AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC. - FORM 10-Q - November 14, 2016

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EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER OF THE COMPANY - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.arcrca9302016ex312.htm
EX-32 - SECTION 1350 CERTIFICATIONS - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.arcrca9302016ex32.htm
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER OF THE COMPANY - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.arcrca9302016ex311.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, 2016

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission file number: 000-55198

arcretailcolorabbreviated.jpg

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter) 
Maryland
  
27-3279039
(State or other  jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
  
  
  
405 Park Ave., 14th Floor, New York, NY      
  
 10022
(Address of principal executive offices)
  
(Zip Code)
(212) 415-6500   
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company 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, 2016, the registrant had 99,268,676 shares of common stock outstanding.

AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
273,375

 
$
274,993

Buildings, fixtures and improvements
819,806

 
815,568

Acquired intangible lease assets
181,655

 
192,454

       Total real estate investments, at cost
1,274,836

 
1,283,015

       Less: accumulated depreciation and amortization
(106,537
)
 
(68,221
)
Total real estate investments, net
1,168,299

 
1,214,794

Cash and cash equivalents
45,152

 
40,033

Restricted cash
5,105

 
4,828

Prepaid expenses and other assets
26,423

 
17,629

Deferred costs, net
7,140

 
7,369

Land held for sale
—

 
500

Total assets
$
1,252,119

 
$
1,285,153

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 

Mortgage notes payable, net of deferred financing costs
$
126,762

 
$
127,251

Mortgage premiums, net
4,023

 
4,764

Credit facility
304,000

 
304,000

Below-market lease liabilities, net
72,707

 
78,103

Derivatives, at fair value
567

 
415

Accounts payable and accrued expenses (including $887 and $828 due to related parties as of September 30, 2016 and December 31, 2015, respectively)
24,188

 
18,216

Deferred rent and other liabilities
3,917

 
3,958

Distributions payable
5,209

 
5,296

Total liabilities
541,373

 
542,003

Preferred stock, $0.01 par value per share, 50,000,000 authorized, none issued or outstanding at September 30, 2016 and December 31, 2015
—

 
—

Common stock, $0.01 par value per share, 300,000,000 shares authorized, 99,268,681 and 96,866,152 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
993

 
969

Additional paid-in capital
881,443

 
859,421

Accumulated other comprehensive loss
(561
)
 
(410
)
Accumulated deficit
(171,129
)
 
(116,830
)
Total stockholders' equity
710,746

 
743,150

Total liabilities and stockholders' equity
$
1,252,119

 
$
1,285,153


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

3
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, 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,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Rental income
$
25,436

 
$
21,545

 
$
76,538

 
$
55,375

Operating expense reimbursements
7,552

 
6,343

 
22,699

 
16,256

Total revenues
32,988

 
27,888

 
99,237

 
71,631

Operating expenses:
 

 
 

 
 

 
 
Asset management fees to related party
2,251

 
1,792

 
6,746

 
3,249

Property operating
10,552

 
9,004

 
31,217

 
23,726

Impairment charges
—

 
—

 
—

 
4,434

Fair value adjustment to contingent purchase price consideration
—

 
4

 
1,784

 
(13,798
)
Acquisition and transaction related
2,064

 
5,585

 
2,526

 
9,564

General and administrative
2,928

 
1,888

 
7,272

 
6,149

Depreciation and amortization
15,137

 
13,581

 
47,488

 
34,039

Total operating expenses
32,932

 
31,854

 
97,033

 
67,363

Operating income (loss)
56

 
(3,966
)
 
2,204

 
4,268

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(3,240
)
 
(2,148
)
 
(9,587
)
 
(5,345
)
Loss on disposition of land
—

 
—

 
(4
)
 
—

Gain on involuntary conversion
193

 
—

 
193

 
—

Other income
5

 
6

 
15

 
14

Total other expense, net
(3,042
)
 
(2,142
)
 
(9,383
)
 
(5,331
)
Net loss
$
(2,986
)
 
$
(6,108
)
 
$
(7,179
)
 
$
(1,063
)
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Change in unrealized loss on derivative
215

 
(266
)
 
(151
)
 
(408
)
Comprehensive loss
$
(2,771
)
 
$
(6,374
)
 
$
(7,330
)
 
$
(1,471
)
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
$
(0.03
)
 
$
(0.06
)
 
$
(0.07
)
 
$
(0.01
)

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

4
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2016
(In thousands, except share data)
(Unaudited)

 
Common Stock
 
 
 
 
 
 
 
 
 
Number of Shares
 
Par Value
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders' Equity
Balance, December 31, 2015
96,866,152

 
$
969

 
$
859,421

 
$
(410
)
 
$
(116,830
)
 
$
743,150

Common stock issued through distribution reinvestment plan
2,399,029

 
24

 
22,013

 
—

 
—

 
22,037

Common stock repurchases
(2,500
)
 
—

 
(25
)
 
—

 
—

 
(25
)
Share-based compensation
6,000

 
—

 
34

 
—

 
—

 
34

Distributions declared
—

 
—

 
—

 
—

 
(47,120
)
 
(47,120
)
Net loss
—

 
—

 
—

 
—

 
(7,179
)
 
(7,179
)
Other comprehensive loss
—

 
—

 
—

 
(151
)
 
—

 
(151
)
Balance, September 30, 2016
99,268,681

 
$
993

 
$
881,443

 
$
(561
)
 
$
(171,129
)
 
$
710,746

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

5
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(7,179
)
 
$
(1,063
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation
20,228

 
13,594

Amortization of in-place lease assets
27,026

 
20,358

Amortization of deferred costs
1,763

 
1,516

Amortization of mortgage premiums
(741
)
 
(116
)
Accretion of market lease and other intangibles, net
(2,394
)
 
(2,433
)
Bad debt expense
781

 
836

Fair value adjustment to contingent purchase price consideration
1,784

 
(13,798
)
Impairment charges
—

 
4,434

Loss on disposition of land
4

 
—

Gain on involuntary conversion
(193
)
 
—

Share-based compensation
34

 
42

Ineffective portion of derivative
1

 
3

Changes in assets and liabilities:
 

 
 

Prepaid expenses and other assets
(5,801
)
 
(12,299
)
Accounts payable and accrued expenses
7,102

 
12,396

Deferred rent and other liabilities
(41
)
 
1,584

Restricted cash
(625
)
 
(1,403
)
Net cash provided by operating activities
41,749

 
23,651

Cash flows from investing activities:
 
 
 
Investments in real estate and other assets
—

 
(434,210
)
Deposits for real estate acquisitions
—

 
(350
)
Proceeds from disposition of land
496

 
—

Proceeds from contingent purchase price consideration
—

 
14,996

Restricted cash
348

 
(810
)
Capital expenditures
(6,429
)
 
(6,318
)
Net cash used in investing activities
(5,585
)
 
(426,692
)
Cash flows from financing activities:
 

 
 

Payments on mortgage notes payable
(824
)
 
(387
)
Proceeds from credit facility
—

 
304,000

Payments of financing costs
—

 
(827
)
Common stock repurchases
(5,051
)
 
(4,802
)
Payments of offering costs and fees related to stock issuances, net
—

 
(1,176
)
Distributions paid
(25,170
)
 
