ARCT-9.30.2011-10Q
Table of Contents

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

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended September 30, 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 o
 
Accelerated filer o
Non-accelerated filer x
(Do not check if a smaller reporting company)
Smaller reporting company o

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

The number of outstanding shares of the registrant’s common stock on November 4, 2011 was 176,694,332 shares.
Table of Contents

AMERICAN REALTY CAPITAL TRUST, INC.
 
INDEX

PART I — FINANCIAL INFORMATION
Page
Item 1. Financial Statements
 
Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)
Consolidated Statement of Changes in Equity for the Nine Months Ended Nine 30, 2011 (Unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Reserved
Item 5. Other Information
Item 6. Exhibits
Signatures
Table of Contents

PART I - Financial Information
Item 1. Financial Statements

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

 
 
September 30,
2011
 
December 31,
2010
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Real estate investments, at cost:
 
 

 
 

Land
 
$
295,917

 
$
142,401

Buildings, fixtures and improvements
 
1,319,801

 
631,999

Acquired intangible lease assets
 
227,397

 
108,193

Total real estate investments, at cost
 
1,843,115

 
882,593

Less accumulated depreciation and amortization
 
(77,672
)
 
(32,777
)
Total real estate investments, net
 
1,765,443

 
849,816

Cash and cash equivalents
 
291,504

 
31,985

Restricted cash
 
2,708

 
90

Investment securities, at fair value
 
17,191

 
—

Investment in unconsolidated joint venture
 
11,385

 
11,945

Receivable from affiliate
 
6,806

 
—

Prepaid expenses and other assets
 
24,578

 
12,049

Deferred costs, net
 
13,549

 
8,169

Total assets
 
$
2,133,164

 
$
914,054

LIABILITIES AND EQUITY
 
 
 
 

Mortgage notes payable
 
$
649,068

 
$
372,755

Mortgage discount and premium, net
 
716

 
1,163

Long-term notes payable
 
—

 
12,790

Below-market lease liabilities, net
 
8,226

 
8,454

Derivatives, at fair value
 
9,065

 
5,214

Accounts payable and accrued expenses
 
26,572

 
3,638

Deferred rent and other liabilities
 
4,454

 
3,858

Distributions payable
 
10,206

 
3,518

Total liabilities
 
708,307

 
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, 176,548,719 and 61,824,238 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
 
1,765

 
618

Additional paid-in capital
 
1,535,760

 
529,740

Accumulated other comprehensive loss
 
(5,175
)
 
(3,878
)
Accumulated deficit
 
(129,443
)
 
(46,464
)
Total stockholders’ equity
 
1,402,907

 
480,016

Non-controlling interests
 
21,950

 
22,648

Total equity
 
1,424,857

 
502,664

Total liabilities and equity
 
$
2,133,164

 
$
914,054


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


2

Table of Contents

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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
34,943

 
$
11,928

 
$
83,715

 
$
28,737

Operating expense reimbursements
 
1,252

 
—

 
2,314

 
—

Total revenues
 
36,195

 
11,928

 
86,029

 
28,737

Expenses:
 
 
 
 
 
 
 
 
Acquisition and transaction related
 
5,554

 
785

 
23,377

 
1,766

Property operating
 
1,542

 
—

 
2,666

 
—

Asset management fees to affiliate
 
1,022

 
500

 
2,572

 
850

General and administrative
 
746

 
250

 
2,203

 
811

Depreciation and amortization
 
19,828

 
5,731

 
45,015

 
14,237

Total operating expenses
 
28,692

 
7,266

 
75,833

 
17,664

Operating income
 
7,503

 
4,662

 
10,196

 
11,073

Other income (expenses):
 
 
 
 
 
 
 
 
Interest expense
 
(10,167
)
 
(4,724
)
 
(26,599
)
 
(12,511
)
Equity in income of unconsolidated joint venture
 
22

 
—

 
71

 
—

Loss on derivative instruments
 
(3,114
)
 
(177
)
 
(2,967
)
 
(568
)
Other income
 
379

 
102

 
473

 
486

Gain (loss) on disposition of property
 
—

 
143

 
(44
)
 
