American Finance Trust, Inc - FORM 10-Q - November 6, 2018

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EX-32 - EXHIBIT 32 PRINCIPAL EXCUTIVE AND FINANCIAL OFFICER CERTIFCATION - American Finance Trust, Incafin9302018ex32.htm
EX-31.2 - EXHIBIT 31.2 PRICIPAL FINANCIAL OFFICER CERTIFICATION - American Finance Trust, Incafin9302018ex312.htm
EX-31.1 - EXHIBIT 31.1 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION - American Finance Trust, Incafin9302018ex311.htm
EX-10.10 - EXHIBIT 10.10 FORM OF RESTRICTED STOCK AGREEMENT - American Finance Trust, Incex1010-afinx2018omnibuspla.htm
EX-10.1 - EXHIBIT 10.1 1ST AMENDMENT TO CREDIT AGREEMENT - American Finance Trust, Incex101-1stamendmenttocredit.htm
EX-4.2 - EXHIBIT 4.2 1ST AMEND TO 2ND AMEND LIMITED PARTNRESHIP AGREEMENT - American Finance Trust, Incex42-afinx1stamendmentto2n.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 September 30, 2018
 
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: 001-38597

arct5logocolornotickera06.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., 3rd 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, every Interactive Data File required to be submitted 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 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
 
Smaller reporting company o
 
 
Emerging growth company x
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. x
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 October 31, 2018, the registrant had 106,230,905 shares of common stock outstanding, comprised of 79,966,219 shares of Class A common stock and 26,264,686 shares of Class B-2 common stock.


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)
 
September 30,
2018
 
December 31,
2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
635,201

 
$
607,675

Buildings, fixtures and improvements
2,455,512

 
2,449,020

Acquired intangible lease assets
423,271

 
454,212

Total real estate investments, at cost
3,513,984

 
3,510,907

Less: accumulated depreciation and amortization
(440,127
)
 
(408,194
)
Total real estate investments, net
3,073,857

 
3,102,713

Cash and cash equivalents
60,265

 
107,666

Restricted cash
20,060

 
19,588

Deposits for real estate acquisitions
650

 
565

Derivative assets, at fair vale
222

 
23

Goodwill
1,605

 
1,605

Deferred costs, net
15,756

 
8,949

Prepaid expenses and other assets
63,527

 
50,859

Assets held for sale
28,198

 
4,682

Total assets
$
3,264,140

 
$
3,296,650

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Mortgage notes payable, net
$
1,212,137

 
$
1,303,433

Credit facility
260,700

 
95,000

Market lease liabilities, net
95,031

 
108,772

Accounts payable and accrued expenses (including $1,577 and $3,169 due to related parties as of September 30, 2018 and December 31, 2017, respectively)
37,969

 
27,355

Deferred rent and other liabilities
7,415

 
9,421

Dividends payable
9,837

 
11,613

Total liabilities
1,623,089

 
1,555,594

 
 
 
 
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, 106,250,846 and 105,172,185 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
1,063

 
1,052

Additional paid-in capital
2,412,940

 
2,393,237

Accumulated other comprehensive income
222

 
95

Accumulated deficit
(778,912
)
 
(657,874
)
Total stockholders’ equity
1,635,313

 
1,736,510

Non-controlling interests
5,738

 
4,546

Total equity
1,641,051

 
1,741,056

Total liabilities and equity
$
3,264,140

 
$
3,296,650


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rental income
$
66,407

 
$
62,287

 
$
189,249

 
$
176,867

Operating expense reimbursements
8,481

 
7,182

 
26,866

 
20,936

Interest income from debt investments
—

 
260

 
—

 
753

Total revenues
74,888

 
69,729

 
216,115

 
198,556

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Asset management fees to related party
5,849

 
5,250

 
17,295

 
15,250

Property operating
13,497

 
10,760

 
40,009

 
29,996

Impairment charges
1,172

 
7,605

 
10,057

 
14,183

Acquisition and transaction related
1,186

 
1,173

 
4,427

 
7,556

Listing fees
4,988

 
—

 
4,988

 
—

Vesting and conversion of Class B Units
15,786

 
—

 
15,786

 
—

Share-based compensation — multi-year outperformance agreement
2,150

 
—

 
2,150

 
—

General and administrative
6,539

 
4,986

 
18,552

 
15,067

Depreciation and amortization
35,332

 
41,132

 
107,269

 
113,048

Total operating expenses
86,499

 
70,906

 
220,533

 
195,100

Operating (loss) income
(11,611
)
 
(1,177
)
 
(4,418
)
 
3,456

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(17,017
)
 
(14,502
)
 
(49,166
)
 
(44,912
)
Gain on sale of real estate investments
1,328

 
264

 
29,590

 
14,095

Other income
9

 
18

 
69

 
211

Total other expense, net
(15,680
)
 
(14,220
)
 
(19,507
)
 
(30,606
)
Net loss
(27,291
)
 
(15,397
)
 
(23,925
)
 
(27,150
)
Net loss attributable to non-controlling interests
46

 
30

 
40

 
45

Net loss attributable to stockholders
(27,245
)
 
(15,367
)
 
(23,885
)
 
(27,105
)
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Change in unrealized gain on derivatives
269

 
10

 
127

 
44

Comprehensive loss attributable to stockholders
$
(26,976
)
 
$
(15,357
)
 
$
(23,758
)
 
$
(27,061
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
105,905,281

 
104,545,591

 
105,379,306

 
97,852,337

Net loss per share attributable to stockholders - basic and diluted
$
(0.26
)
 
$
(0.15
)
 
$
(0.23
)
 
$
(0.28
)
 

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

4
AMERICAN FINANCE TRUST, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except share data)
(Unaudited)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-in
Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Non-controlling Interests
 
Total Equity
Balance, December 31, 2017
105,172,185

 
$
1,052

 
$
2,393,237

 
$
95

 
$
(657,874
)
 
$
1,736,510

 
$
4,546

 
$
1,741,056

Common stock issued through distribution reinvestment plan
990,393

 
10

 
23,238

 
—

 
—

 
23,248

 
—

 
23,248

Common stock repurchases
(1,122,245
)
 
(11
)
 
(20,226
)
 
—

 
—

 
(20,237
)
 
—

 
(20,237
)
Vesting and conversion of Class B Units
1,052,420

 
11

 
15,775

 
—

 
—

 
15,786

 
—

 
15,786

Redemption of Class A Units
30,691

 
—

 
736

 
—

 
—

 
736

 
(736
)
 
—

Share-based compensation — restricted shares
127,402

 
1

 
180

 
—

 
—

 
181

 
—

 
181

Share-based compensation — multi-year outperformance agreement
—

 
—

 
—

 
—

 
—

 
—

 
2,150

 
2,150

Dividends declared
—

 
—

 
—

 
—

 
(97,052
)
 
(97,052
)
 
—

 
(97,052
)
Distributions to non-controlling interest holders
—

 
—

 
—

 
—

 
(101
)
 
(101
)
 
(182
)
 
(283
)
Net loss
—

 
—

 
—

 
—

 
(23,885
)
 
(23,885
)
 
(40
)
 
(23,925
)
Other comprehensive income
—

 
—

 
—

 
127

 
—

 
127

 
—

 
127

Balance, September 30, 2018
106,250,846

 
$
1,063

 
$
2,412,940

 
$
222

 
$
(778,912
)
 
$
1,635,313

 
$
5,738

 
$
1,641,051


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

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

 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(23,925
)
 
$
(27,150
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation
65,522

 
62,719

Amortization of in-place lease assets
41,084

 
50,149

Amortization (including accelerated write-off) of deferred costs
4,916

 
5,734

Amortization of mortgage premiums on borrowings
(2,693
)
 
(3,117
)
Discount accretion on commercial mortgage loan
—

 
(16
)
Amortization of market lease intangibles, net
(9,444
)
 
(3,085
)
Share-based compensation — restricted shares
181

 
102

Share-based compensation — multi-year outperformance agreement
2,150

 
—

Vesting and conversion of Class B Units
15,786

 
—

Mark-to-market adjustments
(72
)
 
(105
)
Gain on sale of real estate investments
(29,590
)
 
(14,095
)
Impairment charges
10,057

 
14,183

Prepayment costs on mortgages
3,421

 
963

Changes in assets and liabilities:
 
 
 
Prepaid expenses and other assets
(11,104
)
 
(7,912
)
Accounts payable and accrued expenses
9,478

 
(5,297
)
Deferred rent and other liabilities
(2,006
)
 
(8,295
)
Net cash, cash equivalents and restricted cash provided by operating activities
73,761

 
64,778

Cash flows from investing activities:
 
 
 
Capital expenditures
(7,783
)
 
(4,344
)
Investments in real estate and other assets
(192,630
)
 
(107,108
)
Deposits for real estate investments
(85
)
 
(810
)
Proceeds from sale of real estate investments
37,177

 
184,014

Cash paid in merger transaction
—

 
(94,502
)
Cash acquired in merger transaction
—

 
26,163

Net cash, cash equivalents and restricted cash (used in) provided by investing activities
(163,321
)
 
3,413

Cash flows from financing activities:
 
 
 

Proceeds from mortgage notes payable
29,887

 
23,950

Payments on mortgage notes payable
(46,586
)
 
(3,364
)
Payments on credit facility
(95,000
)
 
(114,000
)
Proceeds from credit facility
260,700

 
70,000

Payments of financing costs
(7,031
)
 
(1,576
)
Payments of prepayment costs on mortgages
(3,421
)
 
(963
)
Common stock repurchases
(20,237
)
 
(29,061
)
Distributions to related party
(101
)
 
—

Dividends paid
(75,580
)
 
(66,010
)
Net cash, cash equivalents and restricted cash provided by (used in) financing activities
42,631

 
(121,024
)
Net change in cash, cash equivalents and restricted cash
(46,929
)
 
(52,833
)
Cash, cash equivalents and restricted cash beginning of period
127,254

 
139,105

Cash, cash equivalents and restricted cash end of period
$
80,325

 
$
86,272

 
 
 
 

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

 
Nine Months Ended September 30,
 
2018
 
2017
Supplemental Disclosures:
 
 
 
Cash paid for interest
$
46,580

 
$
41,534

Cash paid for income taxes
$
925

 
$
736

 
 
 
 
Non-Cash Investing and 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
$
(74,546
)
 
$
(89,978
)
Common stock issued through distribution reinvestment plan
$
23,248

 
$
43,524

Accrued capital expenditures
$
2,192

 
$
1,012


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

7
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)


Note 1 — Organization
American Finance Trust, Inc. (the “Company”) is a diversified REIT focused on acquiring and managing a diversified portfolio of primarily service-oriented and traditional retail and distribution related commercial real estate properties in the U.S. 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, as a result of the Merger (as defined in Note 2 - Merger Transaction), a portfolio of retail properties consisting primarily of power centers and lifestyle centers. The Company intends to focus its future acquisitions primarily on net leased retail properties. As of September 30, 2018, the Company owned 616 properties, comprised of 19.2 million rentable square feet, which were 94.2% leased, including 582 net leased commercial properties (527 of which are retail properties) and 34 retail properties which were acquired in the Merger.
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.
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, “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.
On July 19, 2018 (the “Listing Date”), the Company listed shares of its common stock, which had been renamed “Class A common stock” in connection with a series of corporate actions effected earlier in July 2018, on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “AFIN” (the “Listing”). Related to the Listing, the Company incurred fees of $5.0 million for the three and nine months ended September 30, 2018 for financial advisory and other transaction related costs.
To effect the Listing, and to address the potential for selling pressure that may have existed at the outset of listing, the Company listed only shares of Class A common stock, which represented approximately 50% of its outstanding shares of common stock, on Nasdaq on the Listing Date. The Company’s two other classes of outstanding stock at the time of the Listing were Class B-1 common stock, which comprised approximately 25% of the Company’s outstanding shares of common stock at that time, and Class B-2 common stock, which comprised approximately 25% of the Company’s outstanding shares of common stock at that time. As of September 30, 2018, the Company had 106.3 million shares of common stock outstanding, comprised of 53.7 million shares of Class A common stock, 26.3 million shares of Class B-1 common stock, and 26.3 million shares of Class B-2 common stock. In accordance with their terms, all shares of Class B-1 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on October 10, 2018. All shares of Class B-2 common stock will automatically convert into shares of Class A common stock to be listed on Nasdaq no later than January 15, 2019, 180 days following the Listing Date. For additional information see Note 9 — Common Stock.
In addition to the above events, the Listing resulted in other impacts to our financial statements which are discussed throughout these financial statements, including:
•
The vesting and conversion of Class B Units (as defined herein) held by the Advisor into Class A Units of the OP (previously designated as “OP Units” under the agreement of limited partnership of the OP in effect prior to the Listing) that were redeemed for shares of Class A common stock (these transactions are collectively referred to herein as “Vesting and conversion of Class B Units,” (see Note 9 — Common Stock and Note 11 — Related Party Transactions—“Asset Management Fees and Variable Management/Incentive Fees”).
•
The redemption of the additional Class A Units (formerly known as OP Units), previously held by affiliates of the Advisor, for shares of Class A common stock (see Note 9 — Common Stock and Note 11 — Related Party Transactions).
•
The Company entered into the Listing Note (as defined herein) with the Advisor (see Note 11 — Related Party Transactions—“Listing Arrangements”).
•
The advisory agreement with the Advisor was amended to lower the quarterly thresholds the Company must reach on a quarterly basis for the Advisor to receive a variable management fee (see Note 11 — Related Party Transactions—“Asset Management Fees and Variable Management/Incentive Fees”).

8
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

•
The issuance of an equity award to the Advisor under the 2018 OPP (as defined herein) (see Note 3 — Summary of Significant Accounting Policies, Note 14 — Net Loss Per Share and Note 13 — Share-Based Compensation).
•
The change in the rate at which the Company pays dividends on its common stock from an annualized rate equal to $1.30 per share to an annualized rate equal to $1.10 per share (see Note 9 — Common Stock).
Note 2 — Merger Transaction
On February 16, 2017, the Company and the OP completed (a) the merger of American Realty Capital — Retail Centers of America, Inc. (“RCA”) with and into a subsidiary of the Company (the “Merger Sub”), with the Merger Sub surviving as a wholly owned subsidiary of the Company and (b) the merger of American Realty Capital Retail Operating Partnership, L.P. (the “RCA OP”) with and into the OP, with the OP as the surviving entity (together, the “Merger”). Pursuant to the terms and subject to the conditions set forth in the Agreement and Plan of Merger (the “Merger Agreement”) entered into by the Company and the OP with RCA, the RCA OP and the Merger Sub, at the effective time of the Merger on February 16, 2017 (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 (x) 0.385 shares of the Company’s 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”).
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 shares of RCA Common Stock previously issued by RCA became fully vested and entitled to receive the Merger Consideration.
The Company issued 38.2 million shares of its common stock as Stock Consideration and paid $94.5 million in Cash Consideration.
Prior to the Merger, 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 limited partner interests in the OP designated as OP units (“OP Units”) 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 informed the Company that the Advisor engaged Lincoln Retail REIT Services, LLC (“Lincoln”) as an independent service provider to provide real estate-related services similar to the services provided by Lincoln to the RCA Advisor prior to the Effective Time. Lincoln will continue to provide, subject to the Advisor’s or its affiliates’ oversight, asset management, property management and leasing services for those multi-tenant properties acquired by the Company from RCA in the Merger. The Advisor informed the Company that the Advisor 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 for services rendered by Lincoln. The Company has no obligation to Lincoln.
Accounting Treatment for the Merger
The Merger was 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 established 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

9
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

multiple sources including real estate valuations prepared by independent valuation firms and market sales data. The fair value of the Total Merger Consideration that exceeded the fair value of net assets acquired, was recorded as goodwill.

The following table summarizes the estimated fair value of the consideration transferred pursuant to the Merger and the estimated fair values of the assets acquired and liabilities assumed as of the Effective Time.
(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 (1)
 
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
 
18,959

Goodwill
 
1,605

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

_________________________________
(1) 
Valued at $24.00 per share as of the date of the Merger.
As a result of the Merger, the Company acquired goodwill of $1.6 million, which is primarily attributable to expected synergies from combining operations of the Company and RCA.

10
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

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 and nine months ended September 30, 2018 are not necessarily indicative of the results for the entire year or any subsequent interim periods.
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, 2017, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2018, as amended on June 8, 2018. There have been no significant changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2018.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity (“VIE”) for which the Company is the primary beneficiary. The Company has determined the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company’s assets and liabilities are held by the OP.
Reclassifications
The presentation of prior year restricted cash on the Company’s consolidated statements of cash flows has been changed to conform to the current year presentation. The change in the current year presentation relates to the adoption of accounting standards update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which was adopted by the Company effective December 31, 2017. As a result, the Company adjusted its statements of cash flows for the nine months ended September 30, 2017, to include $7.9 million of restricted cash in the beginning cash balance and remove transfers of $0.7 million between cash and restricted cash from operations, $1.0 million between cash and restricted cash from investing activities and $0.2 million between cash and restricted cash from financing activities.
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 six to 24 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.

11
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

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 initial 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.
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 an impairment exists, due to the inability to recover the carrying value of a property, the Company would recognize an impairment loss in the consolidated statement of operations and comprehensive loss 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 recorded would equal the adjustment to fair value less estimated cost to dispose of the asset.
Revenue Recognition
The Company’s 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 the Company’s leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rents receivable that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When the Company acquires a property, 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. The Company defers the revenue related to lease payments received from tenants in advance of their due dates.
The Company owns 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, the Company defers 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. For the three and nine months ended September 30, 2018, approximately $0.2 million and $0.6 million, respectively, in contingent rental income is included in rental income on the accompanying consolidated statements of operations and comprehensive loss.
The Company continually reviews receivables related to rent and unbilled rents receivable and determines 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, the Company records an increase in the Company’s allowance for uncollectible accounts or records a direct write-off of the receivable in the Company’s consolidated statements of operations and comprehensive loss.
Cost recoveries from tenants are included in operating expense reimbursements on the accompanying consolidated statements of operations and comprehensive loss in the period the related costs are incurred, as applicable.

12
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Recently Issued Accounting Pronouncements
Adopted as of January 1, 2018:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and has since issued several additional amendments thereto (collectively referred to herein as “ASC 606”). ASC 606 establishes a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under ASC 606, 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. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A reporting entity may apply the amendments in ASC 606 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. The Company adopted this guidance effective January 1, 2018 using the modified retrospective approach, and it did not have an impact on the Company’s consolidated financial statements. The new guidance did not have an impact on the Company’s consolidated financial statements, primarily as a result of revenue being sourced from lease arrangements that are outside the scope of ASC 606 until the new lease standard is adopted.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10), 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 Company adopted this guidance effective January 1, 2018 and there was no impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides 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 Company adopted the new guidance beginning in the first quarter of 2018, and it did not have a material impact on the Company’s statement of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which 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 Company adopted this guidance effective January 1, 2018, and will apply the new rules prospectively. The Company expects, based on historical property acquisitions, that in most cases, a future property acquired after adoption will be treated as an asset acquisition rather than a business acquisition, which will result in the capitalization of related transaction costs. The Company has evaluated the impact of this new guidance beginning in the first quarter of 2018, and determined that it did not have a material impact on the Company’s consolidated financial statements. As a result, the Company has treated its property acquisitions during the nine months ended September 30, 2018 as asset acquisitions, and has capitalized the related transaction costs of approximately $2.2 million.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Assets Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance related to partial sales of non-financial assets, eliminates rules specifically addressing the sales of real estate, clarifies the definition of in substance non-financial assets, removes the exception to the financial asset derecognition model and clarifies the accounting for contributions of non-financial assets to joint ventures. The Company adopted this guidance effective January 1, 2018 using the modified transition method. Sales of real estate in which the Company loses its controlling interest in the real estate property will result in the full gain amount being recognized at the time of the partial sale. During the three months ended September 30, 2018 the Company did not retain any interest in properties in which it sold.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update states that modification accounting should be used unless the fair value of the award, the vesting terms of the award and the classification of the award as either equity or liability, all do not change as a result of the modification. The Company adopted this guidance effective January 1, 2018 and it did not have an impact on the Company’s consolidated financial statements. The Company expects that any future modifications to its issued share-based awards will be accounted for using modification accounting, unless the modification meets all of the exception criteria noted above. As a result,

13
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

the modification would be treated as an exchange of the original award for a new award, with any incremental fair value being treated as additional compensation cost.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting as an amendment and update expanding the scope of Topic 718 (“ASU 2018-07”). ASU 2018-07 specifies that Topic 718 now applies to all share-based payment transactions, even non-employee awards, in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Under the new guidance, awards to nonemployees are measured on the grant date, rather than on the earlier of the performance commitment date or the date at which the nonemployee’s performance is complete. Also, the awards would be measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can be measured more reliably. In addition, entities may use the expected term to measure nonemployee awards or elect to use the contractual term as the expected term, on an award-by-award basis. The new guidance is effective for the Company in annual periods beginning after December 15, 2018 and interim periods within those annual periods, however early adoption is permitted. The Company early adopted ASU 2018-07 on July 1, 2018 as it relates to the award made to the Advisor pursuant to an award agreement entered into on the Listing Date, effective as of the Listing (the “2018 OPP”) (see Note 13 — Share-Based Compensation for additional details).
Pending Adoption as of September 30, 2018:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, in July 2018 ("ASU 2018-11"), which allows lessors a practical expedient by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is consistent with the Company’s existing policies. ASC 842 originally required a modified retrospective method of adoption, however, ASU 2018-11 indicates that companies may be permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The pronouncement allows some optional practical expedients. In addition, in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new leasing standard.
The Company does not expect this guidance to impact its existing lessor revenue recognition pattern.
The Company is a lessee for some properties in which it has ground leases as of September 30, 2018. For these leases, the Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining lease payments upon adoption of this update. The new standard requires lessees to apply a dual lease classification approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. 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 Company will adopt this new guidance upon its effective date on January 1, 2019 and will continue to evaluate the impact of this new guidance until it becomes effective.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which 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. On July 25, 2018, the FASB proposed an amendment to ASU 2016-13 to clarify that operating lease receivables recorded by lessors (including unbilled straight-line rent) are explicitly excluded from the scope of ASU 2016-13. The company is currently evaluating the impact of this new guidance.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This new standard simplifies subsequent measurements of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, entities will perform their interim or annual goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge based on the amount that the carrying amount exceeds the reporting unit's fair value. The loss recognized should not exceed the total goodwill allocated to the reporting unit.

