to an insurance had deposits of $3.1 million of which $2.7 million were in excess of the amount insured by the FDIC Although the Company bears risk to amounts in excess of those insured by the FDIC it does not anticipate These deposits are guaranteed by the Federal Deposit 31 2011 limit At December the company institutions result financial as any losses Deferred Costs Net Deferred costs net consists of deferred financing costs net of accumulated amortization deferred leasing costs net of accumulated amortization and deferred offering costs Deferred financing costs represent commitment fees legal fees and other costs associated with obtaining commitments for financing These costs are amortized over the terms of the respective financing agreements using the effective interest method Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined the financing will not close At December 312011 the Company had $2.5 million of deferred financing costs net of accumulated amortization The Company had no deferred financing costs at December 31 2010 Deferred leasing costs consisting primarily of lease commissions and payments made to assume existing leases are deferred and amortized over the term of the lease At December costs The Company had no deferred leasing costs at December 31 2011 the Company had $0.3 million of deferred leasing 31 2010 Deferred offering costs connection with registering relating to the IPO totaled costs relating offering costs fees fees paid to various regulatory agencies incurred in represent professional to sell shares of the Companys common stock As of December31 2010 deferred offering costs $0.3 million On September 2011 the day the Company closed its IPO the deferred offering equity As of December 31 2011 the Company had no deferred to stockholders and other costs to the IPO were reclassified Derivative Instruments The Company may use derivative financial instruments to hedge all or portion of the interest rate risk associated with its borrowings Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets The principal objective of such agreements is to minimize the risks and/or costs associated with the Companys operating and financial structure as well as to hedge specific anticipated transactions F-il AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 The Company records all derivatives on the balance sheet at fair value The accounting for changes in the fair value of derivatives depends on the intended use of the derivative whether the Company has elected to designate derivative in hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting Derivatives designated and qualifying as hedge of the exposure to changes in the fair value of an asset liability or firm commitment attributable to particular risk such as interest rate risk are considered fair value hedges Derivatives designated and qualifying as hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges Derivatives may also be designated as hedges of the foreign currency exposure of net investment in foreign operation Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in fair value hedge or the earnings effect of the hedged forecasted transactions in cash flow hedge The Company may enter into derivative contracts that are intended to economically hedge certain of its risk even though hedge accounting does not apply or the Company elects not to apply hedge accounting The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and qualifies for hedge accounting treatment If the Company elects not to apply hedge accounting treatment any changes in the fair value of these derivative instruments is recognized immediately in gains losses on derivative instruments in the consolidated statement of operations If the derivative is designated and qualifies for hedge accounting treatment the change in the estimated fair value of the derivative is recorded in other comprehensive income loss to the extent that it is effective Any ineffective portion of derivatives change in fair value will be immediately recognized in earnings Revenue Recognition Upon the acquisition of real estate certain properties will have term of the lease The Company will record rental revenue for the full leases where minimum rent payments increase during the basis When the term of each lease on straight-line Company acquires property the term of existing leases is considered to commence of this calculation Cost recoveries from tenants are included in tenant reimbursement as of the acquisition date for the purposes income in the period the related costs are incurred as applicable The Companys revenues which are derived primarily from rental with the terms of each lease reported on straight-line basis over income include rents tenant pays in accordance the initial term of the lease Since many of the leases provide that each for rental increases at specified intervals straight-line basis accounting requires the Company to record receivable and include in revenues unbilled rent receivables that the Company will only receive ifthe tenant makes all rent payments required through the expiration of the initial term of the lease The Company defers the revenue related to lease payments received from tenants in advance of their due dates The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenants payment history the financial industry in which the tenant operates and economic conditions in the area in which the property is located In the event the collectability condition of the tenant business record an increase in the allowance receivable is in doubt the Company will of for uncollectible accounts conditions in the that or record direct write-off of the receivable in the consolidated statements of operations Organization Offe ring and Related Costs Organization offering and related costs include costs stock These costs include but are not limited to incurred in connection with the Companys issuance of common printing mailing and filing fees ii escrow related legal accounting fees and iiireimbursement to the Dealer Manager for amount they paid to reimburse the bonified due diligence expenses of broker-dealers Share-Based Compensation The Company has stock-based incentive award plan for its affiliated Manager non-executive directors officers other employees and independent contractors who are providing services to the company as applicable and non-executive director restricted share plan which are accounted for under the guidance for share based payments The expense for such awards is included in general and administrative expenses of the award have been met See Note II is recognized over the vesting period or when the requirements for exercise Share-Based Compensation for additional