143

Total other expenses
 
(12,880
)
 
(4,656
)
 
(29,066
)
 
(12,450
)
Net income (loss)
 
(5,377
)
 
6

 
(18,870
)
 
(1,377
)
Net income attributable to non-controlling interests
 
(284
)
 
(80
)
 
(830
)
 
(76
)
Net loss attributable to stockholders
 
$
(5,661
)
 
$
(74
)
 
$
(19,700
)
 
$
(1,453
)
Basic and diluted net loss per share
 
$
(0.03
)
 
$
(0.00
)
 
$
(0.17
)
 
$
(0.06
)

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

3

Table of Contents

AMERICAN REALTY CAPITAL TRUST, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Nine Months Ended September 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
 
112,708,998

 
1,128

 
1,111,787

 
—

 
—

 
1,112,915

 
—

 
1,112,915

Offering costs, commissions and dealer manager fees
 
—

 
—

 
(124,282
)
 
—

 
—

 
(124,282
)
 
—

 
(124,282
)
Common stock issued through distribution reinvestment plan
 
2,632,002

 
26

 
24,978

 
—

 
—

 
25,004

 
—

 
25,004

Distributions declared
 
—

 
—

 
—

 
—

 
(63,279
)
 
(63,279
)
 
—

 
(63,279
)
Common stock redemptions
 
(655,119
)
 
(7
)
 
(7,562
)
 
—

 
—

 
(7,569
)
 
—

 
(7,569
)
Issuance of restricted shares
 
38,600

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation
 
—

 
—

 
1,099

 
—

 
—

 
1,099

 
—

 
1,099

Distributions to non-controlling interest holders
 
—

 
—

 
—

 
—

 
—

 
—

 
(1,528
)
 
(1,528
)
Designated derivatives, fair value adjustment
 
—

 
—

 
—

 
(864
)
 
—

 
(864
)
 
—

 
(864
)
Unrealized gain (loss) on investment securities, net
 
—

 
—

 
—

 
(433
)
 
—

 
(433
)
 
—

 
(433
)
Net income (loss)
 
—

 
—

 
—

 
—

 
(19,700
)
 
(19,700
)
 
830

 
(18,870
)
Total comprehensive income (loss)
 
—

 
—

 
—

 
(1,297
)
 
(19,700
)
 
(20,997
)
 
830

 
(20,167
)
Balance, September 30, 2011
 
176,548,719

 
$
1,765

 
$
1,535,760

 
$
(5,175
)
 
$
(129,443
)
 
$
1,402,907

 
$
21,950

 
$
1,424,857

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

4

Table of Contents

AMERICAN REALTY CAPITAL TRUST, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
 
Nine Months Ended September 30,
 
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 

Net loss
 
$
(18,870
)
 
$
(1,377
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation
 
35,778

 
11,415

Amortization of intangibles
 
9,237

 
2,822

Amortization of deferred financing costs
 
3,641

 
703

Amortization of mortgage discounts and premiums, net
 
(116
)
 
—

Amortization of restricted stock grants
 
1,099

 
77

Accretion of below-market lease liability
 
(228
)
 
(235
)
(Gain) loss on disposition of property
 
44

 
(143
)
Loss on derivative instruments
 
2,967

 
568

Gain on sales to non-controlling interest holders
 
—

 
(623
)
Equity in income of unconsolidated joint venture
 
(71
)
 
—

Changes in assets and liabilities:
 
 
 
 
Prepaid expenses and other assets
 
(12,378
)
 
(4,148
)
Accounts payable and accrued expenses
 
21,808

 
2,010

Deferred rent and other liabilities
 
596

 
173

Net cash provided by operating activities
 
43,507

 
11,242

Cash flows from investing activities:
 
 
 
 
Investment in real estate and other assets
 
(920,000
)
 
(338,280
)
Purchase of investment securities
 
(17,624
)
 
—

Distributions from unconsolidated joint venture
 
631

 
—

Capital expenditures
 
(254
)
 
