American Finance Trust, Inc - FORM 10-Q - May 12, 2017

Attached files

file filename
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER OF THE COMPANY - American Finance Trust, Incafin3312017ex311.htm
EX-32 - SECTION 1350 CERTIFICATIONS - American Finance Trust, Incafin3312017ex32.htm
EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER OF THE COMPANY - American Finance Trust, Incafin3312017ex312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 000-55197

arct5logocolornoticker.jpg

American Finance Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland
  
90-0929989
(State or other  jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
405 Park Ave., 4th Floor, New York, New York
  
10022
(Address of principal executive offices)
  
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer,," "smaller reporting company" and "emerging growth 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
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of April 30, 2017, the registrant had 103,912,675 shares of common stock outstanding.

AMERICAN FINANCE TRUST, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.
AMERICAN FINANCE TRUST, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
March 31,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
593,421

 
$
328,656

Buildings, fixtures and improvements
2,394,659

 
1,395,602

Acquired intangible lease assets
450,609

 
300,129

Total real estate investments, at cost
3,438,689

 
2,024,387

Less: accumulated depreciation and amortization
(301,178
)
 
(287,090
)
Total real estate investments, net
3,137,511

 
1,737,297

Cash and cash equivalents
44,591

 
131,215

Restricted cash
17,778

 
7,890

Commercial mortgage loan, held for investment, net
17,181

 
17,175

Deposits for real estate acquisitions
537

 
—

Prepaid expenses and other assets
44,530

 
29,513

Goodwill
1,069

 
—

Deferred costs, net
1,337

 
3,767

Assets held for sale
112,658

 
137,602

Total assets
$
3,377,192

 
$
2,064,459

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable, net of deferred financing costs
$
1,149,227

 
$
1,022,275

Mortgage premiums, net
13,698

 
10,681

Credit facility
190,000

 
—

Market lease liabilities, net
117,114

 
13,915

Accounts payable and accrued expenses (including $1,957 and $910 due to related parties as of March 31, 2017 and December 31, 2016, respectively)
27,606

 
13,553

Derivatives, at fair value
130

 
—

Deferred rent and other liabilities
11,574

 
9,970

Distributions payable
14,591

 
9,199

Total liabilities
1,523,940

 
1,079,593

Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, none issued and outstanding
—

 
—

Common stock, $0.01 par value per share, 300,000,000 shares authorized, 103,660,874 and 65,805,184 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
1,037

 
658

Additional paid-in capital
2,357,998

 
1,449,662

Accumulated deficit
(510,616
)
 
(465,454
)
Total stockholders' equity
1,848,419

 
984,866

Non-controlling interests
4,833

 
—

Total equity
1,853,252

 
984,866

Total liabilities and equity
$
3,377,192

 
$
2,064,459


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

3
AMERICAN FINANCE TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended March 31,
 
2017
 
2016
Revenues:
 
 
 
Rental income
$
51,739

 
$
40,500

Operating expense reimbursements
5,241

 
2,946

Interest income from debt investments
240

 
340

Total revenues
57,220

 
43,786

 
 
 
 
Operating expenses:
 
 
 
Asset management fees to related party
4,750

 
4,500

Property operating
7,042

 
3,337

Impairment charges
3,929

 
—

Acquisition and transaction related
5,436

 
343

General and administrative
4,844

 
3,378

Depreciation and amortization
31,478

 
25,493

Total operating expenses
57,479

 
37,051

Operating (loss) income
(259
)
 
6,735

Other (expense) income:
 
 
 
Interest expense
(15,785
)
 
(12,631
)
Gain on sale of real estate investments
5,222

 
—

Other income
92

 
42

Total other expense, net
(10,471
)
 
(12,589
)
Net loss
$
(10,730
)
 
$
(5,854
)
Net loss attributable to non-controlling interests
13

 
—

Net loss attributable to stockholders
(10,717
)
 
(5,854
)
 
 
 
 
Comprehensive loss attributable to stockholders
$
(10,717
)
 
$
(5,854
)
 
 
 
 
Basic and diluted weighted-average shares outstanding
84,652,179

 
64,955,420

Basic and diluted net loss per share attributable to stockholders
$
(0.13
)
 
$
(0.09
)
 

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

4
AMERICAN FINANCE TRUST, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Three Months Ended March 31, 2017
(In thousands, except share data)
(Unaudited)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-in
Capital
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Non-controlling Interests
 
Total Equity
Balance, December 31, 2016
65,805,184

 
$
658

 
$
1,449,662

 
$
(465,454
)
 
$
984,866

 
$
—

 
$
984,866

Issuances of common stock
38,210,213

 
382

 
916,661

 
—

 
917,043

 
—

 
917,043

Common stock issued through distribution reinvestment plan
491,817

 
5

 
11,882

 
—

 
11,887

 
—

 
11,887

Common stock repurchases
(848,822
)
 
(8
)
 
(20,237
)
 
—

 
(20,245
)
 
—

 
(20,245
)
Share-based compensation, net of forfeitures
2,482

 
—

 
30

 
—

 
30

 
—

 
30

Distributions declared
—

 
—

 
—

 
(34,445
)
 
(34,445
)
 
—

 
(34,445
)
Issuances of operating partnership units
—

 
—

 
—

 
—

 
—

 
4,887

 
4,887

Distributions to non-controlling interest holders
—

 
—

 
—

 
—

 
—

 
(41
)
 
(41
)
Net loss
—

 
—

 
—

 
(10,717
)
 
(10,717
)
 
(13
)
 
(10,730
)
Balance, March 31, 2017
103,660,874

 
$
1,037

 
$
2,357,998

 
$
(510,616
)
 
$
1,848,419

 
$
4,833

 
$
1,853,252


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

5
AMERICAN FINANCE TRUST, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(10,730
)
 
$
(5,854
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
18,324

 
16,815

Amortization of in-place lease assets
13,128

 
8,678

Amortization (including accelerated write-off) of deferred costs
3,504

 
1,100

Amortization of mortgage premiums on borrowings
(1,126
)
 
(976
)
Discount accretion on investment
(6
)
 
(7
)
Amortization of market lease intangibles, net
(453
)
 
415

Share-based compensation
30

 
10

Mark-to-market adjustments
(73
)
 
—

Gain on sale of real estate investments
(5,222
)
 
—

Impairment charges
3,929

 
—

Changes in assets and liabilities:
 
 
 
Prepaid expenses and other assets
1,906

 
(869
)
Accounts payable and accrued expenses
(7,291
)
 
1,921

Deferred rent and other liabilities
(7,202
)
 
(648
)
Restricted cash
(309
)
 
—

Net cash provided by operating activities
8,409

 
20,585

Cash flows from investing activities:
 
 
 
Proceeds from sale of commercial mortgage loans
—

 
56,884

Capital expenditures
(133
)
 
—

Investments in real estate and other assets
(8,714
)
 
(34,244
)
Deposits for real estate investments
(537
)
 
—

Proceeds from sale of real estate investments
139,974

 
—

Cash paid in merger transaction
(94,504
)
 
 
Cash acquired in merger transaction
21,922

 
—

Restricted cash
(337
)
 
—

Net cash provided by investing activities
57,671

 
22,640

Cash flows from financing activities:
 
 
 

Payments on mortgage notes payable
(392
)
 
(251
)
Payments on credit facility
(114,000
)
 
—

Payments of financing costs
(900
)
 
—

Refunds of deferred financing costs
—

 
88

Common stock repurchases
(20,245
)
 
(16,000
)
Distributions paid
(17,166
)
 
(26,767
)
Restricted cash
(1
)
 
(1
)
Net cash used in financing activities
(152,704
)
 
(42,931
)
Net change in cash and cash equivalents
(86,624
)
 
294

Cash and cash equivalents, beginning of period
131,215

 
130,500

Cash and cash equivalents, end of period
$
44,591

 
$
130,794


6
AMERICAN FINANCE TRUST, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash paid for interest
$
12,104

 
$
11,229

Cash paid for income taxes
$
176

 
$
270

 
 
 
 
Non-Cash Financing Activities:
 
 
 
Equity issued in the merger transaction
$
921,930

 
$
—

Credit facility assumed or used to acquire investments in real estate
$
304,000

 
$
—

Mortgage notes payable assumed or used to acquire investments in real estate
$
127,651

 
$
—

Premiums on assumed mortgage notes payable
$
4,143

 
$
—

Mortgage notes payable released in connection with disposition of real estate
$
(1,451
)
 
$
—

Common stock issued through distribution reinvestment plan
$
11,887

 
$
—

Accrued capital expenditures
$
912

 
$
—


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

7
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)


Note 1 — Organization
American Finance Trust, Inc. (the "Company"), formerly known as American Realty Capital Trust V, Inc., is a diversified REIT with a retail focus. The Company owns a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants and a portfolio of stabilized core retail properties, consisting primarily of power centers and lifestyle centers, which were acquired in the Merger (as defined below). The Company intends to focus its future acquisitions primarily on net leased retail properties and stabilized core retail properties. As of March 31, 2017, the Company owned 491 properties, comprised of 20.3 million rentable square feet, which were 97.3% leased, including 456 net leased commercial properties and 35 stabilized core retail properties.
The Company, incorporated on January 22, 2013, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ended December 31, 2013. Substantially all of the Company's business is conducted through American Finance Operating Partnership, L.P. (the "OP"), a Delaware limited partnership, and its wholly-owned subsidiaries.
On April 4, 2013, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 68.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts. The IPO closed in October 2013. As of March 31, 2017, the Company had 103.7 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the Company's distribution reinvestment plan (the "DRIP").
The Company has no employees. The Company has retained American Finance Advisors, LLC (the "Advisor") to manage the Company's affairs on a day-to-day basis. American Finance Properties, LLC (the "Property Manager") serves as the Company's property manager. The Advisor and the Property Manager are wholly owned subsidiaries of AR Global Investments, LLC (the successor business to AR Capital, LLC, the "Sponsor" or "AR Global"), as a result of which, they are related parties of the Company, and each have received or may receive, as applicable, compensation, fees and expense reimbursements for services related to managing the Company's business.
The shares of the Company's common stock have been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "AFIN" (the "Listing"), subject to the Company being in compliance with all applicable listing standards on the date it begins trading on the NYSE. The Company's approval for listing is valid through August 2017, although it may apply to extend the outside date for listing. While the Company intends to list its shares of common stock at a time yet to be determined by its board of directors, there can be no assurance as to when or if the Company's common stock will commence trading or of the price at which our shares may trade.
Note 2 — Merger Transaction
On September 6, 2016, the Company and the OP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with American Realty Capital — Retail Centers of America, Inc. (“RCA”), American Realty Capital Retail Operating Partnership, L.P. (the “RCA OP”) and Genie Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (the “Merger Sub”). The Merger Agreement provided for (a) the merger of RCA with and into the Merger Sub (the “Merger”), with the Merger Sub surviving as a wholly owned subsidiary of the Company and (b) the merger of the RCA OP with and into the OP, with the OP as the surviving entity (the “Partnership Merger”, and together with the Merger, the “Mergers”). The Mergers became effective on February 16, 2017.
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Mergers (the “Effective Time”), each outstanding share of common stock of RCA, $0.01 par value per share (“RCA Common Stock”) (including any restricted shares of RCA Common Stock and fractional shares), was converted into the right to receive (x) a number of shares of common stock of the Company, $0.01 par value per share (the “Company Common Stock”) equal to 0.385 shares of Company Common Stock (the “Stock Consideration”) and (y) cash from the Company, in an amount equal to $0.95 per share (the “Cash Consideration,” and together with the Stock Consideration, the “Merger Consideration”).

8
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

In addition, at the Effective Time, (i) each unit of partnership interest of the RCA OP designated as an OP Unit issued and outstanding immediately prior to the Effective Time (other than those held by RCA as described in clause (ii) below) was automatically converted into 0.424 validly issued units of limited partnership interest of the OP (the “Partnership Merger Consideration”); (ii) each unit of partnership interest of the RCA OP designated as either an OP Unit or a GP Unit held by RCA and issued and outstanding immediately prior to the Effective Time was automatically converted into 0.385 validly issued units of limited partnership interest of the OP; (iii) each unit of partnership interest of the RCA OP designated as a Class B Unit held by RCA’s advisor and a sub-advisor issued and outstanding immediately prior to the Effective Time was converted into the Partnership Merger Consideration (the “Class B Consideration,” and together with the Partnership Merger Consideration and the Merger Consideration, the “Total Merger Consideration”) and (iv) the interest of American Realty Capital Retail Advisor, LLC, the special limited partner of the RCA OP (the “RCA Advisor”), in the RCA OP was redeemed for a cash payment, determined in accordance with the existing terms of the RCA OP’s agreement of limited partnership.
In addition, as provided in the Merger Agreement, all outstanding restricted stock previously issued by RCA became fully vested and entitled to receive the Merger Consideration.
The Company issued 38.2 million shares of Company Common Stock as consideration in the Merger and paid $94.5 million in Cash Consideration.
Prior to the Mergers, the Company and RCA each were sponsored, directly or indirectly, by AR Global. AR Global and its affiliates provide investment and advisory services to the Company, and previously provided such services to RCA, pursuant to written advisory agreements. In connection with, and subject to the terms and conditions of the Merger Agreement, RCA OP units held by AR Global and its affiliates were exchanged for OP Units of the Company and certain special limited partner interests in the RCA OP held by AR Global and its affiliates were, consistent with the terms of the RCA OP partnership agreement, redeemed for a cash payment of approximately $2.8 million.
The Advisor has informed the Company that it has engaged Lincoln Retail REIT Services, LLC (“Lincoln”) as an independent service provider. Lincoln previously provided real estate-related services to the RCA Advisor. The Advisor has informed the Company that, as the Advisor’s independent service provider, Lincoln has agreed to continue to provide, subject to the Advisor’s or its affiliates’ oversight, asset management, property management and leasing services related to those multi-tenant properties formerly owned by RCA and now owned by the Company. For the performance of such real estate-related services, the Advisor has informed the Company that the Advisor has agreed to pass through to Lincoln a portion of the fees and/or other expense reimbursements otherwise payable to the Advisor or its affiliates by the Company. The Company has no direct obligation to Lincoln in connection with such engagement of Lincoln by the Advisor.
Accounting Treatment for the Mergers
The Mergers are accounted for under the acquisition method for business combinations pursuant to accounting principles generally accepted in the United States of America ("GAAP"), with the Company as the accounting acquirer of RCA. The consideration transferred by the Company to acquire RCA establishes a new accounting basis for the assets acquired, liabilities assumed and any non-controlling interests, measured at their respective fair value as of the Effective Time. In determining the fair value of the consideration transferred, including the Stock Consideration and any non-controlling interests, the Company utilized multiple sources including real estate valuations prepared by independent valuation firms and market sales data. To the extent fair value of the Total Merger Consideration exceeds fair value of net assets acquired, any such excess represents goodwill. Alternatively, if fair value of net assets acquired exceeds fair value of the Total Merger Consideration, the transaction could result in a bargain purchase gain that is recognized immediately in earnings and attributable to the Company's common stockholders. Measurement period adjustments to the estimated fair value of identifiable assets and liabilities of RCA, as well as adjustments to the Total Merger Consideration may change the determination and amount of goodwill and/or bargain purchase gain and may impact depreciation, amortization and accretion based on revised fair value of assets acquired and liabilities assumed.