14
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

The amendments become effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the potential impact of this new guidance.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to better align cash flow and fair value hedge accounting with the corresponding risk management activities. Among other things, the amendments expand which hedging strategies are eligible for hedge accounting, align the timing of recognition of hedge results with the earnings effect of the hedged item and allow companies to include the change in fair value of the derivative in the same income statement line item as the earnings effect of the hedged item. Additionally, for cash flow hedges that are highly effective, the update allows for all changes in fair value of the derivative to be recorded in other comprehensive income. The revised guidance is effective for reporting periods beginning after December 15, 2018. Early application is permitted. The Company is currently evaluating the impact of this new guidance.
Note 4 — Real Estate Investments
The following table presents the allocation of real estate assets acquired and liabilities assumed during the periods presented:
 
 
Nine Months Ended September 30,
(Dollar amounts in thousands)
 
2018
 
2017
Real estate investments, at cost (1):
 
 
 
 
Land
 
$
54,132

 
$
303,868

Buildings, fixtures and improvements
 
106,560

 
1,150,645

Total tangible assets
 
160,692

 
1,454,513

Acquired intangibles: (2)
 
 
 
 
In-place leases
 
32,451

 
170,748

Above-market lease assets
 
644

 
22,862

Below-market ground lease asset
 
—

 
1,233

Above-market ground lease liability
 
—

 
—

Below-market lease liabilities
 
(1,157
)
 
(106,369
)
Total intangible assets, net
 
31,938

 
88,474

Prior Credit Facility assumed in the Merger (3)
 
—

 
(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
 
$
192,630

 
$
1,123,620

Number of properties purchased
 
101

 
81

_____________________________________
(1) 
Real estate investments, at cost and market lease liabilities acquired during the nine months ended September 30, 2017 were subsequently adjusted after 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 nine months ended September 30, 2018 were 17.8 years, 17.4 years and 20.1 years, respectively, as of each property’s respective acquisition date.
(3) 
The Prior Credit Facility was scheduled to mature on May 1, 2018. On April 26, 2018, the Company repaid the Prior Credit Facility in full and entered into the Credit Facility (see Note 6 - Credit Facility for definitions and additional information).
Total acquired intangible lease assets and liabilities consist of the following as of the dates presented:

15
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

 
 
September 30, 2018
 
December 31, 2017
(In thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
In-place lease assets
 
$
397,473

 
$
133,039

 
$
264,434

 
$
421,369

 
$
140,085

 
$
281,284

Above-market lease assets
 
24,565

 
6,724

 
17,841

 
31,610

 
11,309

 
20,301

Below-market ground lease asset
 
1,233

 
52

 
1,181

 
1,233

 
28

 
1,205

Total acquired intangible lease assets
 
$
423,271

 
$
139,815

 
$
283,456

 
$
454,212

 
$
151,422

 
$
302,790

Intangible liabilities:
 
 

 
 

 
 
 
 
 
 
 
 
Above-market ground lease liability
 
$
85

 
$
5

 
$
80

 
$
85

 
$
3

 
$
82

Below-market lease liabilities
 
111,408

 
16,457

 
94,951

 
119,249

 
10,559

 
108,690

Total acquired intangible lease liabilities
 
$
111,493

 
$
16,462

 
$
95,031

 
$
119,334

 
$
10,562

 
$
108,772

The following table presents amortization expense and adjustments to revenue and property operating expenses for intangible assets and liabilities during the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
In-place leases
 
$
13,499

 
$
18,685

 
$
41,084

 
$
50,149

Total added to depreciation and amortization
 
$
13,499

 
$
18,685

 
$
41,084

 
$
50,149

 
 
 
 
 
 
 
 
 
Above-market leases
 
$
(1,012
)
 
$
(1,607
)
 
$
(3,104
)
 
$
(4,387
)
Below-market lease liabilities
 
6,791

 
3,134

 
12,584

 
7,491

Total added to rental income
 
$
5,779

 
$
1,527

 
$
9,480

 
$
3,104

 
 
 
 
 
 
 
 
 
Below-market ground lease asset
 
$
8

 
$
8

 
$
24

 
$
20

Above-market ground lease liability
 
—

 
—

 
(1
)
 
(1
)
Total added to property operating expenses
 
$
8

 
$
8

 
$
23

 
$
19

The following table provides the projected amortization expense and adjustments to revenue and property operating expenses for intangible assets and liabilities for the next five years:
(In thousands)
 
2018 (remainder)
 
2019
 
2020
 
2021
 
2022
In-place leases
 
$
12,709

 
$
42,614

 
$
35,775

 
$
30,907

 
$
26,828

Total to be added to depreciation and amortization
 
$
12,709

 
$
42,614

 
$
35,775

 
$
30,907

 
$
26,828

 
 
 
 
 
 
 
 
 
 
 
Above-market leases
 
$
(992
)
 
$
(3,283
)
 
$
(2,462
)
 
$
(2,131
)
 
$
(1,751
)
Below-market lease liabilities
 
2,140

 
8,010

 
7,298

 
6,587

 
6,177

Total to be added to rental income
 
$
1,148

 
$
4,727

 
$
4,836

 
$
4,456

 
$
4,426

 
 
 
 
 
 
 
 
 
 
 
Below-market ground lease asset
 
$
8

 
$
32

 
$
32

 
$
32

 
$
32

Above-market ground lease liability
 
(1
)
 
(2
)
 
(2
)
 
(2
)
 
(2
)
Total to be added to property operating expenses
 
$
7

 
$
30

 
$
30

 
$
30

 
$
30



16
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(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
2018 (remainder)
 
$
58,395

2019
 
230,694

2020
 
219,492

2021
 
208,038

2022
 
196,988

Thereafter
 
1,218,654

 
 
$
2,132,261

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:
 
 
September 30,
Tenant
 
2018
 
2017
SunTrust Bank
 
*
 
11.5%
_____________________
* Tenant’s annualized rental income on a straight-line basis was not greater than or equal to 10.0% of the Company’s consolidated annualized rental income for all portfolio properties as of the date specified.
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 September 30, 2018 and 2017.
The Company did not own properties in any state that in total represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of September 30, 2018 and 2017.
Real Estate Held for Sale
When assets are identified by management as held for sale, the Company stops recognizing depreciation and amortization expense on the identified assets and estimates the sales price, net of costs to sell, of those assets. If the carrying amount of the assets classified as held for sale exceeds the estimated net sales price, the Company records an impairment charge equal to the amount by which the carrying amount of the assets exceeds the Company’s estimate of the net sales price of the assets.
As of September 30, 2018 and December 31, 2017, there were two and four properties, respectively, classified as held for sale. During the nine months ended September 30, 2018, the Company sold all four of the properties that were held for sale as of December 31, 2017 and classified two additional properties as held for sale. The disposal of these properties does not represent a strategic shift. Accordingly, the operating results of these properties remain classified within continuing operations for all periods presented. The following table details the major classes of assets associated with the properties that have been reclassified as held for sale as of the dates indicated:

17
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

(Dollar amounts in thousands)
 
September 30, 2018
 
December 31, 2017
Real estate investments held for sale, at cost:
 
 
 
 
Land
 
$
10,975

 
$
1,453

Buildings, fixtures and improvements
 
15,989

 
4,677

Acquired intangible lease assets
 
3,667

 
1,252

Total real estate assets held for sale, at cost
 
30,631

 
7,382

Less accumulated depreciation and amortization
 
(2,433
)
 
(2,666
)
Total real estate investments held for sale, net
 
28,198

 
4,716

 
 
 
 
 
Impairment charges related to properties reclassified as held for sale
 
—

 
(34
)
Assets held for sale
 
$
28,198

 
$
4,682


Real Estate Sales
During the three months ended September 30, 2018, the Company closed on the sale of six properties, including four properties leased to SunTrust Banks, Inc. (“SunTrust”), for an aggregate contract price of $28.3 million, resulting in a gain of $1.3 million. During the nine months ended September 30, 2018, the Company closed on the sale of 25 properties, including 17 properties leased to SunTrust which had lease terms that expired between December 31, 2017 and March 31, 2018, for an aggregate contract price of $115.1 million, exclusive of closing costs. These sales resulted in aggregate gains of $29.6 million, which are reflected in gain on sale of real estate investments on the consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2018. The Company recorded impairment charges of approximately $0.3 and $0.5 million for the three and nine months ended September 30, 2018, respectively, upon reclassification of properties to assets 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.
During the three months ended September 30, 2017, the Company sold seven properties leased to SunTrust for an aggregate contract price of $6.0 million, resulting in aggregate gains on sale of $0.3 million. During the nine months ended September 30, 2017, the Company closed on the sale of 19 properties, including 13 properties operated by SunTrust, for a contract price of $277.9 million, exclusive of closing costs. These sales resulted in aggregate gains of $0.3 million and $14.1 million, which are reflected in gain on sale of real estate investments on the consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2017, respectively. The Company recorded impairment losses of $0.2 million and $4.5 million for the three and nine months ended September 30, 2017, respectively, upon reclassification of properties to assets 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.
Impairment of Held for Use Real Estate Investments
As of September 30, 2018, the Company owned held for use properties, which included 21 held for use single-tenant net lease properties leased to SunTrust, which had lease terms that expired between December 31, 2017 and March 31, 2018. For all of its held for use properties, the Company had reconsidered the projected cash flows due to various performance indicators. As a result, the Company 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 held for use 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 held for use properties, and that market and economic conditions at the time of any potential sales of these 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.

18
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

For some of the held for use properties, the Company has executed a non-binding letter of intent (“LOI”) or a definitive purchase and sale agreement (“PSA”) to sell the properties. In those instances, the Company used the sale price from the applicable 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.
As a result of its consideration of impairment of its held for use properties, during the three and nine months ended September 30, 2018, the Company recognized impairment charges of $0.9 million and $9.6 million, respectively, on three (including two leased to SunTrust) and 11 (including eight leased to SunTrust) of the Company’s held for use properties, respectively, based on executed LOIs or PSAs received. The majority of the impairment charges related to two multi-tenant properties. During the three and nine months ended September 30, 2017, the Company recognized impairment charges of $7.4 million and $9.7 million, respectively on the held for use SunTrust properties based on LOIs entered into. These amounts are recorded in impairment charges in the Company’s consolidated statement of operations and comprehensive loss.
Note 5 — Mortgage Notes Payable, Net
The Company’s mortgage notes payable, net as of September 30, 2018 and December 31, 2017 consisted of the following:
 
 
 
 
Outstanding Loan Amount as of
 
Effective Interest Rate as of
 
 
 
 
 
 
Portfolio
 
Encumbered Properties
 
September 30,
2018
 
December 31,
2017
 
September 30,
2018
 
Interest Rate
 
Maturity
 
Anticipated Repayment
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
 
 
SAAB Sensis I
 
1
 
$
7,178

 
$
7,470

 
5.93
%
 
Fixed
 
Apr. 2025
 
Apr. 2025
SunTrust Bank II
 
24
 
18,631

 
21,243

 
5.50
%
 
Fixed
 
Jul. 2031
 
Jul. 2021
SunTrust Bank III
 
93
 
73,852

 
79,729

 
5.50
%
 
Fixed
 
Jul. 2031
 
Jul. 2021
SunTrust Bank IV
 
24
 
20,298

 
22,756

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

 
125,000

 
5.16
%
 
Fixed
 
Jul. 2026
 
Jan. 2021
Stop & Shop I
 
4
 
37,004

 
37,562

 
5.63
%
 
Fixed
 
Jun. 2041
 
Jun. 2021
Mortgage Loan I
 
253
 
574,515

 
638,115

 
4.36
%
 
Fixed
 
Sep. 2020
 
Sep. 2020
Liberty Crossing (1)
 
—
 
—

 
11,000

 
—
%
 
—
 
—
 
—
Tiffany Springs MarketCenter (1)
 
—
 
—

 
33,802

 
—
%
 
—
 
—
 
—
Shops at Shelby Crossing
 
1
 
22,689

 
23,002

 
4.97
%
 
Fixed
 
Mar. 2024
 
Mar. 2024
Patton Creek
 
1
 
40,241

 
40,858

 
5.76
%
 
Fixed
 
Dec. 2020
 
Dec. 2020
Bob Evans I
 
23
 
23,950

 
23,950

 
4.71
%
 
Fixed
 
Sep. 2037
 
Sep. 2027
Mortgage Loan II
 
12
 
210,000

 
210,000

 
4.25
%
 
Fixed
 
Jan. 2028
 
Jan. 2028
Mortgage Loan III
 
22
 
33,400

 
33,400

 
4.12
%
 
Fixed
 
Jan. 2028
 
Jan. 2028
Mortgage Loan IV
 
39
 
29,887

 
—

 
5.16
%
 
Fixed
(3) 
Mar. 2025
 
Mar. 2025
Gross mortgage notes payable
 
498
 
1,216,645

 
1,307,887

 
4.65
%
(2) 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization (4)
 
 
 
(12,543
)
 
(15,182
)
 
 
 
 
 
 
 
 
Mortgage premiums, net
 
 
 
8,035

 
10,728

 
 
 
 
 
 
 
 
Mortgage notes payable, net
 
 
 
$
1,212,137

 
$
1,303,433

 
 
 
 
 
 
 
 
_____________________________________
(1) 
These mortgage notes payable were repaid during the second quarter of 2018.
(2) 
Calculated on a weighted-average basis for all mortgages outstanding as of the dates indicated.
(3) 
Fixed as a result of the Company having entered into swap agreements, which are included in derivatives, at fair value on the unaudited consolidated balance sheet as of September 30, 2018.
(4) 
Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining financing. These costs are amortized to interest expense over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are generally expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.

19
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

As of September 30, 2018 and December 31, 2017, the Company had pledged $2.4 billion and $2.5 billion, respectively, in real estate investments, at cost 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. In addition, as of September 30, 2018, $811.8 million in real estate investments, at cost were included in the unencumbered asset pool comprising the borrowing base under the Credit Facility. Therefore, this real estate is only available to serve as collateral or satisfy other debts and obligations if it is first removed from the borrowing base under the Credit Facility (see Note 6 — Credit Facility for definition).
The following table summarizes the scheduled aggregate principal payments on mortgage notes payable based on stated maturity dates for the five years subsequent to September 30, 2018 and thereafter:
(In thousands)
 
Future Principal Payments
2018 (remainder)
 
$
615

2019
 
2,533

2020
 
615,400

2021
 
1,398

2022
 
1,070

Thereafter
 
595,629

 
 
$
1,216,645

The Company’s mortgage notes payable agreements require the compliance of certain property-level financial covenants including debt service coverage ratios. As of September 30, 2018, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
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 to an unsecured amended and restated credit agreement, dated December 2, 2014 by and among the RCA OP, to which the OP is successor by merger, BMO Harris Bank N.A., (“BMO Bank”) as administrative agent, letter of credit issuer, swingline lender and a lender, and the other parties thereto, relating to a $325.0 million revolving credit facility (the “Prior Credit Facility”). On April 26, 2018, the Company repaid the Prior Credit Facility in full and entered into a $415.0 million revolving unsecured corporate credit facility (the “Credit Facility”) with BMO Bank, as administrative agent, Citizens Bank, N.A. and SunTrust Robinson Humphrey, Inc., as joint lead arrangers, and the other lenders from time to time party thereto. In September 2018, the lenders under the Credit Facility increased the aggregate total commitments under the Credit Facility by $125.0 million, bringing total commitments to $540.0 million.
The Credit Facility includes an uncommitted “accordion feature” whereby, upon the request of the OP, but at the sole discretion of the participating lenders, the commitments under the Credit Facility may be increased by up to an additional $500.0 million, subject to obtaining commitments from new lenders or additional commitments from participating lenders and certain customary conditions. As of September 30, 2018, and as discussed above, the Company increased its commitments through this accordion feature by $125.0 million, leaving $375.0 million remaining.
The amount available for future borrowings under the Credit Facility is based on the lesser of (1) a percentage of the value of the pool of eligible unencumbered real estate assets comprising the borrowing base, and (2) a maximum amount permitted to maintain a minimum debt service coverage ratio with respect to the borrowing base, in each case, as of the determination date. As of September 30, 2018, the Company had a total borrowing capacity under the Credit Facility of $358.8 million based on the value of the borrowing base under the Credit Facility. Of this amount, $260.7 million was outstanding under the Credit Facility as of September 30, 2018 and $98.1 million remained available for future borrowings.
The Credit Facility is interest-only. Upon the Listing, the maturity date of the Credit Facility was automatically extended from April 26, 2020 to April 26, 2022 and the Company has a one-time right, subject to customary conditions, to extend the maturity date for an additional term of one year to April 26, 2023. Borrowings under the Credit Facility will bear interest at either (i) the Base Rate (as defined in the Credit Facility) plus an applicable spread ranging from 0.60% to 1.20%, depending on the Company’s consolidated leverage ratio, or (ii) LIBOR plus an applicable spread ranging from 1.60% to 2.20%, depending on the Company’s consolidated leverage ratio. As of September 30, 2018 and December 31, 2017, the weighted-average interest rate under the Credit Facility and Prior Credit Facility was 4.04% and 2.48%, respectively.

20
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

The Credit Facility contains various customary operating covenants, including a restricted payments covenant, as well as covenants restricting, among other things, the incurrence of liens, investments, fundamental changes, agreements with affiliates and changes in nature of business. The Credit Facility also contains financial maintenance covenants with respect to maximum consolidated leverage, maximum consolidated secured leverage, minimum fixed charge coverage, maximum other recourse debt to total asset value, and minimum net worth. As of September 30, 2018, the Company was in compliance with the operating and financial covenants under the Credit Facility.
Note 7 — Fair Value Measurements
Fair Value Hierarchy
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.
Derivative Instruments
The Company’s derivative instruments are measured at fair value on a recurring basis. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with these derivatives 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 September 30, 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivatives 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.
Real Estate Investments - Held for Sale
The Company has impaired real estate investments held for sale, which are carried at fair value on a non-recurring basis on the consolidated balance sheets as of September 30, 2018 and December 31, 2017. Impaired real estate investments held for sale were valued using the sale price from the applicable 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.
Real Estate Investments - Held for Use
The Company also has impaired real estate investments held for use (see Note 4 — Real Estate Investments for additional information on impairment charges recorded by the Company), which are carried at fair value on a non-recurring basis on the consolidated balance sheets as of September 30, 2018 and December 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 regions as the impaired properties in order to generate an estimated sale price, which is an unobservable input.

21
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

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 impaired properties, the Company had an executed LOI or PSA to sell the property. In those instances, the Company used the sale price from the applicable 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 September 30, 2018 and December 31, 2017, 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
September 30, 2018
 
 

 
 

 
 

 
 

Impaired real estate investments held for use
 
—

 
8,351

 
—

 
8,351

Interest rate swaps - assets
 
—

 
222

 
—

 
222

Total
 
$
—

 
$
8,573

 
$
—

 
$
8,573

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Impaired real estate investments held for sale
 
$
—

 
$
432

 
$
—

 
$
432

Impaired real estate investments held for use
 
—

 
20,434

 
10,330

 
30,764

Interest rate swaps - assets
 
—

 
23

 
—

 
23

Total
 
$
—

 
$
20,889

 
$
10,330

 
$
31,219

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 nine months ended September 30, 2018 and 2017.
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 dividends 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 September 30, 2018 and December 31, 2017 are reported in the following table:
 
 
 
 
September 30, 2018
 
December 31, 2017
(In thousands)
 
Level
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Gross mortgage notes payable
 
3
 
$
1,216,645

 
$
1,215,912

 
$
1,307,887

 
$
1,332,240

Credit facilities
 
3
 
$
260,700

 
$
260,700

 
$
95,000

 
$
95,000

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 Prior Credit Facility or 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 the credit risk of the Company or credit markets.
Note 8 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and 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.

22
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2018 and December 31, 2017:
(In thousands)
 
Balance Sheet Location
 
September 30, 2018
 
December 31, 2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest Rate Swaps
 
Derivative assets, at fair value
 
$
222

 
$
23

   Total
 
 
 
$
222

 
$
23

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. Additionally, during the nine months ended September 30, 2018, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amounts resulted in a gain of $81,863.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that approximately $52,984 will be reclassified from accumulated other comprehensive income as an increase to interest expense.
As of September 30, 2018 and December 31, 2017, the Company had the following derivatives that were designated as cash flow hedges of interest rate risk.
 
 
September 30, 2018
 
December 31, 2017
Interest Rate Derivative
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest Rate Swaps
 
4
 
$
29,887

 
1
 
$
34,098

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2018 and 2017:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Amount of gain (loss) recognized in accumulated other comprehensive income on interest rate derivatives (effective portion)
 
$
215

 
$
1

 
$
121

 
$
9

Amount of loss reclassified from accumulated other comprehensive income into income as interest expense
 
$
(53
)
 
$
(9
)
 
$
(88
)
 
$
(35
)
Amount of gain (loss) recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
 
$
—

 
$
—

 
$
82

 
$
—


23
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Non-Designated Hedges
Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. A gain of approximately $21,000 is included in interest expense on the consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2017. There was no gain or loss on non-designated hedging relationship during the three months ended September 30, 2017. As of September 30, 2018 and December 31, 2017, the Company did not have any derivatives that were not designated as hedges in qualifying hedging relationships, therefore no gain or loss was recorded in the three and nine months ended September 30, 2018.
Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2018 and December 31, 2017. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset on the Balance Sheet
 
 
(In thousands)
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Recognized (Liabilities)
 
Gross Amounts Offset on the Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented on the Balance Sheet
 
Financial Instruments
 
Cash Collateral Received (Posted)
 
Net Amount
September 30, 2018
 
$
222

 
$
—

 
$
—

 
$
222

 
$
—

 
$
—

 
222

December 31, 2017
 
$
23

 
$
—

 
$
—

 
$
23

 
$
—

 
$
—

 
23

Credit-Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
As of September 30, 2018, the Company did not have any derivatives in a net liability position. As a result, there is no termination value associated with the settlement of the Company’s obligations under the agreement, and the Company has not posted any collateral related to the agreement.
Note 9 — Common Stock
As of September 30, 2018 and December 31, 2017, the Company had 106.3 million and 105.2 million shares of common stock outstanding, respectively, comprised of, as of September 30, 2018 and following a sequence of corporate actions during July 2018 as described in more detail below, 53.7 million shares of Class A common stock, 26.3 million shares of Class B-1 common stock, and 26.3 million shares of Class B-2 common stock.
In connection with the Listing, the Company’s board of directors changed the rate at which the Company pays dividends on its common stock to an annualized rate equal to $1.10 per share, or $0.0916667 per share on a monthly basis, effective as of July 1, 2018. Additionally, effective July 1, 2018, the Company transitioned to declaring dividends based on monthly, rather than daily, record dates and will generally pay dividends on or around the 15th day of each month (or, if not a business day, the next succeeding business day) to common stock holders of record on the applicable record date of such month. Prior to July 1, 2018, dividends were payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month.
In April 2013, the Company’s board of directors authorized a monthly dividends equivalent to $1.65 per annum, per share of common stock. Effective July 1, 2017, the Company’s board of directors authorized a decrease in the daily accrual of dividends to an annualized rate of $1.30 per annum, per share of common stock.
Dividend payments are dependent on the availability of funds. The Company’s board of directors may reduce the amount of dividends paid or suspend dividend payments at any time and therefore dividends payments are not assured.