information on these plans F-I AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Income Taxes The Company elected to be qualified to be taxed as REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December31 2011 If the Company qualifies for taxation as REIT as anticipated it generally will not be subject to federal stockholders and so long as it distributes corporate income tax to the extent at least 90% of its REIT taxable income REITs it distributes its REIT taxable income to its are subject to number of other organizational and operational requirements Even if the Company qualifies for taxation as REIT it may be subject to certain state and local taxes on its income and property and federal income and excise taxes on its undistributed income Per Share Data restricted Income loss per basic share of common stock is calculated by dividing net income loss less dividends on unvested issued and outstanding during such period shares of common stock number of shares of common stock stock by the weighted-average considers the effect dilutive of potentially Diluted income loss per share of common stock outstanding during the period Reportable Segments The Company has determined that it has one reportable segment with activities related to investing in real estate The Companys investments in real estate generate rental revenue and other income through the leasing of properties which comprised 100% of its total consolidated revenues Although the Companys investments in real estate will be geographically diversified throughout the United States management evaluates operating performance on an individual property level The Companys properties have been aggregated into one reportable segment Recent Accounting Pronouncements In May 2011 the Financial Accounting Standards Board the FASB issued guidance that expands the existing disclosure requirements for fair value measurements primarily for Level measurements which are measurements based on unobservable inputs such as the Companys own data This guidance is largely consistent with current fair value measurement principles with few exceptions that do not result in change in general practice The guidance will be applied prospectively and will be effective for interim and annual reporting periods ending after December 15 2011 The adoption of this guidance is not expected to have material impact on the Companys financial position or results of operations as the guidance relates only to disclosure requirements In June 2011 the FASB issued guidance requiring entities to present items of net income and other comprehensive income either in one continuous statement referred to as the statement of comprehensive income or in two separate but consecutive statements of net income and other comprehensive income The new guidance does not change which components of comprehensive income are recognized in net income or other comprehensive income or when an item of other comprehensive income must be reclassified to net income The guidance will be applied prospectively and will be effective for interim and aimual reporting periods ending after December 15 2011 In December 2011 the FASB deferred certain provisions of this guidance related to the presentation of certain reclassification adjustments out of accumulated other comprehensive income by component in both the statement and the statement where the reclassification is presented The adoption of this guidance is not expected to have material impact on the Companys financial position or results of operations but will change the location of the presentation of other comprehensive income to more closely associate the disclosure with net income In September 2011 the FASB issued guidance which modifies the requirements for testing for goodwill impairment and gives entities the option to perform qualitative assessment of goodwill before calculating the fair value of reporting unit If the entities determine based on the qualitative assessment that the fair value of reporting unit is more likely than not less than the carrying value then further impairment tests would be required Otherwise further testing would not be needed The guidance is effective for annual impairment tests for fiscal periods beginning after December 15 2011 The adoption of this guidance is not expected to have material impact on the Companys financial position or results of operations F- 13 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 In December 2011 the FASB issued guidance which contains new disclosure requirements regarding the nature of and entitys rights of offset and related arrangements associated with its financial instruments and derivative instruments The new disclosures are designed to make financial statements prepared under U.S GAAP more comparable to those prepared under International Financial Reporting Standards and will give the financial statement users information about both exposures The guidance is effective for interim and annual reporting periods beginning on or after January gross and net 2013 The adoption of this guidance is not expected to have material impact on the Companys financial position or results of operations Note Real Estate Investments The following table presents the allocation of real estate investment assets acquired the year ended December 31 2011 There were no property acquisitions inception to December 31 2010 amounts in thousands during the period from December by or contributed to the Company during 2010 date of Real estate investments at cost Land Buildings fixtures and improvements Total tangible assets Acquired intangibles In-place leases Purchace price of acquired real estate investments Number of properties acquired 18489 107340 125829 11044 136873 88 Purchase price includes the properties that were contributed in September 2011 in conjunction with the completion of the IPO by the Contributor an affiliate of the Sponsor at amortized cost as well as $17.5 million of properties acquired by the Company since the IPO The Company owns and operates commercial properties As of December 31 2011 the Company owned 90 properties of which are vacant and classified as held for sale at December 31 2011 63 of the properties were contributed in September 2011 in conjunction with the completion of the IPO by the Contributor an affiliate of the Sponsor at amortized cost F- 14 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 The Companys portfolio 88 properties as of December of real estate investment properties which were all 100% leased is comprised of the following 31 2011 dollar amounts in thousands Portfolio l-Iome Depot Citizens Bank Community Bank Dollar GLnra Advance Auto Valgreens Total Portfoio Number of Properties 