9
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

The following table summarizes the estimated fair value of the consideration transferred pursuant to the Mergers and the estimated fair values of the assets acquired and liabilities assumed as of the effective date of the Mergers.
(In thousands)
 
RCA
Total Consideration:
 
 
Fair value of the Cash Consideration, including redemption of fractional shares, as defined in the Merger Agreement
 
$
94,504

Fair value of the Stock Consideration
 
917,046

Fair value of the Partnership Merger Consideration
 
2

Fair value of the Class B Consideration
 
4,882

Fair value of the Total Merger Consideration
 
$
1,016,434

 
 
 
Assets Acquired at Fair Value
 
 
Land
 
$
282,063

Buildings, fixtures and improvements
 
1,079,944

Acquired intangible lease assets
 
178,634

Total real estate investments, at fair value
 
1,540,641

Cash and cash equivalents
 
21,922

Restricted cash
 
4,241

Prepaid expenses and other assets
 
19,495

Goodwill
 
1,069

Total assets acquired at fair value
 
1,587,368

Liabilities Assumed at Fair Value
 
 
Mortgage notes payable
 
127,651

Mortgage premiums
 
4,143

Credit facility
 
304,000

Market lease liabilities
 
104,840

Derivatives
 
203

Accounts payable and accrued expenses
 
21,291

Deferred rent and other liabilities
 
8,806

Total liabilities assumed at fair value
 
570,934

Net assets acquired
 
$
1,016,434

The allocations in the table above from land, buildings, fixtures and improvements, acquired intangible lease assets and below-market lease liabilities have been provisionally allocated, and will be finalized as soon as practical within the measurement period pursuant to GAAP upon finalization of the valuation process.
As a result of the Merger, the Company acquired goodwill of $1.1 million, which is primarily attributable to expected synergies from combining operations of the Company and RCA.
Note 3 — Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. The interim data includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results for the entire year or any subsequent interim periods.

10
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of, and for the year ended December 31, 2016, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 13, 2017. There have been no significant changes to the Company's significant accounting policies during the three months ended March 31, 2017, other than the updates described below.
Purchase Accounting
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired, including those acquired in the Merger, based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company's analysis of comparable properties in the Company's portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates and the value of in-place leases as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from 12 to 18 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company's pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Any excess of purchase price over the fair values of assets acquired and liabilities assumed are recorded as goodwill. Alternatively, if the fair value of net assets acquired exceeds the fair value of consideration paid, the transaction results in a bargain purchase gain that the Company recognizes immediately in earnings.
Derivative Instruments
The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions.

11
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

The Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any change in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the accompanying consolidated statement of operations and comprehensive loss. If the derivative is designated and qualifies for hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
Non-controlling interests
The non-controlling interests represent the portion of the equity in the OP that is not attributable to the Company. Non-controlling interests are presented as a separate component of equity on the consolidated balance sheets and presented as net income (loss) attributable to non-controlling interests on the consolidated statements of operations and comprehensive loss. Non-controlling interests are allocated a share of net income (loss) based on their share of equity ownership.
Non-controlling interests resulted from the issuance of OP shares in conjunction with the Mergers and were recognized at fair value as of the Effective Time. In determining the fair value of the non-controlling interests, the Company utilized multiple sources including real estate valuations prepared by independent valuation firms and market sales data. Please see Note 2 — Merger Transaction for additional information on the Mergers.
Recently Adopted Accounting Pronouncements
In October 2016, the FASB issued guidance where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. The Company has adopted the provisions of this guidance beginning January 1, 2017 and determined that there is no impact to the Company's consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The Company is evaluating the impact of the implementation of this guidance, including performing a preliminary review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. The Company is continuing to evaluate the allowable methods of adoption.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity's accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. The Company is currently evaluating the impact of the new guidance.

12
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company has begun developing an inventory of all leases as well as identifying any non-lease components in our lease arrangements. The Company is continuing to evaluate the impact of this new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In June 2016, the FASB issued guidance that changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. The amendments may be adopted early for reporting periods beginning after December 15, 2018. The company is currently evaluating the impact of this new guidance.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In November 2016, the FASB issued guidance on the classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In January 2017, the FASB issued guidance on simplifying subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments in this update modify the concept of impairment from the condition that exists to when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The revised guidance is effective for reporting periods beginning after December 15, 2019, and the amendments will be applied prospectively. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this new guidance.
In January 2017, the FASB issued guidance that revises the definition of a business. This new guidance is applicable when evaluating whether an acquisition should be treated as either a business acquisition or an asset acquisition. Under the revised guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not be considered a business. The revised guidance is effective for reporting periods beginning after December 15, 2017, and the amendments will be applied prospectively. Early application is permitted only for transactions that have not previously been reported in issued financial statements. The Company has assessed this revised guidance and expects, based on historical property acquisitions, that in most cases, a future property acquired would be treated as asset acquisition rather than a business acquisition, which would result in the capitalization of related transaction costs. The Company has not adopted this guidance as of March 31, 2017.

13
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

In February 2017, the FASB issued guidance on the derecognition of nonfinancial assets. The guidance clarifies the definition of in substance non-financial assets, unifies guidance related to partial sales of non-financial assets, eliminates rules specifically addressing the sales of real estate, removes the exception to the financial asset derecognition model and clarifies the accounting for contributions of non-financial assets to joint ventures. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this new guidance.

14
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Note 4 — Real Estate Investments
The Company owned 491 properties, which were acquired for investment purposes, as of March 31, 2017. The following table presents the allocation of real estate assets acquired and liabilities assumed during the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
(Dollar amounts in thousands)
 
2017
 
2016
Real estate investments, at cost (1):
 
 
 
 
Land
 
$
283,611

 
$
1,729

Buildings, fixtures and improvements
 
1,086,218

 
29,664

Total tangible assets
 
1,369,829

 
31,393

Acquired intangibles:
 
 
 
 
In-place leases (2)
 
155,588

 
3,162

Above-market lease assets (2)
 
22,751

 
548

Below-market ground lease asset (2)
 
1,233

 
—

Above-market ground lease liability (2)
 
—

 
(85
)
Below-market lease liabilities (2)
 
(104,887
)
 
(774
)
Total intangible assets, net
 
74,685

 
2,851

Credit facility assumed in the Merger
 
(304,000
)
 
—

Mortgage notes payable assumed in the Merger
 
(127,651
)
 
—

Premiums on mortgage notes payable assumed in the Merger
 
(4,143
)
 
—

Other assets acquired and (liabilities assumed) in the Merger, net
 
16,427

 
—

Consideration paid for acquired real estate investments, net of liabilities assumed
 
$
1,025,147

 
$
34,244

Number of properties purchased
 
41

 
4

_____________________________________
(1)
Real estate investments, at cost and market lease liabilities acquired during the three months ended March 31, 2017 have been provisionally allocated pending receipt and review of final appraisals and/or other information.
(2)
Weighted-average remaining amortization periods for in-place leases, above-market lease assets and below-market lease liabilities acquired during the three months ended March 31, 2017 were 6.2 years, 9.1 years and 18.9 years, respectively, as of each property's respective acquisition date.
Total acquired intangible lease assets and liabilities consist of the following as of the dates presented:
 
 
March 31, 2017
 
December 31, 2016
(In thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
In-place leases
 
$
416,278

 
$
99,208

 
$
317,070

 
$
286,548

 
$
95,547

 
$
191,001

Above-market lease assets
 
33,098

 
8,099

 
24,999

 
13,581

 
8,106

 
5,475

Below-market ground lease asset
 
1,233

 
4

 
1,229

 
—

 
—

 
—

Total acquired intangible lease assets
 
$
450,609

 
$
107,311

 
$
343,298

 
$
300,129

 
$
103,653

 
$
196,476

Intangible liabilities:
 
 

 
 

 
 
 
 
 
 
 
 
Above-market ground lease liability
 
$
85

 
$
2

 
$
83

 
$
85

 
$
1

 
$
84

Below-market lease liabilities
 
123,214

 
6,183

 
117,031

 
18,443

 
4,612

 
13,831

Total acquired intangible lease liabilities
 
$
123,299

 
$
6,185

 
$
117,114

 
$
18,528

 
$
4,613

 
$
13,915


15
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

The following table presents amortization expense and adjustments to revenue and property operating expense for intangible assets and liabilities for the three months and three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
(In thousands)
 
2017
 
2016
In-place leases
 
$
13,128

 
$
8,678

Total added to depreciation and amortization
 
$
13,128

 
$
8,678

 
 
 
 
 
Above-market leases
 
$
(1,164
)
 
$
(756
)
Below-market lease liabilities
 
1,620

 
341

Total added to (deducted from) rental income
 
$
456

 
$
(415
)
 
 
 
 
 
Below-market ground lease asset
 
$
4

 
$
—

Above-market ground lease liability
 
(1
)
 
—

Total deducted from property operating expense
 
$
3

 
$
—

The following table provides the projected amortization expense and adjustments to revenue and property operating expense for intangible assets and liabilities for the next five years:
(In thousands)
 
April 1, 2017 to December 31, 2017
 
2018
 
2019
 
2020
 
2021
In-place leases
 
$
52,084

 
$
53,691

 
$
42,921

 
$
33,891

 
$
28,710

Total to be added to depreciation and amortization
 
$
52,084

 
$
53,691

 
$
42,921

 
$
33,891

 
$
28,710

 
 
 
 
 
 
 
 
 
 
 
Above-market leases
 
$
(4,690
)
 
$
(4,084
)
 
$
(3,232
)
 
$
(2,411
)
 
$
(2,074
)
Below-market lease liabilities
 
7,944

 
9,185

 
8,457

 
7,736

 
6,875

Total to be added to rental income
 
$
3,254

 
$
5,101

 
$
5,225

 
$
5,325

 
$
4,801

 
 
 
 
 
 
 
 
 
 
 
Below-market ground lease asset
 
$
23

 
$
32

 
$
32

 
$
32

 
$
32

Above-market ground lease liability
 
(1
)
 
(2
)
 
(2
)
 
(2
)
 
(2
)
Total to be added to property operating expense
 
$
22

 
$
30

 
$
30

 
$
30

 
$
30

The following table presents unaudited pro forma information as if the Merger had been consummated on January 1, 2016:
 
 
Three Months Ended March 31,
(In thousands, except per share data)
 
2017 (1)
 
2016
Pro forma revenues
 
$
74,588

 
$
77,623

Pro forma net loss
 
$
(5,429
)
 
$
(5,183
)
Basic and diluted pro forma net loss per share
 
$
(0.05
)
 
$
(0.05
)
_____________________
(1)
For the three months ended March 31, 2017, aggregate revenues and net income derived from the Company's 2017 acquisitions (for the Company's period of ownership) were $16.5 million and $1.4 million, respectively.

16
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

The following table presents future minimum base rent payments on a cash basis due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items:
(In thousands)
 
Future Minimum
Base Rent Payments
April 1, 2017 to December 31, 2017
 
$
181,241

2018
 
225,193

2019
 
212,087

2020
 
195,222

2021
 
184,196

Thereafter
 
906,779

 
 
$
1,904,718

The following table lists the tenants (including, for this purpose, all affiliates of such tenants) from which the Company derives annualized rental income on a straight-line basis constituting 10.0% or more of the Company's consolidated annualized rental income on a straight-line basis for all portfolio properties as of the dates indicated:
 
 
March 31,
Tenant
 
2017
 
2016
SunTrust Bank
 
11.6%
 
17.7%
Sanofi US
 
7.5%
 
11.4%
C&S Wholesale Grocer
 
6.7%
 
10.2%
The termination, delinquency or non-renewal of leases by one or more of the above tenants may have a material adverse effect on revenues. No other tenant represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of March 31, 2017 and 2016.
The following table lists the states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of the dates indicated:
 
 
March 31,
State
 
2017
 
2016
New Jersey
 
8.1%
 
20.0%
Georgia
 
7.3%
 
11.0%
The Company did not own properties in any other state that in total represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of March 31, 2017 and 2016.
Real Estate Held For Sale
The Company entered into a purchase and sale agreement dated as of December 27, 2016, as amended on February 17, 2017 and March 15, 2017, for the sale of three properties leased to C&S Wholesale Grocer (the "C&S Properties") for a purchase price of $121.0 million, exclusive of closing costs. The buyer's obligation to close on its acquisition of the C&S Properties was subject to the satisfactory completion of the buyer's due diligence review, which the buyer completed on February 17, 2017. The Company also entered into purchase and sale agreements for the sale of three single-tenant net lease properties operated by SunTrust Bank, a wholly owned subsidiary of SunTrust Banks, Inc. ("SunTrust") for an aggregate contract price of $1.5 million, exclusive of closing costs.
Concurrently with entering into these agreements and satisfactory completion of the conditions noted above, the Company stopped recognizing depreciation and amortization expense and reclassified the long-lived assets associated with these properties as held for sale. The disposal of the properties referenced above does not represent a strategic shift. Accordingly, the operating results of these properties remain classified within continuing operations for all periods presented.

17
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

The Company recognized impairment charges of $2.4 million related to properties held for sale, as the carrying amount of the long-lived assets associated with them was greater than the Company's estimate of their fair value less estimated costs to sell, which is reflected in impairment charges on the consolidated statement of operations and comprehensive loss for the three months ended March 31, 2017.
The following table details the major classes of assets associated with the properties that have been reclassified as held for sale as of March 31, 2017 and December 31, 2016.
(Dollar amounts in thousands)
 
March 31, 2017
 
December 31, 2016
Real estate investments held for sale, at cost:
 
 
 
 
Land
 
$
18,317

 
$
7,225

Buildings, fixtures and improvements
 
86,286

 
142,798

Acquired intangible lease assets
 
29,047

 
18,145

Total real estate assets held for sale, at cost
 
133,650

 
168,168

Less accumulated depreciation and amortization
 
(18,532
)
 
(29,213
)
Total real estate investments held for sale, net
 
115,118

 
138,955

Market lease liabilities, net
 
(67
)
 
—

 
 
 
 
 
Impairment charges related to properties reclassified as held for sale
 
(2,393
)
 
(1,353
)
Assets held for sale
 
$
112,658

 
$
137,602

Real Estate Sales
During the three months ended March 31, 2017, the Company closed on the sale of three properties leased to Merrill Lynch, Pierce, Fenner & Smith (the "Merrill Lynch Properties") for a contract price of $148.0 million, exclusive of closing costs, resulting in a gain of $5.2 million, which is reflected in gain on sale of real estate investments on the consolidated statement of operations and comprehensive loss for the three months ended March 31, 2017. Also during the three months ended March 31, 2017, the Company closed on the sale of two single-tenant net lease properties operated by SunTrust Bank, a wholly owned subsidiary of SunTrust Banks, Inc. ("SunTrust") for an aggregate contract price of $1.0 million, exclusive of closing costs. These sales resulted in impairment charges of $1.4 million. The impairment charges were recognized during 2016, at the time the properties were classified as held for sale.
The disposal of the properties referenced above did not represent a strategic shift. Accordingly, the operating results of the properties sold remain classified within continuing operations for all periods presented until the date of disposal.
Impairment of Held for Use Real Estate Investments
As of March 31, 2017 and December 31, 2016, the Company owned 55 and 57 held for use single-tenant net lease properties operated by SunTrust, respectively, which had lease terms set to expire between December 31, 2017 and March 31, 2018. As a result, the Company reconsidered its intended holding period for these properties and evaluated the impact on its ability to recover the carrying value of such properties based on the expected cash flows over its intended holding period. The Company primarily used a market approach to estimate the future cash flows expected to be generated. This approach involved evaluating comparable sales of properties in the same geographic region as the SunTrust properties in order to generate an estimated sale price. The Company made certain assumptions in this approach including, among others, that the properties in the comparable sales used in the analysis share similar characteristics to the SunTrust properties, and that market and economic conditions at the time of any potential sales of these SunTrust properties, such as discount rates, demand for space, competition for tenants, changes in market rental rates, and costs to operate the property, would be similar to those in the comparable sales analyzed. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analysis may not be achieved, and actual losses or impairment may be realized in the future.
For some of the held for use SunTrust properties noted above, the Company has an executed letter of intent ("LOI") or purchase and sale agreement ("PSA") to sell the properties. In those instances, the Company used the sale price from the LOI or PSA to estimate the future cash flows expected to be generated. The Company made certain assumptions in this approach as well, mainly that the sale of these properties would close at the terms specified in the LOI or PSA. There can be no guarantee that the sales of these properties will close under these terms or at all.