(19,535
)
Net cash (used in) provided by financing activities
(31,045
)
 
277,273

Net change in cash and cash equivalents
5,119

 
(125,768
)
Cash and cash equivalents, beginning of period
40,033

 
170,963

Cash and cash equivalents, end of period
$
45,152

 
$
45,195

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash paid for interest
$
9,598

 
$
3,603

Cash paid for income taxes
$
185

 
$
72

 
 
 
 
Non-Cash Investing and Financing Activities:
 
 
 
Mortgage notes payable assumed or used to acquire investments in real estate
$
—

 
$
42,612

Premium assumed on mortgage note payable
$
—

 
$
4,839

Common stock issued through distribution reinvestment plan
$
22,037

 
$
26,382

Change in accrued common stock repurchases
$
(5,026
)
 
$
2,260

Change in capital improvements in accounts payable and accrued expenses
$
1,963

 
$
(951
)

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

6
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)


Note 1 — Organization
American Realty Capital — Retail Centers of America, Inc. (the "Company") has acquired and owns anchored, stabilized core retail properties, including power centers and lifestyle centers, which are located in the United States and were at least 80.0% leased at the time of acquisition. The Company purchased its first property and commenced active operations in June 2012. As of September 30, 2016, the Company owned 35 properties with an aggregate purchase price of $1.2 billion, comprised of 7.5 million rentable square feet, which were 92.9% leased.
The Company, incorporated on July 29, 2010, 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, 2012. Substantially all of the Company's business is conducted through American Realty Capital Retail Operating Partnership, L.P. (the "OP"), a Delaware limited partnership, and its wholly-owned subsidiaries.
On March 17, 2011, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts. The IPO closed on September 12, 2014. On September 22, 2014, the Company registered an additional 25.0 million shares of common stock to be used under the distribution reinvestment plan (the "DRIP") pursuant to a registration statement on Form S-3 (File No. 333-198864). As of September 30, 2016, the Company had 99.3 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from the IPO and the DRIP, net of share repurchases, of $983.8 million.
The Company has no employees. The Company has retained American Realty Capital Retail Advisor, LLC (the "Advisor") to manage its affairs on a day-to-day basis. The Advisor has entered into a service agreement with an independent third party, Lincoln Retail REIT Services, LLC, a Delaware limited liability company ("Lincoln"), pursuant to which Lincoln provides, subject to the Advisor's oversight, real estate-related services, including locating investments, negotiating financing, and providing property-level asset management services, property management services, leasing and construction oversight services and disposition services, as needed. The Advisor has passed through and will continue to pass through to Lincoln a portion of the fees and/or other expense reimbursements payable to the Advisor for the performance of real estate-related services. The Advisor is under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, the "Parent of the Sponsor" or "AR Global"), the parent of the Company's sponsor, American Realty Capital IV, LLC (the "Sponsor"), as a result of which it is a related party of the Company.
Note 2 — Pending Merger Agreement
On September 6, 2016, the Company and the OP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with American Finance Trust, Inc. (“AFIN”), American Finance Operating Partnership, L.P. (the “AFIN OP”) and Genie Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of AFIN (“Merger Sub”). The Merger Agreement provides for (a) the merger of the Company with and into the Merger Sub (the “Merger”), with the Merger Sub surviving as a wholly owned subsidiary of AFIN and (b) the merger of the OP with and into the AFIN OP, with the AFIN OP as the surviving entity (the “Partnership Merger”, and together with the Merger, the “Mergers”).
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Mergers (the "Effective Time"), each outstanding share of common stock of the Company, $0.01 par value per share ("Company Common Stock") (including any restricted shares of Company Common Stock and fractional shares), will be converted into the right to receive (x) a number of shares of common stock of AFIN, $0.01 par value per share ("AFIN Common Stock") equal to 0.385 shares of AFIN Common Stock (the "Stock Consideration") and (y) cash from AFIN in an amount equal to $0.95 per share (the "Cash Consideration," and together with the Stock Consideration, the "Merger Consideration").

7
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In addition, at the Effective Time, (i) each unit of partnership interest of the OP designated as an OP Unit (an "OP Unit") issued and outstanding immediately prior to the Effective Time (other than those held by the Company as described in clause (ii) below) will automatically be converted into 0.424 validly issued units of limited partnership interest of the AFIN OP (the “Partnership Merger Consideration”); (ii) each unit of partnership interest of the OP designated as either an OP Unit or a GP Unit (a "GP Unit") held by the Company and issued and outstanding immediately prior to the Effective Time will automatically be converted into 0.385 validly issued units of limited partnership interest of the AFIN OP; (iii) each unit of partnership interest of the OP designated as a Class B Unit (a "Class B Unit") held by the Advisor and Lincoln issued and outstanding immediately prior to the Effective Time will be 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 the Advisor, the special limited partner of the OP (the “SLP”), in the OP will be redeemed for a cash payment, to be determined in accordance with the existing terms of the OP’s agreement of limited partnership.
Concurrently with the execution of the Merger Agreement, the Company and the OP entered into a side letter agreement with the Advisor and AFIN, providing for, among other things, termination of the advisory agreement among the Company, the OP and the Advisor, subject to, and at, the date that the Merger becomes effective (the "Termination Agreement"). The Termination Agreement will, pursuant to its terms, automatically terminate and be of no further force or effect if the Merger Agreement is terminated in accordance with its terms.
The Merger Agreement provided the Company with a go-shop period, during which time the Company had the right to actively solicit superior proposals from third parties for 45 days from the date of the Merger Agreement (the "Go-Shop Period"). The Go-Shop Period ended on October 21, 2016 with no alternative acquisition proposals provided by third parties.
In the event that AFIN or the Company terminates the Merger Agreement under specified circumstances, the Company or AFIN, as applicable, are required to pay a termination fee of $25.6 million.
The Company and AFIN each are sponsored, directly or indirectly, by AR Global. AR Global and its affiliates provide services to the Company and AFIN pursuant to written advisory agreements.
The completion of the Mergers is subject to the approval of the Company's and AFIN's stockholders as well as satisfaction of customary closing conditions. A joint preliminary proxy statement/prospectus describing the proposed Mergers was filed on Form S-4 with the Securities and Exchange Commission (the “SEC”) in October 2016. If approved, the Mergers are expected to close in the first quarter of 2017. However, as of the filing of this Quarterly Report on Form 10-Q, the approval of the Mergers has not yet occurred, and the Company cannot assure that the Mergers will be completed based on the terms of the Merger Agreement or at all.
Note 3 — Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("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. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for these interim periods. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results for the entire year or any subsequent interim periods.
These 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, 2015, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 11, 2016. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2016, other than the updates described below.