24
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

On March 19, 2018, 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, 2017, which was published on March 20, 2018.
Listing of the Company’s Common Stock
To address the potential for selling pressure that may have existed at the outset of listing, the Company listed only shares of Class A common stock, which represented approximately 50% of its outstanding shares of common stock, on Nasdaq on the Listing Date. The Company’s two other classes of outstanding stock at the time of the Listing were Class B-1 common stock, which comprised approximately 25% of the Company’s outstanding shares of common stock at that time and Class B-2 common stock, which comprised approximately 25% of the Company’s outstanding shares of common stock at that time. In accordance with their terms, all shares of Class B-1 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on October 10, 2018. All shares of Class B-2 common stock will automatically convert into shares of Class A common stock to be listed on Nasdaq no later than January 15, 2019, 180 days from the Listing Date. Each share of Class B-1 common stock and Class B-2 common stock is otherwise identical to each share of Class A common stock in all other respects, including the right to vote on matters presented to the Company’s stockholders, and shares of all classes of common stock are expected to receive the same dividends.
Corporate Actions
In order to effect the Listing described above, the Company took the following corporate actions on July 3, 2018:
•
The Company effected a 2-to-1 reverse stock split combining every two shares of common stock, par value $0.01 per share, into one share of common stock, par value $0.02 per share, and subsequently reducing the resulting par value of the shares of common stock outstanding after the reverse stock split from $0.02 per share back to $0.01 per share. In addition, the Company changed the name of its common stock to “Class A common stock.”
•
The Company reclassified a number of authorized but unissued shares of Class A common stock equal to half of the number of shares of Class A common stock then outstanding into equal numbers of shares of Class B-1 common stock and shares of Class B-2 common stock.
•
The Company distributed to the holders of shares of Class A common stock a stock dividend equal to one-half share of Class B-1 common stock and one-half share of Class B-2 common stock for each share of Class A common stock outstanding.
As a result of the corporate actions described above, the number of outstanding shares in total, and on a weighted-average basis for earnings per share purposes, remained the same with the exception of any fractional shares that were repurchased or forfeited as a result of the reverse stock split.
The table below provides details of the Company’s outstanding shares of common stock as of June 30, 2018 and September 30, 2018:
 
 
June 30, 2018
 
As of September 30, 2018
 
 
Shares Outstanding
 
Class A Common Stock
 
Class B-1 Common Stock (6)
 
Class B-2 Common Stock
 
Shares Outstanding
Shares of common stock (1)
 
105,049,705

 
52,506,544

 
26,262,476.5

 
26,262,476.5

 
105,031,497

Vesting and conversion of Class B Units (2) (3)
 
—

 
1,052,420

 
—

 
—

 
1,052,420

Redemption of Class A Units (formerly known as OP Units) (3) (4)
 
—

 
30,691

 
—

 
—

 
30,691

Unvested restricted shares (5)
 
9,088

 
131,820

 
2,209

 
2,209

 
136,238

   Total
 
105,058,793

 
53,721,475

 
26,264,685.5

 
26,264,685.5

 
106,250,846

(1) See “Corporate Actions” above for a description of the reverse stock split and classification of shares as Class A common stock, Class B-1 common stock and Class B-2 common stock. Fractional shares of Class A common stock totaling 18,460 were repurchased by the Company as a result of the reverse stock split. Amount at June 30, 2018 included 8,888 shares of common stock owned by the Special Limited Partner. During the third quarter of 2018, all 4,444 shares of Class A common stock owned by the Special Limited Partner were distributed to individual members of the entity and, as a result, the Special Limited Partner owned 2,222 shares of Class B-1 common stock and 2,222 shares of B-2 common stock as of September 30, 2018.

25
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

(2) The Class B Units were converted into an equal number of Class A Units. In addition, effective at the Listing following this conversion and as approved by the Company’s board of directors, these Class A Units were redeemed for an equal number of newly issued shares of Class A common stock consistent with the redemption provisions contained in the agreement of limited partnership of the OP (see Note 11 — Related Party Transactions and Arrangements for additional information).
(3) Following the Listing, all of the shares of Class A common stock, Class B-1 common stock and Class B-2 common stock owned by the Advisor and its affiliates (including the Special Limited Partner) were distributed pro rata to the individual members of those entities, including Edward M. Weil, Jr., the Company’s chairman and chief executive officer.
(4) Pursuant to the redemption provisions contained in the agreement of limited partnership of the OP, holders of Class A Units may redeem all or a portion of their Class A Units for, at the Company’s election, either shares of Class A common stock or the cash equivalent thereof. 203,612 Class A Units were eligible for redemption after the Listing. On July 20, 2018, 30,690.5 Class A Units held by the RCA Advisor and the Special Limited Partner were redeemed for an equal number of newly issued shares of Class A common stock consistent with the redemption provisions contained in the agreement of limited partnership of the OP.
(5) Fractional unvested restricted shares of common stock (“restricted shares”) held by the Company’s independent directors totaled approximately three, and these fractional shares were forfeited in connection with the reverse stock split effected prior to the Listing. Also, during the three months ended September 30, 2018, the Company issued 127,402 restricted shares in the aggregate to members of the Company’s board of directors (see Note 13 — Share-Based Compensation).
(6) In accordance with their terms, all shares of Class B-1 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on October 10, 2018. Fractional shares of Class B-1 common stock totaling approximately 19,922 were repurchased by the Company as a result of the automatic conversion.
Tender Offers
On February 15, 2018, in response to an unsolicited offer to the Company’s stockholders to purchase 1,000,000 shares of the Company’s common stock at a price of $13.66 per share, the Company commenced a tender offer for up to 1,000,000 shares at a price of $14.35 per share (the “February Offer”). The Company made the February Offer in order to deter an unsolicited bidder and other potential future bidders that may try to exploit the illiquidity of the Company’s common stock and acquire it from stockholders at prices substantially below the current Estimated Per-Share NAV. In accordance with the terms of the February Offer, which expired on March 27, 2018, the Company accepted for purchase 483,133 shares for a total cost of approximately $6.9 million, excluding fees and expenses relating to the February Offer.
On May 1, 2018, in response to an unsolicited offer to the Company’s stockholders to purchase 1,000,000 shares of the Company’s common stock at a price of $15.35 per share, the Company commenced a tender offer for up to 1,000,000 shares at a price of $15.45 per share (the “May Offer”). The Company made the May Offer in order to deter an unsolicited bidder and other potential future bidders that may try to exploit the illiquidity of the Company’s common stock and acquire it from stockholders at prices substantially below the current Estimated Per-Share NAV. In accordance with the May Offer, which expired on May 31, 2018, the Company accepted for purchase 207,713 shares for a total cost of approximately $3.2 million, excluding fees and expenses relating to the May Offer.
Authorized Repurchase Program
Effective at the Listing, the Company’s board of directors authorized a share repurchase program of up to $200.0 million of Class A common stock (the “Authorized Repurchase Program”) that the Company may implement from time to time, following the Listing, through open market repurchases or in privately negotiated transactions based on the Company’s board of directors and management’s assessment of, among other things, market conditions prevailing at the particular time. The Company will have the ability to repurchase shares of Class A common stock up to this amount at its discretion, subject to authorization by the Company’s board of directors prior to any such repurchase. There have not been any purchases under the Authorized Repurchase Program.
Terminated Share Repurchase Program
In anticipation of the Listing, the Company’s board of directors terminated the Company’s previous share repurchase program (the “SRP”) in accordance with its terms, effective June 30, 2018. The Company’s board of directors had previously authorized the Company to repurchase shares pursuant to its SRP, which permitted investors to offer to sell their shares back to the Company after they held them for at least one year, subject to certain conditions and limitations. The Company repurchased shares on a semiannual basis, in its sole discretion, at each six-month period ending June 30 and December 31.

26
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

On June 14, 2017, the Company announced that its board of directors had adopted an amendment and restatement of the SRP that superseded and replaced the existing SRP effective as of July 14, 2017. Under the amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of the Company’s common stock or received their shares from the Company (directly or indirectly) through one or more non-cash transactions were considered for repurchase. Other terms and provisions of the amended and restated SRP remained consistent with the SRP then in effect.
Under the SRP, prior to the amendment and restatement, the repurchase price per share for requests other than for death or disability was 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 was equal to Estimated Per-Share NAV applicable on the last day of the semiannual period, as described below.
Under the SRP, repurchases at each semiannual period were 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 were funded from proceeds received during that same semiannual period through the issuance of common stock pursuant to the Company’s distribution reinvestment program (the “DRIP”), as well as any funds reserved by the Company in the sole discretion of the Company’s board of directors. Repurchases were made 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 had 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 did not guarantee that it was able to accommodate all repurchase requests.
When a stockholder requested repurchases and the repurchases were approved, the Company reclassified 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.

27
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

The following table summarizes the repurchases of shares under the SRP cumulatively through the SRP termination date of June 30, 2018:
 
 
Number of Shares
 
Weighted - Average Price per Share
Cumulative repurchases under the SRP as of December 31, 2017 (1)
 
3,306,864

 
$
23.97

Three months ended March 31, 2018 (2)
 
412,939

 
23.37

Three months ended June 30, 2018
 
—

 
—

Cumulative repurchases through the termination date
 
3,719,803

 
—

(1) Excludes rejected repurchase requests received during 2016 with respect to 5.9 million shares for $140.1 million at a weighted-average price per share of $23.65. Also, in July 2017, following the effectiveness of the amendment and restatement of the SRP, the Company’s board of directors approved 100% of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to December 31, 2017. No repurchases were made with respect to requests received during 2017 that were not valid requests in accordance with the amended and restated SRP. At the time the SRP was terminated in anticipation of the Listing, effective June 30, 2018, we had received repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2018 to June 30, 2018 with respect to 0.6 million shares that were therefore not repurchased.
(2) During January 2018, the Company repurchased 412,939 shares for approximately $9.7 million at a price of $23.37 per share equal to the then current Estimated Per-Share NAV.
Distribution Reinvestment Plan
On June 29, 2018, the Company announced that its board of directors had suspended the DRIP effective June 30, 2018. As a result, all dividends paid for the month of June 2018 were paid in cash in July 2018. Prior to its suspension, the Company’s stockholders were able to elect to reinvest dividends by purchasing shares of common stock from the Company at the applicable Estimated Per-Share NAV. On the Listing Date, an amendment and restatement of the Company’s DRIP approved by the Company’s board of directors became effective (the “A&R DRIP”).
Commencing with the dividend paid on August 3, 2018 (the first dividend paid following the Listing Date), the Company’s stockholders that have elected to participate in the A&R DRIP may have dividends payable with respect to all or a portion of their shares of the Company’s common stock (including Class A common stock, Class B-1 common stock and Class B-2 common stock) reinvested in shares of Class A common stock. Shares issued pursuant to the A&R DRIP represent shares that are, at the election of the Company, either (i) acquired directly from the Company, which would issue new shares, at a price based on the average of the high and low sales prices of Class A common stock on Nasdaq on the date of reinvestment, or (ii) acquired through open market purchases by the plan administrator at a price based on the weighted-average of the actual prices paid for all of the shares of Class A common stock purchased by the plan administrator with all participants’ reinvested dividends for the related quarter, less a per share processing fee.
No dealer manager fees or selling commissions are paid with respect to shares issued pursuant to the DRIP or the A&R DRIP. Shares issued pursuant to the DRIP or the A&R DRIP are recorded within stockholders’ equity in the consolidated balance sheets in the period dividends are declared. During the nine months ended September 30, 2018, 990,393 shares of common stock were issued pursuant to the DRIP or A&R DRIP.

28
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Note 10 — 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
2018 (remainder)
 
$
364

2019
 
1,460

2020
 
1,243

2021
 
925

2022
 
941

Thereafter
 
12,516

 
 
$
17,449

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 RCA, the Company, Edward M. Weil, Jr., Leslie D. Michelson, Edward G. Rendell (Weil, Michelson and Rendell, the “Director Defendants”), and AR Global, 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 charter. The complaint sought 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 16, 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. Lead plaintiff, along with other stockholders of RCA, filed an amended complaint on June 19, 2017. The amended complaint named additional individuals and entities as defendants (David Gong, Stanley Perla, Lisa Kabnick (“Additional Director Defendants”), Nicholas Radesca and the RCA Advisor), added counts under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended (the “Securities Act”) in connection with the Registration Statement for the proposed merger, under Section 13(e) of the Exchange Act, and counts for breach of contract and unjust enrichment. The Company, RCA, the Director Defendants, the Additional Director Defendants and Nicholas Radesca deny wrongdoing and liability and intend to vigorously defend the action. On August 14, 2017, defendants moved to dismiss the amended complaint. On March 29, 2018, the Court granted defendants’ motion to dismiss and dismissed the amended complaint. On April 26, 2018, the plaintiffs filed a notice of appeal of the court’s order, which appeal is pending. 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 nine months ended September 30, 2018 or the year ended December 31, 2017.
On February 8, 2018, Carolyn St. Clair-Hibbard, a purported stockholder of the Company, filed a putative class action complaint in the United States District Court for the Southern District of New York against the Company, AR Global, the Advisor, Nicholas S. Schorsch and William M. Kahane. On February 23, 2018, the complaint was amended to, among other things, assert some claims on the plaintiff’s own behalf and other claims on behalf of herself and other similarly situated shareholders of the Company as a class. On April 26, 2018, defendants moved to dismiss the amended complaint. On May 25, 2018, plaintiff filed a second amended complaint. The second amended complaint alleges that the proxy materials used to solicit stockholder approval of the Merger at the Company’s 2017 annual meeting were materially incomplete and misleading. The complaint asserts violations of Section 14(a) of the Exchange Act against the Company, as well as control person liability against the Advisor, AR Global, and Messrs. Schorsch and Kahane under 20(a).  It also asserts state law claims for breach of fiduciary duty against the Advisor, and claims for aiding and abetting such breaches, of fiduciary duty against the Advisor, AR Global and Messrs. Schorsch and Kahane. The complaint seeks unspecified damages, rescission of the Company’s advisory agreement (or severable portions thereof) which became effective when the Merger became effective, and a declaratory judgment that certain provisions of the Company’s advisory agreement are void. The Company believes the second amended complaint is without merit and intends to defend vigorously. On June 22, 2018, defendants moved to dismiss the second amended complaint. On August 1, 2018, plaintiff filed an opposition to

29
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

defendants’ motions to dismiss. Defendants filed reply papers on August 22, 2018, and oral argument was held on September 26, 2018. That motion is now pending. Due to the early stage of the litigation, no estimate of a probable loss or any reasonably possible losses are determinable at this time
On October 26, 2018, Terry Hibbard, a purported stockholder of the Company, filed a putative class action complaint in New York State Supreme Court, New York County, against the Company, AR Global, the Advisor, Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Nicholas Radesca, David Gong, Stanley R. Perla, and Lisa D. Kabnick.  The complaint alleges that the registration statement pursuant to which RCA shareholders acquired shares of the Company during the Merger contained materially incomplete and misleading information.  The complaint asserts violations of Section 11 of the Securities Act against Messrs. Weil, Radesca, Gong, and Perla, and Ms. Kabnick, violations of Section 12(a)(2) of the Securities Act against the Company and Mr. Weil, and control person liability against the Advisor, AR Global, and Messrs. Schorsch and Kahane under Section 15 of the Securities Act.  The complaint seeks unspecified damages and rescission of the Company’s sale of stock pursuant to the registration statement. The Company believes the complaint is without merit and intends to defend vigorously.  The Company has not yet answered or moved to dismiss the complaint. Due to the early stage of the litigation, no estimate of a probable loss or any reasonably possible losses are determinable at this time.
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.
Note 11 — Related Party Transactions and Arrangements
As of September 30, 2018, American Finance Special Limited Partner, LLC (the “Special Limited Partner”), an entity controlled by AR Global, owned 2,222 shares Class B-1 common stock and 2,222 shares of Class B-2 common stock and together with its affiliates, no OP Units after the distribution of 4,444 shares of Class A common stock to the individual members of the Special Limited Partner and the redemption of all OP Units previously held by the Special Limited Partner and its affiliates (see Note 9 - Common Stock for additional information). As of December 31, 2017, the Special Limited Partner owned 8,888 shares of the Company’s outstanding common stock and owned 90 units of limited partnership interests in the OP (“OP Units”).
On September 6, 2016, the agreement of limited partnership of the OP was amended and restated in connection with the effectiveness of the Merger (as so amended and restated, the “A&R OP Agreement”). On the Listing Date, the A&R OP Agreement was amended and restated in connection with the effectiveness of the Listing (as so amended and restated, the “Second A&R OP Agreement”). The amendments effected to the A&R OP Agreement pursuant to the Second A&R OP Agreement generally reflect provisions more consistent with agreements of limited partnership of other operating partnerships controlled by real estate investment trusts whose securities are publicly traded and listed and make other changes in light of the transactions entered into by the Company in connection with the Listing, including designating the units of limited partnership previously designated as “OP Units” that correspond to each share of the Company’s common stock, with respect to dividends and otherwise, as “Class A Units” and setting forth the terms of a new class of units of limited partnership designated as “LTIP Units” (“LTIP Units”) including the Master LTIP Unit (the “Master LTIP Unit”) issued to the Advisor on the Listing Date pursuant to the 2018 OPP. In addition, the Second A&R OP Agreement describes the procedures pursuant to which holders of Class A Units may redeem all or a portion of their Class A Units for, at the Company’s election, either shares of Class A common stock or the cash equivalent thereof. The Second A&R OP Agreement also requires the Company, upon the request of a holder of Class A Units but subject to certain conditions and limitations, to register under the Securities Act the issuance or resale of the shares of Class A common stock issuable upon redemption of Class A Units in accordance with the Second A&R OP Agreement.
Holders of OP Units or Class A Units have the right to redeem their OP Units or Class A 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 applicable 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.

30
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Subsequent to the Listing, all of the Class A Units held by the Advisor and its affiliates were redeemed for shares of Class A common stock and all of the shares of Class A common stock, Class B-1 common stock and Class B-2 common stock owned by the Advisor and its affiliates (including the Special Limited Partner) were distributed pro rata to the individual members of those entities, including Edward M. Weil, Jr., the Company’s chairman and chief executive officer. See Note 9 - Common Stock for additional information regarding these transactions.
Realty Capital Securities, LLC (the “Former Dealer Manager”) served as the dealer manager of the Company’s initial public offering. 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”), which became the parent company of the Former Dealer Manager in December 2012, and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016. 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 AR Capital LLC, AR Global, the Advisor, advisors of other entities sponsored by AR Global, and AR Global’s principals (including Edward M. Weil, Jr.), and RCAP Holdings, LLC. The suit alleges, among other things, certain breaches of duties to RCAP. The Company is not a defendant in the suit, nor are there any allegations that the Advisor engaged in any wrongful conduct. On May 26, 2017, the defendants moved to dismiss. On November 30, 2017, the court issued an opinion partially granting the defendant’s motion to dismiss. On December 7, 2017, the creditor trust moved for limited reargument of the court’s partial dismissal of its breach of fiduciary duty claim, and on January 10, 2018, the defendants filed a supplemental motion to dismiss certain claims. On April 5, 2018, the court issued an opinion denying the creditor trust’s motion for reconsideration while partially granting the defendants’ supplemental motion to dismiss. 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 Company’s board of directors unanimously approved certain amendments to the Amended and Restated Advisory Agreement, as amended (the “First 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 First A&R Advisory Agreement, took effect on July 20, 2015, the date on which the Company filed certain changes to the Company’s charter, which were approved by the Company’s stockholders on June 23, 2015. The initial term of the Second A&R Advisory Agreement of 20 years began on April 29, 2015, and is automatically renewable for another 20-year term upon each 20-year anniversary unless terminated by the Company’s board of directors for cause.
On September 6, 2016, the date of the Merger Agreement, the Company entered into an amendment and restatement of the Second A&R Advisory Agreement (the “Third A&R Advisory Agreement”), which became effective at the Effective Time. The Third A&R Advisory Agreement grants the Company the right to internalize the services provided under the Third A&R Advisory Agreement (“Internalization”) and thereby terminate the Third A&R Advisory Agreement pursuant to a notice received by the Advisor after January 1, 2018 as long as (i) more than 67% of the Company’s independent directors have approved the Internalization; and (ii) the Company pays the Advisor a specified Internalization fee pursuant to the terms of the Third A&R Advisory Agreement, which is equal to $15.0 million plus either (x) if the Internalization occurs on or before December 31, 2028, Subject Fees multiplied by 4.5 and (y) if the Internalization occurs on or after January 1, 2029, Subject Fees multiplied by 3.5 plus 1% of the purchase price of each acquisition or merger that occurs between the date of the notice of Internalization received by the Advisor and the Internalization or 1% of the cumulative net proceeds of any equity raised by the Company between the end of the fiscal quarter in which notice was received and the Internalization. The “Subject Fees” are equal to (i) the product of four multiplied by the sum of (A) the actual base management fee plus (B) the actual variable management fee, in each of clauses (A) and (B), payable for the fiscal quarter in which the notice of Internalization is received by the Advisor, plus, (ii) without duplication, the annual increase in the base management fee resulting from the cumulative net proceeds of any equity raised in respect of the fiscal quarter in which the notice of Internalization is received by the Advisor. Up to 10% of the Internalization fee may be payable in shares of common stock subject to certain conditions.
The initial term of the Third A&R Advisory Agreement expires on April 29, 2035, the twentieth anniversary of Second A&R Advisory Agreement. This term is automatically renewed for successive twenty-year terms upon expiration unless the Third A&R Advisory Agreement is terminated (1) in accordance with an Internalization, (2) by the Company or the Advisor with cause, without penalty, with 60 days’ notice, (3) by the Advisor for (a) a failure to obtain a satisfactory agreement for any successor to the Company to assume and agree to perform obligations under the Third A&R Advisory Agreement or (b) any material breach of the Third A&R Advisory Agreement of any nature whatsoever by the Company, or (4) by the Advisor in connection with a change of control of the Company. Upon the termination of the Third A&R Advisory Agreement, the Advisor will be entitled to receive from the Company all amounts due to the Advisor, as well as the then-present fair market value of the Advisor’s interest in the Company.

