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 June 30, 2011
  
     
 
OR
  
     
¨
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 x No ¨
 
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 July 31, 2011 was 175,729,649 shares.

 
 
 

AMERICAN REALTY CAPITAL TRUST, INC.
 
INDEX

PART I — FINANCIAL INFORMATION
Page
Item 1. Financial Statements
  
Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
 1
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)
 2
Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2011 (Unaudited)
 3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)
 4
Notes to Consolidated Financial Statements (Unaudited)
 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 39
Item 4. Controls and Procedures
 39
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

 
 
 

AMERICAN REALTY CAPITAL TRUST, INC.
  
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

   
June 30,
    
December 31,
  
   
2011
    
2010
  
   
(Unaudited)
        
ASSETS
            
Real estate investments, at cost:
            
Land
  
$
274,658
    
$
142,401
  
Buildings, fixtures and improvements
    
1,155,088
      
631,999
  
Acquired intangible lease assets
    
199,641
      
108,193
  
Total real estate investments, at cost
    
1,629,387
      
882,593
  
Less accumulated depreciation and amortization
    
(57,864
)
    
(32,777
)
Total real estate investments, net
    
1,571,523
      
849,816
  
Cash and cash equivalents
    
276,984
      
31,985
  
Restricted cash
    
2,008
      
90
  
Receivable for sale of common stock     27,233       2,905  
Other assets
    
19,112
      
9,144
  
Investment in joint venture with affiliate
    
11,575
      
11,945
  
Deferred financing costs, net
    
13,039
      
8,169
  
Total assets
  
$
1,921,474
    
$
914,054
  
                 
LIABILITIES AND EQUITY
                
Mortgage notes payable
  
$
642,544
    
$
372,755
  
Mortgage discount and premium, net
    
753
      
1,163
  
Long-term notes payable
    
—
      
12,790
  
Below-market lease liabilities, net
    
8,302
      
8,454
  
Derivatives, at fair value
    
5,117
      
5,214
  
Accounts payable and accrued expenses
    
11,798
      
3,638
  
Deferred rent and other liabilities
    
4,216
      
3,858
  
Distributions payable
    
7,626
      
3,518
  
Total liabilities
    
680,356
      
411,390
  
                 
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding
    
—
      
—
  
Common stock, $0.01 par value; 240,000,000 shares authorized, 149,753,261 and 61,824,238 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    
1,498
      
618
  
Additional paid-in capital
    
1,314,281
      
529,740
  
Accumulated other comprehensive loss
    
(3,904
)
    
(3,878
)
Accumulated deficit
    
(92,934
)
    
(46,464
)
Total stockholders’ equity
    
1,218,941
      
480,016
  
Non-controlling interests
    
22,177
      
22,648
  
Total equity
    
1,241,118
      
502,664
  
Total liabilities and equity
  
$
1,921,474
    
$
914,054
  

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

 
1
 

AMERICAN REALTY CAPITAL TRUST, INC.
  
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
Revenues:
                                
Rental income
  
$
28,054
    
$
9,382
    
$
48,772
    
$
16,810
  
Operating expense reimbursements
    
922
      
—
      
1,061
      
—
  
Total revenues
    
28,976
      
9,382
      
49,833
      
16,810
  
Expenses:
                                
Fees to affiliate
    
950
      
350
      
1,550
      
350
  
Acquisition and transaction related
    
10,691
      
640
      
17,823
      
981
  
Property expenses
    
911
      
—
      
1,124
      
—
  
General and administrative
    
932
      
340
      
1,457
      
562
  
Depreciation and amortization
    
15,244
      
4,721
      
25,187
      
8,506
  
Total operating expenses
    
28,728
      
6,051
      
47,141
      
10,399
  
Operating income
    
248
 
    
3,331
      
2,692
      
6,411
  
Other income (expenses):
                                
Interest expense
    
(9,489
) 
    
(4,093
)
    
(16,235
)
    
(7,755
)
Gains (losses) on derivative instruments
    
6
      
(239
)
    
148
      
(391
)
Loss on disposition of property
    
—
      
—
      
(44
)
    
—
  
Gains (losses) on sale to non-controlling interest holders, net of taxes
    
—
      
17
      
(102
)
    
352
  
Income from joint venture with affiliate
    
25
      
—
      
49
      
—
  
Total other expenses
    
(9,458
)
    
(4,315
)
    
(16,184
)
    
(7,794
)
Net loss
    
(9,210
)
    
(984
)
    
(13,492
)
    
(1,383
)
Net (income) loss attributable to non-controlling interests
    
(307
)
    
(8
)
    
(545
)
    
4
  
Net loss attributable to stockholders
  
$
(9,517
)
  
$
(992
)
  
$
(14,037
)
  
$
(1,379
)
Basic and diluted net loss per share
  
$
(0.09
)
  
$
(0.04
)
  
$
(0.16
)
  
$
(0.07
)

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

 
2
 

AMERICAN REALTY CAPITAL TRUST, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Six Months Ended June 30, 2011
(Dollar amounts in thousands)
(Unaudited)