18
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

As a result of its consideration of impairment, the Company determined that the carrying value of 43 of the held for use SunTrust properties noted above exceeded their estimated fair values as of December 31, 2016 and recognized an aggregate impairment charge of $24.7 million during the year ended December 31, 2016. As of March 31, 2017, the Company recognized additional impairment charges of $1.5 million on five of the held for use SunTrust properties based on LOIs received, which is included on the consolidated statement of operations and comprehensive loss for the three months ended March 31, 2017. No impairment was recognized during the three months ended March 31, 2016.
Note 5 — Commercial Mortgage Loans
The following table is a summary of the Company's commercial mortgage loan portfolio:
 
 
 
 
March 31, 2017
 
December 31, 2016
Loan Type
 
Property Type
 
Par Value
 
Percentage
 
Par Value
 
Percentage
 
 
 
 
(In thousands)
 
 
 
(In thousands)
 
 
Senior
 
Student Housing — Multifamily
 
$
17,200

 
100.0
%
 
$
17,200

 
100
%
Credit Characteristics
As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. The loans are scored on a scale of 1 to 5 as follows:
Investment Rating
 
Summary Description
1
 
Investment exceeding fundamental performance expectations and/or capital gain expected. Trends and risk factors since time of investment are favorable.
2
 
Performing consistent with expectations and a full return of principal and interest expected. Trends and risk factors are neutral to favorable.
3
 
Performing investments requiring closer monitoring. Trends and risk factors show some deterioration.
4
 
Underperforming investment with some loss of interest expected but still expecting a positive return on investment. Trends and risk factors are negative.
5
 
Underperforming investment with expected loss of interest and some principal.
All commercial mortgage loans are assigned an initial risk rating of 2. As of March 31, 2017, the risk rating of the Company's commercial loan held for investment was 3. As of March 31, 2017, the Company did not have any loans that were past due on their payments, in non-accrual status or impaired. No allowance for loan losses has been recorded as of March 31, 2017 or December 31, 2016.
For the three months ended March 31, 2017 and 2016, the activity on the Company's commercial mortgage loans, held for investment, was as follows:
 
 
Three Months Ended
(In thousands)
 
March 31, 2017
 
March 31, 2016
Beginning balance
 
$
17,175

 
$
17,135

Discount accretion and premium amortization (1)
 
6

 
7

Ending balance
 
$
17,181

 
$
17,142

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

19
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Note 6 — Credit Facility
On February 16, 2017, the Company, the OP, and certain other subsidiaries of the Company acting as guarantors, entered into an amendment, assumption, joinder and reaffirmation of guaranties (the “Second Amendment”) to an unsecured amended and restated credit agreement, dated December 2, 2014 (as amended by the Second Amendment, the “Credit Agreement”), by and among the RCA OP to which the OP is successor by merger, BMO Harris Bank N.A., as administrative agent, letter of credit issuer, swingline lender and a lender, and the other parties thereto, relating to a revolving credit facility (the “Amended Credit Facility”). The Second Amendment provides for, among other things, the OP to become the borrower and principal obligor under the Credit Agreement and the Amended Credit Facility, and for the Company to become a guarantor under the Amended Credit Facility. RCA and the RCA OP were parties to the Credit Agreement prior to closing of the Merger.
The Amended Credit Facility provides for aggregate revolving loan borrowings of up to $325.0 million (subject to unencumbered asset pool availability), a swingline subfacility of $25.0 million and a $20.0 million letter of credit subfacility, subject to certain conditions. Through an uncommitted “accordion feature,” the OP, subject to certain conditions, may increase commitments under the Amended Credit Facility to up to $575.0 million.
The Amended Credit Facility will mature on May 1, 2018. Borrowings under the Amended Credit Facility will bear interest at either (i) the base rate (which is defined in the Credit Agreement as the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) LIBOR for a one month interest period plus 1.00%) plus an applicable spread ranging from 0.35% to 1.00%, depending on the Company’s consolidated leverage ratio, or (ii) LIBOR plus an applicable spread ranging from 1.35% to 2.00%, depending on the Company’s consolidated leverage ratio.
The Amended Credit Facility provides for quarterly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period (though no longer than three months) with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Amended Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. Upon the occurrence of an event of default, the requisite lenders have the right to terminate their obligations under the Amended Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. The Company, certain of its subsidiaries and certain subsidiaries of the OP will guarantee the obligations under the Amended Credit Facility.
In connection with the Merger, the Company assumed the outstanding balance on the Amended Credit Facility of $304.0 million. During the three months ended March 31, 2017, the Company paid down $114.0 million, leaving an outstanding balance of $190.0 million as of March 31, 2017.
The Amended Credit Facility contains various customary covenants, including but not limited to financial maintenance covenants with respect to maximum consolidated leverage and consolidated secured leverage, minimum fixed charge coverage, a maximum ratio of other recourse debt to total asset value and minimum net worth. As of March 31, 2017, the Company was in compliance with the financial covenants under the Credit Facility.

20
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Note 7 — Mortgage Notes Payable
The Company's mortgage notes payable as of March 31, 2017 and December 31, 2016 consisted of the following:
 
 
 
 
Outstanding Loan Amount as of
 
Effective Interest Rate as of
 
 
 
 
 
 
Portfolio
 
Encumbered Properties
 
March 31,
2017
 
December 31,
2016
 
March 31,
2017
 
December 31,
2016
 
Interest Rate
 
Maturity
 
Anticipated Repayment
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
SAAB Sensis I
 
1
 
$
7,750

 
$
7,841

 
5.93
%
 
5.93
%
 
Fixed
 
Apr. 2025
 
Apr. 2025
SunTrust Bank II
 
30
 
25,000

 
25,000

 
5.50
%
 
5.50
%
 
Fixed
 
Jul. 2031
 
Jul. 2021
C&S Wholesale Grocer I
 
4
 
82,313

 
82,313

 
5.48
%
 
5.48
%
 
Fixed
 
Apr. 2037
 
Apr. 2017
SunTrust Bank III
 
111
 
88,208

 
88,567

 
5.50
%
 
5.50
%
 
Fixed
 
Jul. 2031
 
Jul. 2021
SunTrust Bank IV
 
27
 
21,243

 
21,243

 
5.50
%
 
5.50
%
 
Fixed
 
Jul. 2031
 
Jul. 2021
Sanofi US I
 
1
 
125,000

 
125,000

 
5.16
%
 
5.16
%
 
Fixed
 
Jul. 2026
 
Jan. 2021
Stop & Shop I
 
4
 
38,090

 
38,271

 
5.63
%
 
5.63
%
 
Fixed
 
Jun. 2041
 
Jun. 2021
Multi-Tenant Mortgage Loan
 
267
 
648,440

 
649,532

 
4.36
%
 
4.36
%
 
Fixed
 
Sep. 2020
 
Sep. 2020
Liberty Crossing
 
1
 
11,000

 
—

 
4.66
%
 
—
%
 
Fixed
 
Jul. 2018
 
Jul. 2018
San Pedro Crossing
 
1
 
17,985

 
—

 
3.79
%
 
—
%
 
Fixed
 
Jan. 2018
 
Jan. 2018
Tiffany Springs MarketCenter
 
1
 
33,802

 
—

 
3.92
%
 
—
%
 
Fixed
(2) 
Oct. 2018
 
Oct. 2018
Shops at Shelby Crossing
 
1
 
23,300

 
—

 
4.97
%
 
—
%
 
Fixed
 
Mar. 2024
 
Mar. 2024
Patton Creek
 
1
 
41,443

 
—

 
5.76
%
 
—
%
 
Fixed
 
Dec. 2020
 
Dec. 2020
Gross mortgage notes payable
 
450
 
1,163,574

 
1,037,767

 
4.75
%
(1) 
4.75
%
(1) 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization
 
 
 
(14,347
)
 
(15,492
)
 
 
 
 
 
 
 
 
 
 
Mortgage notes payable, net of deferred financing costs
 
 
 
$
1,149,227

 
$
1,022,275

 
 
 
 
 
 
 
 
 
 
_____________________________________
(1)
Calculated on a weighted-average basis for all mortgages outstanding as of the dates indicated.
(2)
Fixed as a result of entering into a swap agreement, which is included in derivatives, at fair value on the unaudited consolidated balance sheet as of March 31, 2017.
As of March 31, 2017 and December 31, 2016, the Company had pledged $2.1 billion in real estate investments as collateral for its mortgage notes payable. This real estate is not available to satisfy other debts and obligations unless first satisfying the mortgage notes payable on the properties.
During August 2015, certain subsidiaries of the Company entered into a $655.0 million mortgage loan agreement ("Multi-Tenant Mortgage Loan") with Barclays Bank PLC, Column Financial Inc. and UBS Real Estate Securities Inc. (together, the "Lenders"). The Multi-Tenant Mortgage Loan has a stated maturity of September 6, 2020 and a stated annual interest rate of 4.30%. As of March 31, 2017, the Multi-Tenant Mortgage Loan was secured by mortgage interests in 267 of the Company's properties. As of March 31, 2017, the outstanding balance under the Multi-Tenant Mortgage Loan was $648.4 million.
At the closing of the Multi-Tenant Mortgage Loan, the Lenders placed $42.5 million of the proceeds from the Multi-Tenant Mortgage Loan in escrow, to be released to the Company upon certain conditions, including the receipt of ground lease estoppels, performance of certain repairs and receipt of environmental insurance. As of March 31, 2017, the Lenders had released $34.6 million of the amount originally placed in escrow to the Company. As of March 31, 2017, $7.9 million of the proceeds from the Multi-Tenant Mortgage Loan remained in escrow and is included in restricted cash on the unaudited consolidated balance sheet as of March 31, 2017.

21
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

The following table summarizes the scheduled aggregate principal payments on mortgage notes payable based on stated maturity dates for the five years subsequent to March 31, 2017 and thereafter:
(In thousands)
 
Future Principal Payments
April 1, 2017 to December 31, 2017
 
$
1,691

2018
 
65,182

2019
 
2,533

2020
 
689,325

2021
 
1,398

Thereafter
 
403,445

 
 
$
1,163,574

The Company's mortgage notes payable agreements require the compliance of certain property-level financial covenants including debt service coverage ratios. As of March 31, 2017, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
Note 8 — Fair Value Measurements
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair value. GAAP establishes market-based or observable inputs as the preferred sources of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
The Company's derivative instrument is measured at fair value on a recurring basis. Although the Company has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with this derivative utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparty. However, as of March 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivative. As a result, the Company has determined that its derivative valuation in its entirety is 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 had impaired real estate investments held for sale, which were carried at fair value on a non-recurring basis on the consolidated balance sheets as of March 31, 2017 and December 31, 2016. Impaired real estate investments held for sale were valued using the sale price from the purchase and sale agreement ("PSA") less costs to sell, which is an observable input. As a result, the Company's impaired real estate investments held for sale are classified in Level 2 of the fair value hierarchy.

22
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

The Company also had impaired real estate investments held for use, which were carried at fair value on a non-recurring basis on the consolidated balance sheet as of March 31, 2017 and December 31, 2016. As of March 31, 2017 and December 31, 2016, the Company owned 55 and 57 held for use single-tenant net lease properties operated by SunTrust, respectively, which had lease terms set to expire between December 31, 2017 and March 31, 2018. As a result, the Company reconsidered its intended holding period for these properties and evaluated the impact on its ability to recover the carrying value of such properties based on the expected cash flows over its intended holding period. As a result of its consideration of impairment, the Company determined that the carrying value of 43 of the held for use SunTrust properties noted above exceeded their estimated fair values as of December 31, 2016 and recognized an aggregate impairment charge of $24.7 million, which was recognized during 2016. As of March 31, 2017, the Company recognized additional impairment charges of $1.5 million on five of the held for use SunTrust properties based on LOIs received, which is included on the consolidated statement of operations and comprehensive loss for the three months ended March 31, 2017.
The Company primarily used a market approach to estimate the future cash flows expected to be generated. This approach involved evaluating comparable sales of properties in the same geographic region as the SunTrust properties in order to generate an estimated sale price, which is an unobservable input. As a result, the impaired properties that the Company evaluated using this approach are classified in Level 3 of the fair value hierarchy.
For some of the SunTrust properties noted above, the Company had an executed LOI or PSA to sell the property. In those instances, the Company used the sale price from the LOI or PSA to estimate the future cash flows expected to be generated, which is an observable input. As a result, the impaired properties that the Company evaluated using this approach are classified in Level 2 of the fair value hierarchy.
The following table presents information about the Company's assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2017 and December 31, 2016, aggregated by the level in the fair value hierarchy within which those instruments fall.
(In thousands)
 
Quoted Prices
in Active
Markets
Level 1
 
Significant Other
Observable
Inputs
Level 2
 
Significant
Unobservable
Inputs
Level 3
 
Total
March 31, 2017
 
 

 
 

 
 

 
 

Impaired real estate investments held for sale
 
$
—

 
$
77,466

 
$
—

 
$
77,466

Impaired real estate investments held for use
 
—

 
4,456

 
—

 
4,456

Interest rate swap
 
—

 
(130
)
 
—

 
(130
)
Total
 
$
—

 
$
81,792

 
$
—

 
$
81,792

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Impaired real estate investments held for sale
 
$
—

 
$
961

 
$
—

 
$
961

Impaired real estate Investments held for use
 
—

 
6,525

 
45,032

 
51,557

Total
 
$
—

 
$
7,486

 
$
45,032

 
$
52,518

A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets and liabilities. The Company's policy with respect to transfers between levels of the fair value hierarchy is to recognize transfers into and out of each level as of the end of the reporting period. There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2017 and 2016.

23
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(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, prepaid expenses and other assets, accounts payable and accrued expenses and distributions payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets as of March 31, 2017 and December 31, 2016 are reported in the following table:
 
 
 
 
Carrying Amount at
 
Fair Value at
 
Carrying Amount at
 
Fair Value at
(In thousands)
 
Level
 
March 31, 2017
 
March 31, 2017
 
December 31, 2016
 
December 31, 2016
Commercial mortgage loan, held for investment
 
3
 
$
17,181

 
$
17,200

 
$
17,175

 
$
17,200

Gross mortgage notes payable and mortgage premiums, net
 
3
 
$
1,177,272

 
$
1,210,373

 
$
1,048,448

 
$
1,076,065

Credit facility
 
3
 
$
190,000

 
$
190,000

 
$
—

 
$
—

The fair value of the commercial mortgage loan is estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of investments. The fair value of gross mortgage notes payable is based on combinations of independent third party estimates and management's estimates of market interest rates. Advances under the Credit Facility are considered to be reported at fair value, because its interest rate varies with changes in LIBOR, and there has not been a significant change in credit risk of the Company or credit markets since origination.
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 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 related parties 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.
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 loss 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 loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.