31
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

On September 6, 2016, the date of the Merger Agreement, the Company entered into 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) an Internalization; and (c) certain matters related to changes in the Third A&R Advisory Agreement.
Acquisition Fees
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.
Financing Coordination Fees
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.
Asset Management Fees and Variable Management/Incentive Fees
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 Company’s 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 that would vest, and no longer be subject to forfeiture, at such time as: (a) the value of the OP’s assets plus all distributions paid by the Company equaled or exceeded 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 occurred concurrently with or subsequently to the achievement of the Economic Hurdle: (i) a listing; (ii) a transaction to which the Company or the OP was 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 was 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 was 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 above has been met. Unvested Class B Units were to be forfeited immediately if: (x) the advisory agreement was terminated for any reason other than a termination without cause; or (y) the advisory agreement was terminated without cause by an affirmative vote of a majority of the Company’s board of directors before the Economic Hurdle has been met.
Prior to the Listing, in aggregate, the Company’s board of directors had approved the cumulative issuance of 1,052,420 Class B Units to the Advisor in connection with the arrangement described above. Pursuant to the terms of the A&R OP Agreement, the Advisor was entitled to receive dividends on unvested Class B Units equal to the dividend amount received on the same number of shares of the Company’s common stock. Such distributions on issued Class B Units were included in general and administrative expenses in the consolidated statements of operations and comprehensive loss. As a result of the Listing and the prior determination by the Company’s board of directors that the Economic Hurdle, had been satisfied, the Class B Units vested in accordance with their terms as the Economic Hurdle had been satisfied and the Listing qualified as a liquidity event. The Class B Units were converted into an equal number of Class A Units. In addition, effective at the Listing following this conversion and as approved by the Company’s board of directors, these Class A Units were redeemed for an equal number of newly issued shares of Class A

32
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

common stock consistent with the redemption provisions contained in the Second A&R OP Agreement. As a result, the Company recorded a non-cash expense of approximately $15.8 million recorded in vesting and conversion of Class B Units in the unaudited consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2018.
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 other REIT, 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 (including certain convertible debt, proceeds from the DRIP and any cumulative Core Earnings (as defined below) in excess of dividends paid on common stock but excluding equity based compensation and proceeds from an Specified Transaction after the Effective Time) 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 and nine months ended September 30, 2018 and 2017.
In addition, under the Third A&R Advisory Agreement, the Company is required to pay the Advisor a variable management fee. Prior to the Listing Date, the amount that was required to be paid was equal to the product of (1) the fully diluted shares of common stock outstanding multiplied by (2) (x) 15.0% of the applicable quarter’s Core Earnings 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. On the Listing Date, the Company entered into an amendment to the Third A&R Advisory Agreement (the “Listing Amendment") which lowered the quarterly thresholds of Core Earnings per share the Company must reach in a particular quarter for the Advisor to receive a Variable Management Fee (as defined in the Third A&R Advisory Agreement) from $0.375 and $0.50 to $0.275 and $0.3125. The Listing Amendment also revised the definition of Adjusted Outstanding Shares (as defined in the Third A&R Advisory Agreement), which is used to calculate Core Earnings per share, to be based on the Company’s reported diluted weighted-average shares outstanding. The Company’s board of directors unanimously approved the Listing Amendment upon the unanimous recommendation of the Company’s nominating and corporate governance committee, which is comprised entirely of independent directors.
Core Earnings is defined as, for the applicable period, net income or loss computed in accordance with GAAP 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 or losses or other non-cash items recorded in net income or loss for the applicable 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 impairments 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 (in each case after discussions between the Advisor and the independent directors and the approval of a majority of the independent directors). The variable management fee is payable to the Advisor or its assignees in cash or shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor and the value of any share to be determined by the Advisor acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. The Company did not incur a variable management fee during the three and nine months ended September 30, 2018 and 2017.
Property Management Fees
On September 6, 2016, the date of the Merger Agreement, RCA’s former property manager and leasing agent assigned RCA’s existing property management agreement (as amended and restated in connection with the execution of the Merger Agreement and further amended from time to time, the “Multi-Tenant Property Management Agreement”) and existing leasing agreement (as amended and restated in connection with the execution of the Merger Agreement, the “Multi-Tenant Leasing Agreement”) to the Property Manager. The Multi-Tenant Property Management Agreement and the Multi-Tenant Leasing Agreement became effective at the Effective Time.
The Multi-Tenant Property Management Agreement provides that, unless a property is subject to a separate property management agreement with the Property Manager, the Property Manager is the sole and exclusive property manager for (1) the

33
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

properties owned by RCA prior to the Merger, and (2) any existing anchored, retail properties, such as power centers and lifestyle centers, acquired by the Company after the Effective Time and during the term of the Multi-Tenant Property Management Agreement and the Multi-Tenant Leasing Agreement, (the “Multi-Tenant Properties”). In December 2017, in connection with a $210.0 million mortgage loan secured by 12 of the Company’s anchored, stabilized core retail properties, the Company entered into 12 identical property management agreements with the Property Manager, the substantive terms of which are substantially identical to the terms of the Multi-Tenant Property Management Agreement, with the exception of the transition fees described below.
The Multi-Tenant Property Management Agreement entitles the Property Manager to a management fee equal to 4% of the gross rental receipts from the Multi-Tenant 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 Multi-Tenant 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 Multi-Tenant 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 Multi-Tenant Properties.
Pursuant to the Multi-Tenant Leasing Agreement, the Company may, under certain circumstances and subject to certain conditions, pay the Property Manager a leasing fee for services in leasing Multi-Tenant Properties to third parties.
In addition, also in connection with entering into the Merger Agreement, the Company entered into an amendment and restatement of its existing property management and leasing agreement with the Property Manager (the “Property Management Agreement”), under which the properties owned by the Company prior to the Merger and any double- and triple-net leased single- tenant properties acquired by the Company after the Effective Time have been and will be managed. The amendment and restatement did not change the substantive terms of the Property Management Agreement, which permit the Property Manager to subcontract its duties to third parties and provide that the Company is responsible for all costs and expenses of managing the properties, except for general overhead and administrative expenses of the Property Manager.
The Multi-Tenant Property Management Agreement, the Multi-Tenant Leasing Agreement and the Property Management Agreement each had 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. The current term of the Multi-Tenant Property Management Agreement, the Multi-Tenant Leasing Agreement will therefore end on October 1, 2019.
Professional Fees and Other Reimbursements
The Company reimburses the Advisor’s costs of providing administrative services. During the three and nine months ended September 30, 2018, the Company incurred $2.2 million and $6.2 million, respectively, of reimbursement expenses from the Advisor for providing administrative services exclusive 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 arrangements with Lincoln. During the three and nine months ended September 30, 2017, the Company incurred $1.9 million and $5.4 million, respectively, of reimbursement expenses from the Advisor for providing administrative services. This reimbursement includes reasonable overhead expenses for employees of the Advisor or its affiliates directly involved in the performance of services on behalf of the Company, including the reimbursement of rent expense at certain properties that are both occupied by employees of the Advisor or its affiliates and owned by affiliates of the Advisor. 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 dividends 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 dividends 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 and nine months ended September 30, 2018 and 2017.

34
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

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 arrangements with Lincoln:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Payable as of
 
(In thousands)
 
2018
 
2017
 
2018
 
2017
 
September 30,
2018
 
December 31,
2017
 
One-time fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees and related cost reimbursements (1)
 
$
77

 
$
49

 
$
248

 
$
100

 
$
77

 
$
9

 
Vesting and conversion of Class B Units
 
15,786

 
—

 
15,786

 
—

 
—

 
—

 
Ongoing fees:
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset management fees to related party
 
5,849

 
5,250

 
17,295

 
15,250

 
92

 
408

 
Property management and leasing fees (2)
 
1,966

 
1,965

 
6,571

 
4,788

 
459

 
1,114

 
Professional fees and other reimbursements (3)
 
2,347

 
2,136

 
6,746

 
5,963

 
949

(4) 
1,522

(4) 
Distributions on Class B Units (3)
 
58

 
345

 
736

 
1,206

 
—

 
116

 
Total related party operating fees and reimbursements
 
$
26,083

 
$
9,745

 
$
47,382

 
$
27,307

 
$
1,577

 
$
3,169

 
_________________________________
(1) Amounts for the three and nine months ended September 30, 2018 and 2017 included in acquisition and transaction related expenses in the unaudited consolidated statements of operations and comprehensive loss.
(2) Amounts for the three and nine months ended September 30, 2018 and 2017 are included in property operating expenses in the unaudited consolidated statements of operations and comprehensive loss.
(3) Amounts for the three and nine months ended September 30, 2018 and 2017 are included in general and administrative expense in the unaudited consolidated statements of operations and comprehensive loss.
(4) Balance includes costs which were incurred and accrued due to ANST and a subsidiary of RCAP which were related parties of the Company. See above for further details on the status of the ANST and RCAP relationship.
Listing Arrangements
Fees Incurred in Connection with a Listing
Pursuant to the A&R OP Agreement, in the event that the Company’s common stock was listed on a national exchange, the OP was obligated to distribute to the Special Limited Partner a promissory note in 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 A&R OP Agreement) 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 (including the Merger)or business combination (an “Offering”) as of the Listing Date plus (ii) the total amount of cash that, if distributed to those stockholders who purchased shares of the Company’s common stock in an Offering prior to the Listing, 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.
Effective at the Listing, the OP entered into a listing note agreement with respect to this obligation (the “Listing Note”) with the Special Limited Partner and entered into a related subordination agreement (the “Subordination Agreement”) with the administrative agent under the Company’s Credit Facility, BMO Bank. The Listing Note evidences the OP’s obligation to distribute to the Special Limited Partner the Listing Amount, which will be calculated based on the Market Value of the Company’s common stock. The measurement period used to calculate the Market Value of the Company’s common stock will not be determinable until the end of the 30 consecutive trading days commencing on the 180th day following the date on which shares of Class B-2 common stock convert into shares of Class A common stock. Until the amount of the Listing Note can be determined, the Listing Note will be considered a liability which will be marked to fair value at each reporting date, with changes in the fair value recorded in the consolidated statements of operations and comprehensive loss. The fair value of the Listing Note at issuance and at September 30, 2018 was not material and was determined using a Monte Carlo simulation, which uses a combination of observable and unobservable inputs. If another liquidity event occurs prior to the end of the measurement period, the Listing Note provides for

35
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

appropriate adjustment to the calculation of the Listing Amount. The Special Limited Partner has 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 its entire special limited partnership interest in the OP into Class A Units.
Multi-Year Outperformance Agreement
On the Listing Date, the Company granted a performance-based equity award to the Advisor in the form of a Master LTIP Unit pursuant to the 2018 OPP which, together with the Second A&R OP Agreement, superseded in all respects the general terms of the multi-year outperformance agreement and the amendment and restatement of the limited partnership agreement of the OP previously approved by the Company’s board of directors in April 2015 to be effective upon a listing of the Company’s common stock. On August 30, 2018, the Master LTIP Units automatically converted into 4,496,796 LTIP Units in accordance with its terms. For additional information on the 2018 OPP, see Note 13 — Share-Based Compensation.
Note 12 — 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.
Note 13 — Share-Based Compensation
Equity Plans
Restricted Share Plan
Prior to the Listing, the Company’s board of directors had adopted an employee and director restricted share plan (the “RSP”), pursuant to which the Company could issue restricted shares and restricted stock units in respect of shares of common stock (“RSUs”) under specific award agreements 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 entities that provide services to the Company.
2018 Equity Plan
Effective at the Listing, the Company’s board of directors adopted an equity plan for the Advisor (the “Advisor Plan”) and an equity plan for individuals (the “Individual Plan” and together with the Advisor Plan, the “2018 Equity Plan”). The Advisor Plan is substantially similar to the Individual Plan, except with respect to the eligible participants. Participation in the Individual Plan is open 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 entities that provide services to the Company. By contrast, participation in the Advisor Plan is only open to the Advisor.
The 2018 Equity Plan succeeded and replaced the existing RSP. Following the effectiveness of the 2018 Equity Plan at the Listing, no further awards will be issued under the RSP; provided, however, that any outstanding awards under the RSP, such as unvested restricted shares held by the Company’s independent directors, will remain outstanding in accordance with their terms and the terms of the RSP until all those awards are vested, forfeited, canceled, expired or otherwise terminated in accordance with their terms. The Company accounts for forfeitures when they occur. While the RSP provided only for awards of restricted shares and restricted stock units, the 2018 Equity Plan has been expanded to permit awards of options, stock appreciation rights, stock awards, LTIP Units and other equity awards in addition to restricted shares and restricted stock units. The 2018 Equity Plan has a term of 10 years, commencing on the Listing Date. Identical to the RSP, the number of shares of the Company’s capital stock available for awards under the 2018 Equity Plan, in the aggregate, is equal to 10.0% of the Company’s outstanding shares of common stock on a fully diluted basis at any time. Shares subject to awards under the Individual Plan reduce the number of shares available for awards under the Advisor Plan on a one-for-one basis and vice versa. If any awards granted under the RSP are forfeited for any reason, the number of forfeited shares is again available for purposes of granting awards under the RSP.

36
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

RSUs and Restricted Shares
RSUs represent a contingent right to receive shares of common stock at a future settlement date, subject to satisfaction of applicable vesting conditions and/or other restrictions, as set forth in the RSP and an award agreement evidencing the grant of RSUs. RSUs may not, in general, be sold or otherwise transferred until restrictions are removed and the rights to the shares of common stock have vested. Holders of RSUs do not have or receive any voting rights with respect to the RSUs or any shares underlying any award of RSUs, but such holders are generally credited with dividend or other distribution equivalents which are subject to the same vesting conditions and/or other restrictions as the underlying RSUs and only paid at the time such RSUs are settled in shares of common stock.
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 July 1, 2015 under the RSP, the awards would typically be forfeited with respect to the unvested restricted shares upon the termination of the recipient’s employment or other relationship with the Company. For restricted share awards granted on or after July 1, 2015 under the RSP and restricted share awards granted under the Individual Plan, the awards provide for accelerated vesting of the portion of the unvested restricted shares scheduled to vest in the year of the recipient’s termination of his or her position as a director of the Company due to a voluntary resignation or failure to be re-elected to the Company’s board of directors following nomination therefor. All unvested restricted shares also vest in the event of a Change of Control (as defined in the RSP or the Individual Plan) or a termination of a directorship without cause or as a result of death or disability. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash dividends prior to the time that the restrictions on the restricted shares have lapsed. Any dividends to holders of restricted shares payable in shares of common stock are subject to the same restrictions as the underlying restricted shares.
During the nine months ended September 30, 2018, the Company did not grant any RSU awards, and no unvested RSU awards were outstanding during the nine months ended September 30, 2018. The following table reflects restricted share award activity for the nine months ended September 30, 2018:
 
Number of Shares of Common Stock
 
Weighted-Average Issue Price
Unvested, December 31, 2017
15,708

 
$
23.67

Granted
127,402

 
16.01

Vested
(6,869
)
 
23.58

Forfeited
(3
)
 
—

Unvested, September 30, 2018
136,238

 
16.51

As of September 30, 2018, the Company had $2.1 million of unrecognized compensation cost related to unvested restricted share awards granted, which is expected to be recognized over a weighted-average period of 2.5 years.
The fair value of the restricted shares is being expensed in accordance with the service period required. Compensation expense related to restricted shares was approximately $90,000 and $180,000 for the three and nine months ended September 30, 2018, respectively. Compensation expense related to restricted shares was approximately $53,000 and $102,000 for the three and nine months ended September 30, 2017, respectively. Compensation expense related to restricted shares is included in general and administrative expense on the accompanying consolidated statements of operations and comprehensive loss.
Multi-Year Outperformance Agreement
On the Listing Date, the Company granted a performance-based equity award to the Advisor in the form of a Master LTIP Unit pursuant to the 2018 OPP. The Master LTIP Unit was automatically converted on August 30, 2018 (the “Effective Date”), the 30th trading day following the Listing Date, into 4,496,796 LTIP Units (the “Award LTIP Units”) equal to the quotient of $72.0 million divided by $16.0114, the ten-day trailing average closing price of the Company’s Class A common stock on Nasdaq over the ten consecutive trading days immediately prior to the Effective Date (the “Initial Share Price”). The Effective Date was the grant date for accounting purposes. In accordance with the early adoption of ASU 2018-07 (see Note 3 — Summary of Significant Accounting Policies), the total fair value of the Award LTIP Units of $32.0 million was calculated and fixed as of the grant date, and will be recorded over the requisite service period of three years. As a result, during the three and nine months ended September 30, 2018, the Company recorded share-based compensation expense related to the Award LTIP Units of $2.2 million, which is recorded in share-based compensation — multi-year outperformance agreement in the unaudited consolidated statements

37
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

of operations and comprehensive loss. As of September 30, 2018, the Company had $29.8 million of unrecognized compensation expense related the Award LTIP Units which is expected to be recognized over a period of 2.8 years.
The Award LTIP Units represent the maximum number of LTIP Units that may be earned by the Advisor during a performance period (the “Performance Period”) commencing on the Listing Date and ending on the earliest of (i) the third anniversary of the Listing Date, (ii) the effective date of any Change of Control (as defined in the 2018 OPP) and (iii) the effective date of any termination of the Advisor’s service as advisor of the Company.
Half of the Award LTIP Units (the “Absolute TSR LTIP Units”) are eligible to be earned as of the last day of the Performance Period (the “Valuation Date”) if Company achieves an absolute total stockholder return (“TSR”) for the Performance Period as follows:
Performance Level
 
   Absolute TSR
 
  Percentage of Award LTIPs Earned
Below Threshold
 
 Less than
24
%
 
 
—
%
Threshold
 
 
24
%
 
 
25
%
Target
 
 
30
%
 
 
50
%
Maximum
 
 
36
%
or higher
 
100
%
If the Company’s absolute TSR is more than 24% but less than 30%, or more than 30% but less than 36%, the percentage of the Absolute TSR Award LTIPs earned is determined using linear interpolation as between those tiers, respectively.
Half of the Award LTIP Units (the “Relative TSR LTIP Units”) are eligible to be earned as of the Valuation Date if the amount, expressed in terms of basis points, whether positive or negative, by which the Company’s absolute TSR on the Valuation Date exceeds the average TSR of a peer group as of the Valuation Date as follows:
Performance Level
 
   Relative TSR Excess
 
  Percentage of Relative TSR Award LTIPs Earned
Below Threshold
 
 Less than
-600

basis points
 
—
%
Threshold
 
 
-600

basis points
 
25
%
Target
 
 
—

basis points
 
50
%
Maximum
 
 
+600

basis points
 
100
%
If the relative TSR excess is more than -600 bps but less than 0 bps, or more than 0 bps but less than +600 bps, the percentage of the Relative TSR Award LTIPs earned is determined using linear interpolation as between those tiers, respectively.
Until an LTIP Unit is earned in accordance with the provisions of the 2018 OPP, the holder of the LTIP Unit will be entitled to distributions on the LTIP Unit equal to 10% of the distributions made per Class A Unit (other than distribution of sale proceeds). Distributions paid with respect to an LTIP Unit are not subject to forfeiture, even if the LTIP Unit is ultimately forfeited because it is not earned in accordance with the 2018 OPP. Moreover, the Master LTIP Unit was entitled, on the Effective Date, to receive a distribution equal to the product of 10% of the distributions made per Class A Unit during the period from the Listing Date to the Effective Date multiplied by the number of Award LTIP Units. For the three and nine months ended September 30, 2018, the Company recorded distributions related to the LTIP Units (representing the Master LTIP Unit and the Award LTIP Units) of $0.1 million, which is recorded in the unaudited consolidated statement of changes in equity. After an LTIP Unit is earned, the holder will be entitled to a priority catch-up distribution per earned LTIP Unit equal to the aggregate distributions paid on a Class A Unit during the Performance Period, less the aggregate distributions paid on the LTIP Unit during the Performance Period. As of the Valuation Date, the earned LTIP Units will become entitled to receive the same distributions as are paid on Class A Units. At the time the Advisor’s capital account with respect to an LTIP Unit is economically equivalent to the average capital account balance of a Class A Unit, the LTIP Unit has been earned and it has been vested for 30 days, the Advisor, in its sole discretion, will be entitled to convert the LTIP Unit into a Class A Unit in accordance with the Second A&R OP Agreement. In accordance with, and subject to the terms of, the Second A&R OP Agreement, Class A Units may be redeemed on a one-for-one basis for, at the Company’s election, shares of Class A common stock or the cash equivalent thereof.
If the Valuation Date is the effective date of a Change of Control or a termination of the Advisor without Cause (as defined in the Advisory Agreement), then calculations relating to the number of LTIP Units earned pursuant to the 2018 OPP will be

38
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

performed based on actual performance as of (and including) the effective date of the Change of Control or termination (as applicable) based on the performance through the last trading day prior to the effective date of the Change of Control or termination (as applicable), with the hurdles for calculating absolute TSR pro-rated to reflect that the Performance Period lasted less than three years but without pro-rating the number of Absolute TSR LTIP Units or Relative TSR LTIP Units the Advisor would be eligible to earn to reflect the shortened period.
If the Valuation Date is the effective date of a termination of the Advisor with Cause, then calculations relating to the number of LTIP Units earned pursuant to the 2018 OPP will also be performed based on actual performance as of (and including) the effective date of the termination based on the performance through the last trading day prior to the effective date of the termination, with the hurdles for calculating absolute TSR pro-rated to reflect that the Performance Period lasted less than three years and with the number of Absolute TSR LTIP Units or Relative TSR LTIP Units the Advisor would be eligible to earn also pro-rated to reflect the shortened period.
The award of LTIP Units under the 2018 OPP is administered by the Compensation Committee, provided that any of the Compensation Committee’s powers can be exercised instead by the Company’s board of directors if the board of directors so elects. Following the Valuation Date, the Compensation Committee is responsible for determining the number of Absolute TSR Award LTIPs and Relative TSR Award LTIPs earned, as calculated by an independent consultant engaged by the Compensation Committee and as approved by the Compensation Committee in its reasonable and good faith discretion. The Compensation Committee also must approve the transfer of any Absolute TSR Award LTIPs and Relative TSR Award LTIPs (or Class A Units into which they may be converted in accordance with the terms of the A&R LPA).
LTIP Units earned as of the Valuation Date will also become vested as of the Valuation Date. Any LTIP Units that are not earned and vested after the Compensation Committee makes the required determination will automatically and without notice be forfeited without the payment of any consideration by the Company or the OP, effective as of the Valuation Date.
Director Compensation
Effective on the Listing Date, the Company’s board of directors approved a new director compensation program, which replaced the Company’s existing director compensation program and superseded in all respects the director compensation previously approved by the Company’s board of directors in April 2015. Under the new director compensation program, each of the Company’s directors received a one-time retention grant on September 5, 2018 of 21,234 restricted shares, representing the number of restricted shares equal to the quotient of $340,000 divided by the Initial Share Price, vesting annually over a three-year period commencing on the Listing Date in equal installments. In addition, under the new director compensation program, on a regular basis, each independent director will receive an annual cash retainer of $60,000 and, in connection with each of the Company’s annual meetings of stockholders, a grant of $85,000 in restricted shares, vesting on the one-year anniversary of the annual meeting. Also, members of the Company’s board of directors will no longer be receiving fees for attending meetings or taking actions by written consent. Because the independent directors did not receive an annual grant of restricted shares in connection with the Company’s 2018 annual meeting of stockholders pursuant to the Company’s existing director compensation program, on September 5, 2018 the independent directors received a grant of 5,308 restricted shares pursuant to the new director compensation program, representing the number of restricted shares equal to the quotient of $85,000 divided by the Initial Share price, vesting on the first anniversary of the Listing Date.
The lead independent director receives an additional annual cash retainer of $100,000, the chair of the audit committee of the Company’s board of directors (the “Audit Committee”) receives an additional annual cash retainer of $30,000, each other member of the Audit Committee receives an additional annual cash retainer of $15,000, the chair of each of the Compensation Committee and the NCG Committee receives an additional annual cash retainer of $15,000, and each other member of each of the Compensation Committee and the NCG Committee will receive an additional annual cash retainer of $10,000.
The Company continues to reimburse directors for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the Company’s board of directors and its committees and pay each independent director for each external seminar, conference, panel, forum or other industry-related event attended in person and in which the independent director actively participates, solely in his or her capacity as an independent director of the Company.
Other Share-Based Compensation
The Company may issue Class A common stock in lieu of paying cash for the 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 nine months ended September 30, 2018 and 2017.

