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

FORM 10-Q
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES
  
 
EXCHANGE ACT OF 1934
  
     
 
For the quarterly period ended March 31, 2010
  
     
 
OR
  
     
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES
  
 
EXCHANGE ACT OF 1934
  

For the transition period from _________ to __________

Commission file number: 333-145949

AMERICAN REALTY CAPITAL TRUST, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
  
71-1036989
(State or other  jurisdiction
of incorporation or organization)
  
 (I.R.S. Employer Identification No.)
     
106 York Road
Jenkintown, PA
  
19046
(Address of principal executive offices)
  
 (Zip Code)

 
(215) 887-2189
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
  
Accelerated filer ¨
Non-accelerated filer x
(Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨ Yes x No

The number of outstanding shares of the registrant’s common stock on April 30, 2010 was 23,153,504 shares.

 
 
 


AMERICAN REALTY CAPITAL TRUST, INC.
INDEX
 
PART I — FINANCIAL INFORMATION
  
Item 1. Financial Statements
  
Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009
3
Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (Unaudited)
4
Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2010 (Unaudited)
5
Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (Unaudited)
6
Notes to Consolidated Financial Statements (Unaudited)
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
39
Item 4T. Controls and Procedures
40
PART II — OTHER INFORMATION
40
Item 1. Legal Proceedings
40
Item 1A. Risk Factors
40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
40
Item 3. Defaults Upon Senior Securities
40
Item 4. Reserved
40
Item 5. Other Information
40
Item 6. Exhibits
40
Signatures
41



 
2
 

PART I - Financial Information
Item 1. Financial Statements
AMERICAN REALTY CAPITAL TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)

   
March 31,
2010
  
December 31,
2009
  
   
(Unaudited)
      
ASSETS
          
Real estate investments, at cost:
          
Land
  
$
48,856
    
$
37,779
  
Buildings, fixtures and improvements
    
320,979
      
261,939
  
Acquired intangible lease assets
    
50,159
      
38,838
  
Total real estate investments, at cost
    
419,994
      
338,556
  
Less accumulated depreciation and amortization
    
(15,057
)
    
(11,292
)
  Total real estate investments, net
    
404,937
      
327,264
  
                 
Cash
    
2,778
      
5,010
  
Restricted cash
    
51
      
43
  
Prepaid expenses and other assets
    
6,215
      
4,458
  
Due from affiliates
    
76
      
—
  
Deferred financing costs, net
    
3,182
      
2,502
  
Total assets
  
$
417,239
    
$
339,277
  

           
             
Short-term bridge equity funds
  
$
—
    
$
15,878
  
Mortgage notes payable
    
225,118
      
183,811
  
Long-term notes payable
    
13,000
      
13,000
  
Below-market lease liabilities, net
    
9,006
      
9,085
  
Derivatives, at fair value
    
3,647
      
2,768
  
Accounts payable and accrued expenses
    
1,525
      
1,536
  
Deferred rent and other liabilities
    
1,355
      
1,144
  
Distributions payable
    
1,085
      
1,499
  
Total liabilities
    
254,736
      
228,721
  
                 
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding
    
—
      
—
  
Common stock, $.01 par value; 240,000,000 shares authorized, 20,558,974 and 14,672,237 shares issued and outstanding March 31, 2010 and December 31, 2009, respectively
    
206
      
147
  
Additional paid-in capital
    
173,933
      
122,506
  
Accumulated other comprehensive loss
    
(2,458
)
    
(1,737
)
Accumulated deficit
    
(16,873
) 
    
 (13,669
)
Total American Realty Capital Trust, Inc. stockholders’ equity
    
154,808
      
107,247
  
Noncontrolling interests
    
7,695
      
3,309
  
    Total stockholders’ equity
    
162,503
      
110,556
  
Total liabilities and stockholders’ equity
  
$
417,239
    
$
339,277
  

The accompanying notes are an integral part of these financial statements

 
3
 


AMERICAN REALTY CAPITAL TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
 
   
Three Months Ended March 31,
  
   
2010
    
2009
  
Revenue:
            
       Rental income
  
$
7,428
    
$
2,927
  
                 
Operating expenses:
                
Acquisition and transaction related
    
341
      
—
  
General and administrative
    
224
      
126
  
Depreciation and amortization
    
3,785
      
1,730
  
Total operating expenses
    
4,350
      
1,856
  
Operating income
    
3,078
      
1,071
  
                 
Other income (expense):
                
Interest expense
    
(3,673
)
    
(2,451
)
Interest income
    
11
      
4
  
Gains on sales to noncontrolling interest holders, net
    
335
      
—
  
Gains (losses) on derivative instruments
    
(152
)
    
37
  
Total other expenses
    
(3,479
)
    
(2,410
)
Net loss
    
(401
)
    
(1,339
)
       Net loss attributable to noncontrolling interests
    
12
      
—
  
Net loss attributable to American Realty Capital Trust, Inc.
  
$
(389
)
  
$
(1,339
)
                 
                 
Basic and diluted weighted average
                
common shares outstanding
    
17,845,489
      
1,526,901
  
                 
                 
Basic and diluted loss per share attributable to
     American Realty Capital Trust, Inc.
  
$
(0.02
)
  
$
(0.88
)


The accompanying notes are an integral part of these financial statements


 
4
 

AMERICAN REALTY CAPITAL TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2010
(In thousands except per share data)
(Unaudited)

   
Common Stock
          
Accumulated
        
Total
American
Realty
Capital
            
   
Number of
Shares
    
Par
Value
    
Additional
Paid-In
Capital
    
Other
Comprehensive
Loss
  
Accumulated
Deficit
    
Trust
Stockholders'
Equity
  
Noncontrolling
Interests
    
Total
Stockholders’
Equity
  
Balance,
December 31, 2009
    
14,672,237
    
$
147
    
$
122,506
    
$
(1,737
)
$
(13,669
)
$ 
107,247
  
$
3,309
    
$
110,556
  
Issuance of common stock, net
    
5,738,591
      
58
      
57,078
      
—
    
—
    
57,136
    
—
      
57,136
  
Offering costs, commissions and dealer manager fees
    
—
      
—
      
(7,057
)
    