24
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

As of March 31, 2017, the Company did not have any derivatives that were designated as cash flow hedges of interest rate risk.
Non-designated Hedges
Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. A gain of $0.1 million is included in interest expense on the consolidated statement of operations and comprehensive loss for the three months ended March 31, 2017.
As of March 31, 2017, the Company had the following outstanding interest rate derivatives that were not designated as hedges in qualifying hedging relationships. The Company had no derivatives outstanding as of December 31, 2016:
 
 
March 31, 2017
Interest Rate Derivative
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
Interest Rate Swap
 
1
 
$
34,098

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the accompanying consolidated balance sheet as of March 31, 2017. The Company had no derivatives outstanding as of December 31, 2016:
(In thousands)
 
Balance Sheet Location
 
March 31, 2017
Non-designated derivatives
 
 
 
 
Interest Rate Swap
 
Derivatives, at fair value
 
$
(130
)
Credit-risk-related Contingent Features
The Company has an agreement with its derivative counterparty that contains 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 March 31, 2017, the fair value of derivatives in a net liability position including accrued interest, but excluding any adjustment for nonperformance risk related to these agreements, was $0.2 million. As of March 31, 2017, 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 $0.2 million at March 31, 2017.
Note 10 — Common Stock
As of March 31, 2017 and December 31, 2016, the Company had 103.7 million and 65.8 million shares of common stock outstanding, respectively, including unvested restricted shares and shares issued pursuant to the DRIP.
In April 2013, the Company's board of directors authorized, and the Company declared, a distribution payable on a monthly basis to stockholders of record on each day at a rate equal to $1.65 per annum, per share of common stock. Distributions are payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distributions payments are not assured.
On March 17, 2017, the Company's board of directors approved an estimated net asset value per share of the Company's common stock ("Estimated Per-Share NAV) as of December 31, 2016, which was published on March 20, 2017. The Company intends to publish subsequent valuations of Estimated Per-Share NAV periodically at the discretion of the Company's board of directors, provided that such valuations will be made at least once annually. The Estimated Per-Share NAV does not represent: (1) the amount at which the Company's shares would trade on a national securities exchange or a third party would pay for the Company, (2) the amount a stockholder would obtain if he or she tried to sell his or her shares or (3) the amount stockholders would receive if the Company liquidated its assets and distributed the proceeds after paying all of its expenses and liabilities. In addition, the Estimated Per-Share NAV does not reflect events subsequent to December 31, 2016 that would have affected the Company's net asset value.

25
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Share Repurchase Program
The Company's board of directors has adopted the share repurchase program (as amended and restated, the "SRP"), which permits investors to sell their shares back to the Company after they have held them for at least one year, subject to certain conditions and limitations. The Company may repurchase shares on a semiannual basis, at each six-month period ending June 30 and December 31.
Under the SRP, the repurchase price per share for requests other than for death or disability are as follows:
•
after one year from the purchase date — 92.5% of the then-current Estimated Per-Share NAV;
•
after two years from the purchase date — 95.0% of the then-current Estimated Per-Share NAV;
•
after three years from the purchase date — 97.5% of the then-current Estimated Per-Share NAV; and
•
after four years from the purchase date — 100.0% of the then-current Estimated Per-Share NAV.
In the case of requests for death or disability, the repurchase price per share will be equal to Estimated Per-Share NAV at the time of repurchase.
Under the SRP, repurchases at each semiannual period are limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding during the previous fiscal year. Repurchases pursuant to the SRP for any given semiannual period are funded from proceeds received during that same semiannual period through the issuance of common stock pursuant to the DRIP, as well as any reservation of funds the board of directors may, in its sole discretion, make available for this purpose. If the establishment of an Estimated Per-Share NAV occurs during any semiannual period, any repurchase requests received during such semiannual period are paid at a price based on Estimated Per-Share NAV applicable on the last day of the semiannual period, as described above.
The Company's board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase, change the purchase price for repurchases or otherwise amend the terms of, suspend or terminate the SRP pursuant to any applicable notice requirements under the SRP. Due to these limitations, the Company cannot guarantee that it will be able to accommodate all repurchase requests.
When a stockholder requests repurchases and the repurchases are approved, the Company reclassifies such an obligation from equity to a liability based on the settlement value of the obligation. Shares repurchased have the status of authorized but unissued shares.
The following table summarizes the repurchases of shares under the SRP cumulatively through March 31, 2017:
 
 
Number of Shares
 
Weighted-Average Price per Share
Cumulative repurchases as of December 31, 2016
 
2,081,499

 
$
24.12

Three months ended March 31, 2017
 
848,822

(1) 
23.85

Cumulative repurchases as of March 31, 2017
 
2,930,321

 
$
24.04

___________________________________
(1)
Excludes rejected repurchases of 5.9 million shares, which were unfulfilled as of March 31, 2017.
Distribution Reinvestment Plan
Pursuant to the DRIP, the Company's stockholders could elect to reinvest distributions by purchasing shares of common stock. Until November 14, 2014, the Company offered shares pursuant to the DRIP at $23.75, which was 95.0% of the initial offering price of shares of common stock in the IPO. Effective November 14, 2014, the Company began offering shares pursuant to the DRIP at the then-current Estimated Per-Share NAV. The DRIP was suspended following the payment of the Company's June 2015 distribution on July 1, 2015.
On April 1, 2016, the Company reinstated the DRIP and registered an additional 7.7 million shares of common stock, offered at the then-current Estimated Per-Share NAV, for use under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-210532). On August 30, 2016, in consideration of the Merger, the Company's board of directors determined to suspend the DRIP effective immediately. Following the effectiveness of the joint proxy statement/prospectus relating to the Mergers on December 16, 2016, the Company reinstated the DRIP.

26
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP. Shares issued pursuant to the DRIP are recorded within equity in the accompanying consolidated balance sheets in the period distributions are declared. During the three months ended March 31, 2017, 0.5 million shares of common stock were issued pursuant to the DRIP.
Note 11 — Commitments and Contingencies
Future Minimum Ground Lease Payments
The Company entered into ground lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter:
(In thousands)
 
Future Minimum Base Rent Payments
April 1, 2017 to December 31, 2017
 
$
1,079

2018
 
1,427

2019
 
1,437

2020
 
1,219

2021
 
901

Thereafter
 
13,450

 
 
$
19,513

Litigation and Regulatory Matters
On January 13, 2017, four affiliated stockholders of RCA filed in the United States District Court for the District of Maryland a putative class action lawsuit against the Company, Edward M. Weil, Jr., Leslie D. Michelson, Edward G. Rendell (Weil, Michelson and Rendell, the “Director Defendants”), AR Global, and the Company, alleging violations of Sections 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by RCA and the Director Defendants, violations of Section 20(a) of the Exchange Act by AR Global and the Director Defendants, breaches of fiduciary duty by the Director Defendants, and aiding and abetting breaches of fiduciary duty by AR Global and the Company in connection with the negotiation of and proxy solicitation for a shareholder vote on the proposed merger of the Company and RCA and an amendment to RCA's Articles of Incorporation.  Plaintiffs seek on behalf of the putative class rescission of the merger transaction, which was voted on and approved by stockholders on February 13, 2017, and closed on February 17, 2017, together with unspecified rescissory damages, unspecified actual damages, and costs and disbursements of the action. On April 26, 2017, the Court appointed a lead plaintiff, who has 45 days from that date to either adopt the current complaint or file an Amended Complaint. The Company and the Director Defendants deny wrongdoing and liability and intend to vigorously defend the action. Due to the early stage of the litigation, no estimate of a probable loss or any reasonable possible losses are determinable at this time. No provisions for such losses have been recorded in the accompanying consolidated financial statements for the year ended March 31, 2017.
There are no other material legal or regulatory proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company maintains environmental insurance for its properties that provides coverage for potential environmental liabilities, subject to the policy's coverage conditions and limitations. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on its financial position or results of operations.

27
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Note 12 — Related Party Transactions and Arrangements
As of March 31, 2017 and December 31, 2016, American Finance Special Limited Partner, LLC (the "Special Limited Partner"), an entity controlled by the Sponsor, owned 8,888 shares of the Company's outstanding common stock and 90 and 30,691 units, respectively, of limited partner interests in the OP ("OP Units"). After holding the OP Units for a period of one year, or upon liquidation of the OP or sale of substantially all of the assets of the OP, holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO. American National Stock Transfer, LLC ("ANST"), a subsidiary of the parent company of the Former Dealer Manager, provided other general professional services through January 2016. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was under common control with the Sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name, Aretec Group, Inc. On March 8, 2017, the creditor trust established in connection with the RCAP bankruptcy filed suit against the Sponsor, the Advisor, advisors of other entities sponsored by the Sponsor, and the Sponsor’s principals (including Edward M. Weil, Jr.). The suit alleges, among other things, certain breaches of duties to RCAP. The Company is not named in the suit, nor are there any allegations related to the services the Advisor provides to the Company.  The Advisor has informed the Company that it believes that the suit is without merit and intends to defend against it vigorously.
Fees and Participations Incurred in Connection With the Operations of the Company
On April 29, 2015, the independent directors of the board of directors unanimously approved certain amendments to the Amended and Restated Advisory Agreement, as amended (the "Original A&R Advisory Agreement"), by and among the Company, the OP and the Advisor (the "Second A&R Advisory Agreement"). The Second A&R Advisory Agreement, which superseded the Original A&R Advisory Agreement, took effect on July 20, 2015, the date on which the Company filed certain changes to the Company's Articles of Amendment and Restatement, which were approved by the Company's stockholders on June 23, 2015. The initial term of the Second A&R Advisory Agreement is 20 years beginning on April 29, 2015, and is automatically renewable for another 20-year term upon each 20-year anniversary unless terminated by the board of directors for cause.
On September 6, 2016, the Company entered into an amendment of the Second A&R Advisory Agreement (the "Third A&R Advisory Agreement"), which became effective upon the Effective Time of the Mergers. Under the Third A&R Advisory Agreement, the Company has the right to internalize the services and terminate the Advisory Agreement, referred to as an “internalization,” after January 1, 2018 as long as (1) more than 67% of the Company’s independent directors approve the internalization; (2) the Company provides written notice to the Advisor; and (3) the Company pays the Advisor a fee equal to (a) $15.0 million plus (b) either (x) if the internalization occurs on or before December 31, 2028, the Subject Fees (defined below) multiplied by 4.5 or (y) if the internalization occurs on or after January 1, 2029, the Subject Fees multiplied by 3.5 plus (c)(x) 1% of the purchase price (excluding the portion of the purchase price funded with equity proceeds raised prior to the end of the fiscal quarter in which the notice of election occurs) of each acquisition or merger that occurs between the end of the fiscal quarter in which notice is given and the internalization and (y) without duplication, 1% of the amount of new equity raised by the Company between the end of the fiscal quarter in which notice is given and the internalization. Subject Fees means (I) (A) all amounts payable pursuant to the Advisory Agreement and the Property Management Agreement for the fiscal quarter in which notice occurs multiplied by (B) four plus (II) without duplication, the annual increase in the base management fee resulting from the amount of new equity raised by the Company within the fiscal quarter in which notice occurs, as described above. The initial term of the Third A&R Advisory Agreement, which commenced upon the Effective Time, extends to April 29, 2035, and is automatically renewable for another 20-year term upon each 20-year anniversary.
On September 6, 2016, the Company entered into an amendment to the agreement of limited partnership of the OP (the “A&R OP Agreement”), which became effective upon the Effective Time. The A&R OP Agreement makes certain changes to the provisions of the partnership agreement relating to (a) distributions of net sales proceeds and the Termination Note (as defined in the A&R OP Agreement) issuable on termination of the Third A&R Advisory Agreement to address the issuance of shares of the Company’s common stock pursuant to the Merger and in future transactions; (b) internalization of the Advisor’s services after the Effective Time pursuant to the conditions in the Third A&R Advisory Agreement; and (c) certain matters related to changes in the Third A&R Advisory Agreement.

28
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Prior to January 16, 2016, the Advisor was paid an acquisition fee equal to 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment. The Advisor also has been and may continue to be reimbursed for costs it incurs in providing investment-related services, or "insourced expenses." These insourced expenses may not exceed 0.5% of the contract purchase price of each acquired property and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company has paid and may continue to pay third party acquisition expenses. The aggregate amount of acquisition fees and financing coordination fees (as described below) were not to exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. The Second A&R Advisory Agreement terminated the acquisition fee and financing coordination fee (both as defined in the Second A&R Advisory Agreement) effective January 16, 2016. As of January 16, 2016, aggregate acquisition fees and financing coordination fees did not exceed the 1.5% threshold. Further, the total of all acquisition fees, acquisition expenses and any financing coordination fees payable was not to exceed 4.5% of the Company's total portfolio contract purchase price or 4.5% of the amount advanced for the Company's total portfolio of loans or other investments. As of January 16, 2016, the total of all cumulative acquisition fees, acquisition expenses and financing coordination fees did not exceed the 4.5% threshold.
Additionally, prior to January 16, 2016, if the Advisor provided services in connection with the origination or refinancing of any debt that the Company obtained and used to acquire properties or to make other permitted investments, or that was assumed, directly or indirectly, in connection with the acquisition of properties, the Company paid the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations.
Prior to April 15, 2015, in connection with asset management services provided by the Advisor, the Company issued to the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted, forfeitable partnership units of the OP designated as "Class B Units." The Class B Units were intended to be profit interests and will vest, and no longer be subject to forfeiture, at such time as: (a) the value of the OP's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pretax, non-compounded annual return thereon (the "economic hurdle"); (b) any one of the following events occurs concurrently with or subsequently to the achievement of the economic hurdle described above: (i) a listing; (ii) a transaction to which the Company or the OP is a party, as a result of which OP Units or the Company's common stock are exchanged for, or converted into, the right, or the holders of such securities are otherwise entitled, to receive cash, securities or other property or any combination thereof; or (iii) the termination of the advisory agreement without cause; and (c) the Advisor pursuant to the advisory agreement is providing services to the Company immediately prior to the occurrence of an event of the type described in clause (b) above, unless the failure to provide such services is attributable to the termination without cause of the advisory agreement by an affirmative vote of a majority of the Company's independent directors after the economic hurdle described above has been met. Unvested Class B Units will be forfeited immediately if: (x) the advisory agreement is terminated for any reason other than a termination without cause; or (y) the advisory agreement is terminated without cause by an affirmative vote of a majority of the board of directors before the economic hurdle described above has been met.
As of March 31, 2017, in aggregate, the Company's board of directors had approved the issuance of 1,052,420 Class B Units to the Advisor in connection with the arrangement described above. As of March 31, 2017, the Company could not determine the probability of achieving the performance condition, as such, no expense was recognized in connection with this arrangement during the three months ended March 31, 2017 and 2016. The Advisor receives distributions on unvested Class B Units equal to the distribution amount received on the same number of shares of the Company's common stock. Such distributions on issued Class B Units are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss. As stated above, pursuant to the Amendment, the OP will not issue any further Class B Units. The changes made pursuant to the Amendment were incorporated into the Agreement of Limited Partnership of the OP (the "OP Agreement") through a Third Amendment to the OP Agreement, which was approved by the board of directors and entered into on April 29, 2015.