39
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Note 14 — Net Income (Loss) Per Share
The following table sets forth the basic and diluted net income (loss) per share computations:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except share and per share amounts)
 
2018
 
2017
 
2018
 
2017
Net loss attributable to stockholders - basic and diluted
 
$
(27,245
)
 
$
(15,367
)
 
$
(23,885
)
 
$
(27,105
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
 
105,905,281

 
104,545,591

 
105,379,306

 
97,852,337

 
 
 
 
 
 
 
 
 
Net loss per share attributable to stockholders - basic and diluted
 
$
(0.26
)
 
$
(0.15
)
 
$
(0.23
)
 
$
(0.28
)
Diluted net loss per share assumes the vesting or conversion of restricted shares and OP Units into an equivalent number of unrestricted shares of common stock and the conversion of Class B Units, prior to their vesting and conversion into Class A Units which were redeemed for shares of Class A common stock in connection with the Listing (see Note 11 - Related Party Transactions and Arrangements for additional information), unless the effect is antidilutive. The Company had the following restricted shares, OP Units, Class B Units and Award LTIP Units 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, or in the case of Class B Units, certain contingencies had not been met as of September 30, 2017:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Unvested restricted shares (1)
 
44,933

 
14,404

 
24,744

 
12,030

OP Units (2)
 
179,259

 
203,612

 
195,405

 
169,319

Class B Units (3)
 
205,908

 
1,052,420

 
767,149

 
1,052,420

Award LTIP Units (4)
 
1,515,225

 
—

 
510,625

 
—

Total
 
1,945,325

 
1,270,436

 
1,497,923

 
1,233,769

_____________________________________
(1) 
Weighted-average number of shares of unvested restricted shares outstanding for the periods presented. There were 136,238 and 15,710 unvested restricted shares outstanding as of September 30, 2018 and September 30, 2017, respectively.
(2) 
Weighted-average number of OP Units outstanding for the periods presented. There were 172,921 and 203,612 OP Units outstanding as of September 30, 2018 and September 30, 2017, respectively.
(3) 
Weighted-average number of Class B Units outstanding for the periods presented. There were no Class B Units outstanding as of September 30, 2018 and 1,052,420 Class B Units outstanding as of September 30, 2017.
(4) 
Weighted-average number of Award LTIP Units outstanding for the periods presented. There were 4,496,796 Award LTIP Units outstanding as of September 30, 2018.
Note 15 — 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
Subsequent to September 30, 2018, the Company acquired eleven properties with an aggregate base purchase price of $15.8 million, excluding acquisition related costs.
Dispositions

40
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Subsequent to September 30, 2018, the Company sold two properties with an aggregate contract sale price of approximately $28.3 million.
Litigation Matter
On October 26, 2018, Terry Hibbard, a purported stockholder of the Company, filed a putative class action complaint in New York State Supreme Court, New York County, against the Company, AR Global, the Advisor, Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Nicholas Radesca, David Gong, Stanley R. Perla, and Lisa D. Kabnick.  The complaint alleges that the registration statement pursuant to which RCA shareholders acquired shares of the Company during the Merger contained materially incomplete and misleading information.  The complaint asserts violations of Section 11 of the Securities Act against Messrs. Weil, Radesca, Gong, and Perla, and Ms. Kabnick, violations of Section 12(a)(2) of the Securities Act against the Company and Mr. Weil, and control person liability against the Advisor, AR Global, and Messrs. Schorsch and Kahane under Section 15 of the Securities Act.  The complaint seeks unspecified damages and rescission of the Company’s sale of stock pursuant to the registration statement. The Company believes the complaint is without merit and intends to defend vigorously.  The Company has not yet answered or moved to dismiss the complaint. Due to the early stage of the litigation, no estimate of a probable loss or any reasonably possible losses are determinable at this time.

41

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”), American Finance Advisors, LLC (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:
•
All of our executive officers are also officers, managers, employees or holders of a direct or indirect controlling interest in the Advisor or other entities under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, “AR Global”). As a result, our executive officers, the Advisor and its affiliates face conflicts of interest, including significant conflicts created by the Advisor’s compensation arrangements with us and other investment programs advised by affiliates of AR Global and conflicts in allocating time among these entities and us, which could negatively impact our operating results.
•
The trading price of our Class A common stock may fluctuate significantly and no public market currently exists for shares of our other class of outstanding stock, our Class B-2 common stock.
•
Lincoln Retail REIT Services, LLC (“Lincoln”) and its affiliates, which provide services to the Advisor in connection with our retail portfolio, faces conflicts of interest in allocating its employees’ time between providing real estate-related services to the 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.
•
Our rental revenue is dependent upon the success and economic viability of our tenants.
•
We have not generated, and in the future may not generate, operating cash flows sufficient to fund all of the dividends we pay our stockholders, and, as such, we may be forced to fund distributions from other sources, including borrowings, which may not be available on favorable terms, or at all.
•
We may be unable to pay or maintain cash dividends at the current rate or increase dividends over time.
•
We are obligated to pay fees, which may be substantial, to the 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.
•
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 dividends.
•
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 focused on acquiring and managing a diversified portfolio of primarily service-oriented and traditional retail and distribution related commercial real estate properties in the U.S. We own a diversified portfolio of commercial properties which are net leased primarily to investment grade and other creditworthy tenants and, as a result of the Merger (as defined below), a portfolio of retail properties consisting primarily of power centers and lifestyle centers. Prior to the Merger, we acquired a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants. We intend to focus our future acquisitions primarily on net leased retail properties. As of September 30, 2018, we owned 616 properties, comprised of 19.2 million rentable square feet, which were 94.2% leased, including 582 net leased commercial properties (527 of which are retail properties) and 34 retail properties which were acquired in the Merger.
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 July 19, 2018 (the “Listing Date”), we listed shares of our Class A common stock, on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “AFIN” (the “Listing”). To effect the Listing, and to address the potential for selling pressure that may have existed at the outset of listing, we listed only shares of Class A common stock, which represented approximately 50% of our outstanding shares of common stock, on Nasdaq on the Listing Date. Our two other classes of outstanding stock at the time of the Listing were Class B-1 common stock, which comprised approximately 25% of our outstanding shares of common stock at that time, and Class B-2 common stock, which comprised approximately 25% of our outstanding shares of common stock at that time. As of September 30, 2018, we had 106.3 million shares of common stock outstanding, comprised of 53.7 million shares of Class A common stock, 26.3 million shares of Class B-1 common stock, and 26.3 million shares of Class B-2 common stock. In accordance with their terms, all shares of Class B-1 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on October 10, 2018. All shares of Class B-2 common stock will automatically convert into shares of Class A common stock to be listed on Nasdaq no later than January 15, 2019, 180 days following the Listing Date. For additional information on the Listing see Note 9 — Common Stock to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q.
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, 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. Lincoln and its affiliates provide services to the Advisor in connection with our retail properties acquired in the Merger. The Advisor has informed us 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 us for services rendered by Lincoln. We have no obligation to Lincoln.
American Realty Capital — Retail Centers of America, Inc. Merger
On February 16, 2017, we completed (a) the merger of American Realty Capital — Retail Centers of America, Inc. (“RCA”) with and into a wholly owned subsidiary of the Company and (b) the merger of American Realty Capital Retail Operating Partnership, L.P. (the “RCA OP”) with and into the OP, with the OP as the surviving entity (together, the “Merger”). RCA was sponsored and advised by affiliates of the Advisor. We issued 38.2 million shares of our common stock and paid $94.5 million in cash as consideration to complete the Merger. For additional information on the Merger, see Note 2 — Merger Transaction to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q.
Significant Accounting Estimates and Critical Accounting Policies
For a discussion about our significant accounting estimates and critical accounting policies, see the “Significant Accounting Estimates and Critical Accounting Policies” section of our 2017 Annual Report on Form 10-K. There have been no material changes from these significant accounting estimates and critical accounting policies.
Recently Issued Accounting Pronouncements
Please see Note 3 — Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion.

42

Properties
The following table represents certain additional information about the properties we own at September 30, 2018:
Portfolio
 
Acquisition Date
 
Number of
Properties
 
Rentable Square Feet
 
Remaining Lease Term (1)
 
Percentage Leased
Dollar General I
 
Apr. & May 2013
 
2
 
18,126

 
9.6
 
100.0%
Walgreens I
 
Jul. 2013
 
1
 
10,500

 
19.0
 
100.0%
Dollar General II
 
Jul. 2013
 
2
 
18,052

 
9.7
 
100.0%
AutoZone I
 
Jul. 2013
 
1
 
7,370

 
8.8
 
100.0%
Dollar General III
 
Jul. 2013
 
5
 
45,989

 
9.6
 
100.0%
BSFS I
 
Jul. 2013
 
1
 
8,934

 
5.3
 
100.0%
Dollar General IV
 
Jul. 2013
 
2
 
18,126

 
7.4
 
100.0%
Tractor Supply I
 
Aug. 2013
 
1
 
19,097

 
9.2
 
100.0%
Dollar General V
 
Aug. 2013
 
1
 
12,480

 
9.3
 
100.0%
Mattress Firm I
 
Aug. & Nov. 2013; Feb, Mar. 2014 & Apr. 2014
 
5
 
23,612

 
6.9
 
100.0%
Family Dollar I
 
Aug. 2013
 
1
 
8,050

 
2.8
 
100.0%
Lowe's I
 
Aug. 2013
 
5
 
671,313

 
10.8
 
100.0%
O'Reilly Auto Parts I
 
Aug. 2013
 
1
 
10,692

 
11.8
 
100.0%
Food Lion I
 
Aug. 2013
 
1
 
44,549

 
11.1
 
100.0%
Family Dollar II
 
Aug. 2013
 
1
 
8,028

 
4.8
 
100.0%
Walgreens II
 
Aug. 2013
 
1
 
14,490

 
14.5
 
100.0%
Dollar General VI
 
Aug. 2013
 
1
 
9,014

 
7.4
 
100.0%
Dollar General VII
 
Aug. 2013
 
1
 
9,100

 
9.5
 
100.0%
Family Dollar III
 
Aug. 2013
 
1
 
8,000

 
4.0
 
100.0%
Chili's I
 
Aug. 2013
 
2
 
12,700

 
7.2
 
100.0%
CVS I
 
Aug. 2013
 
1
 
10,055

 
7.3
 
100.0%
Joe's Crab Shack I
 
Aug. 2013
 
1
 
7,646

 
8.5
 
100.0%
Dollar General VIII
 
Sep. 2013
 
1
 
9,100

 
9.8
 
100.0%
Tire Kingdom I
 
Sep. 2013
 
1
 
6,635

 
6.5
 
100.0%
AutoZone II
 
Sep. 2013
 
1
 
7,370

 
4.7
 
100.0%
Family Dollar IV
 
Sep. 2013
 
1
 
8,320

 
4.8
 
100.0%
Fresenius I
 
Sep. 2013
 
1
 
5,800

 
6.8
 
100.0%
Dollar General IX
 
Sep. 2013
 
1
 
9,014

 
6.6
 
100.0%
Advance Auto I
 
Sep. 2013
 
1
 
10,500

 
4.8
 
100.0%
Walgreens III
 
Sep. 2013
 
1
 
15,120

 
7.5
 
100.0%
Walgreens IV
 
Sep. 2013
 
1
 
13,500

 
6.0
 
100.0%
CVS II
 
Sep. 2013
 
1
 
13,905

 
18.4
 
100.0%
Arby's I
 
Sep. 2013
 
1
 
3,000

 
9.8
 
100.0%
Dollar General X
 
Sep. 2013
 
1
 
9,100

 
9.5
 
100.0%
AmeriCold I
 
Sep. 2013
 
9
 
1,407,166

 
9.0
 
100.0%
Home Depot I
 
Sep. 2013
 
2
 
1,315,200

 
8.3
 
100.0%
New Breed Logistics I
 
Sep. 2013
 
1
 
390,486

 
3.1
 
100.0%
American Express Travel Related Services I
 
Sep. 2013
 
1
 
395,787

 
1.5
 
100.0%
SunTrust Bank I
 
Sep. 2013
 
25
 
124,297

 
9.6
 
82.2%
National Tire & Battery I
 
Sep. 2013
 
1
 
10,795

 
5.2
 
100.0%
Circle K I
 
Sep. 2013
 
19
 
54,521

 
10.1
 
100.0%
Walgreens V
 
Sep. 2013
 
1
 
14,490

 
8.9
 
100.0%
Walgreens VI
 
Sep. 2013
 
1
 
14,560

 
10.6
 
100.0%
FedEx Ground I
 
Sep. 2013
 
1
 
21,662

 
4.7
 
100.0%
Walgreens VII
 
Sep. 2013
 
8
 
113,415

 
10.7
 
100.0%
O'Charley's I
 
Sep. 2013
 
20
 
135,973

 
13.1
 
100.0%
Krystal I
 
Sep. 2013
 
6
 
12,730

 
11.0
 
100.0%
1st Constitution Bancorp I
 
Sep. 2013
 
1
 
4,500

 
5.3
 
100.0%

43

Portfolio
 
Acquisition Date
 
Number of
Properties
 
Rentable Square Feet
 
Remaining Lease Term (1)
 
Percentage Leased
American Tire Distributors I
 
Sep. 2013
 
1
 
125,060

 
5.3
 
100.0%
Tractor Supply II
 
Oct. 2013
 
1
 
23,500

 
5.0
 
100.0%
United Healthcare I
 
Oct. 2013
 
1
 
400,000

 
2.8
 
100.0%
National Tire & Battery II
 
Oct. 2013
 
1
 
7,368

 
13.7
 
100.0%
Tractor Supply III
 
Oct. 2013
 
1
 
19,097

 
9.6
 
100.0%
Mattress Firm II
 
Oct. 2013
 
1
 
4,304

 
4.9
 
100.0%
Dollar General XI
 
Oct. 2013
 
1
 
9,026

 
8.6
 
100.0%
Academy Sports I
 
Oct. 2013
 
1
 
71,640

 
9.8
 
100.0%
Talecris Plasma Resources I
 
Oct. 2013
 
1
 
22,262

 
4.5
 
100.0%
Amazon I
 
Oct. 2013
 
1
 
79,105

 
4.8
 
100.0%
Fresenius II
 
Oct. 2013
 
2
 
16,047

 
8.9
 
100.0%
Dollar General XII
 
Nov. 2013 & Jan. 2014
 
2
 
18,126

 
10.2
 
100.0%
Dollar General XIII
 
Nov. 2013
 
1
 
9,169

 
7.5
 
100.0%
Advance Auto II
 
Nov. 2013
 
2
 
13,887

 
4.6
 
100.0%
FedEx Ground II
 
Nov. 2013
 
1
 
48,897

 
4.8
 
100.0%
Burger King I
 
Nov. 2013
 
41
 
168,192

 
15.2
 
100.0%
Dollar General XIV
 
Nov. 2013
 
3
 
27,078

 
9.7
 
100.0%
Dollar General XV
 
Nov. 2013
 
1
 
9,026

 
10.1
 
100.0%
FedEx Ground III
 
Nov. 2013
 
1
 
24,310

 
4.9
 
100.0%
Dollar General XVI
 
Nov. 2013
 
1
 
9,014

 
7.2
 
100.0%
Family Dollar V
 
Nov. 2013
 
1
 
8,400

 
4.5
 
100.0%
CVS III
 
Dec. 2013
 
1
 
10,880

 
5.3
 
100.0%
Mattress Firm III
 
Dec. 2013
 
1
 
5,057

 
4.8
 
100.0%
Arby's II
 
Dec. 2013
 
1
 
3,494

 
9.6
 
100.0%
Family Dollar VI
 
Dec. 2013
 
2
 
17,484

 
5.3
 
100.0%
SAAB Sensis I
 
Dec. 2013
 
1
 
90,822

 
6.5
 
100.0%
Citizens Bank I
 
Dec. 2013
 
9
 
34,777

 
5.3
 
100.0%
SunTrust Bank II
 
Jan. 2014
 
24
 
125,172

 
10.2
 
100.0%
Mattress Firm IV
 
Jan. 2014
 
1
 
5,040

 
5.9
 
100.0%
FedEx Ground IV
 
Jan. 2014
 
1
 
59,167

 
4.8
 
100.0%
Mattress Firm V
 
Jan. 2014
 
1
 
5,548

 
5.1
 
100.0%
Family Dollar VII
 
Feb. 2014
 
1
 
8,320

 
5.8
 
100.0%
Aaron's I
 
Feb. 2014
 
1
 
7,964

 
4.9
 
100.0%
AutoZone III
 
Feb. 2014
 
1
 
6,786

 
4.5
 
100.0%
C&S Wholesale Grocer I
 
Feb. 2014
 
2
 
1,671,233

 
4.5
 
100.0%
Advance Auto III
 
Feb. 2014
 
1
 
6,124

 
5.9
 
100.0%
Family Dollar VIII
 
Mar. 2014
 
3
 
24,960

 
4.8
 
100.0%
Dollar General XVII
 
Mar. & May 2014
 
3
 
27,078

 
9.5
 
100.0%
SunTrust Bank III
 
Mar. 2014
 
93
 
523,116

 
11.1
 
88.6%
SunTrust Bank IV
 
Mar. 2014
 
24
 
128,874

 
10.9
 
91.4%
Dollar General XVIII
 
Mar. 2014
 
1
 
9,026

 
9.5
 
100.0%
Sanofi US I
 
Mar. 2014
 
1
 
736,572

 
14.3
 
100.0%
Family Dollar IX
 
Apr. 2014
 
1
 
8,320

 
5.5
 
100.0%
Stop & Shop I
 
May 2014
 
7
 
491,612

 
8.3
 
100.0%
Bi-Lo I
 
May 2014
 
1
 
55,718

 
7.3
 
100.0%
Dollar General XIX
 
May 2014
 
1
 
12,480

 
9.9
 
100.0%
Dollar General XX
 
May 2014
 
5
 
48,584

 
8.6
 
100.0%
Dollar General XXI
 
May 2014
 
1
 
9,238

 
9.9
 
100.0%
Dollar General XXII
 
May 2014
 
1
 
10,566

 
8.6
 
100.0%
FedEx Ground V
 
Feb. 2016
 
1
 
45,755

 
6.8
 
100.0%
FedEx Ground VI
 
Feb. 2016
 
1
 
120,731

 
6.9
 
100.0%
FedEx Ground VII
 
Feb. 2016
 
1
 
42,299

 
7.0
 
100.0%

44

Portfolio
 
Acquisition Date
 
Number of
Properties
 
Rentable Square Feet
 
Remaining Lease Term (1)
 