   
Common Stock
    
Additional
Paid-In
Capital
    
Accumulated
Other
Comprehensive
Loss
    
Accumulated
Deficit
    
Total Stock-
holders’ Equity
    
Non-controlling
Interests
    
Total
Equity
  
   
Number of
Shares
    
Par
Value
                                      
Balance, December 31, 2010
    
61,824,238
    
$
618
    
$
529,740
    
$
(3,878
)   
  
$
(46,464
)   
  
$
480,016
    
$
22,648
    
$
502,664
  
Issuance of common stock
    
86,796,786
      
869
      
856,993
      
—
      
—
      
857,862
      
—
      
857,862
  
Offering costs, commissions and dealer manager fees
    
—
      
—
      
(82,481
)
    
—
      
—
      
(82,481
)
    
—
      
(82,481
)
Common stock issued through distribution reinvestment plan
    
1,292,028
      
13
      
12,261
      
—
      
—
      
12,274
      
—
      
12,274
  
Distributions declared
    
—
      
—
      
—
      
—
      
(32,433
)
    
(32,433
)
    
—
      
(32,433
)
Common stock redemptions
    
(196,516
)
    
(2
)
    
(2,957
)
    
—
      
—
      
(2,959
)
    
—
      
(2,959
)
Issuance of restricted shares
    
36,725
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Share based compensation
    
—
      
—
      
725
      
—
      
—
      
725
      
—
      
725
  
Distributions to non-controlling interest holders
    
—
      
—
      
—
      
—
      
—
      
—
      
(1,016
)
    
(1,016
)
Designated derivatives, fair value adjustment
    
—
      
—
      
—
      
(26
)
    
—
      
(26
) 
    
—
      
(26
) 
Net income (loss)
    
—
      
—
      
—
      
—
      
(14,037
)
    
(14,037
)
    
545
      
(13,492
)
Total comprehensive income (loss)
    
—
      
—
      
—
      
(26
)
    
(14,037
)
    
(14,063
)
    
545
      
(13,518
)
Balance, June 30, 2011
    
149,753,261
    
$
1,498
    
$
1,314,281
    
$
(3,904
)
  
$
(92,934
)
  
$
1,218,941
    
$
22,177
    
$
1,241,118
  
 
The accompanying notes are an integral part of this financial statement.

 
3
 

AMERICAN REALTY CAPITAL TRUST, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
   
Six Months Ended June 30,
  
   
2011
    
2010
  
Cash flows from operating activities:
            
Net loss
  
$
(13,492
)
  
$
(1,383
)
Adjustments to reconcile net loss to net cash provided by operating activities:
                
Depreciation
    
19,949
      
6,842
  
Amortization of intangibles
    
5,238
      
1,664
  
Amortization of deferred financing costs
    
2,148
      
365
  
Amortization of mortgage discounts and premiums, net
    
(79
)
    
—
  
Amortization of restricted stock grants
    
725
      
2
  
Accretion of below-market lease liability
    
(152
)
    
(157
)
Loss on disposition of property
    
44
      
—
  
(Gain) loss on derivative instruments
    
(148
)
    
391
  
Gain on sales to non-controlling interest holders
    
—
      
(533
)
Income from unconsolidated joint venture
    
(49
)
    
—
  
Changes in assets and liabilities:
                
Prepaid expenses and other assets
    
(7,733
)
    
(2,603
)
Accounts payable and accrued expenses
    
7,118
      
1,309
  
Deferred rent and other liabilities
    
358
      
470
  
Net cash provided by operating activities
    
13,927
      
6,367
  
Cash flows from investing activities:
                
Investment in real estate and other assets
    
(717,054)
      
(182,184
)
    Distributions from joint venture investments
    
419
      
—
  
Proceeds from disposition of real estate and other assets
    
581
      
—
  
Net cash used in investing activities
    
(716,054
)
    
(182,184
)
Cash flows from financing activities:
                
Proceeds from mortgage notes payable
    
243,852
      
76,687
  
Payments on mortgage notes payable
    
(4,814
)
    
(14,643
)
Payments on long-term notes payable
    
(12,790
)
    
—
  
Payments on short-term bridge funds
    
—
      
(15,878
)
Contributions from non-controlling interest holders
    
—
      
9,627
  
Distributions to non-controlling interest holders
    
(1,016
)
    
(354
)
Proceeds from issuance of common stock, net
    
751,053
      
131,425
  
Payments of financing costs
    
(9,273
)
    
(1,526
)
Distributions paid
    
(16,051
)
    
(3,939
)
Redemptions paid
    
(1,917
)
    
(1,592
)
Restricted cash
    
(1,918
)
    
(21
)
Net cash provided by financing activities
    
947,126
      
179,786
  
Net decrease in cash and cash equivalents
    
244,999
      
3,969
  
Cash and cash equivalents, beginning of period
    
31,985
      
5,010
  
Cash and cash equivalents, end of period
  
$
276,984
    
$
8,979
  
 
Supplemental Disclosures:
  
 
    
 
  
Cash paid for interest
   $ 13,534     $ 7,636  
Cash paid for income taxes
     144       383  
Non-Cash Investing and Financing Activities:
                
Common stock issued through distribution reinvestment plan
     12,274       —  
Mortgages assumed in real estate acquisitions
     30,751       —  
 
The accompanying notes are an integral part of these financial statements.