8
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Consolidation
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.
Recently Adopted Accounting Pronouncements
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are VIEs or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. The Company elected to adopt this guidance effective January 1, 2016. The Company has evaluated the impact of the adoption of the new guidance on its consolidated financial statements and has determined the Company’s OP is considered a VIE. However, the Company meets the disclosure exemption criteria as the Company is the primary beneficiary of the VIE and the Company’s partnership interest is considered a majority voting interest in a business and the assets of the OP can be used for purposes other than settling its obligations, such as paying distributions. As such, the new guidance did not have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted for financial statements that have not previously been issued. The Company elected to adopt this guidance effective January 1, 2016. As a result, the Company reclassified $1.4 million and $1.7 million of deferred debt issuance costs related to the Company's mortgage notes payable from deferred costs, net to mortgage notes payable in the Company's consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively. As permitted under the revised guidance, the Company elected to not reclassify the deferred debt issuance costs associated with its Credit Facility (as defined in Note 5 — Credit Facility). The deferred debt issuance costs associated with the Credit Facility, net of accumulated amortization, and deferred leasing costs, net of accumulated amortization, are included in deferred costs, net on the Company's accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015.
In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company has adopted the provisions of this guidance beginning January 1, 2016, electing to account for forfeitures when they occur, and determined that there was no impact to the Company’s consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. The Company has not yet selected a transition method and is currently evaluating the impact of the new guidance.

9
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. The Company is currently evaluating the impact of the new guidance.
In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance.
In March 2016, the FASB issued an update on the accounting for derivative contracts. Under the new guidance, the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods therein. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In October 2016, the FASB issued guidance relating to interest held through related parties that are under common control, where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.

10
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 4 — Real Estate Investments
The Company owned 35 properties, which were acquired for investment purposes, as of September 30, 2016. The following table presents the allocation of real estate assets acquired and liabilities assumed during the nine months ended September 30, 2015. There were no real estate assets acquired or liabilities assumed during the nine months ended September 30, 2016:
(Dollar amounts in thousands)
 
Nine Months Ended September 30, 2015
Real estate investments, at cost:
 
 
Land
 
$
116,657

Buildings, fixtures and improvements
 
328,522

Total tangible assets
 
445,179

Acquired intangibles:
 
 
In-place leases
 
62,996

Above-market lease assets
 
9,990

Below-market lease liabilities
 
(36,504
)
Total intangible real estate investments, net
 
36,482

Total assets acquired, net
 
481,661

Mortgage notes payable assumed or used to acquire real estate investments
 
(42,612
)
Premiums on mortgage notes payable assumed
 
(4,839
)
Cash paid for acquired real estate investments
 
$
434,210

Number of properties purchased
 
15

Total acquired intangible lease assets and liabilities consist of the following as of September 30, 2016 and December 31, 2015:
 
 
September 30, 2016
 
December 31, 2015
(In thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
In-place leases
 
$
158,414

 
$
51,434

 
$
106,980

 
$
168,293

 
$
34,298

 
$
133,995

Above-market leases
 
21,663

 
6,630

 
15,033

 
22,583

 
4,547

 
18,036

Below-market ground lease
 
1,578

 
68

 
1,510

 
1,578

 
39

 
1,539

Total acquired intangible lease assets
 
$
181,655

 
$
58,132

 
$
123,523

 
$
192,454

 
$
38,884

 
$
153,570

Intangible liabilities:
 
 

 
 

 
 
 
 
 
 
 
 
Below-market lease liabilities
 
$
83,492

 
$
10,785

 
$
72,707

 
$
84,837

 
$
6,734

 
$
78,103


11
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table presents amortization expense and adjustments to revenue and property operating expense for intangible assets and liabilities for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
In-place leases
 
$
8,393

 
$
8,244

 
$
27,026

 
$
20,358

Total added to depreciation and amortization
 
$
8,393

 
$
8,244

 
$
27,026

 
$
20,358

 
 
 
 
 
 
 
 
 
Above-market lease assets
 
$
(875
)
 
$
(718
)
 
$
(3,005
)
 
$
(1,916
)
Below-market lease liabilities
 
1,812

 
1,980

 
5,483

 
4,378

Total added to rental income
 
$
937

 
$
1,262

 
$
2,478

 
$
2,462

 
 
 
 
 
 
 
 
 
Below-market ground lease asset
 
$
10

 
$
10

 
$
29

 
$
29

Total added to property operating expense
 
$
10

 
$
10

 
$
29

 
$
29

The following table provides the projected amortization expense and adjustments to revenue and property operating expense for intangible assets and liabilities for the next five years:
(In thousands)
 
October 1, 2016 to
December 31,
2016
 
2017
 
2018
 
2019
 
2020
In-place leases
 
$
7,478

 
$
26,558

 
$
20,030

 
$
13,858

 
$
9,423

Total to be added to depreciation and amortization
 
$
7,478

 
$
26,558

 
$
20,030

 
$
13,858

 
$
9,423

 
 
 
 
 
 
 
 
 
 
 
Above-market lease assets
 
$
(862
)
 
$
(3,319
)
 
$
(2,459
)
 
$
(1,733
)
 
$
(1,134
)
Below-market lease liabilities
 
1,627

 
6,261

 
5,719

 
5,190

 
4,701

Total to be added to rental income
 
$
765

 
$
2,942

 
$
3,260

 
$
3,457

 
$
3,567

 
 
 
 
 
 
 
 
 
 
 
Below-market ground lease asset
 
$
10

 
$
39

 
$
39

 
$
39

 
$
39

Total to be added to property operating expense
 
$
10

 
$
39

 
$
39

 
$
39

 
$
39

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
October 1, 2016 to December 31, 2016
 
$
23,658

2017
 
92,972

2018
 
80,703

2019
 
63,924

2020
 
52,382

Thereafter
 
200,493

 
 
$
514,132

No tenant represented 10.0% or greater of consolidated annualized rental income on a straight-line basis for all properties as of September 30, 2016 and 2015.

12
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table lists the states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of September 30, 2016 and 2015:
 
 
September 30,
State
 
2016
 
2015
Texas
 
12.7%
 
12.5%
North Carolina
 
11.7%
 
11.8%
The Company did not own properties in any other state that in total represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of September 30, 2016 and 2015.
Note 5 — Credit Facility
The Company has entered into a credit facility, that provides for aggregate revolving loan borrowings of up to $325.0 million (subject to unencumbered asset pool availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility, subject to certain conditions, as amended (the "Credit Facility"). Through an uncommitted “accordion feature,” the OP, subject to certain conditions, may increase commitments under the Credit Facility to up to $575.0 million. Borrowings under the Credit Facility, along with cash on hand from the Company’s IPO, have been used to finance acquisitions and for general corporate purposes. As of September 30, 2016, the Company's unused borrowing capacity was $12.7 million, based on the asset pool availability governed by the Credit Facility. As of September 30, 2016 and December 31, 2015, the Company had $304.0 million outstanding under the Credit Facility.
Borrowings under the Credit Facility bear interest, at the OP's election, at either (i) the base rate (which is defined in the Credit Facility as the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) LIBOR for a one month interest period plus 1.0%) plus an applicable spread ranging from 0.35% to 1.00%, depending on the Company's consolidated leverage ratio, or (ii) LIBOR for the applicable interest period plus an applicable spread ranging from 1.35% to 2.00%, depending on the Company's consolidated leverage ratio. As of September 30, 2016, the weighted average interest rate on the Credit Facility was 1.87%. The Credit Facility requires the Company to pay an unused fee per annum of 0.25% and 0.15%, if the unused balance exceeds, or is equal to or less than, 50.0% of the available facility, respectively.
The Credit Facility provides for quarterly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period (though no longer than three months) with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Credit Facility will mature on December 2, 2018, provided that the OP, subject to certain conditions, may elect to extend the maturity date one year to December 2, 2019. The Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. The Company, certain of its wholly-owned subsidiaries and certain wholly-owned subsidiaries of the OP guarantee the obligations under the Credit Facility.
The Credit Facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of September 30, 2016, the Company was in compliance with the financial covenants under the Credit Facility.