—
    
—
    
(7,057
)
  
—
      
(7,057
)
Common stock issued through distribution reinvestment plan
    
148,146
      
1
      
1,406
      
—
    
—
    
1,407
    
—
      
1,407
  
Distributions declared
    
—
      
—
      
—
      
—
    
(2,815
)
  
(2,815
)
  
—
      
(2,815
)
Contributions from noncontrolling interests
    
—
      
—
      
—
      
—
    
—
    
—
    
5,035
      
5,035
  
Distributions to noncontrolling interests
    
—
      
—
      
—
      
—
    
—
    
—
    
(126
)
    
(126
)
Gain on sale of assets to noncontrolling interest holders
                                              
(511
)
    
(511
)
Designated derivatives fair value adjustment
    
—
      
—
      
—
      
(721
) 
  
—
    
(721
) 
  
—
      
(721
) 
Net loss
    
—
      
—
      
—
      
—
    
(389
)
  
(389
) 
  
(12
)
    
(401
)
Total comprehensive loss
    
—
      
—
      
—
      
—
    
—
    
(1,110
)  
  
(12
)
    
(1,122
)
Balance,
March 31, 2010
    
20,558,974
    
$
206
    
$
173,933
    
$
(2,458
)
$
(16,873
)
$ 
154,808
  
$
7,695
    
$
162,503
  


The accompanying notes are an integral part of these financial statements
 
 
5
 

AMERICAN REALTY CAPITAL TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Three Months Ended March 31,
  
   
2010
    
2009
  
Cash flows from operating activities:
            
Net loss
  
$
(401
)
  
$
(1,339
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
                
Depreciation
    
3,074
      
1,382
  
Amortization of intangibles
    
711
      
348
  
Amortization of deferred finance costs
    
168
      
138
  
Accretion of below-market lease liability
    
(79
)
    
(79
) 
Gains on sales to noncontrolling interest holders
    
(511
)
    
—
  
Losses (gains) on derivative instruments
    
152
      
(37
) 
Changes in assets and liabilities:
                
Prepaid expenses and other assets
    
(1,177
)
    
(875
)
Accounts payable and accrued expenses
    
(12
)
    
(238
) 
Due from affiliated entity
    
(76
)
    
(487
) 
Deferred rent and other liabilities
    
211
      
(29
) 
Net cash provided by (used in) operating activities
    
2,060
      
(1,216
) 
                 
Cash flows from investing activities:
                
Investment in real estate and other assets
    
(81,438
)
    
(163
)
Net cash used in investing activities
    
(81,438
)
    
(163
)
                 
Cash flows from financing activities:
                
Proceeds on mortgage notes payable
    
41,735
      
—
  
Payments on mortgage notes payable
    
(428
)
    
(254
)
Payments on related party bridge facility
    
—
      
(5,765
) 
Payments on short-term bridge funds
    
(15,878
)
    
(8,000
) 
Proceeds from long-term notes payable
    
—
      
9,428
  
Contributions from noncontrolling interests
    
5,035
      
—
  
Distributions to noncontrolling interests
    
(126
)
    
—
  
Proceeds from issuances of common stock, net
    
49,479
      
6,494
  
Payments of deferred financing costs
    
(848
)
    
(708
)
Distributions paid
    
(1,815
)
    
(145
)
Restricted cash
    
(8
) 
    
21
  
Net cash provided by financing activities
    
77,146
      
1,071
  
                 
Net decrease in cash
    
(2,232
) 
    
(308
) 
Cash, beginning of period
    
5,010
      
887
  
Cash, end of period
  
$
2,778
    
$
579
  
                 
Supplemental Disclosures of Investing and Financing Activities:
                
Cash paid for income taxes
  
$
317
    
$
—
  
Cash paid for interest
  
$
3,467
    
$
2,468
  


 
6
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 1 — Organization

American Realty Capital Trust, Inc. (the “Company”), incorporated on August 17, 2007, is a Maryland corporation that qualifies as a real estate investment trust (“REIT”) for federal income tax purposes. On January 25, 2008, the Company commenced an initial public offering on a “best efforts” basis of up to 150,000,000 shares of common stock offered at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a Registration Statement on Form S-11 filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Offering”). The Registration Statement also covered up to 25,000,000 shares available pursuant to a distribution reinvestment plan (the “DRIP”) under which our stockholders may elect to have their distributions reinvested in additional shares of the Company’s common stock at the greater of $9.50 per share or 95% of the estimated value of a share of common stock. The Company sold 20,000 shares to American Realty Capital II, LLC (the “Sponsor”) on August 17, 2007, at $10.00 per share. As of March 31, 2010, the Company issued 20,558,974 shares of common stock. Total gross proceeds from these issuances were $203.2 million. As of March 31, 2010, the aggregate value of all share issuances and subscriptions outstanding was $205.4 million based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP).

Substantially all of the Company’s business is conducted through American Realty Capital Operating Partnership, L.P. (the “OP”), a Delaware limited partnership. The Company is the sole general partner of and owns a 99.01% partnership interest in the OP. American Realty Capital Advisors, LLC (the “Advisor”), the Company’s affiliated advisor, is the sole limited partner and owner of 0.99% (noncontrolling interest) of the partnership interests of the OP. In March 2008, the OP issued to the Company 20,000 Operating Partnership units in exchange for $0.2 million. Additionally, in April 2008, the Advisor contributed $2 thousand to the OP in exchange for a 0.99% limited partner interest in the OP. The limited partner interests have the right to convert OP units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP’s assets.

The Company is managed by the Advisor and American Realty Capital Properties, LLC, which serves as the Company’s property manager (the “Property Manager”). Realty Capital Securities, LLC (the “Dealer Manager”), an affiliate of the Sponsor, serves as the dealer manager of the Company’s Offering. These related parties receive compensation and fees for services related to the Offering and for the investment and management of the Company’s assets. These entities receive fees during the offering, acquisition, operational and liquidation stages. The compensation levels during the offering, acquisition and operational stages are discussed in Note 10 — Related Party Transactions and Arrangements.