 
4
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(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 (“IPO”) on a “best efforts” basis of up to 150.0 million 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 (the “Registration Statement”) filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended. The Registration Statement also covered up to 25.0 million shares available pursuant to a distribution reinvestment plan (the “DRIP”) under which the Company’s 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.

On August 5, 2010, the Company filed a registration statement on Form S-11 to register 32.5 million shares of common stock in connection with a follow-on offering. The IPO was originally set to expire on January 25, 2011, three years after its effective date. However, as permitted by Rule 415 of the Securities Act, the Company was permitted to continue its IPO until July 25, 2011. On July 7, 2011, the Company had sold all of the 150.0 million shares that were registered under the IPO and as permitted, began to sell the remaining 25.0 million shares that were initially registered for the DRIP. On July 11, 2011, the Company withdrew  the registration for the additional 32.5 million shares in connection with the follow-on offering. In addition, on July 15, 2011, the Company filed a registration statement on Form S-3 to register an additional 24.0 million shares to be used for the DRIP.

As of June 30, 2011, the Company had approximately 149.8 million shares of common stock outstanding including stock issued under the DRIP and restricted share plan. Total gross proceeds from these issuances were $1.5 billion. As of June 30, 2011, the aggregate value of all share issuances and subscriptions outstanding was $1.5 billion based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP). As of June 30, 2011, approximately 0.5 million shares of common stock had been redeemed under the stock repurchase program at a value of $4.5 million and an additional 0.1 million shares with a redemption value of $1.4 million were accrued for redemption as of June 30, 2011. The Company is dependent upon the net proceeds from the offering to conduct its operations.

The Company has used and intends to use the proceeds  from its IPO to acquire and manage a diverse portfolio of real estate properties consisting primarily of freestanding, single-tenant properties net leased to investment grade and other creditworthy tenants throughout the United States and Puerto Rico. The Company typically funds acquisitions with a combination of equity and debt and in certain cases may use only equity capital or fund a portion of the purchase price through investments from unaffiliated third parties. The Company expects to arrange long-term financing on both a secured and unsecured fixed rate basis. The Company intends to continue to grow existing relationships and develop new relationships throughout the various markets the Company serves, which is expected to lead to further acquisition opportunities.

As of June 30, 2011, the Company owned 368 properties with approximately 11.0 million square feet, 100% leased with a weighted average remaining lease term of 14.5 years. In constructing the portfolio, the Company is committed to diversification (industry, tenant and geography). As of June 30, 2011, rental revenues derived from investment grade tenants (rated BBB- or better by Standard & Poors) approximated 76.4%. The strategy encompasses receiving the majority of revenue from investment grade tenants as the Company further acquires properties and enters into (or assumes) long-term lease arrangements.

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”) is the sole limited partner and owner of 0.99% (non-controlling interest) of the partnership interests of 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 Company has no paid employees. The Company is managed by the Advisor and American Realty Capital Properties, LLC, which serves as its property manager (the “Property Manager”). The Advisor and the Property Manager are affiliated entities that receive compensation and fees for services related to the IPO and for the investment and management of the Company’s assets. These entities receive fees during the Company’s 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.

 
5
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


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.

On May 27, 2011, the Company's board of directors engaged Goldman, Sachs & Co. as its financial advisor to assist it in evaluating strategic alternatives, including the possible sale of all or a portion of the Company, and a public listing on a traded exchange.

Note 2 — Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to the consolidated financial statements for the year ended December 31, 2010, which are included in the Company’s Form 10-K filed with the SEC on March 31, 2011. There have been no significant changes to these policies during 2011 other than the updates described below.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that expands the existing disclosure requirements for fair value measurements, primarily for Level 3 measurements, which are measurements based on unobservable inputs such as the Company’s own data. This guidance is largely consistent with current fair value measurement principles with few exceptions that do not result in a 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 a material impact on the Company’s financial position or results of operations.

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 annual reporting periods ending after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the Company’s 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.

 
6
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


Note 3 — Real Estate Investments

The following table presents the allocation of the assets acquired and liabilities assumed during the periods presented (amounts in thousands):
 
   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
Real estate investments, at cost:
                            
Land
  
$
58,826
    
$
18,822
    
$
132,350
    
$
29,899
  
Buildings, fixtures and improvements
    
250,039
      
69,502
      
523,616
      
128,542
  
Total tangible assets
    
308,865
      
88,324
      
655,966
      
158,441
  
Acquired intangibles:
                                
In-place leases
    
45,943
      
12,422
      
91,508
      
23,743
  
Mortgage assumed
    
(18,321
)
    
—
      
(30,751
)
    
—
  
Mortgage discount, net
    
—
      
—
      
331
      
—
  
Total assets acquired, net
  
$
336,487
    
$
100,746
    
$
717,054
    
$
182,184
  
Number of properties purchased
    
50
      
21
      
110
      
41
  

 
7
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


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 June 30, 2011, all of the properties the Company owned were 100% occupied. The Company acquired and disposed of the following properties during the six months ended June 30, 2011 (dollar amounts in thousands other than annualized average rental income per square foot):
 