13
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 6 — Mortgage Notes Payable
The Company's mortgage notes payable as of September 30, 2016 and December 31, 2015 consist of the following:
 
 
 
 
Outstanding Loan Amount as of
 
Effective Interest Rate as of
 
 
 
 
Portfolio
 
Encumbered Properties
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
 
Interest Rate
 
Maturity Date
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
 
 
Liberty Crossing
 
1
 
$
11,000

 
$
11,000

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

 
17,985

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

 
33,802

 
3.92
%
 
3.92
%
 
Fixed
(1) 
Oct. 2018
Shops at Shelby Crossing
 
1
 
23,500

 
23,781

 
4.97
%
 
4.97
%
 
Fixed
 
Mar. 2024
Patton Creek
 
1
 
41,834

 
42,377

 
5.76
%
 
5.76
%
 
Fixed
 
Dec. 2020
Gross mortgage notes payable
 
5
 
128,121

 
128,945

 
4.76
%
(2) 
4.76
%
(2) 
 
 
 
Deferred financing costs, net of accumulated amortization
 
 
 
(1,359
)
 
(1,694
)
 
 
 
 
 
 
 
 
Mortgage notes payable, net of deferred financing costs
 
 
 
$
126,762

 
$
127,251

 
 
 
 
 
 
 
 
_________________________________
(1)
Fixed as a result of entering into a swap agreement.
(2)
Calculated on a weighted-average basis for all mortgages outstanding as of the dates indicated.
As of September 30, 2016 and December 31, 2015, the Company had pledged $216.1 million and $219.5 million, respectively, in real estate investments as collateral for these mortgage notes payable. This collateral is not available to satisfy other debts and obligations until the mortgage notes payable obligations have been satisfied.
The following table summarizes the scheduled aggregate principal payments for the Company's aggregate long-term debt obligations for the five years subsequent to September 30, 2016:
(In thousands)
 
Future Principal
Payments on
Mortgage Notes Payable
 
Future Principal
Payments on
Credit Facility
 
Total Future Principal
Payments on
Long-Term Debt
Obligations
October 1, 2016 to December 31, 2016
 
$
289

 
$
—

 
$
289

2017
 
1,185

 
—

 
1,185

2018
 
64,039

 
304,000

 
368,039

2019
 
1,322

 
—

 
1,322

2020
 
39,609

 
—

 
39,609

Thereafter
 
21,677

 
—

 
21,677

 
 
$
128,121

 
$
304,000

 
$
432,121

The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of September 30, 2016, the Company was in compliance with financial covenants under its mortgage notes payable agreements.

14
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 7 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
Although the Company has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with this derivative utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparty. However, as of September 30, 2016 and December 31, 2015, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivative. As a result, the Company has determined that its derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties.
The following table presents information about the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, 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, 2016
 
 
 
 
 
 
 
 
Interest rate swap
 
$
—

 
$
(567
)
 
$
—

 
$
(567
)
December 31, 2015
 
 
 
 
 
 
 
 
Interest rate swap
 
$
—

 
$
(415
)
 
$
—

 
$
(415
)
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. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2016. There were no transfers into or out of Level 3 of the fair value hierarchy during the nine months ended September 30, 2016.

15
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, prepaid expenses and other assets, accounts payable and accrued expenses and distributions payable approximates their carrying value on the accompanying 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 accompanying consolidated balance sheets are reported in the following table:
 
 
 
 
Carrying Amount at
 
Fair Value at
 
Carrying Amount at
 
Fair Value at
(In thousands)
 
Level
 
September 30, 2016
 
September 30, 2016
 
December 31, 2015
 
December 31, 2015
Gross mortgage notes payable and mortgage premiums, net
 
3
 
$
132,144

 
$
134,834

 
$
133,709

 
$
134,707

Credit Facility
 
3
 
$
304,000

 
$
304,000

 
$
304,000

 
$
304,000

The fair value of mortgage notes payable is estimated by an independent third party using a discounted cash flow analysis, based on management's estimates of market interest rates. Advances under the Credit Facility are considered to be reported at fair value, because its interest rate varies with changes in LIBOR, and there has not been a significant change in the credit risk of the Company or credit markets since origination.
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.
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. During 2016, such derivatives have been used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next 12 months, the Company estimates that an additional $0.3 million will be reclassified from other comprehensive loss as an increase to interest expense.
As of September 30, 2016 and December 31, 2015, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
 
 
September 30, 2016
 
December 31, 2015
Interest Rate Derivative
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest Rate Swap
 
1
 
$
34,098

 
1
 
$
34,098


16
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015:
(In thousands)
 
Balance Sheet Location
 
September 30, 2016
 
December 31, 2015
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest Rate Swap
 
Derivatives, at fair value
 
$
(567
)
 
$
(415
)
The table below details the location in the accompanying consolidated 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, 2016 and 2015.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Amount of gain (loss) recognized in accumulated other comprehensive loss from interest rate derivatives (effective portion)
 
$
118

 
$
(390
)
 
$
(452
)
 
$
(779
)
Amount of loss reclassified from accumulated other comprehensive loss into income as interest expense (effective portion)
 
$
(97
)
 
$
(124
)
 
$
(301
)
 
$
(371
)
Amount of gain (loss) recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing) *
 
$
2

 
$
(2
)
 
$
(1
)
 
$
(3
)
_________________________________
* The Company reclassified approximately $2,000 of other comprehensive income and $1,000 of other comprehensive loss to interest expense during the three and nine months ended September 30, 2016, respectively, and reclassified $2,000 and $3,000 of other comprehensive loss to interest expense during the three and nine months ended September 30, 2015, which represented the ineffective portion of the change in fair value of the derivative.
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, 2016 and December 31, 2015. 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 accompanying consolidated balance sheets:
 
 
 
 
 
 
 
 
Gross Amounts Not Offset on the Balance Sheet
 
 
(In thousands)
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset on the Balance Sheet
 
Net Amounts of Liabilities presented on the Balance Sheet
 
Financial Instruments
 
Cash Collateral Received (Posted)
 
Net Amount
September 30, 2016
 
$
(567
)
 
$
—

 
$
(567
)
 
$
—

 
$
—

 
$
(567
)
December 31, 2015
 
$
(415
)
 
$
—

 
$
(415
)
 
$
—

 
$
—

 
$
(415
)
Derivatives Not Designated as Hedges
Derivatives not designated as hedges are not speculative. These derivatives may be used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements to be classified as hedging instruments. As of September 30, 2016 and December 31, 2015, the Company does not have any hedging instruments that do not qualify for hedge accounting.
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.