59 20 Contribution or Acquisition Date Sep 2011 Sep 2011 Sep.2011 Nob 201 Nov 2011 Dec Dcc 20 Square Feet 465 600 291.920 4410 77.668 42000 14.414 88 996.012 Remaining Lease Term Base Purchase Price Annualized Rental Annualized Capitalization Rate Rental Income Income per Square Foot 17.9 6.2 4.6 7.6 7.8 9.8 8.9 23 398 95.24 705 998 122 2.425 136.872 9.7% 7.1% 5.1% 9.7o 8.9% 10.1% 7.8% 2258 6.729 36 965 457 245 10.690 4.85 23.05 8.16 5.43 10.88 17.00 10.73 Remaining lease term as of December 31 2011 in years If the portfolio has multiple locations with varying lease expirations remaining lease term is calculated on weighted-average basis Total remaining lease term is an average of the remaining lease term of the total portfolio Original purchase price of properties contributed excluding acquisition and transaction-related costs Acquisition and transaction-related costs include legal costs and closing costs on property Annualized rental income on straight-line basis divided by base purchase price Annualized rental income on straight-line basis for the leases in place as of December 31 2011 which includes the effect of tenant concessions such as free rent as applicable Total portfolio excludes vacant properties contributed in September 2011 which were classified as held for sale at December 31 2011 The aggregate square footage and base purchase price of these vacant properties was 6800 and $2.9 million respectively Future Lease Payments The following table presents future minimum base rental cash payments 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 amounts in thousands 2012 2013 2014 2015 2016 Thereafter Future Minimum Base Rent Payments 10200 10400 10586 10717 10663 45723 98289 F-is AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Tenant Concentration The following table lists the tenants whose aimualized rental income on straight-line basis represented greater than 10% of consolidated annualized rental income on straight-line basis as of December 31 2011 Tenant czensBi1ri Home Depot 62 21.1% The termination delinquency or non-renewal of one or more leases by any of the above tenants may have material effect on revenues No other tenant represents more than 10% of the rental income for the period presented Geographic Concentration The following table lists the states where the Company has concentrations of properties where annual rental income on straight-line basis represented greater than 10% ofconsolidated annualized rental income on straight-line basis as ofDecember 31 2011 State Michigan South Carolina Ohio 23.4% 23.4% l6.8/ Note Senior Secured Revolving Credit Facility On September 72011 the Company closed on $150.0 million senior secured revolving credit facility The OP is the borrower and the Company and the OPs subsidiaries are the guarantors under this facility The proceeds of loans made under the credit agreement may be used other permitted corporate purposes Up to $10.0 million of the facility is available for letter of credits The initial to finance the acquisition of net leased or non-investment grade occupied investment properties and for term of the credit agreement is 36 months Any loan made under the credit facility shall bear floating interest at per annum rates equal to the one month London Interbank Offered Rate LIBOR plus 2.15% to 2.90% depending on the Companys loan to value ratio as specified in the agreement In the event of default the lender has the right to terminate its obligations under the credit agreement including the fimding of ftiture loans and to accelerate the payment on any unpaid principal amount of all outstanding loans The line of credit fee of 0.15% on the unused balance if amounts outstanding under are 50% or more of the the facility total requires facility amount and 0.25% on the unused balance if amounts outstanding under the facility are 50% or less of the total facility amount As of December 31 2011 there was $42.4 million outstanding on this facility which bore an interest rate of 3.17% As of December 31 2011 this facility was collateralized by 59 properties Availability of additional borrowings under this facility are based upon the availability there was $53.0 million of maximum borrowing capacity under of sufficient collateral among other factors At December this facility with $10.6 million available and unused 31 2011 based on the collateral available The Companys sources of recourse financing generally require financial covenants including restrictions on corporate guarantees the maintenance of certain financial ratios such as specified debt to equity and debt service coverage ratios as well as the maintenance of minimum net worth As of December 31 2011 the Company was in compliance with the debt covenants under the senior secured revolving credit facility agreement F- 16 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Note Mortgage Notes Payable The Companys mortgage notes payable consist of the following as of December 31 2011 The Company had no mortgage notes payable at December 31 2010 dollar amounts in thousands Encumbered Properties Outstanding Loan Amount Weighted Average Effective Interest Rate Weighted Average Maturity2 December 31 2011 28 30260 4.67% 4.32 Mortgage notes payable have fixed rates Effective interest rates range from 3.80% to 5.32% at December 31 2011 Weighted average remaining years until maturity as of December 31 2011 The following table summarizes the scheduled aggregate principal repayments subsequent to December 31 2011 amounts in thousands Year 2012 2013 2014 2015 2016 Thereafter Total Total 88 190 13752 11760 4470 30260 The Companys sources of recourse financing generally require financial covenants including restrictions on corporate guarantees the maintenance of certain financial ratios such as specified debt to equity and debt service coverage ratios as well as the maintenance of minimum net worth As of December 31 2011 the Company was in compliance with the debt covenants under the mortgage loan agreements Note Fair Value of Financial Instruments 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 due to affiliates and accounts payable approximate their carrying value on the accompanying consolidated balance sheets due to their short-term nature The fair values of the Companys remaining financial reported below sheets are instruments that are not reported at fair value on the accompanying consolidated balance There were no financial instruments which require fair value disclosure as of December 31 2010 amounts in thousands Mortgage note payable Senior secured revoking credit facility 30260 42407 30626 42407 Carrying Amount at Fair Value at December 31 2011 December 31201 The fair value ofmortgage