Property
    
Acquisition/
Disposal
Date
    
No. of
Buildings
    
Square
Feet
     Ownership Percentage    
Remaining
Lease
Term (1)
    
Base
Purchase
Price (2)
  
Capitalization
Rate (3)
    
Annualized
Rental
Income (4)
  
                                                             
Portfolio as of December 31, 2010:
      
259
      
5,310,215
      
various
      
15.2
    
$
879,215
  
8.41%
    
$
73,006
  
                                                             
Acquisitions for the six months ended June 30, 2011:
                                                             
Lowes (6)
    
January 2011
      
1
      
141,393
      
100
%
    
          15.1
      
              10,018
  
6.74%
      
                   675
  
Citizens
    
January 2011
      
2
      
14,307
      
100
%
    
            7.6
      
                3,811
  
9.11%
      
                   347
  
QuickTrip
    
January 2011
      
1
      
4,555
      
100
%
    
          12.7
      
                3,330
  
8.74%
      
                   291
  
Dillons
    
January 2011
      
1
      
56,451
      
100
%
    
             8.3
      
                5,075
  
7.80%
      
                   396
  
Wawa
    
January 2011
      
2
      
12,433
      
100
%
    
          15.9
      
              17,209
  
7.00%
      
                1,205
  
Walgreens VIII
    
January 2011
      
9
      
122,963
      
100
%
    
          23.6
      
              54,569
  
6.86%
      
                3,742
  
DaVita Dialysis II
    
February 2011
      
4
      
23,154
      
100
%
    
          10.9
      
                8,013
  
8.90%
      
                   713
  
CVS III
    
February 2011
      
1
      
13,338
      
100
%
    
          25.6
      
                5,199
  
7.25%
      
                   377
  
Citigroup, Inc.
    
February 2011
      
1
      
64,036
      
100
%
    
          14.3
      
              27,275
  
7.00%
      
                1,910
  
Coats &  Clark
    
February 2011
      
1
      
401,512
      
100
%
    
            9.5
      
                9,523
  
9.84%
      
                   937
  
Walgreens IX
    
February 2011
      
1
      
13,569
      
100
%
    
          22.4
      
                5,460
  
7.34%
      
                   401
  
Express Scripts
    
March 2011
      
2
      
416,141
      
100
%
    
            7.9
      
              51,281
  
9.02%
      
                4,623
  
DaVita Dialysis III
    
March 2011
      
1
      
18,185
      
100
%
    
          11.9
      
                6,565
  
7.72%
      
                   507
  
Dollar General V
    
March 2011
      
6
      
55,363
      
100
%
    
          14.6
      
                5,195
  
8.84%
      
                   459
  
Wal-Mart
    
March 2011
      
1
      
183,442
      
100
%
    
            7.8
      
              12,633
  
7.15%
      
                   903
  
Kohl's
    
March 2011
      
1
      
88,408
      
100
%
    
          14.6
      
              10,182
  
7.15%
      
                   728
  
Texas Instruments
    
March 2011
      
1
      
125,000
      
100
%
    
            9.4
      
              32,000
  
7.88%
      
                2,522
  
Sam's Club (6)
    