17
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

As of September 30, 2016, the fair value of derivatives in a net liability position including accrued interest, but excluding any adjustment for nonperformance risk related to these agreements, was $0.6 million. As of September 30, 2016, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $0.6 million at September 30, 2016.
Note 9 — Common Stock
As of September 30, 2016 and December 31, 2015, the Company had 99.3 million and 96.9 million shares of common stock outstanding, respectively, including unvested restricted shares and shares issued pursuant to the DRIP.
In September 2011, the Company's board of directors authorized, and the Company declared, a distribution payable on a monthly basis to stockholders of record on each day at a rate equal to $0.0017534247 per day, which is equivalent to $0.64 per annum, per share of common stock. Distributions began to accrue on June 8, 2012, the date of the Company's initial property acquisition. In March 2016, the Company’s board of directors ratified the existing distribution amount equivalent to $0.64 per annum, and, for calendar year 2016, affirmed a change to the daily distribution amount to $0.0017486339 per day per share of common stock, effective January 1, 2016, to reflect that 2016 is a leap year. The distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
On March 7, 2016, 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, 2015, which was published on March 11, 2016. The Company intends to publish subsequent valuations of Estimated Per-Share NAV periodically at the discretion of the Company's board of directors, provided that such valuations will be made at least once annually. The Estimated Per-Share NAV does not represent: (1) the amount at which the Company's shares would trade on a national securities exchange, (2) the amount a stockholder would obtain if he or she tried to sell his or her shares or (3) the amount stockholders would receive if the Company liquidated its assets and distributed the proceeds after paying all of its expenses and liabilities. In addition, the Estimated Per-Share NAV does not reflect events subsequent to December 31, 2015 that would have affected the Company's net asset value.
Share Repurchase Program
The Company's board of directors adopted a share repurchase program (as amended and restated, the "SRP"), which enabled stockholders to sell their shares back to the Company after they had held them for at least one year, subject to certain conditions and limitations. Under the SRP, the Company could repurchase shares on a semiannual basis, at each six-month period ending June 30 and December 31.
On June 29, 2016, the board of directors of the Company determined to amend the SRP to provide for one twelve-month repurchase period for calendar year 2016 instead of two semi-annual periods ending June 30 and December 31. Subsequently, on September 6, 2016, in contemplation of the Mergers, the board of directors determined to suspend the SRP, effective September 8, 2016.
Prior to March 11, 2016, the date the Company first published its Estimated Per-Share NAV, the purchase price per share for requests other than for death or disability under the SRP was as follows:
•
after one year from the purchase date — the lower of $9.25 or 92.5% of the amount actually paid for each share;
•
after two years from the purchase date —the lower of $9.50 or 95.0% of the amount actually paid for each share;
•
after three years from the purchase date — the lower of $9.75 or 97.5% of the amount actually paid for each share; and
•
after four years from the purchase date — the lower of $10.00 or 100.0% of the amount actually paid for each share.
In the case of requests for death or disability prior to March 11, 2016, the repurchase price per share was equal to the price paid to acquire the shares from the Company.

18
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Beginning with March 11, 2016 and through the date the SRP was suspended, the repurchase price per share for requests other than for death or disability were 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.
Beginning with March 11, 2016 and through the date the SRP was suspended, in the case of requests for death or disability, the repurchase price per share was equal to the then-current Estimated Per-Share NAV at the time of repurchase.
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. Funding for repurchases pursuant to the SRP for any given semiannual period were limited to proceeds received during that same semiannual period through the issuance of common stock pursuant to the DRIP.
When a stockholder requested repurchases and the repurchases were approved by the Company's board of directors, it reclassified such obligation from equity to a liability based on the settlement value of the obligation. The following table summarizes the share repurchases cumulatively through September 30, 2016:
 
 
Number of Shares Repurchased
 
Weighted-Average Price per Share
Cumulative repurchases as of December 31, 2015
 
1,355,162

 
$
9.48

Nine months ended September 30, 2016
 
2,500

 
10.00

Cumulative repurchases as of September 30, 2016
 
1,357,662

 
$
9.48

During the nine months ended September 30, 2016, 3.1 million shares were requested for repurchase and were not fulfilled. The SRP was suspended effective as of September 8, 2016.
The Company's board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase, change the purchase price for repurchases or otherwise amend the terms of, suspend or terminate the SRP pursuant to any applicable notice requirements under the SRP.
Distribution Reinvestment Plan
Pursuant to the DRIP, stockholders could elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. In contemplation of the Mergers, the Company determined to suspend the DRIP, effective on August 30, 2016. Accordingly, the final issuance of shares of common stock pursuant to the DRIP prior to the suspension occurred in connection with the Company's July 2016 distribution, paid in August 2016. Until March 2016, the Company offered shares pursuant to the DRIP at $9.50 per share. From April 2016 through the date the DRIP was suspended, the Company offered shares pursuant to the DRIP at the then-current Estimated Per-Share NAV. 
No dealer manager fees or selling commissions were paid with respect to shares purchased pursuant to the DRIP. Participants who purchased shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the IPO. Shares issued under the DRIP are recorded to equity in the accompanying consolidated balance sheet in the period distributions are declared. During the nine months ended September 30, 2016, the Company issued 2.4 million shares of common stock with a value of $22.0 million pursuant to the DRIP.

19
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 10 — Commitments and Contingencies
Future Minimum Ground Lease Payments
The Company entered into a ground lease agreement related to a certain acquisition with a leasehold interest arrangement. 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
October 1, 2016 to December 31, 2016
 
$
127

2017
 
514

2018
 
524

2019
 
535

2020
 
546

Thereafter
 
9,376

 
 
$
11,622

Total ground rent expense was $0.4 million and $0.5 million during the nine months ended September 30, 2016 and 2015, respectively. Total ground rent expense was $0.1 million and $0.2 million during the three months ended September 30, 2016 and 2015, respectively. Ground rent expense is included in property operating expense on the consolidated statements of operations and comprehensive loss.
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. On April 29, 2016, the Company filed its proxy statement (the "Proxy Statement") for its 2016 annual meeting of stockholders (the "Annual Meeting"). Among other things, the Proxy Statement contained proposals soliciting the approval of certain amendments to the Company’s charter (the "Charter"). On May 26, 2016, a lawsuit (the "Derivative Litigation") was brought in the United States District Court for the Southern District of New York by Stuart Simpson, individually on behalf of himself and derivatively on behalf of the Company, against the Company's board of directors seeking an injunction of the stockholder vote at the Annual Meeting unless and until the Company addressed certain alleged misstatements or deficiencies in the Proxy Statement relating to certain of the proposals relating to certain of the proposed amendments to the Charter (the "Withdrawn Charter Amendment Proposals"). The Derivative Litigation was filed after disclosure in the press regarding a potential transaction. In light of the continued evaluation of the proposal by the Company's special committee comprised entirely of independent directors (the "Special Committee") and its advisors including discussions between the Special Committee and the special committee formed by AFIN, and taking into account, among other things, the Derivative Litigation, the Company decided to withdraw the Withdrawn Charter Amendment Proposals from the agenda for the Annual Meeting and the Proxy Statement.
On June 8, 2016, the Company's board of directors entered into a memorandum of understanding (the "MOU") to settle the Derivative Litigation. Pursuant to the MOU, the Derivative Litigation was stayed pending approval by the court of a definitive settlement agreement. The parties later agreed to a Stipulation and Agreement of Settlement, under which the Company agreed to pay plaintiff’s counsel $0.8 million. On September 8, 2016, the plaintiff filed an unopposed motion for preliminary approval of the settlement. The court preliminarily approved the settlement by order dated September 13, 2016, and gave it final approval by order dated November 9, 2016. The action has now been dismissed with prejudice. The Company's directors, as defendants in the Derivative Litigation, denied all allegations of wrongdoing.
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 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.