Percentage Leased
FedEx Ground VIII
 
Feb. 2016
 
1
 
78,673

 
7.1
 
100.0%
Liberty Crossing
 
Feb. 2017
 
1
 
105,779

 
3.5
 
89.6%
San Pedro Crossing
 
Feb. 2017
 
1
 
201,965

 
3.6
 
66.6%
Tiffany Springs MarketCenter
 
Feb. 2017
 
1
 
264,952

 
6.2
 
88.4%
The Streets of West Chester
 
Feb. 2017
 
1
 
236,842

 
10.3
 
94.0%
Prairie Towne Center
 
Feb. 2017
 
1
 
289,277

 
6.0
 
95.3%
Southway Shopping Center
 
Feb. 2017
 
1
 
181,809

 
4.6
 
88.7%
Stirling Slidell Centre
 
Feb. 2017
 
1
 
134,276

 
3.7
 
60.8%
Northwoods Marketplace
 
Feb. 2017
 
1
 
236,078

 
3.3
 
96.5%
Centennial Plaza
 
Feb. 2017
 
1
 
233,797

 
4.6
 
77.8%
Northlake Commons
 
Feb. 2017
 
1
 
109,112

 
3.2
 
87.9%
Shops at Shelby Crossing
 
Feb. 2017
 
1
 
236,107

 
4.1
 
97.6%
Shoppes of West Melbourne
 
Feb. 2017
 
1
 
144,484

 
3.7
 
98.3%
The Centrum
 
Feb. 2017
 
1
 
270,747

 
5.0
 
52.5%
Shoppes at Wyomissing
 
Feb. 2017
 
1
 
103,064

 
3.2
 
88.5%
Southroads Shopping Center
 
Feb. 2017
 
1
 
437,515

 
4.8
 
71.2%
Parkside Shopping Center
 
Feb. 2017
 
1
 
181,620

 
4.5
 
90.5%
Colonial Landing
 
Feb. 2017
 
1
 
263,559

 
4.4
 
70.0%
The Shops at West End
 
Feb. 2017
 
1
 
381,831

 
7.5
 
76.1%
Township Marketplace
 
Feb. 2017
 
1
 
298,630

 
3.3
 
93.9%
Cross Pointe Centre
 
Feb. 2017
 
1
 
226,089

 
10.2
 
100.0%
Towne Centre Plaza
 
Feb. 2017
 
1
 
94,096

 
4.3
 
100.0%
Harlingen Corners
 
Feb. 2017
 
1
 
228,208

 
4.3
 
96.7%
Village at Quail Springs
 
Feb. 2017
 
1
 
100,404

 
7.1
 
100.0%
Pine Ridge Plaza
 
Feb. 2017
 
1
 
239,492

 
3.9
 
97.4%
Bison Hollow
 
Feb. 2017
 
1
 
134,798

 
5.2
 
100.0%
Jefferson Commons
 
Feb. 2017
 
1
 
205,918

 
7.5
 
98.0%
Northpark Center
 
Feb. 2017
 
1
 
318,327

 
3.8
 
67.0%
Anderson Station
 
Feb. 2017
 
1
 
244,170

 
3.4
 
97.9%
Patton Creek
 
Feb. 2017
 
1
 
491,294

 
3.7
 
86.7%
North Lakeland Plaza
 
Feb. 2017
 
1
 
171,397

 
2.0
 
94.9%
Riverbend Marketplace
 
Feb. 2017
 
1
 
142,617

 
5.3
 
90.5%
Montecito Crossing
 
Feb. 2017
 
1
 
179,721

 
3.7
 
97.4%
Best on the Boulevard
 
Feb. 2017
 
1
 
204,568

 
4.0
 
100.0%
Shops at RiverGate South
 
Feb. 2017
 
1
 
140,703

 
6.5
 
97.8%
Dollar General XXIII
 
Mar. & May 2017
 
8
 
72,480

 
10.9
 
100.0%
Jo-Ann Fabrics I
 
Apr. 2017
 
1
 
18,018

 
6.3
 
100.0%
Bob Evans I
 
Apr. 2017
 
23
 
116,899

 
18.6
 
100.0%
FedEx Ground IX
 
May 2017
 
1
 
53,739

 
7.7
 
100.0%
Chili's II
 
May 2017
 
1
 
6,039

 
9.1
 
100.0%
Sonic Drive In I
 
June 2017
 
2
 
2,745

 
13.8
 
100.0%
Bridgestone HOSEPower I
 
June 2017
 
2
 
41,131

 
10.9
 
100.0%
Bridgestone HOSEPower II
 
July 2017
 
1
 
25,125

 
11.1
 
100.0%
FedEx Ground X
 
July 2017
 
1
 
141,803

 
8.8
 
100.0%
Chili's III
 
Aug. 2017
 
1
 
5,742

 
9.1
 
100.0%
FedEx Ground XI
 
Sep. 2017
 
1
 
29,246

 
8.8
 
100.0%
Hardee's I
 
Sep. 2017
 
4
 
13,455

 
19.0
 
100.0%
Tractor Supply IV
 
Oct. 2017
 
2
 
51,030

 
8.1
 
100.0%
Circle K II
 
Nov. 2017
 
6
 
20,068

 
18.8
 
100.0%
Sonic Drive In II
 
Nov. 2017
 
20
 
30,328

 
19.2
 
100.0%
Bridgestone HOSEPower III
 
Dec. 2017
 
1
 
20,859

 
11.8
 
100.0%
Sonny's BBQ I
 
Jan. 2018
 
3
 
18,548

 
15.4
 
100.0%

45

Portfolio
 
Acquisition Date
 
Number of
Properties
 
Rentable Square Feet
 
Remaining Lease Term (1)
 
Percentage Leased
Mountain Express I
 
Jan. 2018
 
9
 
29,821

 
19.3
 
100.0%
Kum & Go I
 
Feb. 2018
 
1
 
5,105

 
9.7
 
100.0%
DaVita I
 
Feb. 2018
 
2
 
13,319

 
7.4
 
100.0%
White Oak I
 
Mar. 2018
 
9
 
21,931

 
19.5
 
100.0%
Mountain Express II
 
June 2018
 
15
 
58,753

 
19.6
 
100.0%
Dialysis I
 
July 2018
 
7
 
64,504

 
9.7
 
100.0%
Children of America I
 
Aug. 2018
 
2
 
32,568

 
14.9
 
100.0%
Burger King II
 
Aug. 2018
 
1
 
3,205

 
14.9
 
100.0%
White Oak II
 
Aug. 2018
 
9
 
17,594

 
19.1
 
100.0%
Bob Evans II
 
Aug. 2018
 
22
 
111,560

 
18.6
 
100.0%
Mountain Express III
 
Sep. 2018
 
14
 
47,002

 
19.9
 
100.0%
Taco John's
 
Sep. 2018
 
7
 
15,006

 
15.1
 
100.0%
 
 
 
 
616
 
19,188,716

 
8.6
 
94.2%
_____________________
(1) 
Remaining lease term in years as of September 30, 2018. If the portfolio has multiple properties with varying lease expirations, remaining lease term is calculated on a weighted-average basis.
(2) 
Includes 21 properties leased to SunTrust Banks, Inc. (“SunTrust”) which were unoccupied as of September 30, 2018. There were 18 properties which had leases expiring on December 31, 2017 and three properties which had leases expiring on March 31, 2018, comprising 0.1 million rentable square feet. As of September 30, 2018, these properties were either being marketed for sale, subject to a non-binding letter of intent (“LOI”) or subject to a definitive purchase and sale agreement (“PSA”). There can be no guarantee that these properties will be sold on the terms contemplated by any applicable LOI or PSA, or at all. Please see Note 4 — Real Estate Investments to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further details.
Results of Operations
Comparison of the Three Months Ended September 30, 2018 and 2017
There were 478 properties that we owned for the entirety of both the three months ended September 30, 2018 and 2017 (our “Three Month Same Store”), comprised of 18.4 million rentable square feet that were 94.1% leased as of September 30, 2018. From July 1, 2017 through September 30, 2018, we acquired 138 properties (our “Acquisitions Since July 1, 2017’’), comprised of 0.8 million rentable square feet that were 100.0% leased as of September 30, 2018. From July 1, 2017 through September 30, 2018, we sold 38 properties (our “Disposals Since July 1, 2017’’), comprised of 0.8 million rentable square feet.
The following table summarizes our leasing activity during the three months ended September 30, 2018:
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
 
(In thousands)
 
 
 
 
Number of Leases
 
Rentable Square Feet
 
Annualized SLR (1) prior to Lease Execution/Renewal/Termination
 
Annualized SLR (1) after Lease Execution/Renewal
 
Costs to execute lease
 
Costs to execute lease per square foot
New leases (2)
 
7

 
94,667

 
$
—

 
$
1,006

 
$
352

 
$
3.72

Lease renewals/amendments (2)
 
19

 
153,952

 
2,461

 
2,443

 
125

 
$
0.81

Lease terminations (3)
 
2

 
103,340

 
407

 
—

 
—

 
$
—

_____________________________________
(1) 
Straight-line rental income.
(2) 
New leases reflect leases in which a new tenant took possession of the space during the three months ended September 30, 2018, excluding new property acquisitions. Lease renewals/amendments reflect leases in which an existing tenant executed terms to extend the life or change the rental terms of the lease during the three months ended September 30, 2018.
(3) 
Represents leases that were terminated prior to their contractual lease expiration dates.

Net loss attributable to stockholders increased $11.8 million to $27.2 million for the three months ended September 30, 2018 from $15.4 million for the three months ended September 30, 2017. The change in net loss attributable to stockholders is discussed in detail for each line item of the undaudited consolidated statements of operations and comprehensive loss in the sections that follow.



46

Property Results of Operations
 
Same Store
 
Acquisitions
 
Disposals
 
Total
 
Three Months Ended September 30,
 
Increase (Decrease)
 
Three Months Ended September 30,
 
Increase (Decrease)
 
Three Months Ended September 30,
 
Increase (Decrease)
 
Total
 
Increase (Decrease)
 
2018
 
2017
 
$
 
2018
 
2017
 
$
 
2018
 
2017
 
$
 
2018
 
2017
 
$
Rental income
$
62,156

 
$
58,917

 
$
3,239

 
$
3,723

 
$
285

 
$
3,438

 
$
528

 
$
3,085

 
$
(2,557
)
 
$
66,407

 
$
62,287

 
$
4,120

Operating expense reimbursements
8,460

 
6,665

 
1,795

 
4

 
—

 
4

 
17

 
517

 
(500
)
 
8,481

 
7,182

 
1,299

Less: Property operating
13,175

 
10,350

 
2,825

 
47

 
2

 
45

 
275

 
408

 
(133
)
 
13,497

 
10,760

 
2,737

NOI
$
57,441

 
$
55,232

 
$
2,209

 
$
3,680

 
$
283

 
$
3,397

 
$
270

 
$
3,194

 
$
(2,924
)
 
$
61,391

 
$
58,709

 
$
2,682

Net operating income (“NOI”) is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to rental income and operating expense reimbursements less property operating expense. NOI excludes all other financial statement amounts included in net income (loss) attributable to stockholders. We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See “Non-GAAP Financial Measures” included elsewhere in this Quarterly Report for additional disclosure and a reconciliation to our net income (loss) attributable to stockholders.
Rental income increased $4.1 million to $66.4 million for the three months ended September 30, 2018, compared to $62.3 million for the three months ended September 30, 2017. The rental income increase was due to an increase of $3.2 million in our Three Month Same Store properties primarily due to accelerated amortization of a below market liability related to a terminated lease and by an increase of $3.4 million from new rental income from our Acquisitions Since July 1, 2017. These increases were partially offset by a loss of rental income of $2.6 million from our Disposals Since July 1, 2017.
Property operating expenses primarily consist of the costs associated with maintaining our properties including real estate taxes, utilities, and repairs and maintenance. 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. As such, operating expense reimbursement income and property operating expense are generally linked. Operating expense reimbursement revenue increased $1.3 million to $8.5 million for the three months ended September 30, 2018 compared to $7.2 million for the three months ended September 30, 2017. This increase was primarily driven by an increase in our Three Month Same Store operating expense reimbursements of $1.8 million, partially offset by a decrease of $0.5 million from our Disposals Since July 1, 2017.
Property operating expenses increased $2.7 million to $13.5 million for the three months ended September 30, 2018 compared to $10.8 million for the three months ended September 30, 2017. This increase was primarily driven by increases in our Three Month Same Store property operating expense due to a favorable real estate tax reassessment in the three months ended September 30, 2017.
Other Results of Operations
Asset Management Fees to Related Party
Asset management fees paid to the Advisor increased $0.5 million to $5.8 million for the three months ended September 30, 2018, compared to $5.3 million for the three months ended September 30, 2017. We pay these fees to the Advisor for managing our day-to-day operations. Following the effective time of the Merger, the fixed portion of the base management fee is (i) $21.0 million annually for the first year following the effective time of the Merger; (ii) $22.5 million annually for the second year following the effective time of the Merger; and (iii) $24.0 million annually for the remainder of the term. We did not incur any variable management fees during the three months ended September 30, 2018 and 2017. Please see Note 11 — Related Party Transactions and Arrangements to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for more information on fees incurred from the Advisor.
Impairment Charges
We recognized $1.2 million of impairment charges during the three months ended September 30, 2018, the majority of which related to three single-tenant properties classified as held for use, as the carrying amount of the long-lived assets associated with these properties was greater than our estimate of their fair value based on an LOI or PSA (see Note 4 — Real Estate Investments for additional information).
We recognized $7.6 million of impairment charges during the three months ended September 30, 2017, $7.4 million of which related to certain SunTrust properties classified as held for use as of September 30, 2017, as the carrying amount of the long-lived assets associated with these properties was greater than our estimate of their fair value based on an executed LOI and PSA. The remaining $0.2 million of impairment charges related to properties sold or 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. See Note 4 — Real Estate Investments for additional information.

47

Acquisition and Transaction Related Expense
Acquisition and transaction related expense remained constant at approximately $1.2 million for the three months ended September 30, 2018 and 2017. Effective January 1, 2018, acquisition costs related to our asset acquisitions are capitalized rather than expensed (see Note 3 — Summary of Significant Accounting Policies—“Recently Issued Accounting Pronouncements” for more information). Acquisition and transaction related expenses for the three months ended September 30, 2018 were primarily related to prepayment charges on mortgages related to our disposition of six properties. Acquisition and transaction related expenses for the three months ended September 30, 2017 were primarily due to costs incurred in connection with our acquisition of eight properties.
Listing Fees
During the three months ended September 30, 2018, we paid $5.0 million in fees associated with the Listing. Of this amount, approximately $4.0 million was paid to BMO Capital Markets Corp., our financial advisor for the Listing.
Vesting and Conversion of Class B Units
During the three months ended September 30, 2018, we recorded a non-cash expense of $15.8 million related to the vesting and conversion of Class B Units. The vesting conditions relating to the Class B Units, which were previously issued to the Advisor, were satisfied upon completion of the Listing. The Class B Units were then converted into an equal number of Class A Units and redeemed for an equal number of newly issued shares of Class A common stock. For additional details on the Class B Units, see Note 11 — Related Party Transactions and Arrangements .
Share-Based Compensation — Multi-Year Outperformance Agreement
During the three months ended September 30, 2018, we recorded non-cash share based compensation expense of $2.2 million resulting from the award of LTIP Units made to the Advisor, effective as of the Listing (the “2018 OPP”). For additional details on the 2018 OPP, see Note 13 — Share-Based Compensation.
General and Administrative Expense
General and administrative expense increased $1.5 million to $6.5 million for the three months ended September 30, 2018, compared to $5.0 million for the three months ended September 30, 2017. The increase was due to higher legal and professional fees, transfer agent fees and general and administrative expense reimbursements to our Advisor, which increased $0.2 million to $2.3 million for three months ended September 30, 2018, compared to $2.1 million for the three months ended September 30, 2017. These increases were partially offset by lower expenses related to distributions on Class B Units, which vested in connection with the Listing, and were ultimately redeemed for common stock, and the related state and local taxes and expense.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $5.8 million to $35.3 million for the three months ended September 30, 2018, compared to $41.1 million for the three months ended September 30, 2017. The decrease was primarily due to a decrease of $4.7 million related to our Three Month Same Store properties and a decrease of $2.2 million from our Disposals Since July 1, 2017. Additionally, depreciation and amortization expense increased $1.1 million on Acquisitions Since July 1, 2017. 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 $2.5 million to $17.0 million for the three months ended September 30, 2018, compared to $14.5 million for the three months ended September 30, 2017. This increase is primarily related to higher average mortgage notes payable in the third quarter of 2018 and higher weighted-average interest rate on our revolving unsecured corporate credit facility (the “Credit Facility”) when compared to our prior revolving unsecured corporate credit facility (the “Prior Credit Facility”), which was repaid with the proceeds from the Credit Facility in May 2018. As of September 30, 2018 and 2017, the weighted-average interest rates on our mortgage notes payable were 4.65% and 4.69%, respectively and the weighted-average interest rate on our Credit Facility and our Prior Credit Facility was 4.04% and 2.65%, respectively.
Gain on Sale of Real Estate Investments
During the three months ended September 30, 2018, we sold six properties which resulted in gains on sale. These properties sold for an aggregate contract price of $28.3 million, resulting in aggregate gains on sale of $1.3 million. During the three months ended September 30, 2017, we sold seven properties leased to SunTrust, three of which resulted in gains on sale. These three properties sold for an aggregate contract price of $1.8 million, resulting in aggregate gains on sale of $0.3 million.

48

Comparison of the Nine Months Ended September 30, 2018 and 2017
There were 406 properties that we owned for the entirety of both the nine months ended September 30, 2018 and 2017 (our “Nine Month Same Store”), comprised of 10.7 million rentable square feet that were 99.1% leased as of September 30, 2018. On February 16, 2017, we acquired 35 retail properties in the Merger (the “Merger Acquisitions”), comprised of 7.5 million rentable square feet that were 86.7% leased as of September 30, 2018. Additionally, during 2017 and the first three quarters of 2018, we acquired 176 properties (our “Acquisitions Since January 1, 2017”), comprised of 1.1 million rentable square feet that were 100% leased as of September 30, 2018. During 2017 and the first three quarters of 2018, we sold 50 properties (our “Disposals Since January 1, 2017”), comprised of 2.7 million rentable square feet.
The following table summarizes our leasing activity during the nine months ended September 30, 2018:
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
(In thousands)
 
 
 
 
Number of Leases
 
Rentable Square Feet
 
Annualized SLR (1) prior to Lease Execution/Renewal/Termination
 
Annualized SLR (1) after Lease Execution/Renewal
 
Costs to execute lease
 
Costs to execute lease per square foot
New leases (2)
 
22

 
325,649

 
$
—

 
$
3,462

 
$
1,766

 
$
5.42

Lease renewals/amendments (2)
 
59

 
596,948

 
8,026

 
7,992

 
525

 
$
0.88

Lease terminations (3)
 
9

 
147,346

 
1,443

 
—

 
—

 
$
—

_____________________________________
(1) 
Straight-line rental income
(2) 
New leases reflect leases in which a new tenant took possession of the space during the nine months ended September 30, 2018, excluding new property acquisitions. Lease renewals/amendments reflect leases in which an existing tenant executed terms to extend the life or change the rental terms of the lease during the nine months ended September 30, 2018.
(3) 
Represents leases that were terminated prior to their contractual lease expiration dates.
Net loss attributable to stockholders decreased $3.2 million to $23.9 million for the nine months ended September 30, 2018 from $27.1 million for the three months ended September 30, 2017. The change in net loss attributable to stockholders is discussed in detail for each line item of the undaudited consolidated statements of operations and comprehensive loss in the sections that follow.
Property Results of Operations
 
Same Store
 
Acquisitions
Disposals
 
Merger
 
Total
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
2018
 
2017
 
$
 
2018
 
2017
 
$
 
2018
2017
 
$
 
2018
2017
 
$
 
2018
 
2017
 
$
Rental income
$
94,373

 
$
96,744

 
$
(2,371
)
 
$
12,822

 
$
2,995

 
$
9,827

 
$
2,931

$
13,768

 
$
(10,837
)
 
$
79,123

$
63,360

 
$
15,763

 
$
189,249

 
$
176,867

 
$
12,382

Operating Expense Re-imbursements
2,048

 
1,964

 
84

 
202

 
63

 
139

 
362

1,777

 
(1,415
)
 
24,254

17,132

 
7,122

 
26,866

 
20,936

 
5,930

Less: Property operating
3,987

 
3,002

 
985

 
318

 
69

 
249

 
933

1,418

 
(485
)
 
34,771

25,507

 
9,264

 
40,009

 
29,996

 
10,013

NOI
$
92,434

 
$
95,706

 
$
(3,272
)
 
$
12,706

 
$
2,989

 
$
9,717

 
$
2,360

$
14,127

 
$
(11,767
)
 
$
68,606

$
54,985

 
$
13,621

 
$
176,106

 
$
167,807

 
$
8,299

NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to rental income and operating expense reimbursements less property operating expense. NOI excludes all other financial statement amounts included in net income (loss) attributable to stockholders. We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See “Non-GAAP Financial Measures” included elsewhere in this Quarterly Report for additional disclosure and a reconciliation of NOI to our net income (loss) attributable to stockholders.
Rental income increased $12.3 million to $189.2 million for the nine months ended September 30, 2018, compared to $176.9 million for the nine months ended September 30, 2017. This increase in rental income was primarily due to $15.8 million of incremental rental income from the Merger Acquisitions, as well as $9.8 million of incremental rental income from our Acquisitions Since January 1, 2017. These increases were partially offset by a decrease in rental income of $10.8 million from our Disposals Since January 1, 2017. Our Nine Month Same Store rental income decreased by $2.4 million primarily due to certain SunTrust leases that expired on December 31, 2017.

49

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. As such, operating expense reimbursement income and property operating expense are generally linked. Operating expense reimbursement revenue increased $5.9 million to $26.9 million for the nine months ended September 30, 2018, compared to $21.0 million for the nine months ended September 30, 2017. This increase was primarily driven by $7.1 million of operating expense reimbursements from the Merger Acquisitions, as well as increases in our Nine Month Same Store operating expense reimbursements and our Acquisitions Since January 1, 2017 of $0.1 million and $0.1 million, respectively. These increases were partially offset by a decrease in operating expense reimbursements of $1.4 million from our Disposals Since January 1, 2017.
Property operating expense increased $10.0 million to $40.0 million for the nine months ended September 30, 2018, compared to $30.0 million for the nine months ended September 30, 2017. This increase was primarily driven by an increase in property operating expense of $9.3 million from the Merger Acquisitions, as well as increases in our Nine Month Same Store property operating expense and our Acquisitions Since January 1, 2017 property operating expense of $1.0 million and $0.2 million, respectively. These increases were partially offset by a decrease of $0.5 million from our Disposals Since January 1, 2017.
Other Results of Operations
Asset Management Fees to Related Party
Asset management fees paid to the Advisor increased $2.0 million to $17.3 million for the nine months ended September 30, 2018, compared to $15.3 million for the nine months ended September 30, 2017. Prior to the effective time of the Merger in February 2017, we paid the 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 payable only if we achieve a quarterly Core Earnings (as defined in the advisory agreement) per share threshold, 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 of the Merger; (ii) $22.5 million annually for the second year following the effective time of the Merger; and (iii) $24.0 million annually for the remainder of the term. We did not incur any variable management fees during the nine months ended September 30, 2018 and 2017. Please see Note 11 — Related Party Transactions and Arrangements to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for more information on fees incurred from the Advisor.
Impairment Charges
We incurred $10.1 million of impairment charges during the nine months ended September 30, 2018, the majority of which related to 11 properties classified as held for use, as the carrying amount of the long-lived assets associated with these properties was greater than our estimate of their fair value based on an executed LOI and PSA (see Note 4 — Real Estate Investments for additional information).
We recognized $14.2 million of impairment charges during the nine months ended September 30, 2017, $9.7 million of which related to certain SunTrust properties classified as held for use as of September 30, 2017, as the carrying amount of the long-lived assets associated with these properties was greater than our estimate of their fair value based on an executed LOI and PSA. The remaining $4.5 million of impairment charges related to properties sold or 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. See Note 4 — Real Estate Investments for additional information.
Acquisition and Transaction Related Expense
Acquisition and transaction related expense decreased $3.2 million to $4.4 million for the nine months ended September 30, 2018, compared to $7.6 million for the nine months ended September 30, 2017. Effective January 1, 2018, acquisition costs related to our asset acquisitions are capitalized rather than expensed (see Note 3 — Summary of Significant Accounting Policies—“Recently Issued Accounting Pronouncements” for more information). Acquisition and transaction related expenses for the nine months ended September 30, 2018 were primarily related to prepayment charges on mortgages related to our disposition of 25 properties. Acquisition and transaction related expenses for the nine months ended September 30, 2017 were primarily due to costs incurred in connection with the Merger. These costs included 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 Merger of $0.5 million. Additionally, we incurred $2.2 million of costs related to our acquisition of 46 properties during the nine months ended September 30, 2017.
Listing Fees
During the nine months ended September 30, 2018, we paid $5.0 million in fees associated with the Listing. Of this amount, approximately $4.0 million was paid to BMO Capital Markets Corp., our financial advisor for the Listing.