March 2011
      
1
      
141,583
      
100
%
    
          14.2
      
              12,821
  
6.64%
      
                   851
  
CVS IV
    
March 2011
      
1
      
13,225
      
100
%
    
          23.6
      
                5,330
  
7.95%
      
                   424
  
Walgreens X
    
March 2011
      
2
      
27,760
      
100
%
    
          19.1
      
                9,000
  
7.46%
      
                   671
  
CVS V
    
March 2011
      
1
      
12,900
      
100
%
    
          22.6
      
                5,759
  
7.29%
      
                   420
  
Provident Bank
    
March 2011
      
1
      
         2,950
      
100
%
    
          22.6
      
2,589
  
9.15%
      
                   237
  
Dillons II
    
March 2011
      
1
      
       63,858
      
100
%
    
          10.3
      
                6,420
  
7.49%
      
                   481
  
FedEx X
    
March & May 2011
      
2
      
      204,157
      
100
%
    
            14.1
      
                32,200
  
7.98%
      
                   2,570
  
~3M
    
March 2011
      
1
      
      650,760
      
100
%
    
          9.8
      
              44,800
  
7.35%
      
             3,294
  
Bojangles
    
March 2011
      
13
      
       47,865
      
100
%
    
          11.9
      
              24,789
  
8.85%
      
                2,193
  
Tractor Supply II
    
March 2011
      
2
      
38,194
      
100
%
    
14.8
      
5,103
  
9.09%
      
463
  
Dollar General VI
    
April 2011
      
2
      
18,428
      
100
%
    
                   14.9
      
                      1,856
  
9.00%
      
167
  
Dollar General VII
    
April 2011
      
2
      
18,340
      
100
%
    
                   14.8
      
                      2,093
  
8.98%
      
188
  
O'Reilly Auto II
    
April 2011
      
1
      
8,154
      
100
%
    
                   11.6
      
                      1,894
  
8.92%
      
169
  
Walgreens XI
    
April 2011
      
1
      
14,550
      
100
%
    
                   24.0
      
                      4,993
  
7.35%
      
367
  
DaVita Dialysis IV
    
April 2011
      
1
      
6,020
      
100
%
    
                     8.4
      
                      2,061
  
8.88%
      
183
  
Whirlpool
    
April 2011
      
1
      
750,000
      
100
%
    
                     9.8
      
                    19,837
  
8.10%
      
1,606
  
Wrangler
    
April 2011
      
1
      
316,800
      
100
%
    
                     9.5
      
                    17,286
  
8.20%
      
1,417
  
Walgreens XII
    
April 2011
      
1
      
13,605
      
100
%
    
                   22.6
      
                      4,380
  
8.20%
      
359
  
7-Eleven
    
May 2011
      
1
      
3,074
      
100
%
    
                     9.4
      
                      2,950
  
8.24%
      
243
  
BSFS III
    
May 2011
      
1
      
7,864
      
100
%
    
                   14.5
      
                      2,661
  
8.53%
      
227
  
Kohls II
    
May 2011
      
1
      
64,250
      
100
%
    
                   19.6
      
                      6,398
  
7.50%
      
480
  
National Tire & Battery  
    
May 2011
      
3
      
33,920
      
100
%
    
                   14.3
      
                      5,921
  
8.16%
      
483
  
CVS  VI
    
May 2011
      
1
      
13,224
      
100
%
    
                   23.7
      
                      9,110
  
7.21%
      
657
  
BSFS IV
    
May 2011
      
3
      
22,904
      
100
%
    
                   13.4
      
                      8,539
  
8.60%
      
734
  
FedEx XI
    
May 2011
      
1
      
125,502
      
100
%
    
                   10.7
      
                    39,000
  
7.94%
      
3,095
  
Pep Boys
    
May 2011
      
3
      
60,140
      
100
%
    
                   12.1
      
                    12,951
  
8.68%
      
1,124
  
Tops Market
    
May 2011
      
1
      
57,833
      
100
%
    
                   11.7
      
                    10,956
  
7.61%
      
834
  

 
8
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


Property
    
Acquisition/
Disposal
Date
    
No. of
Buildings
  
Square
Feet
  
Ownership
Percentage
  
Remaining
Lease
Term (1)
  
Base
Purchase
Price (2)
  
Capitalization
Rate (3)
  
Annualized
Rental
Income (4)
7-Eleven II
    
May 2011
      
1
      
2,940
      
100
%
    
                     9.5
      
                      2,105
      
7.55%
      
159
  
General Electric
    
May 2011
      
1
      
484,348
      
100
%
    
                     7.8
      
                    23,688
      
7.62%
      
1,806
  
Wal-Mart II
    
May 2011
      
1
      
151,925
      
100
%
    
                     7.6
      
                    12,415
      
8.01%
      
995
  
USPS
    
May 2011
      
1
      
39,297
      
100
%
    
                   13.8
      
                      7,260
      
6.79%
      
493
  
Walgreens XIII
    
May 2011
      
2
      
27,195
      
100
%
    
                   17.1
      
                      9,819
      
7.25%
      
712
  
Walgreens XIV
    
June 2011
      
1
      
14,820
      
100
%
    
                   21.9
      
                      3,986
      
7.15%
      
285
  
Mrs. Bairds
    
June 2011
      
2
      
30,120
      
100
%
    
                     8.2
      
                      3,169
      
8.36%
      
265
  
Walgreens XV
    
June 2011
      
1
      
14,480
      
100
%
    
                   21.9
      
                      4,912
      
7.13%
      
350
  
O'Reilly's III
    
June 2011
      
1
      
8,160
      
100
%
    
                   11.8
      
                      2,000
      
8.70%
      
174
  
FedEx XII
    
June 2011
      
1
      
182,326
      
100
%
    
                   11.8
      
                    35,000
      
7.79%
      
2,726
  
Walgreens XVI
    
June 2011
      
6
      
52,400
      
100
%
    
                   22.7
      
                    51,160
      
6.63%
      
3,392
  
VA Clinic
    
June 2011
      
1
      
10,768
      
100
%
    
                     9.6
      
                      3,190
      
11.66%
      
372
  
BSFS V
    
June 2011
      
1
      
159,797
      
100
%
    
                   10.8
      
                      9,040
      
8.53%
      
771
  
Tractor Supply IV
    
June 2011
      
1
      
19,097
      
100
%
    
                   11.9
      
                      1,750
      
13.94%
      
244
  
O'Reilly's IV
    
June 2011
      
2
      
16,000
      
100
%
    
                   11.7
      
                      3,724
      
8.75%
      
326
  
Trader Joe's
    
June 2011
      
1
      
31,920
      
100
%
    
                   10.5
      
                      5,550
      
12.16%
      
675
  
                                                                 
Disposition for the six months ended June 30, 2011:
                                            
                                                                 
 PNC
    
January 2011
      
(1)
      
(1,992
) 
    
100
%
    
(7.9
) 
    
(680
) 
    
6.91%
      
(47
)
                                                                 
Total
            
368
      
11,045,926
              
14.5
    
$
1,626,338
      
8.08%
    
$
131,377
  
                                                                 
Annualized average rental income per square foot
                  
$
11.89
                                          

(1)
Remaining lease term as of June 30, 2011, in years. If the portfolio has multiple locations with varying lease expirations, remaining lease term is calculated on a weighted-average basis. Total remaining lease term is an average of the remaining lease term of the total portfolio.