20
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 11 — Related Party Transactions and Arrangements
AR Capital, LLC, the former parent of the Sponsor, and American Realty Capital Retail Special Limited Partnership, LLC, an entity controlled by the Sponsor, owned 200,720 and 242,222 shares of the Company's outstanding common stock as of September 30, 2016 and December 31, 2015, respectively. The Company is the sole general partner and holds substantially all the OP Units. The Advisor, a limited partner in the OP, holds 202 OP Units as of September 30, 2016 and December 31, 2015, which represents a nominal percentage of the aggregate OP ownership. After holding the OP Units for a period of one year, or upon liquidation of the OP or sale of substantially all of the assets of the OP, holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO. American National Stock Transfer, LLC ("ANST"), a subsidiary of the parent company of the Former Dealer Manager, provided other general professional services through January 2016. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was under common control with the Parent of the Sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name, Aretec Group, Inc.
Fees and Participations Paid in Connection With the Operations of the Company
The Advisor is 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 any loan or other investment. The Advisor is also paid for services provided for which it incurs investment-related expenses, or insourced expenses. Such insourced expenses will be fixed initially at, and may not exceed, 0.5% of the contract purchase price and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company pays third party acquisition expenses. Once the proceeds from the IPO have been fully invested, the aggregate amount of acquisition fees and financing coordination fees (as described below) will not exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment, as applicable, for all the assets acquired. In no event will the total of all acquisition fees and acquisition expenses (including any financing coordination fees) payable with respect to the Company's portfolio of investments or reinvestments exceed 4.5% of the contract purchase price to be measured at the close of the acquisition phase or 4.5% of the amount advanced for all loans or other investments.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 1.0% of the amount available or outstanding under such financing, subject to certain limitations.
For periods prior to April 1, 2015, in connection with the asset management services provided by the Advisor, the Company issued to the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted, forfeitable Class B Units. Class B Units are intended to be profit interests which will vest, and no longer be subject to forfeiture, at such time as: (x) the value of the OP's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 7.0% cumulative, pre-tax, non-compounded annual return thereon (the "economic hurdle"); (y) any one of the following occurs: (1) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; (2) a listing of the Company's common stock on a national securities exchange; or (3) another liquidity event; and (z) the Advisor is still providing advisory services to the Company (the "performance condition"). Unvested Class B Units will be forfeited immediately if: (a) the advisory agreement is terminated other than by an affirmative vote of a majority of the Company's independent directors without cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of the Company's independent directors without cause before the economic hurdle has been met.

21
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

When approved by the board of directors, the Class B Units were issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. The number of Class B Units issued in any quarter was equal to the cost of the Company's assets multiplied by 0.1875%, divided by the value of one share of common stock as of the last day of such calendar quarter, which was equal initially to $9.00 (the initial offering price in the IPO minus selling commissions and dealer manager fees). As of September 30, 2016, the Company could not determine the probability of achieving the performance condition. The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. The Advisor receives distributions on the vested and unvested Class B Units it received in connection with its asset management subordinated participation at the same rate as distributions received on the Company's common stock. Such distributions on issued Class B Units are included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss until the performance condition is considered probable to occur. As of September 30, 2016, the Company's board of directors has approved the issuance of and the OP has issued 479,802 Class B Units to the Advisor in connection with this arrangement on a cumulative basis.
Effective April 1, 2015:
i.
for any period commencing on or after April 1, 2015, the Company pays the Advisor or its assignees as compensation for services rendered in connection with the management of the Company’s assets an Asset Management Fee (as defined in the advisory agreement) equal to 0.0625% per month of the Cost of Assets (as defined in the advisory agreement) or, once the Company begins disclosing Estimated Per-Share NAV in periodic or current reports filed with the SEC, 0.0625% of the lower of the Cost of Assets and the fair market value of the Company's assets as reported in the applicable periodic or current report filed with the SEC disclosing Estimated Per-Share NAV;
ii.
such Asset Management Fee is payable monthly in arrears in cash, in shares of common stock, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor; and
iii.
the Company shall not cause the OP to issue any Class B Units in respect of periods subsequent to March 31, 2015.
In connection with property management and leasing services, unless the Company contracts with a third party, the Company will pay to an affiliate of the Advisor a property management fee of 2.0% of gross revenues from the Company's stand-alone single-tenant net leased properties which are not part of a shopping center and 4.0% of gross revenues from all other types of properties. The Company will also reimburse the affiliate for property level expenses. If the Company contracts directly with third parties for such services, the Company will pay them customary market fees. In connection with any construction, renovation or tenant finish-out on any property, the Company will pay the Advisor 6.0% of the hard costs of the construction, renovation and/or tenant finish-out, as applicable.
In connection with the Merger Agreement, the Advisor, as the Company's property manager and leasing agent, assigned the Company's existing property management agreement and existing leasing agreement to American Finance Properties, LLC, AFIN's property manager, effective as of and subject to and contingent upon the closing of the Mergers.
The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that it will not reimburse the Advisor for any amount by which the Company's operating expenses (including the asset management fee, as applicable) at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets, or (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash expenses and excluding any gain from the sale of assets for that period, unless the Company's independent directors determine that such excess was justified based on unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the Advisor in subsequent periods. Additionally, the Company reimburses the Advisor for personnel costs in connection with operational and administrative services; however, the Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions. The Company will not reimburse the Advisor for salaries and benefits paid to the Company's executive officers. During the three and nine months ended September 30, 2016, the Company incurred $0.6 million and $1.6 million, respectively, of reimbursements from the Advisor for providing operational and administrative services. During the three and nine months ended September 30, 2015, the Company incurred $0.3 million of reimbursements from the Advisor for providing operational and administrative services. These reimbursements are included in general and administrative expense on the consolidated statements of operations and comprehensive loss.

22
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flows from operations that would have been paid to the Advisor may be available to pay distributions. The fees that may be 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 and/or property operating costs. No general and administrative costs or property operating costs of the Company were absorbed by the Advisor during the three and nine months ended September 30, 2016 and 2015.
The following table details amounts incurred during the three and nine months ended September 30, 2016 and 2015 and amounts contractually due as of September 30, 2016 and December 31, 2015 in connection with the operations related services described above. Amounts below are inclusive of fees and other expense reimbursements incurred from and due to the Advisor that are passed through and ultimately paid to Lincoln as a result of the Advisor's exclusive service agreement with Lincoln:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Payable as of
(In thousands)
 
2016
 
2015
 
2016
 
2015
 
September 30,
2016
 
December 31,
2015
One-time fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees and related cost reimbursements
 
$
—

 
$
4,150

 
$
—

 
$
7,188

 
$
—

 
$
—

Financing coordination fees
 
—

 
426

 
—

 
426

 
—

 
—

Ongoing fees:
 
 
 
 
 
 
 
 
 
 
 