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Vesting and Conversion of Class B Units
During the nine months ended September 30, 2018, we recorded a non-cash expense of $15.8 million related to the vesting and conversion of Class B Units. The vesting conditions relating to the Class B Units, which were previously issued to the Advisor, were fully satisfied upon completion of the Listing. The Class B Units were then converted into an equal number of Class A Units and redeemed for an equal number of newly issued shares of Class A common stock. For additional details on the Class B Units, see Note 11 — Related Party Transactions and Arrangements .
Share-Based Compensation — Multi-Year Outperformance Agreement
During the nine months ended September 30, 2018, we recorded non-cash share based compensation expense of $2.2 million resulting from the 2018 OPP. For additional details on the 2018 OPP, see Note 13 — Share-Based Compensation.
General and Administrative Expense
General and administrative expense increased $3.5 million to $18.6 million for the nine months ended September 30, 2018, compared to $15.1 million for the nine months ended September 30, 2017. The increase was due to higher legal fees, transfer agent fees and general and administrative expense reimbursements to our Advisor, which increased $0.7 million to $6.7 million for nine months ended September 30, 2018, compared to $6.0 million for the nine months ended September 30, 2017. These increases were partially offset by lower consulting fees and lower expense related to distributions on Class B Units, which vested and converted and were redeemed for shares of Class A common stock in connection with the Listing.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $5.7 million to $107.3 million for the nine months ended September 30, 2018, compared to $113.0 million for the nine months ended September 30, 2017. Depreciation and amortization expense was impacted by decreases of $5.7 million from our Disposals Since January 1, 2017 and $6.2 million from our Nine Month Same Store properties, partially offset by increases of $2.6 million from the properties acquired from RCA in the Merger and $3.5 million related to our Acquisitions Since January 1, 2017. 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 $4.3 million to $49.2 million for the nine months ended September 30, 2018, compared to $44.9 million for the nine months ended September 30, 2017. This increase is primarily related to higher average mortgage notes payable in the first nine months of 2018 and a higher average balance on our Credit Facility, including debt assumed in the Merger on February 16, 2017, and higher weighted-average interest rates on the Credit Facility when compared to the Prior Credit Facility, which was repaid with the proceeds from the Credit Facility in May 2018. As of September 30, 2018 and 2017, the weighted-average interest rates on our mortgage notes payable were 4.65% and 4.72%, respectively and the weighted-average interest rate on our Credit Facility and our Prior Credit Facility was 4.04% and 2.48%, respectively.
Gain on Sale of Real Estate Investments
During the nine months ended September 30, 2018, we sold 25 properties which resulted in gains on sale. These properties sold for an aggregate contract price of $115.1 million, resulting in aggregate gains on sale of $29.6 million.
During the nine months ended September 30, 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 $140.2 million, resulting in a gain on sale of $5.2 million. Additionally, we sold three properties leased to C&S Wholesale Grocer for a contract price of $44.2 million, net of closing costs. The properties had a net carrying value at the date of disposition of $35.6 million, resulting in a gain on sale of $8.6 million. We also sold 13 properties leased to SunTrust for an aggregate contract price of $8.9 million, resulting in aggregate gains on sale of $0.3 million.
Cash Flows from Operating Activities
Cash flows from operating activities was $73.8 million during the nine months ended September 30, 2018 and consisted of net loss of $23.9 million, adjusted for non-cash items of $97.9 million, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, amortization of mortgage premiums on borrowings, share-based compensation, vesting and conversion of Class B Units, mark-to-market adjustments, gain on sale of real estate investments and impairment charges. In addition, the increase in prepaid expenses and other assets of $11.1 million and the decrease in deferred rent of $2.0 million, were partially offset by an increase in accounts payable and accrued expenses of $9.5 million.
Cash flows from operating activities was $64.8 million during the nine months ended September 30, 2017 and consisted of a net loss of $27.2 million, adjusted for non-cash items of $112.5 million, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, impairment charges, share-based compensation, amortization of mortgage premiums, discount accretion and premium amortization on investments, net and gain on sale of real estate investments.

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These operating cash inflows were partially offset by an increase in prepaid expenses and other assets of $7.9 million, a decrease in accounts payable and accrued expenses of $5.3 million, and a decrease in deferred rent and other liabilities of $8.3 million.
Cash Flows from Investing Activities
The net cash used in investing activities during the nine months ended September 30, 2018 of $163.3 million consisted primarily of cash paid for investments in real estate and other assets of $192.6 million, capital expenditures of $7.8 million, partially offset by cash received from the sale of real estate investments of $37.2 million.
The net cash provided by investing activities during the nine months ended September 30, 2017 of $3.4 million consisted of cash paid to acquire RCA in the Merger of $94.5 million, amounts invested in real estate and other assets of $107.1 million, deposits for real estate acquisitions of $0.8 million and capital expenditures of $4.3 million, partially offset by proceeds received from the sale of real estate investments of $184.0 million and cash acquired in the Merger of $26.2 million.
Cash Flows from Financing Activities
The net cash provided by financing activities of $42.6 million during the nine months ended September 30, 2018 consisted primarily of proceeds from mortgage notes payable of $29.9 million and proceeds from our Credit Facility of $260.7 million, partially offset by payments of mortgage notes payable of $46.6 million, payments on our Prior Credit Facility of $95.0 million, payments of deferred financing costs of $7.0 million, prepayment charges on mortgages of $3.4 million, common stock repurchases of $20.2 million and cash dividends of $75.6 million.
The net cash used in financing activities of $121.0 million during the nine months ended September 30, 2017 consisted primarily of payments on the Credit Facility of $114.0 million, common stock repurchases of $29.1 million, cash dividends of $66.0 million, payments of deferred financing costs of $1.6 million, payments of prepayment costs on mortgages of $1.0 million and payments of mortgage notes payable of $3.4 million. These financing cash outflows were partially offset by proceeds from the Credit Facility of $70.0 million and proceeds from mortgage notes payable of $24.0 million.
Liquidity and Capital Resources
We expect to fund our future short-term operating liquidity requirements through a combination of cash on hand, net cash provided by our property operations, proceeds from shares issued through the DRIP and proceeds from our Credit Facility. We may also generate additional liquidity through property dispositions and, to the extent available, secured or unsecured borrowings and offerings of debt or equity securities. As of September 30, 2018 and December 31, 2017, we had cash and cash equivalents of $60.3 million and $107.7 million, respectively. Our principal demands for funds are for payment of our operating and administrative expenses, property acquisitions, capital expenditures, debt service obligations, cash dividends to our stockholders and share repurchases, if any, as authorized by our board of directors.
Mortgage Notes Payable and Credit Facility
As of September 30, 2018, we had $1.2 billion of mortgage notes payable outstanding and $260.7 million outstanding under the Credit Facility, with a net debt to gross asset value ratio of 38%. Net debt excludes the effect of deferred financing costs, net and mortgage premiums, net and includes cash and cash equivalents. Gross asset value is defined as total assets plus accumulated depreciation and amortization. During the nine months ended September 30, 2018, the weighted-average interest rate on the mortgage notes payable and Credit Facility was 4.65% and 4.04%, respectively. The Prior Credit Facility was scheduled to mature on May 1, 2018. On April 26, 2018, the Company repaid the Prior Credit Facility in full and entered into the Credit Facility. Future scheduled principal payments on our mortgage notes payable for the remainder of 2018 and the year ended December 31, 2019 are $0.6 million and $2.5 million, respectively.
During the quarter ended March 31, 2018, we entered into a $29.9 million mortgage loan agreement (“Mortgage Loan IV”) with the Bank of Texas. The Mortgage Loan IV has a stated maturity in March, 2025 and an effective interest rate of 5.16%. As of September 30, 2018 the Mortgage Loan IV was secured by mortgage interests in 39 of our properties. Proceeds from the Mortgage Loan IV were used to pay down approximately $25.0 million under the Prior Credit Facility.
As of September 30, 2018, we had $3.5 billion in gross real estate assets and we had pledged $2.4 billion in gross real estate investments as collateral for our mortgage notes payable. In addition, $811.8 million in gross real estate investments were included in the unencumbered asset pool comprising the borrowing base under the Credit Facility. Therefore, this real estate is only available to serve as collateral or satisfy other debts and obligations if it is first removed from the borrowing base under the Credit Facility.
Credit Facility - Terms and Capacity
On April 26, 2018, we, the OP and certain other subsidiaries acting as guarantors, entered into the Credit Facility with BMO Harris Bank N.A., as administrative agent, Citizens Bank, N.A. and SunTrust Robinson Humphrey, Inc., as joint lead arrangers, and the lenders from time to time party thereto (collectively, the “Lenders”). Affiliates of SunTrust Robinson Humphrey, Inc. are tenants at several of our properties.

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The Credit Facility provides for aggregate revolving loan borrowings of up to $415.0 million, a swingline subfacility of $10.0 million and a $15.0 million letter of credit subfacility, subject to certain conditions. In September 2018, the lenders under the Credit Facility increased the aggregate total commitments under the Credit Facility by $125.0 million, bringing total commitments to $540.0 million. The increased commitments were made pursuant to the Credit Facility’s uncommitted “accordion feature” whereby, upon the request of the OP but at the sole discretion of the participating lenders, the commitments under the Credit Facility may be increased by up to an additional $500.0 million, subject to obtaining commitments from new lenders or additional commitments from participating lenders and certain customary conditions. As of September 30, 2018, and as discussed above, the Company increased its commitments through this accordion feature by $125.0 million, leaving $375.0 million remaining.
The amount available for future borrowings under the Credit Facility is based on the lesser of (1) a percentage of the value of the pool of eligible unencumbered real estate assets comprising the borrowing base, and (2) a maximum amount permitted to maintain a minimum debt service coverage ratio with respect to the borrowing base, in each case, as of the determination date. As of September 30, 2018, we had a total borrowing capacity under the Credit Facility of $358.8 million based on the value of the borrowing base under the Credit Facility. Of this amount, $260.7 million was outstanding under the Credit Facility as of September 30, 2018 and $98.1 million remained available for future borrowings. The proceeds from any borrowings under the Credit Facility may be used for any general corporate purpose, including refinancing existing indebtedness, funding real estate acquisitions, financing capital expenditures and working capital and for general corporate purposes, including funding any tender offer or share repurchases.
Borrowings under the Credit Facility are interest-only. Because the Listing occurred, the maturity date of the Credit Facility was automatically extended from April 26, 2020 to April 26, 2022. In addition, because the Listing occurred, the Company has a one-time right, subject to customary condition, to extend the maturity date for an additional term of one year, to April 26, 2023. Borrowings under the Credit Facility will bear interest at either (i) the Base Rate (as defined in the Credit Facility) plus an applicable spread ranging from 0.60% to 1.20%, depending on our consolidated leverage ratio, or (ii) LIBOR plus an applicable spread ranging from 1.60% to 2.20%, depending on our consolidated leverage ratio.
Acquisitions and Dispositions
One of our primary uses of cash during the three and nine months ended September 30, 2018 has been for acquisitions of properties.
During the three months ended September 30, 2018, we acquired 62 properties for $120.7 million, including capitalized acquisition costs, and we acquired 101 properties during the nine months ended September 30, 2018 for $192.6 million including capitalized acquisition costs costs. These acquisitions were funded through a combination of mortgage debt, draws on the Prior Credit Facility and Credit Facility (see Credit Facility discussion above), proceeds from dispositions of properties (see below) and available cash on hand.
During the three months ended September 30, 2018, we sold six properties, for an aggregate contract price of $28.3 million, excluding disposition related costs. In connection with these sales, we repaid $12.1 million of mortgage debt. After all disposition related costs, net proceeds from these dispositions, classified as investing cash flows, were $15.5 million. During the nine months ended September 30, 2018, we closed on the sale of 25 properties, for an aggregate contract price of $115.1 million, excluding disposition related costs. In connection with these sales, we repaid $74.5 million of mortgage debt. After all disposition related costs, net proceeds from these dispositions, classified as investing cash flows, were $37.2 million.
We acquired eleven additional properties subsequent to September 30, 2018 with an aggregate base purchase price of $15.8 million, excluding acquisition related costs. We have also entered into PSAs to acquire an additional 29 properties for an aggregate contract purchase price of approximately $53.0 million and an LOI, which is non-binding, to acquire an additional 31 properties for approximately $35.2 million. We anticipate using available cash on hand, proceeds from future dispositions of properties and proceeds from borrowings (including borrowings under the Credit Facility) to pay the consideration required to complete these acquisitions. These acquisitions are subject to conditions, and there can be no assurance they will be completed on their current terms, or at all.
We sold two properties subsequent to September 30, 2018 with an aggregate contract sale price of approximately $28.3 million. We also have entered into PSAs to dispose of an additional eight properties (six leased to SunTrust), for an aggregate contract sale price of approximately $63.0 million. These dispositions are subject to conditions, and there can be no assurance they will be completed on their current terms, or at all.
Common Stock Repurchases
During the nine months ended September 30, 2018, we repurchased 1,122,245 shares of our common stock for approximately $20.2 million. Of this amount, 412,939 shares were repurchased during the first quarter of 2018 pursuant to our share repurchase program (the “SRP”), for approximately $9.7 million, at a price of $23.37 per share equal to the then current Estimated Per-Share NAV as of December 31, 2016. These repurchases were funded from proceeds from the DRIP and cash on hand. Our SRP was terminated in anticipation of the Listing, effective June 30, 2018.

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In addition to the common stock repurchases made under the SRP, during the nine months ended September 30, 2018, we repurchased 483,133 and 207,713 shares of our common stock at prices of $14.35 and $15.45 per share, respectively, pursuant to tender offers which expired on March 27, 2018 and May 31, 2018, respectively. The total cost of the shares repurchased in the two tender offers was approximately $6.9 million and $3.2 million, respectively. These repurchases were funded from cash on hand. Further, we repurchased approximately 18,460 fractional shares of Class A common stock at a price of $23.56 per share, the Estimated Per Share NAV as of December 31, 2017 for a total of $0.4 million, in connection with the reverse stock split related to the Listing and approximately 19,922 fractional shares of Class B-1 common stock in connection with the automatic conversion of all shares of Class B-1 common stock into shares of Class A common stock on October 10, 2018 at a price of $14.79 per share, the closing price of Class A common stock on October 9, 2018, for a total of approximately $0.3 million (see Note 9 - Common Stock). These repurchases were also funded from cash on hand.
Effective at the Listing, our board of directors authorized, repurchase, from time to time, of up to $200.0 million of Class A common stock we may implement through open market repurchases or in privately negotiated transaction based on our board of directors’ and management’s assessment of, among other things, market conditions prevailing at the particular time. We will have the ability to repurchase shares of Class A common stock up to this amount at its discretion, subject to authorization by our board of directors prior to any such repurchase. There have not been any purchases authorized, through open market purchases or otherwise, under this program.
Non-GAAP Financial Measures
This section includes non-GAAP financial measures, including Funds from Operations (“FFO”), Adjusted Funds from Operations (“AFFO”) and NOI. While NOI is a property-level measure, AFFO is based on total Company performance and therefore reflects the impact of other items not specifically associated with NOI such as, interest expense, general and administrative expenses and operating fees to related parties. Additionally, NOI as defined here, includes straight-line rent which is excluded from AFFO. A description of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure, which is net income, is provided below.
Funds from Operations and Adjusted Funds from Operations
Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. FFO is not equivalent to net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by 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, excluding gains or losses from sales of property but including asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s definition.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time, especially if not adequately maintained or repaired and renovated as required by relevant circumstances or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation and certain other items may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, among other things, provides a more complete understanding of our performance to investors and to management, and when compared year over year, 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.
Adjusted Funds from Operations
In calculating AFFO, we start with FFO, then we exclude certain income or expense items from AFFO that we consider to be more reflective of investing activities, such as fees related to the Listing, other non-cash income and expense items and the income and expense effects of other activities that are not a fundamental attribute of our business plan. These items include early extinguishment of debt and unrealized gains and losses, which may not ultimately be realized, such as gains or losses on derivative instruments and gains and losses on investments. In addition, by excluding non-cash income and expense items such as amortization of above-market and below-market leases intangibles, amortization of deferred financing costs, straight-line rent, vesting and conversion of the Class B Units and share-based compensation related to restricted shares and the 2018 OPP from AFFO, we believe we provide useful information regarding income and expense items which have a direct impact on our ongoing operating performance. By providing AFFO, we believe we are presenting useful information that can be used to better assess the sustainability of our ongoing operating performance without the impacts

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of transactions that are not related to the ongoing profitability of our portfolio of properties. AFFO presented by us may not be comparable to AFFO reported by other REITs that define AFFO differently.
In calculating AFFO, we exclude certain expenses which under GAAP are characterized as operating expenses in determining operating net income. All paid and accrued merger, acquisition and transaction related fees and certain other expenses negatively impact our operating performance during the period in which expenses are incurred or properties are acquired will also have negative effects on returns to investors, but are not reflective of our on-going performance. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income. In addition, as discussed above, we view gains and losses from fair value adjustments as items which are unrealized and may not ultimately be realized and not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. Excluding income and expense items detailed above from our calculation of AFFO provides information consistent with management’s analysis of the operating performance of the Company. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe AFFO provides useful supplemental information. We believe that in order to facilitate a clear understanding of our operating results, AFFO should be examined in conjunction with net income (loss) as presented in our consolidated financial statements. AFFO should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to pay dividends.
The tables below reflect the items deducted from or added to net loss in our calculation of FFO and AFFO for the periods presented:
 
 
Three Months Ended
Nine Months Ended September 30, 2018
(In thousands)
 
March 31,
2018
 
June 30,
2018
 
September 30, 2018
 
Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
15,401

 
$
(12,041
)
 
$
(27,245
)
 
$
(23,885
)
Impairment charges
 
322

 
8,563

 
1,172

 
10,057

Depreciation and amortization
 
36,499

 
35,438

 
35,332

 
107,269

Gain on sale of real estate investments
 
(24,637
)
 
(3,625
)
 
(1,328
)
 
(29,590
)
Proportionate share of adjustments for non-controlling interests to arrive at FFO
 
(24
)
 
(78
)
 
(59
)
 
(161
)
FFO attributable to stockholders
 
27,561

 
28,257

 
7,872

 
63,690

Acquisition and transaction related
 
1,954

 
1,287

 
1,186

 
4,427

Listing fees
 
—

 
—

 
4,988

 
4,988

Vesting and conversion of Class B Units
 
—

 
—

 
15,786

 
15,786

Amortization of market lease and other intangibles, net
 
(1,358
)
 
(2,320
)
 
(5,766
)
 
(9,444
)
Straight-line rent
 
(2,253
)
 
(2,540
)
 
(2,589
)
 
(7,382
)
Amortization of mortgage premiums on borrowings
 
(835
)
 
(1,001
)
 
(857
)
 
(2,693
)
Mark-to-market adjustments
 
(24
)
 
(48
)
 
—

 
(72
)
Share-based compensation — restricted shares
 
26

 
65

 
90

 
181

Share-based compensation — multi-year outperformance agreement
 
—

 
—

 
2,150

 
2,150

Amortization of deferred financing costs, net and change in accrued interest
 
1,419

 
2,126

 
1,734

 
5,279

Proportionate share of adjustments for non-controlling interests to arrive at AFFO
 
1

 
6

 
(28
)
 
(21
)
AFFO attributable to stockholders
 
$
26,491

 
$
25,832

 
$
24,566

 
$
76,889


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Three Months Ended
 
Nine Months Ended September 30, 2017
(In thousands)
 
March 31,
2017
 
June 30,
2017
 
September 30, 2017
 
Net loss attributable to stockholders (in accordance with GAAP)
 
$
(10,717
)
 
$
(1,021
)
 
$
(15,367
)
 
$
(27,105
)
Impairment charges
 
3,929

 
2,649

 
7,605

 
14,183

Depreciation and amortization
 
31,478

 
40,438

 
41,132

 
113,048

Gain on sale of real estate investments
 
(5,222
)
 
(8,609
)
 
(264
)
 
(14,095
)
Proportionate share of adjustments for non-controlling interests to arrive at FFO
 
(31
)
 
(68
)
 
(94
)
 
(193
)
FFO attributable to stockholders
 
19,437

 
33,389

 
33,012

 
85,838

Acquisition and transaction related
 
5,436

 
947

 
1,173

 
7,556

Amortization of market lease and other intangibles, net
 
(453
)
 
(1,113
)
 
(1,519
)
 
(3,085
)
Straight-line rent
 
(1,572
)
 
(1,882
)
 
(2,077
)
 
(5,531
)
Amortization of mortgage premiums on borrowings
 
(1,126
)
 
(928
)
 
(1,063
)
 
(3,117
)
Discount accretion on investment
 
(6
)
 
(7
)
 
(3
)
 
(16
)
Mark-to-market adjustments
 
(73
)
 
(7
)
 
(25
)
 
(105
)
Share-based compensation
 
30

 
19

 
53

 
102

Amortization of deferred financing costs, net and change in accrued interest
 
4,807

 
536

 
1,152

 
6,495

Proportionate share of adjustments for non-controlling interests to arrive at AFFO
 
(7
)
 
5

 
4

 
2

AFFO attributable to stockholders
 
$
26,473

 
$
30,959

 
$
30,707

 
$
88,139

Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate. NOI is equal to total revenues, excluding contingent purchase price consideration, less property operating and maintenance expense. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss).