—

Proceeds from disposition of real estate and other assets
 
581

 
757

Net cash used in investing activities
 
(936,666
)
 
(337,523
)
Cash flows from financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
243,852

 
105,378

Payments on mortgage notes payable
 
(8,818
)
 
(3,521
)
Payments on long-term notes payable
 
(12,790
)
 
(210
)
Payments on short-term bridge funds
 
—

 
(15,878
)
Contributions from non-controlling interest holders
 
—

 
13,966

Distributions to non-controlling interest holders
 
(1,528
)
 
(661
)
Proceeds from issuance of common stock, net
 
991,424

 
240,319

Payments of financing costs
 
(18,814
)
 
(4,196
)
Distributions paid
 
(31,587
)
 
(7,037
)
Redemptions paid
 
(6,443
)
 
(2,449
)
Restricted cash
 
(2,618
)
 
(34
)
Net cash provided by financing activities
 
1,152,678

 
325,677

Net increase (decrease) in cash and cash equivalents
 
259,519

 
(604
)
Cash and cash equivalents, beginning of period
 
31,985

 
5,010

Cash and cash equivalents, end of period
 
$
291,504

 
$
4,406

 
 
 
Nine Months Ended September 30,
 
 
2011
 
2010
Supplemental Disclosures:
 
 

 
 

Cash paid for interest
 
$
22,422

 
$
14,541

Cash paid for income taxes
 
144

 
388

Non-Cash Investing and Financing Activities:
 
 

 
 

Common stock issued through distribution reinvestment plan
 
25,004

 
—

Mortgages assumed in real estate acquisitions
 
41,279

 
—

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

5

Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 18, 2011, the Company’s IPO closed. All shares registered under the IPO and 22.2 million shares available under the DRIP were allocated to the IPO and sold. 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 September 30, 2011, the Company had approximately 176.5 million shares of common stock outstanding including stock issued under the DRIP and restricted share plan. Total gross proceeds from these issuances were $1.7 billion. As of September 30, 2011, the aggregate value of all share issuances and subscriptions outstanding was $1.8 billion based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP). As of September 30, 2011, approximately 0.9 million shares of common stock had been redeemed under the stock repurchase program at a value of $9.0 million and an additional 0.2 million shares with a redemption value of $1.5 million were accrued for redemption as of September 30, 2011.

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. The Company expects to redeploy the remaining cash balance into real estate by the end of 2011, while retaining a certain minimal level of cash for liquidity purposes.

As of September 30, 2011, the Company owned 405 properties with approximately 13.2 million square feet, 100% leased with a weighted average remaining lease term of 13.8 years. In constructing the portfolio, the Company is committed to diversification (industry, tenant and geography). As of September 30, 2011, rental revenues derived from investment grade tenants as rated by a major rating agency approximated 73.8% of total rental revenues. 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. As of September 30, 2011, the Company had $291.5 million of uninvested cash and cash equivalents which it intends to use primarily for acquisitions of property.

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. See Note 11 — Related Party Transactions and Arrangements.

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Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 financial statements of the Company included herein were prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the audited 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.

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.

In September 2011, the FASB issued guidance that allows entities to perform a qualitative analysis as the first step in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then a quantitative analysis for impairment is not required. The guidance is effective for interim and annual impairment tests for fiscal periods beginning 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.




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Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30,
 
Nine Months Ended September 30,
 
 
2011
 
2010
 
2011
 
2010
Real estate investments, at cost:
 
 
 
 
 
 

 
 
Land
 
$
21,259

 
$
46,662

 
$
153,609

 
$
76,561

Buildings, fixtures and improvements
 
164,459

 
93,271

 
688,075

 
221,813

Total tangible assets
 
185,718

 
139,933

 
841,684

 
298,374

Acquired intangibles:
 
 
 
 
 
 
 
 
In-place leases
 
27,756

 
16,163

 
119,264

 
39,906

Mortgage assumed
 
(10,528
)
 
—

 
(41,279
)
 