29
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Under the Second A&R Advisory Agreement, the Company was required to pay a fixed base management fee of $18.0 million annually. Under the Third A&R Advisory Agreement, the fixed portion of the base management fee increased from $18.0 million annually to (i) $21.0 million annually for the first year following the Effective Time; (ii) $22.5 million annually for the second year following the Effective Time; and (iii) $24.0 million annually for the remainder of the term. If the Company acquires (whether by merger, consolidation or otherwise) any REIT, other than RCA, that is advised by an entity that is wholly-owned, directly or indirectly, by AR Global, other than any joint ventures, (a "Specified Transaction") the fixed portion of the base management fee will be increased by an amount equal to the consideration paid for the acquired company's equity multiplied by 0.0031, 0.0047 and 0.0062 for years one, two and three and thereafter, respectively, following the Specified Transaction. The variable portion of the base management fee changed from a quarterly fee equal to 0.375% of the cumulative net proceeds of any equity raised after the Company lists its common stock on a national securities exchange to a monthly fee equal to one-twelfth of 1.25% of the cumulative net proceeds of any equity raised by the Company or its subsidiaries from and after the Effective Time. Base management fees are included in asset management fees to related party on the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2017 and 2016.
In addition, under the Third A&R Advisory Agreement, the Company is required to pay the Advisor a variable management fee equal to (x) 15.0% of the applicable quarter's Core Earnings (as defined below) per share in excess of $0.375 per share plus (y) 10.0% of the applicable quarter's Core Earnings per share in excess of $0.50 per share, in each case as adjusted for changes in the number of shares of common stock outstanding. Core Earnings are defined as, for the applicable period, GAAP net income or loss excluding non-cash equity compensation expense, the variable management fee, acquisition and transaction related fees and expenses, financing related fees and expenses, depreciation and amortization, realized gains and losses on the sale of assets, any unrealized gains, losses or other non-cash items recorded in net loss for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income, one-time events pursuant to changes in GAAP and certain non-cash charges, impairment losses on real estate related investments and other than temporary impairment of securities, amortization of deferred financing costs, amortization of tenant inducements, amortization of straight-line rent, amortization of market lease intangibles, provision for loss loans, and other non-recurring revenue and expenses. The Company did not incur a variable management fee during the three months ended March 31, 2017 and 2016.
On September 6, 2016, the RCA Advisor, as RCA’s former property manager and leasing agent, assigned RCA’s existing property management agreement (the "Target Property Management Agreement") and existing leasing agreement (the "Target Leasing Agreement") to the Property Manager, in respect of (1) the properties owned by RCA prior to the Merger, and (2) any existing anchored, stabilized core retail properties, such as power centers and lifestyle centers, acquired by the Company after the Effective Time and during the term of the Target Property Management Agreement and the Target Leasing Agreement, (collectively, the "Target Properties"). The Target Property Management Agreement and the Target Leasing Agreement became effective at the Effective Time.
 In connection with the Merger Agreement, the Target Property Management Agreement and the Target Leasing Agreement, the Company has entered into an amended and restated property management and leasing agreement (the “Property Management Agreement”) with the Property Manager in respect of (1) the properties owned by the Company prior to the Merger and (2) any double- and triple-net leased single tenant properties acquired by the Company after the Effective Time and during the term of the Property Management Agreement (collectively, the "Company Properties" and together with the Target Properties, the "Properties"). The Property Management Agreement became effective at the Effective Time. 
The Target Property Management Agreement provides that the Property Manager is entitled to a management fee equal to 4% of the gross rental receipts from the Target Properties, including common area maintenance reimbursements, tax and insurance reimbursements, percentage rental payments, utility reimbursements, late fees, vending machine collections, service charges, rental interruption insurance, and a 15% administrative charge for common area expenses.
In addition, the Property Manager is entitled to transition fees of up to $2,500 for each Target Property managed, a construction fee equal to 6% of construction costs incurred, if any, and reimbursement of all expenses specifically related to the operation of a Target Property, including compensation and benefits of property management, accounting, lease administration, executive and supervisory personnel of the Property Manager, and excluding expenses of the Property Manager’s corporate and general management office and excluding compensation and other expenses applicable to time spent on matters other than the Target Properties.
The Target Property Management Agreement, the Target Leasing Agreement and the Property Management Agreement each have an initial term ending October 1, 2018, with automatic renewal for successive one-year terms unless terminated 60 days prior to the end of a term or terminated for cause due to material breach of the agreement, fraud, criminal conduct or willful misconduct, insolvency or bankruptcy of the Property Manager.

30
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

The Company reimburses the Advisor's costs of providing administrative services, but may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions. During the three months ended March 31, 2017 and 2016, the Company incurred $1.5 million and 0.8 million, respectively, of reimbursement expenses from the Advisor for providing administrative services. These reimbursements are included in general and administrative expense on the consolidated statements of operations and comprehensive loss.
In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to forgive certain fees. Because the Advisor may forgive certain fees, cash flows from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that are forgiven are not deferrals and, accordingly, will not be paid to the Advisor. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs or property operating costs. No such fees were forgiven or costs were absorbed by the Advisor during the three months ended March 31, 2017 and 2016.
The following table details amounts incurred and payable to related parties in connection with the operations-related services described above as of and for the periods presented. Amounts below are inclusive of fees and other expense reimbursements incurred from and due to the Advisor that are passed through and ultimately paid to Lincoln as a result of the Advisor's exclusive service agreement with Lincoln:
 
 
Three Months Ended March 31,
 
Payable as of
(In thousands)
 
2017
 
2016
 
March 31,
2017
 
December 31,
2016
Ongoing fees:
 
 
 
 
 
 
 
 
Asset management fees
 
4,750

 
4,500

 
—

 
—

Property management and leasing fees
 
737

 
—

 
503

 
—

Professional fees and other reimbursements (1)
 
1,646

 
862

 
1,454

 
763

Distributions on Class B Units (1)
 
428

 
432

 
—

 
147

Total related party operation fees and reimbursements
 
$
7,561

 
$
5,794

 
$
1,957

 
$
910

_________________________________
(1)
These costs are included in general and administrative expense on the consolidated statements of operations and comprehensive loss.
The predecessor to the Sponsor was party to a services agreement with RCS Advisory Services, LLC, a subsidiary of RCAP ("RCS Advisory"), pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by AR Global with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to AR Global instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory.
The Company was also party to a transfer agency agreement with ANST, a subsidiary of RCAP, pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services), and supervisory services overseeing the transfer agency services performed by DST Systems, Inc., a third-party transfer agent ("DST"). The Sponsor received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. On February 26, 2016, the Company entered into a definitive agreement with DST to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services).

31
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Fees Incurred in Connection with the Liquidation or Listing of the Company's Real Estate Assets
In connection with the Listing, the Company, as the general partner of the OP, would cause the OP to issue a note (the "Listing Note") to the Special Limited Partner to evidence the OP's obligation to distribute to the Special Limited Partner an aggregate amount (the "Listing Amount") equal to 15.0% of the difference (to the extent the result is a positive number) between:
•
the sum of (i) the "market value" (as defined in the Listing Note) of the Company's common stock plus (ii) the sum of all distributions or dividends (from any source) paid by the Company to its stockholders prior to the Listing; and
•
the sum of (i) the gross proceeds ("Gross Proceeds") of all public and private offerings, including issuance of the Company's common stock pursuant to a merger or business combination (an "Offering") plus (ii) the total amount of cash that, if distributed to those stockholders who purchased shares of common stock in an Offering, would have provided those stockholders a 6.0% cumulative, non-compounded, pre-tax annual return (based on a 365-day year) on the Gross Proceeds.
The "market value" used to calculate the Listing Amount will not be determinable until the end of a measurement period, the period of 30 consecutive trading days, commencing on the 180th day following the Listing, unless another liquidity event, such as a merger, occurs prior to the end of the measurement period. If another liquidity event occurs prior to the end of the measurement period, the Listing Note provides for appropriate adjustment to the calculation of the Listing Amount.
The Special Limited Partner will have the right to receive distributions of "Net Sales Proceeds," as defined in the Listing Note, until the Listing Note is paid in full; provided that, the Special Limited Partner has the right, but not the obligation, to convert the entire Special Limited Partner interest into OP Units. OP Units are convertible into shares of the Company's common stock in accordance with the terms governing conversion of OP Units into shares of common stock and contained in the Second Amended and Restated Agreement of Limited Partnership of the OP by the Company, as general partner of its OP, with the limited partners party thereto (the "Second A&R OP Agreement"), which will be entered into at Listing.
On April 29, 2015, the board of directors authorized the execution, in conjunction with the potential Listing, the Second A&R OP Agreement to conform more closely with agreements of limited partnership of other operating partnerships controlled by real estate investment trusts whose securities are publicly traded and listed, and to add long term incentive plan units ("LTIP Units") as a new class of units of limited partnership in the OP to the existing common units ("OP Units"). The Company may at any time cause the OP to issue LTIP Units pursuant to an outperformance agreement. On April 29, 2015, the board of directors approved the general terms of a Multi-Year Outperformance Agreement to be entered into with the Company, the OP and the Advisor in connection with the Listing.
The Advisor was paid a brokerage commission on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and one-half of the total brokerage commission paid, if a third party broker was also involved; provided, however, that in no event could the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such commissions were incurred during the three months ended March 31, 2017 and 2016. The Second A&R Advisory Agreement terminated the brokerage commission to the Advisor.
Note 13 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company including accounting and legal services, human resources and information technology.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.

32
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Note 14 — Share-Based Compensation
Restricted Share Plan
The Company had an employee and director incentive restricted share plan (the "Original RSP"), which provided for the automatic grant of 1,333 restricted shares of common stock to each of the independent directors, without any further action by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholders' meeting. Restricted stock issued to independent directors vests over a five-year period following the date of grant in increments of 20.0% per annum. The Original RSP provided the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to other entities that provide services to the Company. The total number of shares of common stock granted under the Original RSP could not exceed 5.0% of the Company's shares of common stock on a fully diluted basis at any time, and in any event could not exceed 3.4 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. For restricted share awards granted prior to 2015, such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. Restricted share awards granted during or after 2015 provide for accelerated vesting of the portion of the unvested shares scheduled to vest in the year of the recipient's voluntary termination or the failure to be re-elected to the board. The Company accounts for forfeitures when they occur. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock are subject to the same restrictions as the underlying restricted shares.
In April 2015, the board of directors adopted an Amended and Restated RSP (the "A&R RSP") that replaces in its entirety the Original RSP. The A&R RSP amends the terms of the Original RSP as follows:
•
it increases the number of shares of Company capital stock, par value $0.01 per share (the "Capital Stock"), available for awards thereunder from 5.0% of the Company's outstanding shares of Capital Stock on a fully diluted basis at any time, not to exceed 3.4 million shares of Capital Stock, to 10.0% of the Company's outstanding shares of Capital Stock on a fully diluted basis at any time;
•
it removes the fixed amount of shares that were automatically granted to the Company's independent directors; and
•
it adds restricted stock units (including dividend equivalent rights thereon) as a permitted form of award.
The following table reflects restricted share award activity for the three months ended March 31, 2017:
 
Number of Shares of Common Stock
 
Weighted-Average Issue Price
Unvested, December 31, 2016
9,367

 
$
23.70

Granted
2,482

 
24.17

Unvested, March 31, 2017
11,849

 
$
23.80

As of March 31, 2017, the Company had $0.2 million of unrecognized compensation cost related to unvested restricted share awards granted. That cost is expected to be recognized over a weighted-average period of 2.9 years.
The fair value of the restricted shares is being expensed in accordance with the service period required. Compensation expense related to restricted stock was approximately $30,000 and $11,000 for the three months ended March 31, 2017 and 2016, respectively. Compensation expense related to restricted stock is included in general and administrative expense on the accompanying consolidated statements of operations and comprehensive loss.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at each director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. There were no shares of common stock issued to directors in lieu of cash compensation during the three months ended March 31, 2017 and 2016.

33
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Note 15 — Net Loss Per Share
The following table sets forth the basic and diluted net loss per share computations for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
(In thousands, except share and per share amounts)
 
2017
 
2016
Basic and diluted net loss attributable to stockholders
 
$
(10,717
)
 
$
(5,854
)
Basic and diluted weighted-average shares outstanding
 
84,652,179

 
64,955,420

Basic and diluted net loss per share attributable to stockholders
 
$
(0.13
)
 
$
(0.09
)
Diluted net loss per share assumes the conversion of all common stock equivalents into an equivalent number of common shares, unless the effect is antidilutive. The Company considers unvested restricted stock, OP Units and Class B Units to be common share equivalents. The Company had the following common share equivalents on a weighted-average basis that were excluded from the calculation of diluted net loss per share as their effect would have been antidilutive for the periods presented:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Unvested restricted stock (1)
 
10,444

 
7,455

OP Units (2)
 
99,590

 
90

Class B Units
 
1,052,420

 
1,052,420

Total weighted-average antidilutive common share equivalents
 
1,162,454

 
1,059,965

_____________________________________
(1)
Weighted-average number of shares of unvested restricted stock outstanding for the period presented. There were 11,851 and 7,455 shares of unvested restricted stock outstanding as of March 31, 2017 and 2016, respectively.
(2)
Weighted-average number of OP Units outstanding for the period presented. There were 203,612 and 90 OP Units outstanding as of March 31, 2017 and 2016, respectively.
Note 16 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to, or disclosures in, the consolidated financial statements except for the following disclosures:
Acquisitions
From April 1, 2017 to May 12, 2017, the Company acquired 27 properties with an aggregate base purchase price of $59.7 million, excluding acquisition related costs.
Dispositions
From April 1, 2017 to May 12, 2017, the Company sold four properties with an aggregate contract sale price of $122.2 million. Simultaneously with the disposition of three of these properties operated by C&S Wholesale Grocer, the Company paid down the associated mortgage notes payable with a principal balance of $82.3 million.

34

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of American Finance Trust, Inc. and the notes thereto. As used herein, the terms "Company," "we," "our" and "us" refer to American Finance Trust, Inc., a Maryland corporation, including, as required by context, American Finance Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and its subsidiaries. The Company is externally managed by American Finance Advisors, LLC (our "Advisor"), a Delaware limited liability company. Capitalized terms used herein but not otherwise defined have the meaning ascribed to those terms in "Part I — Financial Information" included in the notes to the unaudited consolidated financial statements contained herein.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Finance Trust, Inc. (the "Company," "we" "our" or "us"), our Advisor and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•
The anticipated benefits from the Mergers (as defined below) with American Realty Capital - Retail Centers of American, Inc. ("RCA") may not be realized or may take longer to realize than expected.
•
All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in American Finance Advisors, LLC (our "Advisor") or other entities under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global" or our "Sponsor"). As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by affiliates of our Sponsor and conflicts in allocating time among these entities and us, which could negatively impact our operating results.
•
Although we have announced our intention to list our shares of common stock on an exchange at a time yet to be determined, there can be no assurance that our shares of common stock will be listed or of the price at which our shares may trade. No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.
•
Lincoln Retail REIT Services, LLC, a Delaware limited liability company ("Lincoln") and its affiliates, which provides services to our Advisor in connection with our stabilized core retail portfolio, faces conflicts of interest in allocating its employees' time between providing real estate-related services to our Advisor and other programs and activities in which they are presently involved or may be involved in the future.
•
The performance of our retail portfolio is linked to the market for retail space generally and factors that may impact our retail tenants, such as the increasing use of the Internet by retailers and consumers.
•
We depend on tenants for our rental revenue and, accordingly, our rental revenue is dependent upon the success and economic viability of our tenants.
•
Our tenants may not achieve our rental rate incentives and our expenses could be greater, which may impact our results of operations.
•
We have not generated, and in the future may not generate, operating cash flows sufficient to cover 100% of our distributions, and, as such, we may be forced to source distributions from borrowings, which may be at unfavorable rates, or depend on our Advisor to waive reimbursement of certain expenses or fees. There is no assurance that our Advisor will waive reimbursement of expenses or fees.
•
We may be unable to pay or maintain cash distributions at the current rate or increase distributions over time.
•
We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates.
•
We are subject to risks associated with any dislocation or liquidity disruptions that may exist or occur in the credit markets of the United States of America.