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its common stock until its shares are listed for trading. In the event it does not obtain listing prior to the tenth anniversary of the completion or termination of the Offering, its charter requires that it either: (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.


 
7
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 2 — Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to the consolidated financial statements in the Company’s Form 10-K for the year ended December 31, 2009. There have been no significant changes to these policies during 2010.

Note 3 — Real Estate Investments

The following table presents the allocation of the assets acquired during the three months ended March 31, 2010. No acquisitions were completed during the three months ended March 31, 2009 (dollar amounts in thousands):

Real estate investments, at cost:
  
Three Months
Ended
March 31, 2010
  
Land
  
$
11,077
  
Buildings, fixtures and improvements
    
59,040
  
     
70,117
  
         
Acquired intangibles:
        
In-place leases
    
11,321
  
Below-market lease liabilities, net
    
—
  
         
Total assets acquired
    
81,438
  
         
         
Cash paid for acquired real estate investments
  
$
81,438
  
         
Number of properties purchased during the three month period
    
20
  



 
8
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 3 — Real Estate Investments (continued)

The Company acquires and operates commercial properties. All such properties may be acquired and operated by the Company alone or jointly with another party. As of March 31, 2010, all of the properties the Company owned were 100% occupied by an investment grade or credit quality tenant on a long-term basis comprised of freestanding, single tenant commercial space. The Company’s portfolio of real estate properties is comprised of the following properties as if March 31, 2010 (dollar amounts in thousands):
 
Seller / Property Name
  
Acquisition Date
  
No. of
Buildings
  
Square
 Feet
  
Percentage Ownership
  
Remaining
Lease
Term (1)
  
Base
 Purchase
Price (2)
  
Capitalization
Rate (3)
    
Total
 Purchase
Price (4)
  
Net
 Operating
Income (5)
  
                                         
FedEx Distribution Center
  
March 2008
  
1
  
55,440
  
51%
  
8.7
  
$
9,694
  
7.53%
  
$
 10,208
  
$
730
  
First Niagara (formerly Harleysville National Bank) Portfolio
  
March 2008
  
15
  
177,774
  
100%
  
12.8
    
40,976
  
7.48%
    
  41,676
    
3,064
  
Rockland Trust Company Portfolio
  
May 2008
  
18
  
121,057
  
100%
  
11.3
    
32,188
  
7.86%
    
  33,117
    
2,530
  
PNC Bank (formerly National City Bank)
  
September & October 2008
  
2
  
8,403
  
(6)
  
18.9
    
6,664
  
8.21%
    
  6,853
    
547
  
Rite Aid
  
September 2008
  
6
  
74,919
  
100%
  
13.3
    
18,576
  
7.79%
    
  18,839
    
1,447
  
PNC Bank Portfolio
  
November 2008
  
50
  
275,436
  
100%
  
8.7
    
 42,286
  
7.35%
    
    44,813
    
3,108
  
FedEx       Distribution Center
  
July 2009
  
1
  
152,640
  
100%
  
13.6
    
31,692
  
8.84%
    
31,692
    
2,803
  
Walgreens
  
July 2009
  
1
  
14,820
  
56%
  
22.3
    
3,818
  
8.12%
    
3,818
    
310
  
CVS I
  
September 2009
  
10
  
131,105
  
(7)
  
24.0
    
40,649
  
8.48%
    
40,649
    
3,448
  
CVS II
  
November 2009
  
15
  
198,729
  
100%
  
24.3
    
59,788
  
8.48%
    
59,788
    
5,071
  
Home Depot
  
December 2009
  
1
  
465,600
  
100%
  
19.8
    
23,532
  
9.31%
    
23,532
    
2,192
  
Bridgestone Firestone I
  
December 2009
& January 2010
  
6
  
57,336
  
100%
  
14.2
    
15,041
  
9.08%
    
15,041
    
1,390
  
Advance Auto
  
December 2009
  
1
  
7,000
  
100%
  
11.7
    
1,730
  
9.25%
    
1,730
    
160
  
Fresenius
  
January 2010
  
2
  
140,000
  
100%
  
12.3
    
12,462
  
9.28%
    
12,462
    
1,159
  
Reckitt Benckiser
  
February 2010
  
1
  
574,106
  
85%
  
11.9
    
31,735
  
8.40%
    
31,735
    
2,668
  
Jack in the Box
  
February 2010
  
4
  
10,216
  
100%
  
19.9
    
8,200
  
7.75%
    
8,200
    
639
  
Bridgestone
   Firestone II
  
February &
March 2010
  
12
  
93,599
  
100%
  
13.8
    
26,414
  
8.69%
    
26,414
    
2,299
  
       
  
  
  
      
  
    
  
  
  
    
  
        
Total
      
146
  
2,558,180
      
16.0
  
$
405,445
  
8.28%
  
$
410,567
  
$
33,565
  
________________________

 
(1)
-
Remaining lease term as of March 31, 2010, in years. If the portfolio has multiple locations with varying lease expirations, remaining lease term is calculated on a weighted-average basis.
 
(2)
-
Contract purchase price excluding acquisition related costs.
 
(3)
-
Net operating income divided by base purchase price.
 
(4)
-
Base purchase for acquisitions prior to January 1, 2009 include capitalized acquisition related costs. Effective January 1, 2009, acquisition related costs are required to be expensed in accordance with GAAP.
 
(5)
-
Annualized 2010 rental income less property operating expenses, as applicable. 
 
(6)
  
Ownership percentage is 51% of one branch and 65% of one branch.
 
(7)
  
Ownership percentage of three branches is 51% and 100% of the remaining seven branches.


 
9
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 3 — Real Estate Investments (continued)

The following table lists tenants whose rental income represents greater than 10% of consolidated  rental income on an annualized basis as of March 31, 2010 and 2009:

 
2010
  
2009
CVS
25%
  
—
PNC Bank
11%
  
32%
FedEx
11%
  
—
Bridgestone Firestone
11%
  
—
First Niagara
9%
  
27%
Rockland Trust Company
8%
  
22%
Rite Aid
4%
  
13%

No other tenant represents more than 10% of the annualized rental income for the periods presented.