—

Mortgage discount, net
 
—

 
—

 
331

 
—

Total assets acquired, net
 
$
202,946

 
$
156,096

 
$
920,000

 
$
338,280

Number of properties purchased
 
37

 
62

 
147

 
103


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 September 30, 2011, all of the properties the Company owned were 100% occupied. The Company acquired and disposed of the following properties during the nine months ended September 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/NOI(4)
Portfolio as of December 31, 2010:
 
259
 
5,310,215

 
various

 
15.2

 
$
867,215


8.42
%
 
$
73,006

 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisitions for the nine months ended September 30, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
Lowes (5)
 
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 (5)
 
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


8

Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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/NOI(4)
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

 
9.07
%
 
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

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 (6)
 
June 2011
 
1
 
10,768

 
100
%
 
9.6

 
3,190

 
8.31
%
 
265

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

Dollar General VIII
 
July & August 2011
 
3
 
27,152

 
100
%
 
14.8
 
2,850

 
8.74
%
 
249

Dollar General IX
 
July 2011
 
1
 
9,348

 
100
%
 
14.8
 
885

 
9.04
%
 
80

GSA I (6)
 
July 2011
 
1
 
10,784

 
100
%
 
7.4
 
6,025

 
8.28
%
 
499

Lockheed Martin
 
July 2011
 
1
 
102,466

 
100
%
 
8.3
 
13,048

 
8.05
%
 
1,050

FedEx XIII
 
July 2011
 
4
 
274,602

 
100
%
 
8.3
 
27,615

 
7.96
%
 
2,199

GSA II (6)
 
August 2011
 
1
 
10,803

 
100
%
 
9.0
 
4,546

 
7.81
%
 
355

Dollar General X
 
August & September 2011
 
6
 
55,200

 
100
%
 
14.8
 
5,418

 
8.84
%
 
479

PetSmart
 
August 2011
 
1
 
1,000,375

 
100
%
 
10.8
 
48,648

 
7.55
%
 
3,672

GSA III (6)
 
August 2011
 
1
 
11,190

 
100
%
 
14.8
 
4,355

 
7.94
%
 
346

Verizon
 
August 2011
 
1
 
40,000

 
100
%
 
10.2
 
12,600

 
8.27
%
 
1,042

CVS VI
 
August 2011
 
1
 
11,945

 
100
%
 
17.4
 
2,805

 
7.45
%
 
209


9

Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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/NOI(4)
Renal Advantage
 
August 2011
 
9
 
74,457

 
100
%
 
11.8
 
19,010

 
9.65
%
 
1,834

GSA IV (6)
 
August 2011
 
1
 
23,485

 
100
%
 
9.6
 
7,424

 
8.45
%
 
627

Lowes II
 
August 2011
 
1
 
135,197

 
100
%
 
9.4
 
15,000

 
7.33
%
 
1,099

GSA V (6)
 
August 2011
 
1
 
64,455

 
100
%
 
7.3
 
7,250

 
8.08
%
 
586

CVS VII
 
September 2011
 
1
 
10,885

 
100
%
 
10.4
 
2,820

 
8.19
%
 
231

Sealy
 
September 2011
 
1
 
257,000

 
100
%
 
12.2
 
17,944

 
8.95
%
 
1,606

GSA VI (6)
 
September 2011
 
1
 
34,285

 
100
%
 
14.8
 
8,590

 
8.07
%
 
693

GSA VII (6)
 
September 2011
 
1
 
25,508

 
100
%
 
14.8
 
6,642

 
8.60
%
 
571

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Disposition for the nine months ended September 30, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
PNC
 
January 2011
 
(1)
 
(1,992
)
 
100
%
 
(7.9
)
 
(680
)
 
6.91
%
 
(47
)
Total
 
 
 
405
 
13,225,063

 
 
 
13.8

 
$
1,827,813

 
8.14
%
 
148,697

Annualized average rental income per square foot
 
 
 
 
 
$
11.24

 
 
 
 
 
 
 
 
 
 
Other investments (7) 
 
 
 
 
 
 
 
 
 
 
 
29,625

 
 
 
 
Total investment portfolio
 
 
 
 
 
 
 
 
 
 
 
$
1,857,438

 
 