(2)
Contract purchase price excluding acquisition and transaction-related costs. Acquisition and transaction-related costs include legal costs, acquisition fees paid to the Advisor and closing costs on the property.

(3)
Annualized rental income on a straight-line basis divided by base purchase price. Total capitalization rate is an average of the capitalization rate of the total portfolio.

(4)
Annualized rental income for the property portfolio on a straight-line basis as of June 30, 2011, which includes the effect of tenant concessions such as free rent, as applicable.

(5)
Includes a $12.0 million investment in a joint venture.

(6)
Property is a parcel of land with a ground lease which contains a building that will be conveyed to the Company at the end of the ground lease. Square footage and number of buildings refers to the building that is constructed on the parcel of land.


 
9
 
 
AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


Future Lease Payments

The following table presents future minimum base rental cash payments due to the Company subsequent to June 30, 2011. These amounts exclude contingent rentals 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):

Year
  
Future Minimum
Base Rent Payments
July 1, 2011 to December 31, 2011
  
$
62,322
  
2012
    
125,470
  
2013
    
126,446
  
2014
    
128,452
  
2015
    
129,952
  
Thereafter
    
1,311,441
  
Total
  
$
1,884,083
  

The following table lists tenants whose annualized rental income on a straight-line basis represented greater than 10% of consolidated annualized income as of June 30, 2011 and 2010:

  
  
2011
  
2010
                 
FedEx
    
16
%
    
16
%
Walgreens
    
13
%
    
—
  
CVS
    
8
%
    
20
%

No other tenant represented more than 10% of the annualized rental income for the periods presented. The termination, delinquency or non-renewal of one of the above tenants may have a material adverse effect on revenues.

Note 4 — Revolving Credit Facilities

At June 30, 2011 and December 31, 2010, the Company had 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 June 30, 2011 or December 31, 2010. There are no unused borrowing fees associated with this facility.

In July 2010, the Company obtained a secured revolving credit facility with Capital One, N.A. (“Capital One”) for an aggregate maximum principal amount of $30.0 million. The proceeds of loans made under the credit agreement may be used to finance the acquisition of net leased, investment or non-investment grade occupied properties. The initial term of the credit agreement is 30 months, which may be extended by 12 months, subject to satisfaction of certain conditions, including payment of an extension fee.

Any loan made under the Capital One credit agreement shall bear floating interest at per annum rates equal to either one month London Interbank Offered Rate (“LIBOR”) plus 3.25% or three month LIBOR plus 3.25%, at the Company’s option. In the event of a default, Capital One 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 a fee of 0.25% on the unused balance.

In August 2010, the Company obtained a secured revolving credit facility with U.S. Bank, N.A. (“U.S. Bank”) for an aggregate maximum principal amount of $20.0 million, which subsequently increased to $30.0 million. The proceeds of loans made under the credit agreement may be used to finance the acquisition of net leased, investment or non-investment grade occupied properties. The initial term of the credit agreement is 24 months, with a one-time extension option of 12 months, subject to satisfaction of certain conditions, including payment of an extension fee.

 
10
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


Any loan made under the U.S. Bank credit agreement shall bear floating interest at a per annum rate equal to one month LIBOR plus 3.25%. In the event of a default, U.S. Bank has the right to suspend the funding of future loans and to accelerate the payment on any unpaid principal amount of the outstanding loans. The line of credit requires a fee of 0.25% on the unused balance.

The Company must collateralize the Capital One and U.S. Bank lines of credit with certain of its properties in addition to meeting certain minimum cash deposit requirements. The Company has drawn on these lines of credit from time to time to finance the purchase price of acquisitions on a short-term basis. There are no amounts outstanding on these lines of credit as of June 30, 2011 or December 31, 2010.

Note 5 — Mortgage Notes Payable

The Company’s mortgage notes payable consist of the following (dollar amounts in thousands):

 
Encumbered
Properties
  
Outstanding
Loan Amount
  
Weighted
Average
Effective
Interest
Rate (1)
  
Weighted
Average
Maturity (2)
  
June 30, 2011
269
  
$
642,544
  
5.35%
    
5.08
  
December 31, 2010
196
  
$
372,755
  
5.73%
    
6.15
  

(1)
Mortgage notes payable are fixed rate mortgages or mortgages with rates that are fixed through the use of interest rate hedging instruments. Effective interest rates range from 4.09% to 6.97% at June 30, 2011 and 4.36% to 6.97% at December 31, 2010.

(2)
Weighted average remaining years until maturity as of the periods presented.