Note 4 — Short-Term Bridge Equity Funds

In connection with the purchase of certain properties, the Company utilized short-term bridge equity funds to finance a portion of the purchase price of such properties from time to time. The Company’s short-term borrowings as of December 31, 2009, consist of the following (dollar amounts in thousands):

Funds
  
Property
    
Outstanding
Loan
Amount (2)
  
Effective
Interest Rate
    
Interest Rate
                       
Short-term bridge funds
  
FedEx Distribution Center
    
 $
15,878 
    
5.75 
 %
        
Variable (1)

(1) Funds bear a floating interest rate based on the greater of prime rate plus 0.75% or 5.75%
(2) Such borrowing was repaid in January 2010.

There were no short-term equity bridge funds outstanding at March 31, 2010.

At March 31, 2010, the Company has available a $10.0 million revolving line of credit unsecured bridge facility with an affiliated entity. There were no amounts outstanding under this facility at March 31, 2010 or December 31, 2009.

 
10
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 5 — Mortgage Notes Payable

The Company’s mortgage notes payable as of March 31, 2010 consist of the following (dollar amounts in thousands):

Property
  
Encumbered
Properties
  
Outstanding
Loan
Amount
  
Effective
Interest Rate
    
Interest
Rate
  
Maturity
  
                           
FedEx Distribution Center
    
1
  
 $
6,965
    
6.29
%
        
Fixed 
    
September 2037
  
First Niagara (formerly Harleysville National Bank) Portfolio
    
15
    
31,000
    
6.59
%
  
(1) 
    
Fixed 
    
January 2018
  
Rockland Trust Company Portfolio
    
18
    
23,534
    
4.92
%
  
(2) 
    
Fixed
    
May 2013
  
PNC Bank (formerly National City Bank) Portfolio
    
2
    
 4,394 
    
4.89
%
  
(3) 
    
Fixed
    
September 2013
  
Rite Aid
    
6
    
     12,808
    
6.97
%
        
Fixed
    
September 2017
  
PNC Bank Portfolio
    
50
    
     32,818
    
5.25
%
  
(4) 
    
Fixed
    
November 2013
  
Walgreens
    
1
    
1,550
    
6.64
% 
  
(5) 
    
Fixed 
    
August 2019
  
CVS I
    
10
    
23,649
    
6.88
%
  
(6)
    
Fixed
    
October 2019
  
CVS II
    
15
    
32,979
    
6.64
%
        
Fixed
    
December 2014
  
Home Depot
    
1
    
13,716
    
6.55
%
        
Fixed
    
December 2012
  
FedEx Distribution Center
    
1
    
16,228
    
6.03
%
  
(7)
    
Fixed
    
January 2015
  
Fresenius
    
2
    
6,082
    
6.72
%
        
Fixed
    
January 2015
  
Reckitt Benckiser
    
1
    
15,000
    
6.23
%
  
(8)
    
Fixed
    
February 2017
  
Jack in the Box
    
4
    
4,395
    
6.45
%
        
Fixed
    
February 2015
  
Total
    
127
  
$
225,118
    
  6.17
% 
                  


 
11
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 5 — Mortgage Notes Payable (continued)

   The Company’s mortgage notes payable as of December 31, 2009 consist of the following (dollar amounts in thousands):

Property
  
Encumbered
Properties
  
Outstanding
Loan
Amount
  
Effective
Interest Rate
    
Interest
Rate
  
Maturity
  
                           
FedEx Distribution Center
    
1
  
 $
6,965
    
6.29 
%
        
Fixed 
    
September 2037
  
First Niagara (formerly Harleysville National Bank) Portfolio
    
15
    
31,000
    
6.59 
%
  
(1) 
    
Fixed 
    
January 2018
  
Rockland Trust Company Portfolio
    
18
    
23,649
    
4.92 
%
  
(2) 
    
Fixed
    
May 2013
  
PNC Bank (formerly National City Bank) Portfolio
    
2
    
 4,412 
    
4.89 
%
  
(3) 
    
Fixed
    
September 2013
  
Rite Aid
    
6
    
     12,808
    
6.97 
%
        
Fixed
    
September 2017
  
PNC
    
50
    
     32,933
    
5.25 
%
  
(4) 
    
Fixed
    
November 2013
  
Walgreens
    
1
    
1,550
    
6.64
% 
  
(5) 
    
Fixed 
    
August 2019
  
CVS I
    
10
    
23,710
    
6.88
%
  
(6)
    
Fixed
    
October 2019
  
CVS II
    
15
    
33,068
    
6.64
%
        
Fixed
    
December 2014
  
Home Depot
    
1
    
13,716
    
6.34
%
        
Fixed
    
December 2012
  
Total
    
120
  
$
183,811
    
  6.15
% 
                  
 
(1)
-
The effective interest rate resets at the end of year five to the then current 5-year Treasury rate plus 2.25%, but in no event will be less than 6.5%.
-
Fixed as a result of entering into a rate lock agreement with a LIBOR floor and cap of 3.54% and 4.125%, respectively.
(3)
-
Fixed as a result of entering into a swap agreement with a rate of 3.565% for a notional amount of $0.3 million and a rate lock agreement on a notional amount of $4.1 million with a LIBOR floor and cap of 3.37% and 4.45%, respectively, in connection with the entering into the mortgage.
(4)
-
Fixed as a result of entering in a swap agreement for 3.6% plus a spread of 1.65% in connection with the entering into the mortgage.
(5)
-
The effective interest rate is fixed until 2014 then adjusts to the greater of 6.55% or the five-year U.S. Treasury rate plus 3.50%. The note can be prepaid with no less than 30 days notice with a 1% minimum premium of the then outstanding principal balance.
(6)
-
The effective interest rate adjusts at the discretion of the lender at the end of the sixth year.
(7)
-
Fixed as a result of entering in a swap agreement for 2.775% plus a spread of 3.18% in connection with the entering into the mortgage.
(8)
-
Fixed as a result of entering in a swap agreement for 3.295% plus a spread of 2.85% in connection with the entering into the mortgage.