notes payable is estimated using discounted cash flow analysis based on the Managers experience with similartypes of borrowing arrangements The interest rate of the senior secured revolving credit facility is determined by variable market rate and the Companys leverage ratio and has terms commensurate with the market as such the outstanding balance on the facility approximates fair value F- 17 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Note Common Stock On September 2011 the Companys IPO became effective As of December 31 2011 the Company had total of 7.3 million shares of common stock outstanding including unvested restricted shares with total net proceeds from common stock issuances of $78.1 million which includes the effect of recissions At December 312010 the Company had stock from its initial capitalization of 1000 shares for proceeds of $10.00 On September 2011 the Companys Board of Directors authorized and the Company declared an annual dividend rate of $0.875 per share or an annual dividend rate of 7.0% based on the initial common stock price of $12.50 payable in cash monthly beginning in October2011 on the fifteenth day of each month to stockholders of record at the close of business on the eighth day of such month On February 27 2012 the Companys Board of Directors authorized and the Company declared an annual dividend rate of $0.880 per share Accordingly on March 15 2012 the Company paid distribution of$0.0733 per share to stockholders of record at the close of business on March 2012 Note Commitments and Contingencies Litigation In the ordinary course of business the Company may become subject to litigation or claims There are no material legal proceedings pending or known to be contemplated against the Company Environmental Matters In connection with the ownership and operation of real estate the Company may potentially be liable for costs and damages related to enviromnental of any non-compliance matters The Company does not own any properties liability or other claim and is not aware of any other environmental has not been notified by any governmental authority condition that it believes will have material adverse effect on the results of operations Note Related Party Transactions and Arrangements Common Stock Ownership Certain affiliates of the Company have purchased shares of the Companys common stock As of December 31 2011 31.3% of the shares of common stock outstanding on fully diluted basis including the Contributors 310000 OP Units that are convertible to common stock and the 167400 restricted shares granted to the Manager were purchased by or granted to affiliates of the Company See Note Organization for more information on stock issued in the Formation Transactions The Company has issued restricted stock to the Manager and non-executive directors in conjunction with share-based compensation plans See Note 11 Share-Based Compensation Fees Paid in Connection with the Offrring The Companys affiliated Dealer Manager received selling commissions of 6% of the gross offering proceeds from the sale of the Companys common stock before reallowance of commissions earned by participating broker-dealers The affiliated Dealer re-allowed Manager received dealer manager fees of 2% of the gross offering proceeds before reallowance Dealer Manager was permitted to re-allow all or portion of participating 100% of commissions earned to broker-dealers its dealer manager In addition the affiliated Dealer Manager to participating broker-dealers The affiliated fee to participating broker-dealers Total commissions paid to the affiliated Dealer Manager for the year ended December 31 2011 were $4.0 million There were no fees paid to the Dealer Manager during the period from December 2010 date of inception to December 31 2010 F-I AMERICAN REALTY CAPITAL PROPERTIES iNC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Fees Paid in Connection With the Operations of the Company The Company will pay the Sponsor an acquisition fee equal to 1.0% of the contract purchase price including assumed indebtedness of each property the Company acquires which is originated by the Sponsor The acquisition fee is payable in cash at the closing of each acquisition The Company will pay the Sponsor financing fee equal to 0.75% of the amount available under any secured mortgage financing or refinancing that the Company obtains and uses for the acquisition of properties that is arranged by the Sponsor The financing fee is payable in cash at the closing of each financing The Company will pay the Manager an annual base management fee equal to 0.50% of the average unadjusted book value of the Companys real estate assets calculated and payable monthly in advance provided that the full amount of the distributions declared by us in respect of our OP units for the six immediately preceding months is equal to or greater than certain net income thresholds related to our operations Our Manager will waive such portion of its management fee in excess of such thresholds The management fee is payable in cash The Company may be required to pay the Manager earnings weighted average number of shares and weighted quarterly incentive fee calculated based on the Companys annualized average price per share of common stock One half of each quarterly installment of the incentive fee will be payable cash No such incentive fees have been paid to the Manager since inception in shares of common stock The remainder of the incentive fee will be payable in The Company is required to reimburse the Sponsor including fees and expenses due diligence fees and expenses other third party fees and expenses costs of appraisals fees and expenses title option payments and deposits on properties not acquired for all out-of-pocket incurred by the Sponsor accounting actually costs without limitation legal travel expenses nonrefundable insurance premiums and other closing costs personnel costs and miscellaneous expenses relating to the selection acquisition and due diligence of properties The Companys reimbursement obligation is not subject to any dollar limitation Expenses will be reimbursed in cash on monthly basis following for the salaries and other compensation of its personnel the end of each month However the Company will not reimburse the Sponsor between the an administrative Furthermore under support agreement Company and the Sponsor the Sponsor will pay or reimburse the Company for its general administrative expenses including without limitation legal fees audit fees board of directors fees insurance marketing and investor relation fees until September 2012 which is one year after thresholds as specified in the agreement the closing of the Companys IPO to the