 
Asset management fees
 
2,251

 
1,792

 
6,746

 
3,249

 
—

 
—

Property management and leasing fees
 
1,809

 
1,426

 
4,875

 
3,604

 
577

 
452

Professional fees and other reimbursements
 
673

 
1,146

 
2,056

 
3,062

 
310

 
376

Distributions on Class B Units
 
74

 
74

 
221

 
169

 
—

 
—

Total related party operation fees and reimbursements
 
$
4,807

 
$
9,014

 
$
13,898

 
$
17,698

 
$
887

 
$
828

The predecessor to the Parent of the Sponsor was a party to a services agreement with RCS Advisory Services, LLC, a subsidiary of the parent company of the Former Dealer Manager (“RCS Advisory”), pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by AR Global with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to AR Global instructed RCS Advisory to stop providing such services in November 2015, and no services have since been provided by RCS Advisory.
The Company was also party to a transfer agency agreement with ANST, pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end Internal Revenue Service ("IRS") reporting and other services), and supervisory services overseeing the transfer agency services performed by DST Systems, Inc., a third-party transfer agent ("DST"). The Parent of the Sponsor received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. On February 26, 2016, the Company entered into a definitive agreement with DST to  provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services).
Fees and Participations Paid in Connection with Liquidation or Listing
 The Company will pay a brokerage commission to the Advisor or its affiliates on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and one-half of the total brokerage commission paid, if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in light of the size, type and location of the property, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such amounts were incurred during the three and nine months ended September 30, 2016 and 2015.

23
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The Advisor is entitled to receive a subordinated participation in the net sales proceeds of the sale of real estate assets of 15.0% of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 7.0% cumulative, pre-tax non-compounded annual return on the capital contributed by investors. The Company cannot assure that it will provide this 7.0% annual return and the Advisor will not be entitled to the subordinated participation in net sale proceeds unless the Company's investors have received a 7.0% cumulative non-compounded annual return on their capital contributions plus the 100.0% repayment of capital committed by such investors. No such amounts were incurred during the three and nine months ended September 30, 2016 and 2015.
If the Company's shares of common stock are listed on a national securities exchange, the Advisor will be entitled to receive a subordinated incentive listing distribution from the OP of 15.0% of the amount by which the Company's market value plus distributions paid prior to listing exceeds the aggregate capital contributed by investors plus an amount equal to a 7.0% cumulative, pre-tax non-compounded annual return to investors.  The Company cannot assure that it will provide this 7.0% annual return and the Advisor will not be entitled to the subordinated incentive listing distribution unless investors have received a 7.0% cumulative, pre-tax non-compounded annual return on their capital contributions plus the 100.0% repayment of capital committed by such investors. No such distribution was incurred during the three and nine months ended September 30, 2016 and 2015. Neither the Advisor nor any of its affiliates can earn both the subordinated participation in the net sales proceeds and the subordinated listing distribution.
Upon termination or non-renewal of the advisory agreement, the Advisor will be entitled to receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company's market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 7.0% cumulative, pre-tax non-compounded return to investors. The Advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.
Upon a merger pursuant to which the Company's stockholders receive cash or the securities of a listed company, as full or partial consideration, or an asset sale, the Advisor will be entitled to receive, in redemption of the Advisor's interest in the OP, distribution from the OP equal to 15.0% of the amount by which the sum of the Company's market value plus the distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 7.0% cumulative, pre-tax non-compounded return to investors. Upon the closing of the Mergers, if the Mergers are consummated, the Advisor will receive a cash payment, to be determined in accordance with the foregoing.
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
Stock Option Plan
The Company has a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to the Company's independent directors, officers, advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for stock options granted to the independent directors under the Plan will be equal to the fair market value, as defined in the Plan, of a share on the last business day preceding the annual meeting of stockholders. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. As of September 30, 2016 and December 31, 2015, no stock options were issued under the Plan. Pursuant to the Merger Agreement, the board of directors terminated the Plan, effective as of and subject to and contingent upon the closing of the Merger.

24
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further approval by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholders' meeting. Restricted stock issued to independent directors will vest over a five-year period following the date of grant in increments of 20.0% per annum. However, pursuant to the Merger Agreement, if the Merger is consummated, any issued and outstanding restricted shares of the Company's common stock will fully vest immediately prior to the Effective Time, and the RSP will terminate, effective as of and subject to and contingent upon the closing of the Merger. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of shares of common stock granted under the RSP may not exceed 5.0% of the Company's outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. For restricted share awards granted prior to 2015, such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. Restricted share awards granted during or after 2015 provide for accelerated vesting of the portion of the unvested shares scheduled to vest in the year of the recipient's voluntary termination or the failure to be re-elected to the board. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock are subject to the same restrictions as the underlying restricted shares.
The following table reflects restricted share award activity for the nine months ended September 30, 2016:
 
Number of Shares of Restricted Stock
 
Weighted-Average Issue Price Per Share
Unvested, December 31, 2015
11,400

 
$
9.00

Granted
6,000

 
9.00

Vested
(1,800
)
 
9.00

Unvested, September 30, 2016
15,600

 
$
9.00

As of September 30, 2016, the Company had $0.1 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company's RSP. That cost is expected to be recognized over a weighted-average period of 3.0 years.
The fair value of the restricted shares is being expensed in accordance with the service period required. Compensation expense related to restricted stock was approximately $19,000 and $23,000 during the three months ended September 30, 2016 and 2015, respectively. Compensation expense related to restricted stock was approximately $34,000 and $42,000 during the nine months ended September 30, 2016 and 2015, respectively. Compensation expense related to restricted stock is included in general and administrative expense on the accompanying consolidated statements of operations and comprehensive loss.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors, at each director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. There were no shares of common stock issued to directors in lieu of cash compensation during the nine months ended September 30, 2016 and 2015.

25
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 14 — Net Loss Per Share
 The following is a summary of the basic and diluted net loss per share computation for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except share and per share amounts)
 
2016
 
2015
 
2016
 
2015
Basic and diluted net loss
 
$
(2,986
)
 
$
(6,108
)
 
$
(7,179
)
 
$
(1,063
)
Basic and diluted weighted-average shares outstanding
 
99,152,942

 
96,400,048

 
98,323,350

 
95,439,305

Basic and diluted net loss per share
 
$
(0.03
)
 
$
(0.06
)
 
$
(0.07
)
 
$
(0.01
)
The Company had the following common share equivalents on a weighted-average basis that were excluded from the calculation of diluted net loss per share as their effect would have been antidilutive for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Unvested restricted stock (1)
 
13,774

 
17,217

 
12,033

 
15,596

OP Units
 
202

 
202

 
202

 
202

Class B Units (2)
 
479,802

 
479,802

 
479,802

 
364,049

Total common stock equivalents
 
493,778

 
497,221

 
492,037

 
379,847

_____________________
(1)
Weighted-average number of shares of unvested restricted stock outstanding for the periods presented. There were 15,600 and 18,000 shares of unvested restricted stock outstanding as of September 30, 2016 and 2015, respectively.
(2)
Weighted-average number of issued and unvested Class B Units outstanding for the periods presented. As of September 30, 2016 and 2015, the Company's board of directors had approved the issuance of 479,802 Class B Units.
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.