 
12
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 5 — Mortgage Notes Payable (continued)

The following table summarizes the scheduled aggregate principal repayments of the mortgage notes payable for the five years subsequent to March 31, 2010 (in thousands):

   
Total
  
April 2010 to December 2010
  
$
1,534
  
2011
    
2,963
  
2012
    
16,867
  
2013
    
60,047
  
2014
    
35,135
  
2015 and thereafter
    
108,572
  
Total
  
$
225,118
  

The sources of secured 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 a minimum net worth. As of March 31, 2010, the Company was in compliance with the debt covenants under its outstanding loan agreements.

Note 6 — Long-Term Notes Payable

As of March 31, 2010, the Company had issued $13.0 million of notes payable (the “Notes”) in a private placement pursuant to Rule 506 of Regulation D promulgated under the Securities Act.  The proceeds of the private placement were used to repay outstanding short-term bridge equity fund draws (see Note 4 – Short-Term Bridge Equity Funds).

The Notes bear interest at 9.0% annually, provided that the interest rate will be adjusted to 9.57% annually for Notes on which the Company does not incur a selling commission.  The Company will pay interest-only monthly payments to subscribers of the Notes until the maturity on December 15, 2011.  The Company has the right to extend the maturity date for two additional one-year periods.

The Company has the right to prepay the Notes in whole or in part any time following the first anniversary of the closing date.  If repaid on or before the second anniversary of the closing date, the Company will pay 2.0% of the remaining amount due on the Notes as a prepayment premium.  If repaid after the second anniversary of the closing date but before the third anniversary of the closing date, the Company will pay 1% of the remaining amount due on the Notes as a prepayment premium.  The foregoing not withstanding, the Company shall have the right to repay the amount due under the Notes in whole or in part without penalty within 360 days of the maturity date.  The Company will not have the right to prepay the amount due under the notes during the two optional extension periods. The Notes are unsecured.

The Company is required to prepay the Notes out of any proceeds derived from the sale or refinancing of the PNC Bank properties after any required payments of the principal and interest due under the mortgage notes payable on those properties (see Note 5 – Mortgage Notes Payable).  Such prepayment is subject to the prepayment premiums described above.

As of March 31, 2010, the Company was in compliance with all covenants included within the Note agreement.


 
13
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 7 — Fair Value of Financial Instruments

The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment.  This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:

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

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

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

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

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties.  However, as of March 31, 2010 and December 31, 2009, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives.  As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 
14
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 7 — Fair Value of Financial Instruments (continued)
 
The following table presents information about the Company’s assets (including derivatives that are presented net) measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009, aggregated by the level in the fair value hierarchy within with those instruments fall (amounts in thousands):
   
Quoted Prices in
Active Markets
Level 1
    
Significant Other
Observable Inputs
Level 2
    
Significant
Unobservable Inputs
Level 3
    
Total
  
March 31, 2010:
                                
Total derivatives, net
  
$
—
    
$
3,647
    
$
—
    
$
3,647
  
December 31, 2009:
                                
Total derivatives, net
  
$
—
    
$
2,768
    
$
—
    
$
2,768
  

The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, other receivables, due from affiliates, short-term bridge funds, accounts payable and accrued expenses and distributions payable approximates their carrying value on the consolidated balance sheet due to their short-term nature. Mortgage notes payable bear interest at fixed and variable rates. The fair value was obtained by calculating the present value based on current market interest rates. The fair values of the Company’s remaining financial instruments that are not reported at fair value on the consolidated balance sheet are reported below (amounts in thousands):
 
   
Carrying
Amount at
March 31,
2010
    
Fair Value at
March 31,
2010
    
Carrying
Amount at
December 31,
2009
    
Fair Value at
December 31,
2009
  
                                 
Mortgage notes payable
  
$
225,118
    
$
218,299
    
$
183,811
    
$
171,728
  
Other long-term notes payable
    
13,000
      
13,000
      
13,000
      
13,000
  

Note 8 — Derivative and Hedging Activities

Risk Management Objective of Using Derivatives

The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and collars as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.


 
15
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 8 — Derivative and Hedging Activities (continued)

During 2010 and 2009, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.  The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.  During the three months ended March 31, 2010 and 2009, the Company recognized income of $400 and loss of $375, respectively, related to hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $2.0 million will be reclassified from other comprehensive income as an increase to interest expense.

As of March 31, 2010, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):

Interest Rate Derivative
    
Number of
Instruments
    
Notional
  
           
Interest Rate Swaps
  
4
  
$ 
64,189
  
Interest Rate Collars
  
1
    
4,115
  

As of December 31, 2009, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):

Interest Rate Derivative
    
Number of
Instruments
    
Notional
  
           
Interest Rate Swaps
  
2
  
$
33,093
  
Interest Rate Collars
  
1
    
4,115
  

Non-Designated Hedges

Derivatives not designated as hedges are not speculative. These derivatives are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements to be classified as hedging instruments. The Company has one interest rate collar contract outstanding, with an aggregate notional amount of $23.5 million and $23.7 million at March 31, 2010 and December 31, 2009, respectively, with an established ceiling and floor for the underlying variable rate at 4.125% and 3.54%, respectively. This contract was not able to be designated as a hedging instrument as it does not qualify for hedge accounting based on the results of the net written option test.  As such, all changes in the fair value of the interest rate collar have been included in the Company’s statement of operations for the three months ended March 31, 2010 and 2009.  For the three months ended March 31, 2010 and 2009, the Company has recorded unrealized losses of $0.4 million and $0.1 million, respectively, related to this derivative instrument.