35

•
We may fail to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT"), which would result in higher taxes, may adversely affect our operations and would reduce the value of an investment in our common stock and our cash available for distributions.
•
We may be deemed by regulators to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus subject to regulation under the Investment Company Act.
Overview
We are a diversified REIT with a retail focus. We own a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants and a portfolio of stabilized core retail properties. consisting primarily of power centers and lifestyle centers, which were acquired in the Merger (as defined below). We intend to focus our future acquisitions primarily on net leased retail properties and stabilized core retail properties. As of March 31, 2017, we owned 491 properties, comprised of 20.3 million rentable square feet, which were 97.3% leased, including 456 net leased commercial properties and 35 stabilized core retail properties.
Incorporated on January 22, 2013, we are a Maryland corporation that elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ended December 31, 2013. Substantially all of our business is conducted through the OP and its wholly-owned subsidiaries.
On April 4, 2013, we commenced our initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 68.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts. The IPO closed in October 2013. As of March 31, 2017, we had 103.7 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to our distribution reinvestment plan (the "DRIP").
On March 17, 2017, our board of directors approved an estimated net asset value per share of our common stock ("Estimated Per-Share NAV") equal to $23.37 as of December 31, 2016, which was published on March 20, 2017.
We have no employees. We have retained the Advisor to manage our affairs on a day-to-day basis. American Finance Properties, LLC (the "Property Manager") serves as our property manager. The Advisor and the Property Manager are wholly owned subsidiaries of AR Global Investments, LLC (the successor business to AR Capital, LLC, the "Sponsor" or "AR Global"), as a result of which, they are related parties of ours, and each have received or may receive, as applicable, compensation, fees and expense reimbursements for services related to managing our business.
The shares of our common stock have been approved for listing on the NYSE under the symbol "AFIN" (the "Listing"), subject to our being in compliance with all applicable listing standards on the date it begins trading on the NYSE. Our approval for listing is valid through August 2017, although we may apply to extend the outside date for listing. While we intend to list our shares of common stock at a time yet to be determined by its board of directors, there can be no assurance as to when or if our common stock will commence trading or of the price at which our shares may trade.
Completed Mergers
American Realty Capital — Retail Centers of America, Inc. Merger
On September 6, 2016, the Company and the OP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with RCA, American Realty Capital Retail Operating Partnership, L.P. (the “RCA OP”) and Genie Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (the “Merger Sub”). The Merger Agreement provided for (a) the merger of RCA with and into the Merger Sub (the “Merger”), with the Merger Sub surviving as a wholly owned subsidiary of the Company and (b) the merger of the RCA OP with and into the OP, with the OP as the surviving entity (the “Partnership Merger”, and together with the Merger, the “Mergers”). The Mergers became effective on February 16, 2017.
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Mergers (the “Effective Time”), each outstanding share of common stock of RCA, $0.01 par value per share (“RCA Common Stock”) (including any restricted shares of RCA Common Stock and fractional shares), was converted into the right to receive (x) a number of shares of common stock of the Company, $0.01 par value per share (the “Company Common Stock”) equal to 0.385 shares of Company Common Stock (the “Stock Consideration”) and (y) cash from the Company, in an amount equal to $0.95 per share (the “Cash Consideration,” and together with the Stock Consideration, the “Merger Consideration”).

36

In addition, at the Effective Time, (i) each unit of partnership interest of the RCA OP designated as an OP Unit issued and outstanding immediately prior to the Effective Time (other than those held by RCA as described in clause (ii) below) was automatically converted into 0.424 validly issued units of limited partnership interest of the OP (the “Partnership Merger Consideration”); (ii) each unit of partnership interest of the RCA OP designated as either an OP Unit or a GP Unit held by RCA and issued and outstanding immediately prior to the Effective Time was automatically converted into 0.385 validly issued units of limited partnership interest of the OP; (iii) each unit of partnership interest of the RCA OP designated as a Class B Unit held by RCA’s advisor and a sub-advisor issued and outstanding immediately prior to the Effective Time was converted into the Partnership Merger Consideration (the “Class B Consideration,” and together with the Partnership Merger Consideration and the Merger Consideration, the “Total Merger Consideration”) and (iv) the interest of American Realty Capital Retail Advisor, LLC, the special limited partner of the RCA OP (the “RCA Advisor”), in the RCA OP was redeemed for a cash payment, determined in accordance with the existing terms of the RCA OP’s agreement of limited partnership.
In addition, as provided in the Merger Agreement, all outstanding restricted stock of RCA became fully vested and entitled to receive the Merger Consideration.
The Company issued approximately 38.2 million shares of Company Common Stock as consideration in the Merger and paid approximately $94.5 million in Cash Consideration.
Prior to the Mergers, the Company and RCA each were sponsored, directly or indirectly, by AR Global. AR Global and its affiliates provide investment and advisory services to the Company, and previously provided such services to RCA, pursuant to written advisory agreements. In connection with, and subject to the terms and conditions of the Merger Agreement, RCA OP units held by AR Global and its affiliates were exchanged for OP Units of the Company and certain special limited partner interests in the RCA OP held by AR Global and its affiliates were, consistent with the terms of the RCA OP partnership agreement, redeemed for a cash payment of approximately $2.8 million.
The Advisor has informed us that it has engaged Lincoln Retail REIT Services, LLC (“Lincoln”) as an independent service provider. Lincoln previously provided real estate-related services on behalf of the RCA Advisor to RCA. The Advisor has informed us that, as the Advisor’s independent service provider, Lincoln has agreed to continue to provide, subject to the Advisor’s or its affiliates’ oversight, asset management, property management and leasing services related to those multi-tenant properties formerly owned by RCA and now owned by us. For the performance of such real estate-related services, the Advisor has informed us that it has agreed to pass through to Lincoln a portion of the fees and/or other expense reimbursements otherwise payable to the Advisor or its affiliates by us. We have no direct obligation to Lincoln in connection with such engagement of Lincoln by the Advisor.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Because many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rents receivable that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease is executed. We defer the revenue related to lease payments received from tenants in advance of their due dates.
We own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, we defer the recognition of contingent rental income, until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. Contingent rental income is included in rental income on the consolidated statements of operations and comprehensive (loss) income.
We continually review receivables related to rent and unbilled rents receivable and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations and comprehensive (loss) income.

37

Cost recoveries from tenants are included in operating expense reimbursements in our consolidated statements of operations and comprehensive (loss) income in the period the related costs are incurred, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive (loss) income. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates.
In allocating non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations, prepared by independent valuation firms. We also consider information and other factors including: market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental rates, tenant credit profile, store profitability and the importance of the location of the real estate to the operations of the tenant's business.
Real estate investments that are intended to be sold are designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on our operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive (loss) income for all applicable periods.
Depreciation and Amortization
We are required to make subjective assessments as to the useful lives of the components of our real estate investments for purposes of determining the amount of depreciation to record on an annual basis. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our real estate investments, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.

38

Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Commercial Mortgage Loans
Commercial mortgage loans held for investment purposes are anticipated to be held until maturity, and accordingly, are carried at cost, net of unamortized acquisition fees and expenses capitalized, discounts or premiums and unfunded commitments. Commercial mortgage loans that are deemed to be impaired will be carried at amortized cost less a specific allowance for loan losses. Interest income is recorded on the accrual basis and related discounts, premiums and capitalized acquisition fees and expenses on investments are amortized over the life of the investment using the effective interest method. Amortization is reflected as an adjustment to interest income from debt investments in our consolidated statements of operations and comprehensive (loss) income. Guaranteed loan exit fees payable by the borrower upon maturity are accreted over the life of the investment using the effective interest method. The accretion of guaranteed loan exit fees is recognized in interest income from debt investments in our consolidated statements of operations and comprehensive (loss) income.
Acquisition fees and expenses incurred in connection with the origination and acquisition of commercial mortgage loan investments are evaluated based on the nature of the expense to determine if they should be expensed in the period incurred or capitalized and amortized over the life of the investment.
Commercial mortgage loans held for sale are carried at the lower of cost or fair value. We evaluate fair value on an individual loan basis. The amount by which cost exceeds fair value is accounted for as a valuation allowance, and changes in the valuation allowance are included in net income. Purchase discounts are no longer amortized during the period the loans are held for sale.
Purchase Accounting
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired, including those acquired in the Merger, based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company's analysis of comparable properties in the Company's portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates and the value of in-place leases as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from 12 to 18 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company's pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

39

Any excess of purchase price over the fair values of assets acquired and liabilities assumed are recorded as goodwill. Alternatively, if the fair value of net assets acquired exceeds the fair value of consideration paid, the transaction results in a bargain purchase gain that the Company recognizes immediately in earnings.
Recently Adopted Accounting Pronouncements
In October 2016, the FASB issued guidance where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. We have adopted the provisions of this guidance beginning January 1, 2017 and determined that there is no impact to our consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. We are evaluating the impact of the implementation of this guidance, including performing a preliminary review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. We are continuing to evaluate the allowable methods of adoption.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity's accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. We are currently evaluating the impact of the new guidance.
In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. We have begun developing an inventory of all leases as well as identifying any non-lease components in our lease arrangements. We are continuing to evaluate the impact of this new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In June 2016, the FASB issued guidance that changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. The amendments may be adopted early for reporting periods beginning after December 15, 2018. We are currently evaluating the impact of this new guidance.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.

40

In November 2016, the FASB issued guidance on the classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In January 2017, the FASB issued guidance on simplifying subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments in this update modify the concept of impairment from the condition that exists to when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The revised guidance is effective for reporting periods beginning after December 15, 2019, and the amendments will be applied prospectively. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of this new guidance.
In January 2017, the FASB issued guidance that revises the definition of a business. This new guidance is applicable when evaluating whether an acquisition should be treated as either a business acquisition or an asset acquisition. Under the revised guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not be considered a business. The revised guidance is effective for reporting periods beginning after December 15, 2017, and the amendments will be applied prospectively. Early application is permitted only for transactions that have not previously been reported in issued financial statements. We have assessed this revised guidance and expect, based on historical property acquisitions, that in most cases, a future property acquired would be treated as an asset acquisition rather than a business acquisition, which would result in the capitalization of related transaction costs. We have not adopted this guidance as of March 31, 2017.
In February 2017, the FASB issued guidance on the derecognition of nonfinancial assets. The guidance clarifies the definition of in substance non-financial assets, unifies guidance related to partial sales of non-financial assets, eliminates rules specifically addressing the sales of real estate, removes the exception to the financial asset derecognition model and clarifies the accounting for contributions of non-financial assets to joint ventures. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the impact of this new guidance.

41

Properties
As of March 31, 2017, we owned 491 properties, which were acquired for investment purposes, comprised of 20.3 million rentable square feet and located in 39 states. All of our properties are freestanding, single-tenant properties and stabilized core retail properties, 97.3% leased with a weighted-average remaining lease term of 7.5 years as of March 31, 2017.
The following table represents certain additional information about the properties we own at March 31, 2017:
Portfolio
 