extent the amount of certain net earnings from operations declared by the Company in respect of our is less than the amount of the distributions OP units during such one year period To the extent these amounts are paid by the Sponsor they would not be subject to reimbursement by the Company F-i AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 The following table details amounts paid and reimbursed to affiliates as well as amounts contractually due to the Sponsor and the Manager which were forgiven in connection with the operations related services described above amounts in thousands One-time fees Acquisition fccs and reiatcd cost rcirnbursemcnts Financing coordination fees and rdated cost reimbursements Othcr expensc rcimbursemcnts On-going fees Base asset management fees Incentive asset management fees Total related party operation fees and reimbursements Paid Forgiven 400 131 135 666 202 202 These cash fees have been waived The Companys Board of Directors may elect subject to the Managers approval to pay future asset management fees in the form of performance-based restricted shares There were no fees or reimbursements paid to the Manager during the period from December 2010 date of inception to December 31 2010 Note 10 Economic Dependency Under various agreements the Company has engaged or will engage the Manager and its affiliates to provide certain services that are essential to the Company including asset management services supervision of the management and leasing of properties owned by the Company asset acquisition and disposition decisions the sale of shares of the Companys common stock available for issue in follow-on offerings as well as other administrative responsibilities for the Company including accounting services and investor relations As result of these relationships the Company is dependent upon the Manager the Sponsor and their affiliates In the event that these companies were unable to provide the Company with the respective services the Company would be required to find alternative providers of these services Note 11 Share-Based Compensation Equity Plan The Company has adopted the American Realty Capital Properties Inc Equity Plan the Equity Plan which provides for the grant of stock options restricted shares of common stock restricted stock units dividend equivalent rights and other equity- based awards to the Manager non-executive directors officers and other employees and independent contractors including employees or directors of the Manager and its affiliates who are providing services to the Company Under the Equity Plan the Companys compensation Manager Concurrently with the closing of the IPO the Company granted to the Manager to 3.0% of the number of shares of common stock sold through the IPO This award of restricted shares will vest ratably on committee is authorized to approve grants of equity-based awards to the 167400 shares which is equal restricted quarterly basis over three-year period beginning with respect to this restricted stock whether or not vested on October 12011 The Manager to receive distribution equivalents at the same time and in the same amounts as dividends are paid to the is entitled stockholders commencing on the first anniversary of the date of grant The Manager will defer any distributions payable to it in connection with the restricted stock that it is granted under the Equity Plan until such time as the Company is covering the payment of distributions to the stockholders based on the criteria in the agreement for the six immediately preceding months In addition to the restricted stock that was granted to the Manager concurrently with the completion to time grant additional equity incentive awards to the Manager pursuant of the IPO the Company may from time to the Equity Plan The Manager may in the future allocate portion of these awards or ownership or profits interests in it to officers or any other personnel of the Manager or other personnel of the Manager or its affiliates in order to provide incentive compensation to them For the year ended December 31 2011 compensation expense for restricted shares was $0.2 million F-20 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 The Company authorized and reserved total number of shares equal to 10.0% of the total number of issued and outstanding shares of common stock on fully diluted basis assuming the redemption of all OP Units for shares of common stock at any time under the Equity Plan for equity incentive awards other than the initial grant to the Manager All such awards of shares will vest ratably on an annual basis over three-year period beginning on the first anniversary of the date of grant and shall provide for distribution equivalents with respect to this restricted stock whether or not vested at the same time and in the same amounts as dividends are paid to the stockholders Director Stock Plan Concurrently with the closing of the IPO the Company granted 3000 restricted shares of common stock to each of the Companys three Stock Plan Awards of restricted independent directors each ofwhom is non-executive director pursuant to the Director Stock Plan the Director stock will vest ratably over five-year period following the first anniversary of the date of grant in increments of 20% per annum subject to the directors continued service on the Board of Directors and shall provide for distribution equivalents with respect to this restricted stock whether or not vested at the same time and in the same amounts as distributions are paid to the stockholders At December 312011 total of 99000 shares of common stock are reserved for issuance under the Director Stock Plan As of December 31 2011 there were 9000 restricted shares issued to independent directors under the Director Stock Plan at fair value of $12.50 per share For the year ended December 31 2011 compensation expense for the vesting of directors shares was immaterial Note 12 Net Loss Per Share The following is summary of the basic and diluted net loss per share computation for the year ended December 31 2011 The Company had no income or loss for the period from December 2010 date of inception to December 31 2010 dollars in thousands expect for per share data Net loss from continuing operations attributable to stockholders Loss from discontinued operations attributable to stockholders Net loss attributable to stockholders Weighted average common shares outstanding Basic and diluted net loss per share from continuing operations attributable to stockholders Basic and diluted net loss per share attributable to stockholders Year Ended Decenber 31 2011 1759 816 2575 2045320 0.86 iL26 As of December 31 2011 the Company had 310000 OP Units