 
16
 


AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 8 — Derivative and Hedging Activities (continued)

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2010 and December 31, 2009 (in thousands):

     
Fair Value (Liability)
 
Balance
Sheet
Location
  
March 31,
2010
  
December 31,
2009
Derivatives designated as hedging instruments:
              
Interest Rate Products
Derivatives,
at fair value
  
$
(2,372
)
 
$
          (1,646)
               
Derivatives not designated as hedging instruments:
              
Interest Rate Products
Derivatives,
at fair value
    
(1,275
)
  
 
(1,122)

Derivatives in Cash Flow Hedging Relationships

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three months ended March 31, 2010 and 2009 (in thousands):

   
Three Months Ended March 31,
  
   
2010
  
  2009
    
Amount of gain recognized in accumulated  other comprehensive income as interest rate derivatives (effective portion)
  
$
1,144
  
$ 
 
(205)
    
                 
Amount of  loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion)
    
(424
)
  
 
(264)
    
                 
Amount of gain recognized in income on derivative as gain on derivative instruments (ineffective portion and amount excluded from effectiveness testing)
    
—
    
 
—
    

Derivatives Not Designated as Hedging Instruments

The table below details the amount and location in the financials statements of the gain or loss recognized on derivatives not designated as hedging instruments for the three months ended March 31, 2010 and 2009 (amounts in thousands):
 
Location of Gain or (Loss) Recognized
in Income on Derivative
Three Months Ended March 31,
  
2010
    
2009
  
           
Interest expense 
   $ (200 )   $ (180 )
Gains (losses) on derivative instruments
     (152 )     37  
                 
Total
   $ (352 )     (143 )


 
17
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 8 — Derivative and Hedging Activities (continued)

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The Company has agreements with several of its derivative counterparties that incorporate the loan covenant provisions of the Company's indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

As of March 31, 2010, the fair value of derivatives in a net liability position, related to these agreements was $3.6 million. As of March 31, 2010, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions it could have been required to settle its obligations under the agreements at their aggregate termination value of $4.0 million.

Note 9— 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 us.

Environmental Matters

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

Note 10 - Related-Party Transactions and Arrangements

Certain affiliates of the Company receive, and will continue to receive, fees and compensation in connection with the sale of the Company’s common stock (as well as sales of long-term notes and exchange transactions) and the acquisition, management and sale of the assets of the Company. The Dealer Manager receives, and will continue to receive, a selling commission of up to 7.0% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers. The Dealer Manager reallows, and intends to continue to reallow, 100% of commissions earned to participating broker-dealers. In addition, the Dealer Manager will receive up to 3.0% of the gross proceeds from the Offering, before reallowance to participating broker-dealers, as a dealer-manager fee. The Dealer Manager, in its sole discretion, may reallow all or a portion of its dealer-manager fee to such participating broker-dealers, based on such factors as the volume of shares sold by such participating broker-dealers and marketing support incurred as compared to those of other participating broker-dealers. No selling commissions or dealer-manager fees are paid to the Dealer Manager with respect to shares sold under the DRIP.


 
18
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 10 - Related-Party Transactions and Arrangements (continued)

The following table details the results of such activities related to the Dealer Manager (amounts in thousands):

   
Three Months
Ended
 March 31,
  
   
2010
    
2009
  
             
Total commissions paid to Dealer Manager
  
$
5,357
    
$
705
  
Less:
                
    Commissions to participating broker dealers
    
(3,765
)
    
(483
)
    Reallowance to participating broker dealers
    
(605
)
    
(45
)
Net to affiliated Dealer Manager  (1)
  
$
987
    
$
177
  

 
(1)
Dealer Manager is responsible for commission payments due to their employees as well as its general overhead and various selling related expenses.

The Advisor receives an acquisition and advisory fee of 1.0% of the contract purchase price of each acquired property and will be reimbursed for acquisition costs incurred in the process of acquiring properties, but not to exceed 0.5% of the contract purchase price. In no event will the total of all fees and acquisition expenses payable with respect to a particular property or investment exceed 4.0% of the contract purchase price.

The Advisor receives a financing coordination fee equal to 1.0% of amounts borrowed under certain financing arrangements.

Certain organization and offering expenses associated with the sale of the Company’s common stock (excluding selling commissions and the dealer-manager fees as outlined on the above table) are paid for by the Advisor or its affiliates and are reimbursed by the Company up to 1.5% of total gross offering proceeds over the term of the offering.

The following table details amounts paid to the affiliated companies for the activities described above (amounts in thousands):

   
Three Months
Ended
March 31,
  
   
2010
    
2009
  
             
Acquisition fees and related cost reimbursements
  
$
798
    
$
—
  
Financing coordination fees
    
417
      
—
  
Organizational and offering expense reimbursements
    
1,103
      
—
  
Net to affiliated Advisor
  
$
2,318
    
$
—
  

 The Company pays its Advisor an annualized asset management fee of up to 1.0% based on the aggregate contract purchase price of acquired real estate investments. The asset management fee is payable six months in advance on the first day of the month following the end of each calendar quarter end. Such advance fees cannot exceed estimated asset management fees for the subsequent two calendar quarterly periods.


 
19
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 10 — Related-Party Transactions and Arrangements (continued)

The following table outlines activity related to asset management fees (amounts in thousands):

   
Three Months
Ended March 31,
  
   
2010
    
2009
  
             
Earned asset management fee
  
$
891
    
$
383
  
Waived by affiliate (not deferred)
    
(891
)
    
(355
)
Paid to affiliate
  
$ 
—
    
$ 
28
  
                 
Prepaid asset management fees
  
$
2,012
    
$
—
  

If the Advisor or its affiliates provides a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of property, the Company will pay the Advisor a brokerage commission not to exceed the lesser of one-half of a reasonable, customary and competitive real estate commission or 3.0% of the contract price for the property sold, inclusive of any commission paid to outside brokers provided, however, in no event may the real estate commissions paid to the Advisor, its affiliates or unaffiliated third-parties exceed 6.0% of the contract price. In addition, after investors have received a return of their net capital contributions and a 6.0% annual cumulative, non-compounded return, then the Advisor is entitled to receive 15.0% of remaining net sale proceeds. During the three months ended March 31, 2010 and 2009, the Company did not pay any fees or amounts to the Advisor relating to the sale of properties.

In the event the Company’s common stock is listed in the future on a national securities exchange, a subordinated incentive listing fee equal to 15.0% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing, exceeds the sum of the total amount of capital raised from investors plus an amount equal to a 6.0% annual cumulative, non-compounded return to investors will be paid to the Advisor.