Acquisition Date
 
Number of
Properties
 
Rentable Square Feet
 
Remaining Lease
Term (1)
Dollar General I
 
Apr. & May 2013
 
2
 
18,126

 
11.1
Walgreens I
 
Jul. 2013
 
1
 
10,500

 
20.5
Dollar General II
 
Jul. 2013
 
2
 
18,052

 
11.2
Auto Zone I
 
Jul. 2013
 
1
 
7,370

 
10.3
Dollar General III
 
Jul. 2013
 
5
 
45,989

 
11.1
BSFS I
 
Jul. 2013
 
1
 
8,934

 
6.8
Dollar General IV
 
Jul. 2013
 
2
 
18,126

 
8.9
Tractor Supply I
 
Aug. 2013
 
1
 
19,097

 
10.7
Dollar General V
 
Aug. 2013
 
1
 
12,480

 
10.8
Mattress Firm I
 
Aug. & Nov. 2013; Feb., Mar. & Apr. 2014
 
5
 
23,612

 
8.4
Family Dollar I
 
Aug. 2013
 
1
 
8,050

 
4.3
Lowe's I
 
Aug. 2013
 
5
 
671,313

 
12.3
O'Reilly Auto Parts I
 
Aug. 2013
 
1
 
10,692

 
13.3
Food Lion I
 
Aug. 2013
 
1
 
44,549

 
12.6
Family Dollar II
 
Aug. 2013
 
1
 
8,028

 
6.3
Walgreens II
 
Aug. 2013
 
1
 
14,490

 
16.0
Dollar General VI
 
Aug. 2013
 
1
 
9,014

 
8.9
Dollar General VII
 
Aug. 2013
 
1
 
9,100

 
11.0
Family Dollar III
 
Aug. 2013
 
1
 
8,000

 
5.5
Chili's I
 
Aug. 2013
 
2
 
12,700

 
8.7
CVS I
 
Aug. 2013
 
1
 
10,055

 
8.8
Joe's Crab Shack I
 
Aug. 2013
 
2
 
16,012

 
10.0
Dollar General VIII
 
Sep. 2013
 
1
 
9,100

 
11.3
Tire Kingdom I
 
Sep. 2013
 
1
 
6,635

 
8.0
Auto Zone II
 
Sep. 2013
 
1
 
7,370

 
6.2
Family Dollar IV
 
Sep. 2013
 
1
 
8,320

 
6.3
Fresenius I
 
Sep. 2013
 
1
 
5,800

 
8.3
Dollar General IX
 
Sep. 2013
 
1
 
9,014

 
8.1
Advance Auto I
 
Sep. 2013
 
1
 
10,500

 
6.3
Walgreens III
 
Sep. 2013
 
1
 
15,120

 
9.0
Walgreens IV
 
Sep. 2013
 
1
 
13,500

 
7.5
CVS II
 
Sep. 2013
 
1
 
13,905

 
19.9
Arby's I
 
Sep. 2013
 
1
 
3,000

 
11.3
Dollar General X
 
Sep. 2013
 
1
 
9,100

 
11.0
AmeriCold I
 
Sep. 2013
 
9
 
1,407,166

 
10.5
Home Depot I
 
Sep. 2013
 
2
 
1,315,200

 
9.8
New Breed Logistics I
 
Sep. 2013
 
1
 
390,486

 
4.6
American Express Travel Related Services I
 
Sep. 2013
 
2
 
785,164

 
2.9
L.A. Fitness I
 
Sep. 2013
 
1
 
45,000

 
6.9
SunTrust Bank I
 
Sep. 2013
 
31
 
180,600

 
6.7
National Tire & Battery I
 
Sep. 2013
 
1
 
10,795

 
6.7
Circle K I
 
Sep. 2013
 
19
 
54,521

 
11.6
Walgreens V
 
Sep. 2013
 
1
 
14,490

 
10.4
Walgreens VI
 
Sep. 2013
 
1
 
14,560

 
12.1
FedEx Ground I
 
Sep. 2013
 
1
 
21,662

 
6.2

42

Portfolio
 
Acquisition Date
 
Number of
Properties
 
Rentable Square Feet
 
Remaining Lease
Term (1)
Walgreens VII
 
Sep. 2013
 
10
 
142,140

 
12.6
O'Charley's I
 
Sep. 2013
 
20
 
135,973

 
14.6
Krystal Burgers Corporation I
 
Sep. 2013
 
6
 
12,730

 
12.5
1st Constitution Bancorp I
 
Sep. 2013
 
1
 
4,500

 
6.8
American Tire Distributors I
 
Sep. 2013
 
1
 
125,060

 
6.8
Tractor Supply II
 
Oct. 2013
 
1
 
23,500

 
6.5
United Healthcare I
 
Oct. 2013
 
1
 
400,000

 
4.3
National Tire & Battery II
 
Oct. 2013
 
1
 
7,368

 
15.2
Tractor Supply III
 
Oct. 2013
 
1
 
19,097

 
11.1
Mattress Firm II
 
Oct. 2013
 
1
 
4,304

 
6.4
Dollar General XI
 
Oct. 2013
 
1
 
9,026

 
10.1
Academy Sports I
 
Oct. 2013
 
1
 
71,640

 
11.3
Talecris Plasma Resources I
 
Oct. 2013
 
1
 
22,262

 
6.0
Amazon I
 
Oct. 2013
 
1
 
79,105

 
6.3
Fresenius II
 
Oct. 2013
 
2
 
16,047

 
10.4
Dollar General XII
 
Nov. 2013 & Jan. 2014
 
2
 
18,126

 
11.7
Dollar General XIII
 
Nov. 2013
 
1
 
9,169

 
9.0
Advance Auto II
 
Nov. 2013
 
2
 
13,887

 
6.1
FedEx Ground II
 
Nov. 2013
 
1
 
48,897

 
6.3
Burger King I
 
Nov. 2013
 
41
 
168,192

 
16.7
Dollar General XIV
 
Nov. 2013
 
3
 
27,078

 
11.2
Dollar General XV
 
Nov. 2013
 
1
 
9,026

 
11.6
FedEx Ground III
 
Nov. 2013
 
1
 
24,310

 
6.4
Dollar General XVI
 
Nov. 2013
 
1
 
9,014

 
8.7
Family Dollar V
 
Nov. 2013
 
1
 
8,400

 
6.0
Walgreens VIII
 
Dec. 2013
 
1
 
14,490

 
6.8
CVS III
 
Dec. 2013
 
1
 
10,880

 
6.8
Mattress Firm III
 
Dec. 2013
 
1
 
5,057

 
6.3
Arby's II
 
Dec. 2013
 
1
 
3,494

 
11.1
Family Dollar VI
 
Dec. 2013
 
2
 
17,484

 
6.8
SAAB Sensis I
 
Dec. 2013
 
1
 
90,822

 
8.0
Citizens Bank I
 
Dec. 2013
 
9
 
34,777

 
6.8
Walgreens IX
 
Jan. 2014
 
1
 
14,490

 
5.8
SunTrust Bank II
 
Jan. 2014
 
30
 
148,233

 
10.0
Mattress Firm IV
 
Jan. 2014
 
1
 
5,040

 
7.4
FedEx Ground IV
 
Jan. 2014
 
1
 
59,167

 
6.3
Mattress Firm V
 
Jan. 2014
 
1
 
5,548

 
6.6
Family Dollar VII
 
Feb. 2014
 
1
 
8,320

 
7.3
Aaron's I
 
Feb. 2014
 
1
 
7,964

 
6.4
Auto Zone III
 
Feb. 2014
 
1
 
6,786

 
6.0
C&S Wholesale Grocer I
 
Feb. 2014
 
5
 
3,044,685

 
5.5
Advance Auto III
 
Feb. 2014
 
1
 
6,124

 
7.4
Family Dollar VIII
 
Mar. 2014
 
3
 
24,960

 
6.3
Dollar General XVII
 
Mar. & May 2014
 
3
 
27,078

 
11.0
SunTrust Bank III
 
Mar. 2014
 
111
 
596,977

 
9.7
SunTrust Bank IV
 
Mar. 2014
 
27
 
142,625

 
10.1
Dollar General XVIII
 
Mar. 2014
 
1
 
9,026

 
11.0
Sanofi US I
 
Mar. 2014
 
1
 
736,572

 
9.3
Family Dollar IX
 
Apr. 2014
 
1
 
8,320

 
7.0
Stop & Shop I
 
May 2014
 
8
 
544,112

 
9.6
Bi-Lo I
 
May 2014
 
1
 
55,718

 
8.8
Dollar General XIX
 
May 2014
 
1
 
12,480

 
11.4

43

Portfolio
 
Acquisition Date
 
Number of
Properties
 
Rentable Square Feet
 
Remaining Lease
Term (1)
Dollar General XX
 
May 2014
 
5
 
48,584

 
10.1
Dollar General XXI
 
May 2014
 
1
 
9,238

 
11.4
Dollar General XXII
 
May 2014
 
1
 
10,566

 
10.1
FedEx Ground V
 
Feb. 2016
 
1
 
45,755

 
8.3
FedEx Ground VI
 
Feb. 2016
 
1
 
120,731

 
8.4
FedEx Ground VII
 
Feb. 2016
 
1
 
42,299

 
8.5
FedEx Ground VIII
 
Feb. 2016
 
1
 
78,673

 
8.6
Liberty Crossing
 
Feb. 2017
 
1
 
105,779

 
2.6
San Pedro Crossing
 
Feb. 2017
 
1
 
201,965

 
3.8
Tiffany Springs MarketCenter
 
Feb. 2017
 
1
 
264,952

 
5.0
The Streets of West Chester
 
Feb. 2017
 
1
 
236,842

 
11.4
Prairie Towne Center
 
Feb. 2017
 
1
 
289,277

 
7.2
Southway Shopping Center
 
Feb. 2017
 
1
 
181,809

 
4.3
Stirling Slidell Centre
 
Feb. 2017
 
1
 
134,276

 
3.3
Northwoods Marketplace
 
Feb. 2017
 
1
 
236,078

 
3.1
Centennial Plaza
 
Feb. 2017
 
1
 
233,797

 
2.2
Northlake Commons
 
Feb. 2017
 
1
 
109,112

 
4.2
Shops at Shelby Crossing
 
Feb. 2017
 
1
 
236,107

 
3.1
Shoppes of West Melbourne
 
Feb. 2017
 
1
 
144,484

 
4.3
The Centrum
 
Feb. 2017
 
1
 
270,747

 
2.6
Shoppes at Wyomissing
 
Feb. 2017
 
1
 
103,064

 
2.5
Southroads Shopping Center
 
Feb. 2017
 
1
 
437,515

 
4.8
Parkside Shopping Center
 
Feb. 2017
 
1
 
181,620

 
5.7
West Lake Crossing
 
Feb. 2017
 
1
 
75,928

 
4.7
Colonial Landing
 
Feb. 2017
 
1
 
263,559

 
4.4
The Shops at West End
 
Feb. 2017
 
1
 
381,831

 
11.2
Township Marketplace
 
Feb. 2017
 
1
 
298,630

 
2.2
Cross Pointe Centre
 
Feb. 2017
 
1
 
226,089

 
10.0
Towne Center Plaza
 
Feb. 2017
 
1
 
94,096

 
5.8
Harlingen Corners
 
Feb. 2017
 
1
 
228,208

 
5.3
Village at Quail Springs
 
Feb. 2017
 
1
 
100,404

 
2.0
Pine Ridge Plaza
 
Feb. 2017
 
1
 
239,492

 
3.2
Bison Hollow
 
Feb. 2017
 
1
 
134,798

 
5.6
Jefferson Commons
 
Feb. 2017
 
1
 
205,918

 
8.8
Northpark Center
 
Feb. 2017
 
1
 
318,327

 
4.3
Anderson Station
 
Feb. 2017
 
1
 
243,550

 
3.7
Patton Creek
 
Feb. 2017
 
1
 
491,294

 
4.6
North Lakeland Plaza
 
Feb. 2017
 
1
 
171,397

 
3.4
Riverbend Marketplace
 
Feb. 2017
 
1
 
142,617

 
6.0
Montecito Crossing
 
Feb. 2017
 
1
 
179,721

 
5.0
Best on the Boulevard
 
Feb. 2017
 
1
 
204,568

 
4.8
Shops at Rivergate South
 
Feb. 2017
 
1
 
140,703

 
8.5
Dollar General XXIII
 
Mar. 2017
 
6
 
54,280

 
12.2
 
 
 
 
491
 
20,324,057

 
7.5
_____________________
(1)
Remaining lease term in years as of March 31, 2017. If the portfolio has multiple properties with varying lease expirations, remaining lease term is calculated on a weighted-average basis.

44

CRE Debt Investments
As of March 31, 2017, we had one CRE Debt Investment. The following table shows selected data from our investment portfolio as of March 31, 2017:
Deal Name
 
Par Value
 
Carrying Value
 
Interest Rate
 
Effective Yield
 
Loan to Value (1)
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Senior Loan
 
$
17,200

 
$
17,181

 
4.50% + 1M LIBOR
 
5.6
%
 
66.0
%
 
 
$
17,200

 
$
17,181

 
 
 
5.6
%
 
66.0
%
_____________________
(1)
Loan to value percentage is from metrics at origination.
Results of Operations
We were incorporated on January 22, 2013 and purchased our first property and commenced active operations on April 29, 2013. As of March 31, 2017, we owned 491 properties, comprised of 20.3 million rentable square feet that were 97.3% leased.
Comparison of the Three Months Ended March 31, 2017 to the Three Months Ended March 31, 2016
There were 446 properties that we owned for the entirety of the three months ended March 31, 2017 and the three months ended March 31, 2016 (our "Three Month Same Store"), comprised of 12.5 million rentable square feet that were 100.0% leased as of March 31, 2017. We acquired 35 stabilized core retail properties in connection with the Merger (the "Merger Acquisitions"), comprised of 7.5 million rentable square feet that were 92.7% leased as of March 31, 2017. Additionally, during 2016 and the first quarter of 2017, excluding properties acquired in the Merger, we acquired ten properties (our "Acquisitions Since January 1, 2016"), comprised of 0.3 million rentable square feet that were 100.0% leased as of March 31, 2017. During 2016 and the first quarter of 2017, we sold 17 properties (our "Disposals Since January 1, 2016"), comprised of 0.6 million rentable square feet. Also during 2016, we amended terms on 160 of our leases with SunTrust Bank (our "Leasing Activity Since January 1, 2016"), which in general extended the remaining lease terms of these leases, increasing our annualized straight-line rent from SunTrust Bank.
Rental Income
Rental income increased $11.2 million to $51.7 million for the three months ended March 31, 2017, compared to $40.5 million for the three months ended March 31, 2016. This increase in rental income was primarily due to $12.7 million of incremental rental income from the Merger Acquisitions, as well as $0.3 million of incremental rental income from our Acquisitions Since January 1, 2016. Our Three Month Same Store rental income also increased by $0.9 million, as a result of our Leasing Activity Since January 1, 2016. These increases were partially offset by a decrease in rental income of $2.7 million from our Disposals Since January 1, 2016.
Operating Expense Reimbursements
Operating expense reimbursement revenue increased $2.3 million to $5.2 million for the three months ended March 31, 2017 compared to $2.9 million for the three months ended March 31, 2016. This increase was primarily driven by $3.7 million of operating expense reimbursements from the Merger Acquisitions. This increase was partially offset by a decrease in operating expense reimbursements of $1.5 million from our Disposals Since January 1, 2016. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties.

45

Interest Income from Debt Investments
Interest income from debt investments decreased $0.1 million to $0.2 million for the three months ended March 31, 2017 compared to $0.3 million for the three months ended March 31, 2016. Interest income from debt investments relates to our CRE Debt Investments. For the three months ended March 31, 2017, the average carrying value of our commercial mortgage loan was $17.2 million, with a weighted-average yield of 5.28%. For the three months ended March 31, 2016, we had commercial mortgage loans with a weighted-average balance of $31.4 million and a weighted-average yield of 4.17%.
Asset Management Fees to Related Party
Asset management fees to related party increased $0.3 million to $4.8 million for the three months ended March 31, 2017, compared to $4.5 million for the three months ended March 31, 2016. We pay these fees to our Advisor for managing our day-to-day operations. Prior to the Effective Time of the Merger, we paid our Advisor i) a base management fee with a fixed portion of $1.5 million payable monthly and a variable portion, if applicable, payable quarterly in arrears, and ii) a variable management fee, if applicable, payable quarterly in arrears. Following the Effective Time of the Merger, the fixed portion of the base management fee increased from $18.0 million annually to (i) $21.0 million annually for the first year following the Effective Time; (ii) $22.5 million annually for the second year following the Effective Time; and (iii) $24.0 million annually for the remainder of the term. We did not incur the variable portion of the base management fee or a variable management fee during the three months ended March 31, 2017 and 2016. Please see Note 12 — Related Party Transactions and Arrangements for more information on fees incurred from our Advisor.
Property Operating Expense
Property operating expense increased $3.7 million to $7.0 million for the three months ended March 31, 2017 compared to $3.3 million for the three months ended March 31, 2016. This increase was primarily driven by property operating expense of $5.2 million from the Merger Acquisitions, partially offset by a decrease of $1.5 million from our Dispositions Since January 1, 2016. Property operating expenses primarily relate to the costs associated with maintaining our properties including real estate taxes, utilities, and repairs and maintenance. Most of these expenses are passed through and reimbursed by our tenants.
Impairment charges
We incurred $3.9 million of impairment charges during the three months ended March 31, 2017. $2.4 million of these impairment charges related to our properties reclassified as held for sale, as the carrying amount of the long-lived assets associated with these properties was greater than our estimate of their fair value less estimated costs to sell. The remaining $1.5 million of impairment charges were taken on five held for use properties operated by SunTrust, which had lease terms set to expire between December 31, 2017 and March 31, 2018. We determined, based on LOIs received, that the carrying value of these properties exceeded their estimated fair values less costs to sell. No impairment charges were incurred during the three months ended March 31, 2016.
Acquisition and Transaction Related Expense
Acquisition and transaction related expense increased $5.1 million to $5.4 million for the three months ended March 31, 2017, compared to $0.3 million for the three months ended March 31, 2016. Acquisition and transaction related expenses for the three months ended March 31, 2017 were primarily due to costs incurred in connection with the Mergers. These costs include fees to the special committee's financial advisor and legal counsel of $4.1 million, fees to transfer RCA's mortgages and credit facility of $0.8 million and legal and other fees related to the Mergers of $0.5 million of the board of directors for their review of the Merger, as well as fees to the special committee's outside financial advisor and legal counsel. Acquisition and transaction related expenses for the three months ended March 31, 2016 were primarily due to our sale of two commercial mortgage loans in January 2016, which were sold for $56.9 million.
General and Administrative Expense
General and administrative expense increased $1.4 million to $4.8 million for the three months ended March 31, 2017, compared to $3.4 million for the three months ended March 31, 2016. This increase primarily related to an increase in fees incurred from related parties for cost reimbursements including incremental personnel costs from the Merger, as well as an increase in audit fees and legal fees.