outstanding which are convertible to common stock and 176400 shares of unvested restricted stock outstanding which were excluded from the calculation of diluted loss per share as the effect would have been antidilutive Note 13 Discontinued Operations and Properties Held for Sale The Company separately classifies properties held for sale in the accompanying consolidated balance sheets and consolidated statements of operations In the normal course of business changes property as held for sale or reclassify property that is designated in the market may compel as held for sale back to held for investment the Company to decide to classify In these situations property is transferred to held for sale or back to held for investment at the lesser of fair value or depreciated cost As ofDecember 31 2011 the Company held two vacant properties which are classified as held for sale on the accompanying balance sheet and are recorded at fair value less costs to sell the properties of $1.8 million Operating impairment loss on the value of the two properties was $0.8 million for the year ended December loss for the two properties was $37000 and 31 2011 The Company paid no consideration for these two vacant properties in connection with the Formation Transactions F-2 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Note 14 Quarterly Results Unaudited Presented below is period from December summary of the unaudited 2010 date of inception quarterly financial information for the year 31 2010 in thousands except ended December 31 2011 and the share and per share amounts to December Period from December 2010 Date of to 31 Inception December 2010 Quarters Ended March 31 2011 June 30 2011 September 30 2011 December 31 2011 Revenues 576 2599 Loss from discontinued operations attributable to stockholders 808 Basic and diluted operations attributable loss per share from continuing to stockholders F-22 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Note 15 Pro Forma Consolidated Statement of Operations Un audited The following pro forma Consolidated Statement of Operations for the year ended December 31 2011 is presented as if the assets and liabilities of ARC Income Properties LLC and ARC Income Properties III LLC had been contributed to the Company as of January 2011 This financial statement should be read in conjunction with the Companys historical financial statements and notes thereto The pro forma Consolidated results of operations would have actual Statement of Operations is unaudited and is not necessarily indicative of what the been had these entities been contributed to the Company as of January 2011 nor does it purport to present the future results of operations of the Company in thousands except share and per share amounts American Realty Capital ARC Income ARC Income Properties Inc Properties LLC2 Properties LLC3 III Pro Forma Adjustments4 Pro Forma14t Revenues Rental income Total revenues Operating expenses Management fee Acquisition and transaction related General and administratic Depreciation and amortization Total operating expenses Operating income Interest expense Other income Total other expense Net income loss 3.175 3.175 1875 593 1612 4080 90S 924 4.650 4650 18 82 217 317 433 1.548 1.548 50 606 656 892 300 893 5826 2115 6.082 923 5826 2.115 1.828 1493 1223 Net income atribtttable to non-controlling interests front continuing operations Net loss attributable to stockholders from continuing operations Discontinued operations Loss from operations of held for sale properties oss on held for sale properties Loss from discontinued operations oss from discontinued operations attributable to non-controlling interest Loss from discontinued operations attributable to stockholders 69 1759 815 852 816 1.493 1223 12431 90 90 -- 90 Net income attributable to American Realty Capital Properties Inc 2575 1583 1223 Per share data Weighted aeiage shares outstanding hanirtgs per share basic Weighted average shares fully diluted Earning per share fully diluted F-23 9373 9373 300 725 2435 3.460 5913 2783 2782 3131 1174 2957 127 815 942 36 906 2051 7.323434 0.40 7.809.834 0.38 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Reflects the historical Statement of Operations of American Realty Capital Properties Inc for the period indicated Reflects the historical Statement of Operations of ARC Income Properties LLC for the period indicated Reflects the historical Statement of Operations of ARC Income Properties III LLC for the period indicated Adjustments and pro forma balances based on the 7.3 million shares of common stock outstanding at December 31 2011 Represents management fee ofthe maximum ofO.50% ofunadjusted to the Manager will be made on book value ofassets that may be charged by affiliated periodic basis based on available cash Manager The determination of payment of fees flow Represents the $1.9 million of one-time transaction costs incurred by the Company related to the transfer of ownership interests in the predecessor companies and transaction costs related to the purchase of property These costs are mainly comprised of legal costs settlement costs and professional fees Excludes estimated general and administrative costs primarily for legal fees audit fees board of directors fees insurance marketing and investor relations fees related to operation as public company which are expected to have an ongoing effect on the results of operations of the Company to be approximately $0.5 million per year on an ongoing basis Represents reversal of interest expense for long-term notes repaid at the closing of the IPO reversal of interest expense on $82.6 million of mortgage debt which was refinanced by the Company reversal of related deferred financing costs for $51.5 million drawn on the new $150.0 million senior secured facility See Note 4Senior Secured Revolving Credit Facility and amortization of deferred financing an addition of estimated interest revolving credit amortization expense costs for the new facility The detail of these amounts are as follows amounts in thousands Reversal of interest expense for long-term notes Reversal of interest expense for $82.6 million mortgage note Reversal of deferred financing cost amortization on long-tenn notes and mortgage to be refinanced Interest expense for $51.5 million draw on new senior secured credit facility Deferred fmancing amortization for new $150.0 million senior secured credit facility Period from December 2010 Date of Inception to December31 2011 1994 3739 1677 1086 242 6082 Represents the necessary adjustment to reflect value of 10000 OP Units issued to the owner ofthe predecessor companies 10 Includes the effect of the conversion of 310000 OP Units to common stock