 
 

(1) 
Remaining lease term as of September 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 or annualized net operating income ("NOI") as applicable, divided by base purchase price. Total capitalization rate is an average of the capitalization rate of the total portfolio.
(4) 
Annualized rental income/NOI for net leases is rental income on a straight-line basis as of September 30, 2011, which includes the effect of tenant concessions such as free rent, as applicable. For gross leased properties amount is rental income on a straight-line basis as of September 30, 2011, which includes the effect of tenant concessions such as free rent, as applicable, plus operating expense reimbursement revenue less property operating expenses.
(5) 
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.
(6) 
Lease on the property is a gross lease. As such, annualized rental income/NOI for this property is rental income on a straight-line basis as of September 30, 2011, which includes the effect of tenant concessions such as free rent, as applicable, plus operating expense reimbursement revenue less property operating expenses.
(7) 
Includes a $12.0 million investment in a joint venture and $17.6 million in investments in the common stock of other real estate investment trusts.


10

Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

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

Future Lease Payments

The following table presents future minimum base rental cash payments due to the Company subsequent to September 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
October 1, 2011 to December 31, 2011
 
$
35,643

2012
 
143,646

2013
 
144,736

2014
 
146,990

2015
 
148,599

Thereafter
 
1,431,965

Total
 
$
2,051,579


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

  
 
2011
 
2010
FedEx
 
15
%
 
13
%
Walgreens
 
12
%
 
7
%
CVS
 
8
%
 
17
%

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 — Investment Securities

At September 30, 2011, the Company had equity investments in common stock with a fair value of $17.2 million. These investments are accounted for as available-for-sale investments and therefore increases or decreases in the fair value of these investments are recorded in other comprehensive income as a component of equity on the balance sheet unless the securities are considered to be permanently impaired at which time the losses would be reclassified to expense.

The following table details the unrealized gains and losses on investment securities as of September 30, 2011 (in thousands):

 
 
 Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Common stock
 
$
17,624

 
$
127

 
$
(560
)
 
$
17,191


All unrealized losses had a holding period of less than three months. No available for sale investments were held at December 31, 2010.


11

Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

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

Note 5 — Revolving Credit Facilities

In August 2011, the Company obtained a secured revolving credit facility with RBS Citizens, N.A. and a syndicate of financial institutions (“RBS Facility”) for an aggregate maximum principal amount of $115.0 million. The facility has an accordion feature that allowed it to be increased up to a maximum of $250.0 million under certain conditions. 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. Up to $15.0 million of the facility is available for letter of credits. The initial term of the credit agreement is 36 months.

Any loan made under the RBS Facility shall bear floating interest at per annum rates equal to the one month London Interbank Offered Rate (“LIBOR”) plus 2.05% to 2.85% depending on the Company's loan to value ratio as specified in the agreement. In the event of a default, RBS 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 0.15% on the unused balance if amounts outstanding under the facility are 50% or more of the total facility amount and 0.25% on the unused balance if amounts outstanding under the facility are 50% or less of the total facility amount. The revolving line of credit was unused at September 30, 2011.

At September 30, 2011 and December 31, 2010, the Company had available a $10.0 million revolving unsecured line of credit bridge facility with an affiliated entity. There were no amounts outstanding under this facility at September 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 could be used to finance the acquisition of net leased, investment or non-investment grade occupied properties. The initial term of the credit agreement was 30 months. The agreement was terminated in August 2011 when the Company obtained the RBS facility.

Any loan made under the Capital One credit agreement bore floating interest at per annum rates equal to either one month LIBOR plus 3.25% or three month LIBOR plus 3.25%, at the our option. The line of credit required 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 initial term of the credit agreement was 24 months. The credit agreement was unused and was terminated in August 2011 when the Company obtained the RBS facility.

There were no amounts outstanding on the Capital One or U.S. Bank lines of credit as of December 31, 2010.