The following table summarizes the scheduled aggregate principal repayments subsequent to June 30, 2011 (amounts in thousands):

Year
  
Total
July 1, 2011 to December 31, 2011
  
$
4,900
  
2012
    
3,970
  
2013
    
59,910
  
2014
    
34,513
  
2015
    
120,625
  
Thereafter
    
418,626
  
Total
  
$
642,544
  

The Company’s 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 a minimum net worth. As of June 30, 2011, the Company was in compliance with the debt covenants under the mortgage loan agreements.

Note 6 — Long-Term Notes Payable

As of December 31, 2010, the Company had $12.8 million of outstanding long-term notes payable (the “Notes”) from 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.

 
11
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)

The Notes bore interest at 9.0% annually, provided that the interest rate would be adjusted to 9.57% annually for Notes on which the Company did not incur a selling commission. The Company paid interest-only monthly payments to subscribers of the Notes. The balances of the Notes were repaid in full in May 2011. In connection with this payoff, $0.7 million of unamortized deferred financing costs were charged to interest expense.

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 June 30, 2011 and December 31, 2010, 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.

The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments, are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the counterparties.

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 June 30, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which 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
  
June 30, 2011:
                        
Total derivatives, net
  
$
—
    
$
5,117
    
$
—
    
$
5,117
  
December 31, 2010:
                                
Total derivatives, net
  
$
—
    
$
5,214
    
$
—
    
$
5,214
  

 
12
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


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, accounts payable and distributions payable approximates their carrying value on the consolidated balance sheet due to their short-term nature. The fair value of mortgage notes payable are obtained by calculating the present value at current market rates.

The fair values of the Company’s financial instruments that are not reported at fair value on the consolidated balance sheet are reported below (amounts in thousands):

   
Carrying
Amount at
June 30,
2011
    
Fair Value at
June 30,
2011
    
Carrying
Amount at
December 31,
2010
    
Fair Value at
December 31,
2010
  
Mortgage notes payable (1)
  
$
643,297
    
$
653,419
    
$
373,918
    
$
388,984
  
Other long-term notes payable
  
$
—
    
$
—
    
$
12,790
    
$
12,790
  

(1)
Carrying amount includes premiums and discounts on mortgage notes payable.

Note 8 — Derivatives 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.

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.

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.

 
13
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


As of June 30, 2011, 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 Amount
Interest Rate Swaps
    
4
    
$
63,069
  
Interest Rate Collars
    
1
      
4,115
  

As of December 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 Amount
Interest Rate Swaps
    
4
    
$
63,532
  
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 $22.9 and $23.2 million at June 30, 2011 and December 31, 2010, 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 statements of operations for the six months ended June 30, 2011 and 2010.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheets as of June 30, 2011 and December 31, 2010 (amounts in thousands):

 
Balance Sheet Location
  
June 30, 2011
  
December 31, 2010
Derivatives designated as hedging instruments:
  
    
  
      
  
  
Interest Rate Products
Derivatives, at fair value
  
$
(3,906
)
  
$
(3,828
)
Derivatives not designated as hedging instruments:
  
                
Interest Rate Products
Derivatives, at fair value
  
$
(1,211
)
  
$
(1,386
)


 
14
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


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 and six months ended June 30, 2011 and 2010 (amounts in thousands):
 
   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
     
2011
      
2010
    
2011
    
2010
  
Amount of loss recognized in accumulated other comprehensive income as interest rate derivatives (effective portion)
  
$
(1,250
)
  
$
(2,256
)
  
$
(1,095
)
  
$
(3,400
)
Amount of loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion)
  
$
(522
)
  
$
(516
)
  
$
(1,069
)
  
$
(940
)
Amount of gain (loss) recognized in income on derivative as loss on derivative instruments (ineffective portion and amount excluded from effectiveness testing)
  
$
10
    
$
—
    
$
(63
)
  
$
—
  

Derivatives Not Designated as Hedging Instruments

The table below details the amount and location in the financial statements of the gain or loss recognized on derivatives not designated as hedging instruments for the three and six months ended June 30, 2011 and 2010 (amounts in thousands):
 
 
Three Months Ended June 30,
  
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
Location of Gain or (Loss) Recognized in Income on Derivative:
                                
Gains (losses) on derivative instruments
  
$
6
    
$
 (239
)
  
$
148
    
$
(391
)
Total
  
$
6
    
$
(239
)
  
$
148
    
$
(391
)

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.

As of June 30, 2011, the fair value of derivatives in a net liability position related to these agreements was $5.1 million. As of June 30, 2011, 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 $5.5 million at June 30, 2011.

 
15
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


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 the Company.

Environmental Matters

In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company 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.

Guarantee of the Debt of Others

In conjunction with entering into a joint venture agreement with an affiliated entity where the Company invested $12.0 million for an ownership percentage of five retail condominium units, the Company agreed to provide a guarantee on a mortgage note payable obtained from a third party in connection with the property acquisition. The guarantee will be in place until the affiliated entity achieves a net worth of $40.0 million. At June 30, 2011, the balance of the mortgage note payable was $21.3 million. The net worth of the affiliated company at June 30, 2011 was $31.7 million. The leverage ratio on the property, defined as mortgage note payable balance divided by the purchase price of the property, was 62.6% as of June 30, 2011. In addition, the properties are leased on a long-term basis which fully cover debt service requirements. Therefore the Company believes that it is unlikely that it would be required to make payments on behalf of the affiliated entity under this arrangement and therefore the fair value of the guarantee is not material. The Company anticipates the net worth threshold to be achieved by the affiliated entity by the end of the third quarter of 2011.