the exercise of 167400 unvested restricted shares of common stock issued to the Manager and 9000 unvested restricted shares of common stock issued to non- executive directors at the closing of the IPO Note 16Subsequent Events The Company has evaluated subsequent events through the filing of this Form 10-K and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except for the following Completion ofAcquisitions ofAssets The following table presents certain information about the properties that the Company acquired from January 2012 to March 2012 dollar amounts in thousands F-24 AMERICAN REALTY CAPITAL PROPERTIES INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31 2011 Total PortfoIic December f0i Acquisitions a1brtfo1ioMarh12O12 No of Buildings gg Square Feet Base Purchase Price 996112 136 27129 1O 4i 8628 l400 Contract purchase price excluding acquisition and transaction related costs Total portfolio excludes vacant properties contributed in September 2011 which were classified as held for sale at December 31 2011 The aggregate square footage and base purchase price of these vacant properties was 6800 and $2.9 million respectively The acquisitions made subsequent to December 31 2011 were made in the normal course of business and none were individually significant to the total portfolio Financings In January 2012 the Company received proceeds of $7.2 million from advances on the senior secured revolving credit facility in order to finance properties As of March 2012 there was $49.6 million outstanding on this facility In March 2012 RBS Citizens approved request by the Company to add two one-year extensions to the senior secured revolving credit facility Each extension will be subject to customary requirements including written notice of intent no defaults and payment of an extension fee F-25 Real Estate and Accumulated Depreciation Schedule III December 31 2011 in thousands Initial Costs Encumbrances at Buildings December31 State 2011 Fixtures and Adjustment Land Improvements to Basis Gross Amount Carried at December 31 2011 Accumulated Depreciation MI Ml NH MI Ml MI CT DL IL IL IL IL IL IL IL MI Ml MI MI MI MI MI Ml MI Ml Ml MI MI Ml MI NH Nl NY NY NY NY NY NY NY NY NY NY 011 665 97 629 670 483 971 534 1036 1.280 511 1.082 441 944 1212 1872 3250 2461 2.184 036 1.159 2.322 1.171 848 1602 1.476 951 1605 1748 2133 1009 908 444 1.315 1348 919 1227 923 SI 943 1655 1.610 739 1.156 117 123 Iii 210 75 85 171 94 183 226 267 191 431 167 214 330 574 434 385 112 204 410 207 150 283 261 168 283 309 376 178 160 78 232 238 162 216 163 143 166 292 284 130 204 13 10 10 F-26 782 820 666 fl 839 745 568 1.142 628 1219 506 1778 273 2872 1.111 1426 2.202 3.824 2.895 2569 748 1363 2.732 1.378 998 1.885 1737 1119 1.888 2057 2.509 1187 1.06$ 522 1547 1586 1081 443 086 954 1109 1947 894 869 1.360 136 75 126 179 211 151 271 132 170 188 466 247 219 94 170 308 172 125 224 217 140 230 257 283 141 127 62 132 150 102 123 93 99 105 166 162 74 174 -- -- Property City Advance Auto Caro Advance Auto Charlotte Anvance Auto Advance Auto I-lift Livonia Advance Auto Sault Sarnte Marie Advance Auto Citizens Bank Ypsilasiti Higanum citizens Bank New London ciliiens Bank Smylna Citi7ens Bank Citizens Bank Citicns Bank .Alsip chicago Chicago citizens Bank Elinwood Park Citi7ens Bank Eergreen Park itizens Bank Lyons Citizens Bank WiIminton citizens Bank clinton Township itizens Bank Dearborn Citizens Bank Dearborn itizens Bank Citicns Bank Detroit Detroit itizens Bank Grosc Pointe Citiiens Bank harper Woods Citizens Bank highland Park CitizensBank Lathnip Village Citizens Bank J.ivonia citizensBank Richmond Citizens Bank Southuield citizens Bank St flair Shores Citizens Bank Citizens Bank Utica \arren citizens Bank Pittsfield Citizens Bank Rohlinsford CitizensBank Citizens Bank Albany Buffalo fitizens Bank East Aurora citi7ens Bank Greene citizens Bank Johnstown Citizens Bank Port Jervis Citizens Bank Rochester Citizens Bank Schenectady Citizens Bank Vails Gate Citizens Bank Whitesboro Citizens Bank Alliance Initial Costs Encumbrances at December 31 2011 Land 201 Buildings Fixtures and Improvements Adjustment to Basis 240 21O 182 l96 191 287 212 317 158 215 .l9 420 15l 141 183 106 t29 13 52 77 22 35 35 10 30 29 62 73Q 31 51 38 13 43 71 .1 13850 2911 1140 l0.7 1357 1031 4111 1080 1202 301 1797 l62 893 2239 1217 1123 2381 798 .1039 600 301 244 293 309 12.4 315 398 313 209 192 354 175 1580 263 162 554 573 598 463 341 15463 2.077 Cross Amount Carried December31 at Accumulated 2011 Depreciation 139 159 204 17973 155 163 181 251 134 313 122 239 97 l27 60 1341 1244 1597 1400 1213 l3Q7 1271 1911 1414 lien 2114 185 1051 2634 1432 1321 2801 997 939 1222 706 430 257 345 386 146 350 468 348 .x 202 373 219 292 193 616 603 629 /c 5l 379 18374 2077 l42 Property City Citizens Bank Broadview Heights citizens Bank Citizens Bank (cid:231)na Bank7 uvk Cleveland e1and Citizens Bank Cleveland Yzens Bankt Lakewood Citizens Bank Bank Louisville iilon Citizens Bank Massillon Citizens Bank Northfield tikens Ban1 Rocky River Citizens Bank Wadsworth Bapk ploisghby Citizens Bank Bank Citizens Bank Ambridge ssqn Narberth Citizens Bank St Albans Citizens Bank White River Junction Community Bank Whitehall Dollar General Bella Vista Dollar General Carlisle JIollar General Green Forest Dollar General Jonesboro Dollar General Appleton City Dollar General Ash Grove Dollar General Dollar General Bernie Dollar General B3on6eld Dollar General Carterville DoiaGendi1 Clarkton Dollar General Diamond Dollar General Ellsinore Dollar General Hallsville Dollar General Dollar General Lilboum 1o11ar General7 Dollar General Qulin Steele tolireral Strafford Dollar General ommerce Home Depot Columbia MTtlc Beach Walgreens Encumbrances allocated based on notes below Total State OH Oij(cid:231) OH OH OH OH OH OH OH OH OH OH PA PA VT VT VT NY AR AR AR IL MO MO MO MO MO MO MO MO MO MO MO MO MO MO OK SC SC 58 817 72667 18489 107340 125829 11648 These properties collateralize $150.0 million senior secured revolving credit facility of which $42.4 million was outstanding as of December 312011 Thete properties collateralize $4.5 million mortgage note payable of which $4.5 million was outstanding as of December31 2011 These properties collateralize an $11.9 million mortgage note payable of which $11.9 million was outstanding as of December 31 2011 F-27 Each location is single tenant freestanding property Each of the properties has depreciable life of 40 years Acquired intangible lease assets in the amount of $11.0 million allocated to individual properties are not reflected in the table above The accumulated depreciation column excludes $3.2 million of amortization table above also excludes vacant properties