Note 6 — 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)
September 30, 2011
 
269

 
$
649,068

 
5.35
%
 
5.35

December 31, 2010
 
196

 
$
372,755

 
5.73
%
 
6.15


(1) 
Mortgage notes payable have fixed rates or rates that are fixed through the use of interest rate hedging instruments. Effective interest rates range from 4.09% to 6.97% at September 30, 2011 and 4.36% to 6.97% at December 31, 2010.
(2) 
Weighted average remaining years until maturity as of the periods presented.


12

Table of Contents

The following table summarizes the scheduled aggregate principal repayments subsequent to September 30, 2011 (amounts in thousands):
Year
 
Total
October 1, 2011 to December 31, 2011
 
$
4,949

2012
 
4,171

2013
 
60,124

2014
 
34,739

2015
 
120,864

Thereafter
 
424,221

Total
 
$
649,068


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 September 30, 2011, the Company was in compliance with the debt covenants under the mortgage loan agreements.

Note 7 — 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.

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 8 — 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 September 30, 2011 and December 31, 2010, the Company has assessed the significance of the impact of the credit valuation adjustments on the

13

Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

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

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 Company has common stock investments which are traded on a national exchange and therefore, due to the availability of quoted market prices in active markets, classified these investments as Level 1 in the fair value hierarchy.

The following table presents information about the Company’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of September 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
September 30, 2011
 
 
 
 
 
 
 
 
Common stock
 
$
17,191

 
$
—

 
$
—

 
$
17,191

Interest rate swap and collar derivatives, net
 
$
—

 
$
9,065

 
$
—

 
$
9,065

December 31, 2010
 
 

 
 

 
 

 
 

Interest rate swap and collar derivatives, net
 
$
—

 
$
5,214

 
$
—

 
$
5,214


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
 
Fair Value at
 
Carrying
Amount at
 
Fair Value at
 
 
September 30,
2011
 
September 30,
2011
 
December 31,
2010
 
December 31,
2010
Mortgage notes payable(1)
 
$
649,784

 
$
669,492

 
$
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 9 — 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

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Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

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

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 $2.3 million will be reclassified from other comprehensive income as an increase to interest expense.

As of September 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
 
10

 
$
106,590

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 $22.8 million and $23.2 million at September 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 nine months ended September 30, 2011 and 2010.


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Table of Contents
AMERICAN REALTY CAPITAL TRUST, INC.

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

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 September 30, 2011 and December 31, 2010 (amounts in thousands):

 
 
Balance Sheet Location
 
September 30, 2011
 
December 31, 2010
Derivatives designated as hedging instruments:
 
  
 
  

 
  

Interest Rate Products
 
Derivatives, at fair value
 
$
(7,976
)
 
$
(3,828
)
Derivatives not designated as hedging instruments:
 
  
 
 
 
 
Interest Rate Products
 
Derivatives, at fair value
 
$
(1,089
)
 
$
(1,386
)

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 nine months ended September 30, 2011 and 2010 (amounts in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2011
 
2010
 
2011
 
2010
Amount of loss recognized in accumulated other comprehensive income as interest rate derivatives (effective portion)
 
$
(1,368
)
 
$
(1,657
)
 
$
(2,464
)
 
$
(5,057
)
Amount of loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion)
 
$
(528
)
 
$
(523
)
 
$
(1,600
)
 
$
(1,463
)
Amount of gain (loss) recognized in income on derivative as loss on derivative instruments (ineffective portion and amount excluded from effectiveness testing) (1)
 
$
(20
)
 
$
(49
)
 
$
(83
)
 
$
(49
)

(1) Excludes $3.2 million that was recognized as a loss on derivative instruments for the three and nine months ended September 30, 2011 for interest rate swap agreements that were entered into at an above market rate in conjunction with entering into a series of rate lock agreements on forecasted mortgages. Once the mortgages close, the swap agreements are expected to qualify as hedging instruments, however the portion of the forecasted change in fair value related to the above market rate of the swaps was excluded from the effectiveness testing and was expensed.

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 nine months ended September 30, 2011 and 2010 (amounts in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2011
 
2010
 
2011
 
2010
Location of Gain or (Loss) Recognized in Income on Derivative:
 
 
 
 

 
 
 
 
Interest expense