In the event that the advisory agreement with the Advisor is terminated upon a change of control of the Company, by the Company without cause, or by the Advisor for good reason (as such terms may be defined in the definitive agreement memorializing the engagement of the Advisor by the Company), the Company shall pay the Advisor a termination fee not to exceed 15.0% of the amount, if any, by which the appraised value of the properties owned by the Company on the date of such termination, less amounts of all indebtedness secured by such properties exceeds the dollar amount equal to the sum of a 6.0% cumulative non-compound return on the Company's stockholders' net investment plus the amount of such investment.

 The Company may reimburse the Advisor for all expenses it paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company does not reimburse for any amount by which its operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of (i) 2.0% of average invested assets, or (ii) 25.0% of net income other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period. The Company will not reimburse for personnel costs in connection with services for which the Advisor receives acquisition fees or real estate commissions. During the three months ended March 31, 2010 and 2009, the Company did not reimburse the Advisor for any such costs.

 
20
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 10 — Related-Party Transactions and Arrangements (continued)

 The Company pays its affiliated Property Manager fees for the management and leasing of the Company’s properties. Such fees equal 2.0% of gross revenues from the Company’s single tenant properties and 4.0% of the gross revenues from its multi-tenant properties, plus reimbursement of the Property Managers’ costs of managing the properties. In the event that the Property Manager assists a tenant with tenant improvements, a separate fee may be charged to the tenant by the Property Manager at a fee not to exceed 5.0% of the cost of such tenant improvements. The Property Manager will be paid leasing commissions at prevailing market rates and may also receive a fee for the initial leasing of newly constructed properties, which generally would equal one month’s rent. The aggregate of all property management and leasing fees paid to affiliates plus all payments to third parties will not exceed the amount that other nonaffiliated management and leasing companies generally charge for similar services in the same geographic location. The Property Manager may subcontract its duties for a fee that may be less than the fee provided for in the property management agreement. For the three months ended March 31, 2010 and 2009, the Company would have incurred property management fees of $0.1 million in each period, however, these fees were waived by the Property Manager to improve the Company’s working capital.

In 2008, the OP entered into an agreement with the principals of the Advisor whereby the OP can obtain up to $10.0 million of bridge equity from the principals from time to time as needed to provide short-term bridge equity relating to property acquisitions or for general working capital purposes. Such bridge equity needs to be satisfied within a six month period and will accrue a yield of 8%. In November 2008, the board approved an extension of the satisfaction period of an additional six months. In connection with the acquisition of the First Niagara (formerly Harleysville National Bank) and the Rockland Trust Company portfolios and a FedEx Corp. distribution facility, the Company obtained bridge equity of $4.0 million, $2.5 million and $2.7 million respectively. This bridge equity was repaid in 2009. During the three months ended March 31, 2009, the Company incurred related party interest expense of $0.1 on this facility.

During the three months ended December 31, 2008, the Company entered into an unsecured bridge equity facility with a related party, American Realty Capital Equity Bridge, LLC (“ARC Bridge”), whereby the Company can obtain bridge equity of up to $10.0 million from time-to-time as needed to provide short-term bridge equity relating to property acquisitions and for general working capital purposes. ARC Bridge is a 50% joint venture between the Sponsor and an unrelated third party. Bridge equity investments from this facility accrued a yield at an annual rate of 30 day LIBOR plus 5% with a floor of 8%. The bridge equity investments relating to the PNC bank locations (formerly National City Bank), Rite Aid portfolio acquisitions and a distribution facility from FedEx Corp. were $ 1.3 million, $5.3 million and $9.6 million, respectively. The related yield on such short-term bridge equity was 8.11%. The Company incurred interest expense on these advances of $0.2 million for the three months ended March 31, 2009. As of March 31, 2010 this facility was repaid in full.

Note 11 — Economic Dependency

Under various agreements, the Company has engaged or will engage the Advisor 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 Company’s common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations.

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

 
21
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 12 — Share-Based Compensation

Stock Option Plan

The Company has a stock option plan (the “Plan”), which authorizes the grant of nonqualified stock options to the Company’s independent directors, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The Company intends to grant options under the Plan to each qualifying director annually. The exercise price for all stock options granted under the Plan will be fixed at $10.00 per share until the termination of our initial public offering, and thereafter the exercise price for stock options granted to our independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. As of March 31, 2010, the Company had granted options to purchase 18,000 shares at $10.00 per share, each with a two year vesting period and an expiration of 10 years. A total of 1,000,000 shares have been authorized and reserved for issuance under the Plan.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used in the determination of fair value: expected life of 10 years, risk free rate of 3.83%, volatility of 5.0% and distribution yield of 6.5%.

During the three months ended March 31, 2010 and 2009, no options were issued, forfeited, or were exercised and 4,500 options became vested. As of March 31, 2010, vested options to purchase 9,000 shares and unvested options to purchase 9,000 shares at $10.00 per share remained outstanding with a weighted average contractual remaining life of 8.5 years. The total compensation charge relating to these option grants is immaterial.

Restricted Share Plan

On January 22, 2010, the Board of Directors adopted an employee and director incentive restricted share plan. The restricted share plan provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further action by the Company’s board of directors or the stockholders, on the date of each annual stockholder’s meeting. Restricted stock issued to independent directors will vest over a five-year period following the first anniversary of the date of grant in increments of 20% per annum. The employee and director incentive restricted share plan provides the Company with the ability to grant awards of restricted shares to the Company’s directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to us, certain of our consultants and certain consultants to the Advisor and its affiliates or to entities that provide services to us. The total number of common shares reserved for issuance under the employee and director incentive restricted share plan is equal to 1.0% of our authorized shares.

Restricted share awards entitle the recipient to common shares from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient’s employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash dividends prior to the time that the restrictions on the restricted shares have lapsed. Any dividends payable in common shares shall be subject to the same restrictions as the underlying restricted shares. The Board of Directors has no present intention to issue any restricted shares under the employee and director incentive restricted share plan.