located in Worth IL and Havertown classified as held for sale at December 31 2011 The aggregate associated with acquired The PA contributed in September 2011 which were base purchase price of these vacant properties was $2.9 million intangible lease assets summary of activity for real estate and accumulated depreciation for the year ended December 31 2011 amounts in thousands Real estate investments at cost Balance at beginning of year Additions- contributions acquisitions and improvements Balance at end of the year Accumulated depreciation Balance at beginning of year Accumulated depreciation of real estate investments contributed in Founalion Transactions Depreciation expense Balance at end of the year Year Ended December 31 2011 125829 125829 10.183 1465 648 There was no real estate activity for the period from December 2010 date of inception to December 31 2010 F-28 CERTIFICATION PURSUANT TO RULE 13a-14a AND 15d-14a UNDER THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED Nicholas Schorsch certify that have reviewed this Annual Report on Form 10-K of American Realty Capital Properties Inc Based on my knowledge this report does not contain any untrue statement of material fact or omit to state material fact necessary to make the statements made in light of the circumstances under which such statements were made not misleading with respect to the period covered by this report Based on my knowledge fairly present in all material the financial statements and other financial information included in this report respects the financial condition results of operations and cash flows of the registrant as of and for the periods presented in this report The registrants other certifying officer and are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules 3a- 15e and over financial reporting as defined in Exchange Rules 3a-l 5f and Sd- 15e and internal 5d-1 5f for the registrant control and have Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant including its consolidated subsidiaries is made known to us by others within those entities particularly during the period in which this report is being prepared Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation and Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter the registrants fourth fiscal quarter in the case of an annual report that has materially affected or is reasonably likely to materially affect the registrants internal control over financial reporting and The registrants other certifying officer and have disclosed based on our most recent evaluation of internal control over financial reporting to the registrants auditors and the audit committee of the registrants board of directors or persons performing the equivalent functions All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record process summarize and report financial information and Any fraud whether or not material that involves management or other employees who have significant role in the registrants internal control over financial reporting Dated this 19th day of March 2012 Is Nicholas Schorsch Nicholas Schorsch Chief Executive Officer and Chairman of the Board of Directors Principal Executive Officer CERTIFICATION PURSUANT TO RULE 13a-14a AND 15d-14a UNDER THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED Brian Block certify that have reviewed this Annual Report on Form 10-K of American Realty Capital Properties Inc Based on my knowledge material fact necessary this report does not contain any untrue statement of material fact or omit to state to make the statements made in light of the circumstances under which such statements were made not misleading with respect to the period covered by this report Based on my knowledge fairly present in all material the financial statements and other financial information included in this report respects the financial condition results of operations and cash flows of the registrant as of and for the periods presented in this report The registrants other certifying officer and are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules over financial reporting as defined in Exchange Rules 3a-1 5e and 15d-1 5e and internal 3a-l 5f and Sd-I 5f for the registrant control and have Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant including its consolidated subsidiaries is made known to us by others within those entities particularly during the period in which this report is being prepared Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation and Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter the registrants fourth fiscal quarter in the case of an annual report that has materially affected or is reasonably likely to materially affect the registrants internal control over financial reporting and The registrants other certifying officer and have disclosed based on our most recent evaluation of internal control over financial reporting to the registrants auditors and the audit committee of the registrants board of directors or persons performing the equivalent functions All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record process summarize and report financial information and Any fraud whether or not material that involves management or other employees who have significant role in the registrants internal control over financial reporting Dated this 19th day of March 2012 Is Brian Block Brian Block Executive Vice President and Chief Financial Officer Principal Financial Officer and Principal Accounting Officer SECTION 1350 CERTIFICATIONS This Certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 Mail Fraud of Title 18 Crimes and Criminal Procedures of the United States Code as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not except to the extent required by the Sarbanes-Oxley Act of 2002 be deemed filed for purposes of Section 18 of the Securities Act of 1934 as amended The undersigned the Company each hereby certify as follows who are the Chief Executive Officer and Chief Financial Officer of American Realty Capital Properties Inc The annual report on Form 10-K of the Company which accompanies this Certificate fuliy complies with the requirements of Section 13a or 15d of the Securities Exchange Act of 1934 and all information contained in this annual report fairly presents in all material respects the financial condition and results of operations of the Company Dated this 19th day of March 2012 Is Nicholas Schorsch Nicholas Schorsch Chief Executive Officer and Chairman of the Board of Directors Principal Executive Officer Is Brian Block Brian Block Executive Vice President and Chief Financial Officer Principal Financial Officer and Principal Accounting Officer page intentionally left blank