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We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. We use NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss).
NOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements. NOI should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to pay dividends.
The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of NOI for the three months ended September 30, 2018:
(In thousands)
 
Same Store
 
Acquisitions
 
Disposals
 
Non-Property Specific
 
Total
Net (loss) income attributable to stockholders (in accordance with GAAP)
 
$
7,224

 
$
2,399

 
$
1,052

 
$
(37,920
)
 
$
(27,245
)
Asset management fees to related party
 
—

 
—

 
—

 
5,849

 
5,849

Impairment charges
 
855

 
—

 
317

 
—

 
1,172

Acquisition and transaction related
 
489

 
—

 
15

 
682

 
1,186

Listing fees
 
—

 
—

 
—

 
4,988

 
4,988

Vesting and conversion of Class B Units
 
—

 
—

 
—

 
15,786

 
15,786

Share-based compensation — multi-year outperformance agreement
 
—

 
—

 
—

 
2,150

 
2,150

General and administrative
 
315

 
1

 
6

 
6,217

 
6,539

Depreciation and amortization
 
33,844

 
1,280

 
208

 
—

 
35,332

Interest expense
 
14,722

 
—

 
—

 
2,295

 
17,017

Gain on sale of real estate investments
 
—

 
—

 
(1,328
)
 
—

 
(1,328
)
Other income
 
(8
)
 
—

 
—

 
(1
)
 
(9
)
Net loss attributable to non-controlling interests
 
—

 
—

 
—

 
(46
)
 
(46
)
NOI
 
$
57,441

 
$
3,680

 
$
270

 
$
—

 
$
61,391

The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of NOI for the three months ended September 30, 2017:

57

(In thousands)
 
Same Store
 
Acquisitions
 
Disposals
 
Non-Property Specific
 
Total
Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
1,167

 
$
(93
)
 
$
(4,729
)
 
$
(11,712
)
 
$
(15,367
)
Asset management fees to related party
 
—

 
—

 
—

 
5,250

 
5,250

Impairment charges
 
1,882

 
—

 
5,723

 
—

 
7,605

Acquisition and transaction related
 
865

 
195

 
—

 
113

 
1,173

General and administrative
 
324

 
—

 
7

 
4,655

 
4,986

Depreciation and amortization
 
38,494

 
181

 
2,457

 
—

 
41,132

Interest expense
 
12,770

 
 
 
—

 
1,732

 
14,502

Gain on sale of real estate investments
 
—

 
—

 
(264
)
 
—

 
(264
)
Other income
 
(270
)
 
—

 
—

 
(8
)
 
(278
)
Net loss attributable to non-controlling interests
 
—

 
—

 
—

 
(30
)
 
(30
)
NOI
 
$
55,232

 
$
283

 
$
3,194

 
$
—

 
$
58,709

The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of NOI for the nine months ended September 30, 2018:
(In thousands)
 
Same Store
 
Acquisitions
 
Disposals
 
Merger
 
Non-Property Specific
 
Total
Net (loss) income attributable to stockholders (in accordance with GAAP)
 
$
(6,932
)
 
$
7,839

 
$
26,612

 
$
10,915

 
$
(62,319
)
 
$
(23,885
)
Asset management fees to related party
 
—

 
—

 
—

 
—

 
17,295

 
17,295

Impairment charges
 
1,111

 
—

 
3,279

 
5,667

 
—

 
10,057

Acquisition and transaction related
 
3,527

 
171

 
18

 
1

 
710

 
4,427

Listing fees
 
—

 
—

 
—

 
—

 
4,988

 
4,988

Vesting and conversion of Class B Units
 
—

 
—

 
—

 
—

 
15,786

 
15,786

Share-based compensation — multi-year outperformance agreement
 
—

 
—

 
—

 
—

 
2,150

 
2,150

General and administrative
 
316

 
43

 
34

 
806

 
17,353

 
18,552

Depreciation and amortization
 
51,946

 
4,654

 
2,014

 
48,655

 
—

 
107,269

Interest expense
 
42,500

 
—

 
—

 
2,572

 
4,094

 
49,166

Gain on sale of real estate investments
 
—

 
—

 
(29,590
)
 
—

 
—

 
(29,590
)
Other income
 
(34
)
 
(1
)
 
(7
)
 
(10
)
 
(17
)
 
(69
)
Net income attributable to non-controlling interests
 
—

 
—

 
—

 
—

 
(40
)
 
(40
)
NOI
 
$
92,434

 
$
12,706

 
$
2,360

 
$
68,606

 
$
—

 
$
176,106

The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of NOI for the nine months ended September 30, 2017:

58

(In thousands)
 
Same Store
 
Acquisitions
 
Disposals
 
Merger
 
Non-Property Specific
 
Total
Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
(943
)
 
$
843

 
$
8,274

 
$
5,639

 
$
(40,918
)
 
$
(27,105
)
Asset management fees to related party
 
—

 
—

 
—

 
—

 
15,250

 
15,250

Impairment charges
 
3,137

 
—

 
11,046

 
—

 
—

 
14,183

Acquisition and transaction related
 
1,106

 
990

 
1

 
—

 
5,459

 
7,556

General and administrative
 
184

 
—

 
20

 
630

 
14,233

 
15,067

Depreciation and amortization
 
58,169

 
1,156

 
7,738

 
45,985

 
—

 
113,048

Interest expense
 
34,821

 
—

 
1,183

 
2,837

 
6,071

 
44,912

Gain on sale of real estate investments
 
—

 
—

 
(14,095
)
 
—

 
—

 
(14,095
)
Other income
 
(768
)
 
—

 
(40
)
 
(106
)
 
(50
)
 
(964
)
Net income attributable to non-controlling interests
 
—

 
—

 
—

 
—

 
(45
)
 
(45
)
NOI
 
$
95,706

 
$
2,989

 
$
14,127

 
$
54,985

 
$
—

 
$
167,807

Common Stock Dividends
Prior to, and continuing into, 2017, our board of directors authorized, and we declared, a dividend 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. On June 14, 2017, we announced that our board of directors authorized a decrease in the daily accrual of dividends to an annualized rate of $1.30 per annum, per share of common stock, effective July 1, 2017. The first dividends declared under the new rate were paid on or about August 5, 2017. In connection with the Listing, our board of directors changed the rate at which we pay dividends on our common stock from an annualized rate equal to $1.30 per share to an annualized rate equal to $1.10 per share, or $0.0916667 per share on a monthly basis, effective as of July 1, 2018. Also, effective July 1, 2018, we transitioned to declaring dividends based on monthly, rather than daily, record dates and will generally pay dividends on the 15th day of each month (or, if not a business day, the next succeeding business day) to common stock holders of record on the applicable record date of such month. Prior to July 1, 2018, dividends were payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month. Dividends are paid on shares of Class A common stock, Class B-1 common stock and Class B-2 common stock at the same rate. The first dividends declared under the new rate were paid in August 2018.
The amount of dividends payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for dividends, 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 dividends paid or suspend dividend payments at any time prior to dividends being declared. Therefore, dividend payments are not assured. In addition, provisions in our Credit Facility restrict our ability to pay dividends, including cash dividends or other dividends payable with respect to our common stock.
Our DRIP was suspended on June 29, 2018 in anticipation of the Listing, and reinstated, amended and restated, effective on the Listing Date (the “A&R DRIP”). Participants in the DRIP prior to this amendment and restatement continued to be participants in the DRIP. Commencing with the dividend paid on August 3, 2018 (the first dividend paid following the Listing Date), our stockholders that have elected to participate in the A&R DRIP may have dividends payable with respect to all or a portion of their shares of each class of our common stock reinvested in shares of Class A common stock. Shares issued pursuant to the DRIP are, at our election, either (i) acquired directly from us, by issuing new shares, at a price based on the average of the high and low sales prices of Class A common stock on Nasdaq on the date of reinvestment, or (ii) acquired through open market purchases by the plan administrator at a price based on the weighted-average of the actual prices paid for all of the shares of Class A common stock purchased by the plan administrator with all participants’ reinvested dividends for the related quarter, less a per share processing fee.

59

During the nine months ended September 30, 2018, dividends paid to common stockholders totaled $98.8 million and distributions paid to holders of LTIP Units totaled $0.1 million. On March 19, 2018, our board of directors approved an estimated net asset value per share of our common stock (“Estimated Per-Share NAV”) as of December 31, 2017, which was published on March 20, 2018 and which served as the purchase price under the DRIP, prior to its amendment and restatement. During the nine months ended September 30, 2018, $23.2 million of dividends that were reinvested in additional shares of our common stock, either through our DRIP at a price based on the then applicable Estimated Per-Share NAV, up until the dividend paid on August 3, 2018, or in accordance with the A&R DRIP. During the nine months ended September 30, 2018, cash used to pay common stock dividends and LTIP distributions was generated from cash flows provided by operations, a portion of proceeds from the DRIP and A&R DRIP and cash on hand, which consists of proceeds from financings and sales of real estate investments.
The following table shows the sources for the payment of dividends to common stockholders, including dividends on unvested restricted shares, for the periods indicated:
 
 
Three Months Ended
Nine Months Ended September 30, 2018
 
 
March 31, 2018
 
June 30, 2018
 
September 30, 2018
 
(In thousands)
 
 
 
Percentage of Dividends
 
 
 
Percentage of Dividends
 
 
 
Percentage of Dividends
 
 
 
Percentage of Dividends
Cash dividends paid to stockholders not reinvested in common stock
 
$
21,906

 
 
 
$
22,961

 
 
 
$
30,713

 
 
 
$
75,580

 
 
Cash dividends reinvested in common stock issued under the DRIP and A&R DRIP
 
11,773

 
 
 
11,475

 
 
 
—

 
 
 
23,248

 
`

Total dividends paid
 
$
33,679

 
 
 
$
34,436

 
 
 
$
30,713

 
 
 
$
98,828

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source of dividend coverage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations
 
$
22,348

 
66.4
%
 
31,480

 
91.4
%
 
$
19,933

 
64.9
%
 
$
73,761

 
74.5
%
Cash proceeds received from common stock issued under the DRIP
 
11,331

 
33.6
%
 
2,956

 
8.6
%
 
—

 
—
%
 
14,287

 
14.5
%
Available cash on hand (1)
 
—

 
—
%
 
—

 
—
%
 
10,780

 
35.1
%
 
10,780

 
10.9
%
Total source of dividend coverage
 
$
33,679

 
100.0
%
 
$
34,436

 
100.0
%
 
$
30,713

 
100.0
%
 
$
98,828

 
99.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations (GAAP basis)
 
$
22,348

 
 
 
$
31,480

 
 
 
$
19,933

 
 
 
$
73,761

 
 
Net income (loss) (in accordance with GAAP)
 
$
15,431

 
 
 
$
(12,065
)
 
 
 
$
(27,291
)
 
 
 
$
(23,925
)
 
 
(1) Consists of proceeds from financings and sales of real estate investments.
We have not generated, and in the future may not generate, operating cash flows sufficient to fund all of the dividends we pay to our stockholders. If we do not generate sufficient cash flows from our operations in the future we may have to reduce our dividend rate or continue to fund dividends from other sources, such as from borrowings or the sale of properties, loans or securities, and we may continue to fund dividends with the proceeds from issuances of common stock pursuant to our DRIP and available cash on hand, which consists of proceeds from sale of real estate investments and proceeds from financings. Moreover, our board of directors may change our dividend policy, in its sole discretion, at any time to either reduce the amount of dividends that we pay or use other sources to fund dividends such as borrowing monies, using the proceeds from asset sales or using the proceeds from the sale of shares, including shares sold under our DRIP. Funding dividends from borrowings could restrict the amount that we can borrow for investments. Funding dividends with the sale of assets may affect our ability to generate additional operating cash flows. Funding dividends from the sale of additional securities could dilute each stockholder’s interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third-party investors. Payment of dividends from these sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the dividends payable to stockholders upon a liquidity event, any or all of which may have an adverse effect on an investment in our shares.
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 September 30, 2018, we were in compliance with the debt covenants under our loan agreements.

60

Contractual Obligations
There were no material changes in the Company’s contractual obligations at September 30, 2018, as compared to those reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
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 11 — Related Party Transactions and Arrangements to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q.

61

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.
There has been no material change in our exposure to market risk during the nine months ended September 30, 2018. For a discussion of our exposure to market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
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 September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

62

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 us, RCA, Edward M. Weil, Jr., Leslie D. Michelson, Edward G. Rendell (Weil, Michelson and Rendell, the “Director Defendants”), and AR Global, 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 us in connection with the negotiation of and proxy solicitation for a shareholder vote on the proposed merger of us and RCA and an amendment to RCA’s charter.  The complaint sought 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 16, 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. Lead plaintiff, along with other stockholders of RCA, filed an amended complaint on June 19, 2017. The amended complaint named additional individuals and entities as defendants (David Gong, Stanley Perla, Lisa Kabnick (“Additional Director Defendants”), Nicholas Radesca and American Realty Capital Retail Advisor, LLC), added counts under Sections 11, 12(a)(2) and 15 of the Securities Act in connection with the Registration Statement for the proposed merger, under Section 13(e) of the Exchange Act, and counts for breach of contract and unjust enrichment. We, in addition to RCA, the Director Defendants, the Additional Director Defendants and Nicholas Radesca deny wrongdoing and liability and intend to vigorously defend the action. On August 14, 2017, defendants moved to dismiss the amended complaint. On March 29, 2018, the Court granted defendants’ motion to dismiss and dismissed the amended complaint. On April 26, 2018, the plaintiffs filed a notice of appeal of the court’s order, which appeal is pending. 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 nine months ended September 30, 2018 or the year ended December 31, 2017.
On February 8, 2018, Carolyn St. Clair-Hibbard, a purported stockholder of ours, filed a putative class action complaint in the United States District Court for the Southern District of New York against us, AR Global, the Advisor, Nicholas S. Schorsch and William M. Kahane. On February 23, 2018, the complaint was amended to, among other things, assert some claims on the plaintiff’s own behalf and other claims on behalf of herself and other similarly situated shareholders of ours as a class. On April 26, 2018, defendants moved to dismiss the amended complaint. On May 25, 2018, plaintiff filed a second amended complaint. The second amended complaint alleges that the proxy materials used to solicit stockholder approval of the Merger at our 2017 annual meeting were materially incomplete and misleading. The complaint asserts violations of Section 14(a) of the Exchange Act against us, as well as control person liability against the Advisor, AR Global, and Messrs. Schorsch and Kahane under 20(a). It also asserts state law claims for breach of fiduciary duty against the Advisor, and claims for aiding and abetting such breaches, of fiduciary duty against the Advisor, AR Global and Messrs. Schorsch and Kahane. The complaint seeks unspecified damages, rescission of our advisory agreement (or severable portions thereof) which became effective when the Merger became effective, and a declaratory judgment that certain provisions of our advisory agreement are void. We believe the second amended complaint is without merit and intends to defend vigorously. On June 22, 2018, defendants moved to dismiss the second amended complaint. On August 1, 2018, plaintiff filed an opposition to defendants’ motions to dismiss. Defendants filed reply papers on August 22, 2018, and oral argument was held on September 26, 2018. That motion is now pending. Due to the early stage of the litigation, no estimate of a probable loss or any reasonably possible losses are determinable at this time.
On October 26, 2018, Terry Hibbard, a purported stockholder of ours, filed a putative class action complaint in New York State Supreme Court, New York County, against us, AR Global, the Advisor, Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Nicholas Radesca, David Gong, Stanley R. Perla, and Lisa D. Kabnick.  The complaint alleges that the registration statement pursuant to which RCA shareholders acquired shares of our common stock during the Merger contained materially incomplete and misleading information.  The complaint asserts violations of Section 11 of the Securities Act against Messrs. Weil, Radesca, Gong, and Perla, and Ms. Kabnick, violations of Section 12(a)(2) of the Securities Act against us and Mr. Weil, and control person liability against the Advisor, AR Global, and Messrs. Schorsch and Kahane under Section 15 of the Securities Act.  The complaint seeks unspecified damages and rescission of our sale of stock pursuant to the registration statement. We believe the complaint is without merit and intend to defend vigorously. We have not yet answered or moved to dismiss the complaint. Due to the early stage of the litigation, no estimate of a probable loss or any reasonably possible losses are determinable at this time.
There are no other material legal or regulatory proceedings pending or known to be contemplated against us.
Item 1A. Risk Factors.
The following risk factors supplement the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.
The trading price of our Class A common stock may fluctuate significantly, and no public market currently exists for shares of our other class of outstanding stock, our Class B-2 common stock.
Our Class A common stock is listed on the Nasdaq. We have another class of outstanding stock, Class B-2 common stock, which will automatically convert into Class A common stock to be listed on Nasdaq no later than January 15, 2019, 180 days following the Listing Date. No public market currently exists for shares of our Class B-2 common stock, and shares of our Class B-2 common stock are, and may continue to be, illiquid. The trading price of our Class A common stock is impacted by a number of factors, many of which are outside our control. Among the factors that could affect the trading price of our Class A common stock are:
•
our financial condition and performance;
•
the financial condition of our tenants, including the extent of tenant bankruptcies or defaults;
•
actual or anticipated quarterly fluctuations in our operating results and financial condition;
•
the amount and frequency of our payment of dividends;

63

•
additional issuances of equity securities, including Class A common stock;
•
additional sales of equity securities, or the perception that additional sales may occur, including sales of Class A common stock following the conversion of shares of our Class B-1 common stock and our Class B-2 common stock, which are currently illiquid, into shares of our Class A common stock.
•
the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities, and fixed income securities;
•
our reputation and the reputation of AR Global, its affiliates or entities sponsored by AR Global;
•
uncertainty and volatility in the equity and credit markets;
•
fluctuations in interest rates;
•
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs;
•
failure to meet analysts’ revenue or earnings estimates;
•
strategic actions by us or our competitors, such as acquisitions or restructurings;
•
the extent of institutional investor interest in us;
•
the extent of short-selling of our Class A common stock;
•
general financial and economic market conditions and, in particular, developments related to market conditions for REITs and other real estate related companies;
•
failure to maintain our REIT status;
•
changes in tax laws;
•
domestic and international economic factors unrelated to our performance; and
•
all other risk factors addressed elsewhere the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sale of Unregistered Equity Securities
We did not complete any sales of unregistered equity securities during the three months ended September 30, 2018 that were not disclosed in a Current Report on Form 8-K except as set forth below. On July 20, 2018, 30,690.50 Class A Units held by affiliates of the Advisor were redeemed for an equal number of newly issued shares of Class A common stock consistent with the redemption provisions contained in the agreement of limited partnership of the OP. This redemption was exempt from registration under Section 4(a)(2) of the Securities Act.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our board of directors adopted the SRP to enable 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. Our SRP was terminated in anticipation of the Listing, effective June 30, 2018.
The following table summarizes the repurchases of shares under the SRP cumulatively through the SRP termination date of June 30, 2018:
 
 
Number of Shares
 
Weighted-Average Price per Share
Cumulative repurchases as of December 31, 2017 (1)
 
3,306,864

 
$
23.97

Three months ended March 31, 2018 (2)
 
412,939

 
23.37

Three months ended June 30, 2018
 
—

 
—

Cumulative repurchases through the termination date
 
3,719,803

 
—

(1) Excludes rejected repurchase requests received during 2016 with respect to 5.9 million shares for $140.1 million at a weighted-average price per share of $23.65. Also, in July 2017, following the effectiveness of the amendment and restatement of the SRP, our board of directors approved 100% of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to December 31, 2017. No repurchases were made with respect to requests received during 2017 that were not valid requests in accordance with the amended and restated SRP. At the time the SRP was terminated in anticipation of the Listing, effective June 30, 2018, we had received repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2018 to June 30, 2018 with respect to 0.6 million shares that were therefore not repurchased.
(2) During January 2018, we repurchased 412,939 shares for approximately $9.7 million at a price of $23.37 per share equal to the then current Estimated Per-Share NAV.
Effective at the Listing, our board of directors authorized, repurchase, from time to time, of up to $200.0 million of Class A common stock we may implement through open market repurchases or in privately negotiated transaction based on our board of directors’ and management’s assessment of, among other things, market conditions prevailing at the particular time. We will have

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the ability to repurchase shares of Class A common stock up to this amount at its discretion, subject to authorization by our board of directors prior to any such repurchase. There have not been any purchases authorized, through open market repurchases or otherwise, through the date of this Quarterly Report on Form 10-Q.
In July 2018, we repurchased approximately 18,460 fractional shares of Class A common stock at a price of $23.56 per share, the Estimated Per Share NAV as of December 31, 2017, in connection with the reverse stock split related to the Listing. On October 10, 2018, we repurchased approximately 19,922 fractional shares of Class B-1 common stock in connection with the automatic conversion of all shares of Class B-1 common stock into shares of Class A common stock at a price of $14.79 per share, the closing price of Class A common stock on October 9, 2018. See Note 9 - Common Stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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.

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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/ Katie P. Kurtz
 
 
Katie P. Kurtz
 
 
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
Dated: November 6, 2018

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EXHIBITS INDEX

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
  
Description
3.1 (1)
 
Articles of Amendment relating to reverse stock split, dated July 3, 2018

3.2 (1)
 
Articles of Amendment relating to par value decrease, dated July 3, 2018
3.3 (1)
 
Articles of Amendment relating to common stock name change, dated July 3, 2018
3.4 (1)
 
Articles Supplementary relating to reclassification of common stock, dated July 3, 2018
3.5 (2)
 
Amended and Restated Bylaws
4.1 (2)
 
Second Amended and Restated Agreement of Limited Partnership of American Finance Operating Partnership, L.P., dated as of July 19, 2018
4.2 *
 
First Amendment to Second Amended and Restated Agreement of Limited Partnership of American Finance Operating Partnership, L.P., dated as of November 6, 2018
10.1 *
 
First Amendment to Credit Agreement, dated as of September 24, 2018, by and among American Finance Operating Partnership, L.P., the guarantors party thereto, the lenders party thereto, and BMO Harris Bank N.A., as administrative agent
10.2  (2)
 
Listing Note Agreement, dated as of July 19, 2018, between American Finance Operating Partnership, L.P. and American Finance Special Limited Partner, LLC
10.3  (2)
 
Subordination Agreement, dated as of dated as of July 19, 2018, among American Finance Special Limited Partner, LLC, BMO Harris Bank N.A. and American Finance Operating Partnership, L.P.

10.4  (2)
 
Amendment No. 1 to the Third Amended and Restated Advisory Agreement, dated July 19, 2018, among American Finance Trust, Inc., American Finance Operating Partnership, L.P. and American Finance Advisors, LLC
10.5  (2)
 
Advisor Multi-Year Outperformance Agreement, dated as of July 19, 2018, between American Finance Operating Partnership, L.P. and American Finance Advisors, LLC
10.6  (2)
 
2018 Advisor Omnibus Incentive Compensation Plan
10.7  (2)
 
2018 Omnibus Incentive Compensation Plan
10.8  (2)
 
Form of Indemnification Agreement
 
Form of Restricted Share Award Agreement
14.1 (2)
 
Amended and Restated Code of Business Conduct and Ethics
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
99.1 (2)
 
 Amended and Restated Distribution Reinvestment Plan
101 *
 
XBRL (eXtensible Business Reporting Language). The following materials from American Finance Trust, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, 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) Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on July 9, 2018.
(2) Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on July 19, 2018.
(3) Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on May 2, 2018.


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American Finance Trust, Inc Reports