46

Depreciation and Amortization Expense
Depreciation and amortization expense increased $6.0 million to $31.5 million for the three months ended March 31, 2017 compared to $25.5 million for the three months ended March 31, 2016. We incurred depreciation and amortization expense of $9.2 million for the approximately 1.5 months that we owned the properties acquired from RCA. Additionally, depreciation and amortization expense increased $0.2 million on our Acquisitions Since January 1, 2016. These increases were partially offset by a decrease of $2.6 million in depreciation and amortization expense on our Disposals Since January 1, 2016. Additionally, our Same Store depreciation and amortization expense decreased $0.8 million, primarily due to the fact that we stopped recognizing depreciation and amortization expense on five of our properties once they were reclassified as held for sale. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.
Interest Expense
Interest expense increased $3.2 million to $15.8 million for the three months ended March 31, 2017, compared to $12.6 million for the three months ended March 31, 2016. This increase is primarily related to the debt we assumed from RCA in the Merger. In connection with the Merger, we assumed mortgage notes payable with a total principal balance of $127.7 million, as well as a credit facility with an outstanding balance of $304.0 million. We subsequently paid down a portion of the credit facility, which had an outstanding balance as of March 31, 2017 of $190.0 million.
Gain on Sale of Real Estate Investments
During the three months ended March 31, 2017, we sold three properties leased to Merrill Lynch, Pierce, Fenner & Smith for a contract price of $145.5 million, net of closing costs. These properties had a net carrying value at the date of disposition of $140.3 million, resulting in a gain on sale of $5.2 million.
Cash Flows for the Three Months Ended March 31, 2017
Cash flows provided by operating activities of $8.4 million during the three months ended March 31, 2017 included a net loss adjusted for non-cash items of $21.3 million (net loss of $10.7 million adjusted for non-cash items, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, impairment charges and share-based compensation, partially offset by amortization of mortgage premiums, discount accretion and premium amortization on investments, net and gain on sale of real estate investments of $32.1 million) and a decrease in prepaid expenses and other assets of $1.9 million. These operating cash flows were partially offset by a decrease in accounts payable and accrued expenses of $7.3 million, a decrease in deferred rent and other liabilities of $7.2 million and changes in restricted cash of $0.3 million.
The net cash provided by investing activities during the three months ended March 31, 2017 of $57.7 million was generated from the sale of real estate investments of $140.0 million and cash acquired in the Merger of $21.9 million, partially offset by cash paid to acquire RCA in the Merger of $94.5 million, amounts invested in real estate and other assets of $8.7 million, deposits for real estate acquisitions of $0.5 million, changes in restricted cash of $0.3 million and capital expenditures of $0.1 million.
The net cash used in financing activities of $152.7 million during the three months ended March 31, 2017 consisted primarily of payments on the Credit Facility of $114.0 million, common stock repurchases of $20.2 million, cash distributions of $17.2 million, payments of deferred financing costs of $0.9 million and payments of mortgage notes payable of $0.4 million.
Cash Flows for the Three Months Ended March 31, 2016
During the three months ended March 31, 2016, we had cash flows provided by operating activities of $20.6 million. The level of cash flows used in or provided by operating activities is affected by, among other things, receipt of rental revenue and the amount of acquisition and transaction related costs incurred. Cash flows from operating activities during the three months ended March 31, 2016 include $0.3 million of acquisition and transaction related costs. Cash inflows during the three months ended March 31, 2016 included a net loss adjusted for non-cash items of $20.2 million (net loss of $5.9 million adjusted for non-cash items, including: depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, net amortization of market lease intangibles and share-based compensation, partially offset by amortization of mortgage premiums, discount accretion and net premium amortization on investments of $26.1 million) and an increase in accounts payable and accrued expenses of $1.9 million. These cash inflows were partially offset by an increase in prepaid expenses and other assets of $0.9 million and a decrease in deferred rent and other liabilities of $0.6 million.
The net cash provided by investing activities during the three months ended March 31, 2016 of $22.6 million was generated from the proceeds from the sale of commercial mortgage loans of $56.9 million, partially offset by amounts invested in real estate and other assets of $34.2 million.
The net cash used in financing activities of $42.9 million during the three months ended March 31, 2016 consisted primarily of cash distributions of $26.8 million, common stock repurchases of $16.0 million and payments of mortgage notes payable of $0.3 million.

47

Liquidity and Capital Resources
As of March 31, 2017, we had cash and cash equivalents of $44.6 million. Our principal demands for funds are for payment of our operating and administrative expenses, capital expenditures, debt service obligations, cash distributions to our stockholders and repurchases of our common stock pursuant to the share repurchase program (as amended and restated, the "SRP").
On February 16, 2017, we, the OP, and certain other subsidiaries of ours acting as guarantors, entered into an amendment, assumption, joinder and reaffirmation of guaranties (the “Second Amendment”) to an unsecured amended and restated credit agreement, dated December 2, 2014 (as amended by the Second Amendment, the “Credit Agreement”), by and among the RCA OP to which the OP is successor by merger, BMO Harris Bank N.A., as administrative agent, letter of credit issuer, swingline lender and a lender, and the other parties thereto, relating to a revolving credit facility noted above (the “Amended Credit Facility”). The Second Amendment provides for, among other things, the OP to become the borrower and principal obligor under the Credit Agreement and the Amended Credit Facility, and for the Company to become a guarantor under the Amended Credit Facility. RCA and the RCA OP were parties to the Credit Agreement prior to closing of the Merger. We expect to fund our future short-term operating liquidity requirements through a combination of cash on hand, net cash provided by our current property operations, proceeds from shares issued through the DRIP and proceeds from the Amended Credit Facility.
The Amended Credit Facility provides for aggregate revolving loan borrowings of up to $325.0 million (subject to unencumbered asset pool availability), a swingline subfacility of $25.0 million and a $20.0 million letter of credit subfacility, subject to certain conditions. Through an uncommitted “accordion feature,” the OP, subject to certain conditions, may increase commitments under the Amended Credit Facility to up to $575.0 million. As of March 31, 2017, our unused borrowing capacity was $135.0 million, based on the aggregate commitments under the Amended Credit Facility.
The Amended Credit Facility will mature on May 1, 2018. Borrowings under the Amended Credit Facility will bear interest at either (i) the base rate (which is defined in the Credit Agreement as the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) LIBOR for a one month interest period plus 1.00%) plus an applicable spread ranging from 0.35% to 1.00%, depending on the Company’s consolidated leverage ratio, or (ii) LIBOR plus an applicable spread ranging from 1.35% to 2.00%, depending on the Company’s consolidated leverage ratio.
The Amended Credit Facility provides for quarterly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period (though no longer than three months) with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Amended Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. Upon the occurrence of an event of default, the requisite lenders have the right to terminate their obligations under the Amended Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. The Company, certain of its subsidiaries and certain subsidiaries of the OP will guarantee the obligations under the Amended Credit Facility.
As of March 31, 2017, we had $1.2 billion of mortgage notes payable outstanding and $190.0 million outstanding under the Amended Credit Facility, with a leverage ratio (total debt divided by total assets) of 40.1%.
Our board of directors has adopted the SRP that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we have sufficient funds available. See Note 10 — Common Stock for more information on terms and conditions of the SRP.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

48

We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisitions fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

49

The table below reflects the items deducted from or added to net loss in our calculation of FFO and MFFO for the periods presented:
 
 
Three Months Ended March 31, 2017
(In thousands)
 
Net loss attributable to stockholders (in accordance with GAAP)
 
$
(10,717
)
Gain on sale of real estate investments
 
(5,222
)
Impairment charges
 
3,929

Depreciation and amortization
 
31,478

Proportionate share of adjustments for non-controlling interests to arrive at FFO
 
(31
)
FFO attributable to stockholders
 
19,437

Acquisition and transaction related fees and expenses
 
5,436

Amortization of market lease and other intangibles, net
 
(453
)
Straight-line rent
 
(1,572
)
Amortization of mortgage premiums on borrowings
 
(1,126
)
Discount accretion on investment
 
(6
)
Mark-to-market adjustments
 
(73
)
Proportionate share of adjustments for non-controlling interests to arrive at MFFO
 
4

MFFO attributable to stockholders
 
$
21,647

Distributions
In April 2013, our board of directors authorized, and we declared, a distribution payable on a monthly basis to stockholders of record on each day at a rate equal to $1.65 per annum, per share of common stock. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time. Therefore, distribution payments are not assured.
During the three months ended March 31, 2017, distributions paid to common stockholders totaled $29.1 million, inclusive of $11.9 million of distributions that were reinvested in additional shares of our common stock through our DRIP. During the three months ended March 31, 2017, cash used to pay distributions was generated from cash flows provided by operations and cash available on hand.
The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock, for the periods indicated:
 
 
Three Months Ended March 31, 2017
 
 
(In thousands)
 
 
 
Percentage of Distributions
Distributions to stockholders
 
$
29,054

 
 
 
 
 
 
 
Source of distribution coverage:
 
 
 
 
Cash flows provided by operations
 
$
8,409

 
28.9
%
Available cash on hand (1)
 
$
20,645

 
71.1
%
Total source of distribution coverage
 
$
29,054

 
100.0
%
 
 
 
 
 
Cash flows provided by operations (GAAP basis)
 
$
8,409

 
 
Net loss (in accordance with GAAP)
 
$
(10,730
)
 
 
_____________________________________
(1)
Includes any remaining proceeds from the IPO and distributions reinvested pursuant to the DRIP.
If we do not generate sufficient cash flows from our operations to cover distributions, we expect to use a portion of our cash on hand to pay distributions, which could cause our stockholders' investment to be adversely impacted. Since inception, our cumulative distributions have exceeded our cumulative FFO and cash flows from operations.

50

Loan Obligations
The payment terms of certain of our mortgage loan obligations require principal and interest payments monthly, with all unpaid principal and interest due at maturity. Our loan agreements stipulate that we comply with specific reporting covenants. As of March 31, 2017, we were in compliance with the debt covenants under our loan agreements.
Our Advisor may, with approval from our board of directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. As of March 31, 2017, our leverage ratio (total debt divided by total assets) was 40.1%.
Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable based on anticipated repayment dates, as well as minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of March 31, 2017. These minimum base rental cash payments due for leasehold interests amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items:
 
 
 
 
 
 
Years Ended December 31,
 
 
(In thousands)
 
Total
 
April 1, 2017 to December 31, 2017
 
2018-2019
 
2020-2021
 
Thereafter
Principal on mortgage notes payable
 
$
1,163,574

 
$
84,004

 
$
67,715

 
$
984,918

 
$
26,937

Interest on mortgage notes payable
 
188,499

 
38,858

 
97,964

 
48,316

 
3,361

Credit Facility
 
190,000

 
—

 
190,000

 
—

 
—

Interest on Credit Facility
 
8,097

 
5,227

 
2,870

 
—

 
—

Ground lease rental payments due
 
19,513

 
1,079

 
2,864

 
2,120

 
13,450

 
 
$
1,569,683

 
$
129,168

 
$
361,413

 
$
1,035,354

 
$
43,748

Several of the loan agreements on our mortgage notes payable feature anticipated repayment dates in advance of the stated maturity dates. Please see table below:
Portfolio
 
Maturity
 
Anticipated Repayment
SAAB Sensis I
 
Apr. 2025
 
Apr. 2025
SunTrust Bank II
 
Jul. 2031
 
Jul. 2021
C&S Wholesale Grocer I
 
Apr. 2037
 
Apr. 2017
SunTrust Bank III
 
Jul. 2031
 
Jul. 2021
SunTrust Bank IV
 
Jul. 2031
 
Jul. 2021
Sanofi US I - New Loan
 
Jul. 2026
 
Jan. 2021
Stop & Shop I
 
Jun. 2041
 
Jun. 2021
Multi-Tenant Mortgage Loan
 
Sep. 2020
 
Sep. 2020
Liberty Crossing
 
Jul. 2018
 
Jul. 2018
San Pedro Crossing
 
Jan. 2018
 
Jan. 2018
Tiffany Springs MarketCenter
 
Oct. 2018
 
Oct. 2018
Shops at Shelby Crossing
 
Mar. 2024
 
Mar. 2024
Patton Creek
 
Dec. 2020
 
Dec. 2020

51

Election as a REIT
We elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2013. We believe that, commencing with such taxable year, we have been organized and have operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT. In order to continue to qualify for taxation as a REIT, we must distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties, as well as federal income and excise taxes on our undistributed income.
Inflation
Some of our leases with our tenants contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions. However, our net leases require the tenant to pay its allocable share of operating expenses, which may include common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
Please see Note 12 — Related Party Transactions and Arrangements of the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates.  Our long-term debt, which consists of secured financings, bears interest at fixed rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus are not exposed to foreign currency fluctuations.
As of March 31, 2017, our fixed rate debt consisted of secured mortgage financings with a gross carrying value of $1.2 billion and a fair value of $1.2 billion. Changes in market interest rates on our fixed-rate debt impact its fair value, but it has no impact on interest expense incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed-rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their March 31, 2017 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $35.3 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $36.8 million.
As of March 31, 2017, our variable-rate debt consisted of our Amended Credit Facility, which had a carrying and fair value of $190.0 million. Interest rate volatility associated with the Amended Credit Facility affects interest expense incurred and cash flow. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from March 31, 2017 levels with all other variables held constant. A 100 basis point increase or decrease in variable rates on the Amended Credit Facility would increase or decrease our interest expense by $1.9 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and, assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of March 31, 2017 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.

52

Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

53

PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
On January 13, 2017, four affiliated stockholders of RCA filed in the United States District Court for the District of Maryland a putative class action lawsuit against the Company, Edward M. Weil, Jr., Leslie D. Michelson, Edward G. Rendell (Weil, Michelson and Rendell, the “Director Defendants”), AR Global, and the Company, alleging violations of Sections 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by RCA and the Director Defendants, violations of Section 20(a) of the Exchange Act by AR Global and the Director Defendants, breaches of fiduciary duty by the Director Defendants, and aiding and abetting breaches of fiduciary duty by AR Global and the Company in connection with the negotiation of and proxy solicitation for a shareholder vote on the proposed merger of the Company and RCA and an amendment to RCA's Articles of Incorporation.  Plaintiffs seek on behalf of the putative class rescission of the merger transaction, which was voted on and approved by stockholders on February 13, 2017, and closed on February 17, 2017, together with unspecified rescissory damages, unspecified actual damages, and costs and disbursements of the action. On April 26, 2017, the Court appointed a lead plaintiff, who has 45 days from that date to either adopt the current complaint or file an Amended Complaint. The Company and the Director Defendants deny wrongdoing and liability and intend to vigorously defend the action. Due to the early stage of the litigation, no estimate of a probable loss or any reasonable possible losses are determinable at this time. No provisions for such losses have been recorded in the accompanying consolidated financial statements for the year ended March 31, 2017.
We are not a party to, and none of our properties are subject to, any material pending legal proceedings.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sale of Unregistered Equity Securities
On February 21, 2017, we issued 2,482 shares of restricted stock that vest over a period of five years to our independent directors, pursuant to our employee and director incentive restricted share plan. No selling commissions or other consideration will be paid in connection with such issuances, which were made without registration under the Securities Act in reliance upon the exemption from registration in Section 4(a)(2) of the Securities Act as transactions not involving any public offering.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our board of directors has adopted the SRP that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we have sufficient funds available.
The following table summarizes the repurchases of shares under the SRP cumulatively through March 31, 2017:
 
 
Number of Shares
 
Weighted-Average Price per Share
Cumulative repurchases as of December 31, 2016
 
2,081,499

 
$
24.12

Three months ended March 31, 2017
 
848,822

(1) 
23.85

Cumulative repurchases as of March 31, 2017
 
2,930,321

 
$
24.04

_________________________________
(1)
Excludes rejected repurchases of 5.9 million shares, which were unfulfilled as of March 31, 2017.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.

54

Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.

55

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
AMERICAN FINANCE TRUST, INC.
 
 
 
 
By:
/s/ Edward M. Weil, Jr.
 
 
Edward M. Weil, Jr.
 
 
Chief Executive Officer and President
(Principal Executive Officer)
 
 
 
 
By:
/s/ Nicholas Radesca
 
 
Nicholas Radesca
 
 
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
Dated: May 12, 2017

56
EXHIBITS INDEX

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
  
Description
10.1 (1)
 
Second Amendment to Amended and Restated Credit Agreement, Assumption, Joinder and Reaffirmation of Guaranties, dated as of February 16, 2017, among American Finance Operating Partnership, L.P., as successor to American Realty Capital Operating Partnership, L.P., Genie Acquisition, LLC as successor to American Realty Capital - Retail Centers of American, Inc., American Finance Trust, Inc., the guarantors party thereto, the lenders party thereto and BMO Harris Bank N.A.
10.2 (1)
 
Amendment No. 1, dated as of February 15, 2017, to the Amended and Restated Agreement of Limited Partnership of American Finance Operating Partnership, L.P.
10.3 (1)
 
Indemnification Agreement, dated as of February 16, 2017, by and between American Finance Trust, Inc. and Leslie D. Michelson and Edward G. Rendell
31.1 *
 
Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *
 
Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 *
 
Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 *
 
XBRL (eXtensible Business Reporting Language). The following materials from American Finance Trust, Inc.'s Quarterly Report on Form 10-Q for the three months ended March 31, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
____________________
*    Filed herewith.
(1) Incorporated by reference to the Current Report on Form 8-K filed on February 21, 2017

57

American Finance Trust, Inc Reports