Note 10 — Related Party Transactions and Arrangements

Fees Paid in Connection with Common Stock Offering

The Company’s affiliated Dealer Manager receives selling commissions of 7% of the gross offering proceeds from the sale of the Company’s common stock (as well as sales of long-term notes and exchange transactions) before reallowance of commissions earned by participating broker-dealers. The Dealer Manager re-allows 100% of commissions earned to participating broker-dealers. In addition, the Dealer Manager receives dealer manager fees of 3% of the gross offering proceeds before reallowance to participating broker-dealers. The Dealer Manager may re-allow all or a portion of its dealer manager fee to participating broker-dealers. No selling commissions or dealer-manager fees are paid to the Dealer Manager with respect to shares sold under the DRIP.

The following table details the results of such activities related to the Dealer Manager (amounts in thousands):
 
   
Three Months Ended June 30,
  
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
Total commissions paid to Dealer Manager
  
$
54,388
    
$
8,981
    
$
76,460
    
$
14,338
  
Less:
                                
Commissions to participating broker dealers
    
(36,493
)
    
(6,039
)
    
(51,182
)
    
(9,804
)
Reallowance to participating broker dealers
    
(5,241
)
    
(649
)
    
(7,407
)
    
(1,254
)
Net to affiliated Dealer Manager (1)
  
$
12,654
    
$
2,293
    
$
17,871
    
$
3,280
  
 
 
(1)
The Dealer Manager is responsible for commission payments due to its employees as well as its general overhead and various selling related expenses.

 
16
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


The Company will reimburse the Advisor up to 1.5% of its gross offering proceeds. The following table details the results of such activities related to organizational and offering costs reimbursed to the Advisor (amounts in thousands):
 
   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
Organizational and offering expense reimbursements
  
$
1,509
    
$
1,175
    
$
2,799
    
$
2,278
  

At June 30, 2011 and December 31, 2010, the Company had a payable to the Dealer Manager and the Advisor of $2.0 million and $0.4 million, respectively, for commissions and reimbursements of expenses. At June 30, 2011, the Company had accrued all organizational and offering costs that the Advisor had incurred on behalf of the Company.
 
Fees Paid in Connection With the Operations of the Company

The Advisor receives an acquisition fee of 1.0% of the contract purchase price of each acquired property and is reimbursed for acquisition costs incurred in the process of acquiring properties, expected to approximate 0.5% of the contract purchase price. In no event will the total of all acquisition and advisory fees and acquisition expenses payable with respect to a particular investment exceed 4% of the contract purchase price.

The Company will pay the Advisor a yearly fee of up to 1% of the contract purchase price of each property based on assets held by the Company on the measurement date, adjusted for appropriate closing dates for individual property acquisitions. On June 7, 2011, the Company and the Advisor agreed to modify the timing of the payment of asset management fees by the Company to the Advisor such that the Company shall pay to the Advisor asset management fees on a current basis, and shall no longer pre-pay those fees, as was allowed under the previous agreement. In addition, such asset management fees shall be payable, at the discretion of the Company’s board subject to the Advisor’s approval, on a prospective basis, in cash, common stock or restricted stock grants, or any combination thereof. See Note 12 – Share-Based Compensation for additional information of limitations on the issuance of restricted shares to the Advisor.

For the management and leasing of its properties, the Company will pay to an affiliate of its Advisor a property management fee of (a) 2% of gross revenues from its single tenant properties and (b) 4% of gross revenues from its multi-tenant properties, plus, in each case, market-based leasing commissions applicable to the geographic location of the property. The Company also will reimburse the affiliate costs of managing the properties. The affiliate may also receive a fee for the initial leasing of newly constructed properties, which would generally equal one month’s rent. In the unlikely event that the affiliate assists a tenant with tenant improvements, a separate fee may be charged to, and payable by the Company. This fee will not exceed 5% of the cost of the tenant improvements. The aggregate of all property management and leasing fees paid to its affiliates plus all payments to third parties for such fees will not exceed the amount that other nonaffiliated management and leasing companies generally charge for similar services in the same geographic location as determined by a survey of brokers and agents in such area. No such fees were incurred or paid for the three or six months ended June 30, 2011 or 2010.

The Company may reimburse its Advisor’s costs of providing administrative services, subject to the limitation that it will not reimburse its Advisor 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 (a) 2% of average invested assets, or (b) 25% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Additionally, the Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or real estate commissions. No such fees were incurred or paid for the three or six months ended June 30, 2011 or 2010.

If the Company’s Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains, and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 1% of the amount available and/or outstanding under such financing, subject to certain limitations.

 
17
 

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)


The following tables detail amounts paid and reimbursed to affiliates as well as amounts contractually due to the Advisor which were forgiven in connection with the operations related services described above (amounts in thousands):