 
22
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 13 — Net Loss Per Share

The following is a summary of the basic and diluted net loss per share computation for the three months ended March 31, 2010 and 2009 (in thousands):

   
Three Months
Ended March 31,
  
   
2010
    
2009
  
             
Net loss attributable to American Realty Capital Trust, Inc.
  
$
(389
) 
  
$
(1,339
) 
Weighted average common shares outstanding
    
17,845
      
1,527
  
Loss per share, basic and diluted
  
 $
(0.02
)
  
 $
(0.88
)

The Company intends to grant options under its Stock Option Plan (“the Plan”) to each qualifying director annually. The exercise price for all stock options granted under the Plan will be fixed at $10.00 per share until the termination of the Company’s initial public offering, and thereafter the exercise price for stock options granted to the independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders.

As of March 31, 2010, 18,000 antidilutive stock options were outstanding.

Note 14 – Noncontrolling Interests

In July 2009, the Company purchased a Walgreens location under a tenant in common structure with an unaffiliated third party. The third party’s investment of $1.1 million represented a 44.0% ownership interest in the property and entitles the investor to receive a proportionate share of the net operating cash flow derived from the property. Upon disposition of the property, the tenant in common will receive a proportionate share of the net proceeds from the sale of the property. The tenant in common has no recourse to any other assets of the Company.  Distributions of $20 thousand were paid to the noncontrolling interest holder of this property for the three months ended March 31, 2010. At March 31, 2010, there were $3.7 million of real estate assets which collateralized $1.6 million of mortgage debt that were subject to this arrangement.

In the third quarter of 2009, the Company contributed a 49% interest in a FedEx distribution facility in Snow Shoe, PA and a PNC bank branch in Palm Coast, FL, to a newly created taxable REIT subsidiary (“TRS”) and sold interests in such properties for net proceeds of $2.0 million under a Delaware statutory trust. This investment represents a 49% ownership interest in these properties and entitles the investors to receive a proportionate share of the net operating cash flow from the properties. Upon disposition of the properties, the noncontrolling interest holders will receive a proportionate share of the net proceeds from the sale of the properties. The interest holders have no recourse to any other assets of the Company. Distributions of $42 thousand were paid to the noncontrolling interest holders of these properties for the three months ended March 31, 2010. At March 31, 2010, there were $12.2 million of real estate assets which collateralized $9.0 million of mortgage debt subject to this agreement.

In September 2009, the Company contributed a partial interest of a PNC bank branch in Pompano, FL to a newly created TRS and sold an interest in the property for net proceeds of $0.4 million under a Delaware statutory trust. This investment represents a 35.2% ownership interest in this property and entitles the investor to receive a proportionate share of the net operating cash flow from the properties. Upon disposition of the property, the noncontrolling interest holder will receive a proportionate share of the net proceeds from the sale of the property. The interest holder has no recourse to any other assets of the Company.  Distributions of $9 thousand were paid to the noncontrolling interest holder of these properties for the three months ended March 31, 2010. At March 31, 2010, there were $3.6 million of real estate assets which collateralized $2.4 million of mortgage debt subject to this agreement.

 
23
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 14 – Noncontrolling Interests (continued)

In January 2010, the Company contributed a partial interest of three CVS Pharmacy locations in Visalia, CA, Smyrna, GA and Chicago, IL to a newly created TRS and sold an interest in the properties for net proceeds of $2.6 million under a Delaware statutory trust. This investment represents a 49% ownership interest in these properties and entitles the investors to receive a proportionate share of the net operating cash flow from the properties. Upon disposition of the properties, the noncontrolling interest holders will receive a proportionate share of the net proceeds from the sale of the properties. The interest holder has no recourse to any other assets of the Company.  Distributions of $30 thousand were paid to the noncontrolling interest holders of these properties for the three months ended March 31, 2010. At March 31, 2010, there were $11.5 million of real estate assets which collateralized $6.8 million of mortgage debt subject to this agreement.

In February 2010, the Company purchased a Reckitt Benckiser location in Tooele, UT with unaffiliated third parties. The third party’s net investment of $2.4 million represented a 14.6% ownership interest in the property and entitles the investors to receive a proportionate share of the net operating cash flow derived from the property. Upon disposition of the property, the third parties will receive a proportionate share of the net proceeds from the sale of the property. The third parties have no recourse to any other assets of the Company.  Distributions of $25 thousand were accrued to be paid to the noncontrolling interest holders of this property for the three months ended March 31, 2010. At March 31, 2010, there were $31.6 million of real estate assets which collateralized $15.0 million of mortgage debt that were subject to this arrangement.

Due to the nature of our involvement with each of the arrangements described above and the significance of our investment in relation to the investment of the other interest holders we have determined that we are the primary beneficiary in each of these arrangements and therefore the entities related to these arrangements are consolidated with our financial statements.

 
24
 

AMERICAN REALTY CAPITAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)

Note 15 — Subsequent Events

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

Completion of Acquisition of Assets

The following table presents certain information about the properties that the Company acquired subsequent to March 31, 2010 (dollar amounts in thousands):
 
Seller /
Property Name
  
Acquisition
Date
  
No. of
Buildings
  
Square
Feet
  
Remaining
Lease
Term (1)
  
Net
Operating
Income (2)
  
Base
Purchase
Price (3)
  
Capitalization
Rate (4)
  
Purchase
Price (5)
                                       
Total portfolio –
March 31, 2010
      
146
  
2,558,180
  
16.0
  
$
33,565
  
$
405,445
  
8.28%
  
$
410,567
Jack in the Box
  
April  2010
  
1
  
2,037
  
20.0
    
142
    
1,810
  
7.82%
    
1,810
FedEx
  
April  2010
  
1
  
118,796
  
11.2
    
3,087
    
34,171
  
9.03%
    
34,141
Jared Jewelers
  
May 2010
  
3
  
18,942
  
18.2
    
682
    
5,422
  
12.58%
    
5,422
Total portfolio –
May 7, 2010
      
151
  
2,697,955
  
15.6
  
$
37,476
  
$
446,848
  
8.38%