26

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 consolidated financial statements of American Realty Capital — Retail Centers of America, Inc. and the notes thereto. As used herein, the terms the "Company," "we," "our" and "us" refer to American Realty Capital — Retail Centers of America, Inc., a Maryland corporation, including, as required by context, American Realty Capital Retail Operating Partnership, L.P. (the "OP"), a Delaware limited partnership, and its wholly-owned subsidiaries. The Company is externally managed by American Realty Capital Retail Advisor, LLC (our "Advisor"), a Delaware limited liability company. Capitalized terms used herein but not otherwise defined have the meanings ascribed to those terms in "Part I — Financial Information" within the notes to the accompanying consolidated financial statements.
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 Realty Capital — Retail Centers of America, Inc. (the "Company," "we," "our" or "us") 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:
•
We may not be able to consummate the Merger (as defined below) with American Finance Trust, Inc. ("AFIN") within the expected time period, or at all, due to various reasons, including, but not limited to, the failure to obtain approval by our stockholders and the stockholders of AFIN.
•
We and AFIN expect to incur substantial expenses related to the Merger, whether or not consummated, and may be unable to realize the anticipated benefits of the Merger or do so within the anticipated time frame.
•
All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in our Advisor, or other entities affiliated with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global" or the "Parent of our Sponsor"). As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including conflicts created by our Advisor's and its affiliates' compensation arrangements with us and other investment programs advised by affiliates of the Parent of our Sponsor and conflicts in allocating time among these investment programs and us, which could negatively impact our operating results.
•
Lincoln Retail REIT Services, LLC, a Delaware limited liability company ("Lincoln") and its affiliates have to allocate time between providing real estate-related services to our Advisor and other programs and activities in which they are presently involved or may be involved in the future.
•
We depend on tenants for revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants.
•
Our tenants may not achieve the rental rate incentives in their lease agreements with us, which may impact our results of operations.
•
Increases in interest rates could increase the amount of our interest payments associated with our credit facility, as amended, (our "Credit Facility") and limit our ability to pay distributions.
•
We are permitted to pay distributions of unlimited amounts from any source. There are no established limits on the amount of borrowings that we may use to fund distribution payments.
•
We have not generated, and in the future may not generate, operating cash flows sufficient to cover 100% of our distributions, and, as such, to maintain the level of distributions, we may need to fund some portion of distributions from borrowings, which may be at unfavorable rates, or depend on our Advisor to waive reimbursement of certain expenses or fees. There is no assurance that our Advisor will waive reimbursement of expenses or fees.
•
We may be unable to maintain cash distributions at the current rate or increase distributions over time.
•
We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates.
•
No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.
•
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.

27

•
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 the cash available for distributions.
•
We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus be subject to regulation under the Investment Company Act.
Overview
We have acquired and own anchored, stabilized core retail properties, including power centers and lifestyle centers, which are located in the United States and were at least 80.0% leased at the time of acquisition. We purchased our first property and commenced active operations in June 2012. As of September 30, 2016, we owned 35 properties with an aggregate purchase price of $1.2 billion, comprised of 7.5 million rentable square feet, which were 92.9% leased.
Incorporated on July 29, 2010, 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, 2012. Substantially all of our business is conducted through American Realty Capital Retail Operating Partnership, L.P. (the "OP"), a Delaware limited partnership, and its wholly-owned subsidiaries.
On March 17, 2011, we commenced our initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts. The IPO closed on September 12, 2014. On September 22, 2014, we registered an additional 25.0 million shares of common stock to be used under the distribution reinvestment plan (the "DRIP") pursuant to a registration statement on Form S-3 (File No. 333-198864).
As of September 30, 2016, we had 99.3 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from the IPO and the DRIP, net of share repurchases, of $983.8 million.
On March 7, 2016, our board of directors approved an estimated net asset value per share of our common stock ("Estimated Per-Share NAV) equal to $9.00 as of December 31, 2015, which was published on March 11, 2016. We intend to publish subsequent valuations of Estimated Per-Share NAV periodically at the discretion of our board of directors, provided that such valuations will be made at least once annually.
We have no employees. We have retained the Advisor to manage our affairs on a day-to-day basis. The Advisor has entered into a service agreement with an independent third party, Lincoln, pursuant to which Lincoln provides, subject to the Advisor's oversight, real estate-related services, including locating investments, negotiating financing, and providing property-level asset management services, property management services, leasing and construction oversight services and disposition services, as needed. The Advisor has passed through and will continue to pass through to Lincoln a portion of the fees and/or other expense reimbursements payable to the Advisor for the performance of real estate-related services. The Advisor is under common control with the Parent of the Sponsor, as a result of which it is a related party of ours.
Pending Merger Agreement
On September 6, 2016, the Company and the OP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AFIN, American Finance Operating Partnership, L.P. (the “AFIN OP”) and Genie Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of the Parent (“Merger Sub”). The Merger Agreement provides for (a) the merger of the Company with and into the Merger Sub (the “Merger”), with the Merger Sub surviving as a wholly owned subsidiary of AFIN and (b) the merger of the OP with and into the AFIN OP, with the AFIN OP as the surviving entity (the “Partnership Merger”, and together with the Merger, the “Mergers”).
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Mergers (the "Effective Time"), each outstanding share of our common stock, $0.01 par value per share ("Company Common Stock") (including any restricted shares of Company Common Stock and fractional shares), will be converted into the right to receive (x) a number of shares of common stock of AFIN, $0.01 par value per share ("AFIN Common Stock") equal to 0.385 shares of AFIN Common Stock (the "Stock Consideration") and (y) cash from AFIN in an amount equal to $0.95 per share (the "Cash Consideration," and together with the Stock Consideration, the "Merger Consideration").

28

In addition, at the Effective Time, if the Mergers are consummated, (i) each unit of partnership interest of the OP designated as an OP Unit issued and outstanding immediately prior to the Effective Time (other than those held by us as described in clause (ii) below) will automatically be converted into 0.424 validly issued units of limited partnership interest of the AFIN OP (the “Partnership Merger Consideration”); (ii) each unit of partnership interest of the OP designated as either an OP Unit or a GP Unit held by us and issued and outstanding immediately prior to the Effective Time will automatically be converted into 0.385 validly issued units of limited partnership interest of the AFIN OP; (iii) each unit of partnership interest of the OP designated as a Class B Unit held by the Advisor and Lincoln issued and outstanding immediately prior to the Effective Time will be 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 the Advisor, the special limited partner of the OP (the “SLP”), in the OP will be redeemed for a cash payment, to be determined in accordance with the existing terms of the OP’s agreement of limited partnership.
Concurrently with the execution of the Merger Agreement, we and the OP entered into a side letter agreement with the Advisor and AFIN, providing for, among other things, termination of the advisory agreement among us, the OP and the Advisor, subject to, and at, the date that the Merger becomes effective (the "Termination Agreement"). The Termination Agreement will, pursuant to its terms, automatically terminate and be of no further force or effect if the Merger Agreement is terminated in accordance with its terms.
The Merger Agreement provided us with a go-shop period, during which time we had the right to actively solicit superior proposals from third parties for 45 days from the date of the Merger Agreement (the "Go-Shop Period"). The Go-Shop Period ended on October 21, 2016 with no alternative acquisition proposals provided by third parties.
In the event that the Company or AFIN terminates the Merger Agreement under specified circumstances, the Company or AFIN, as applicable, are required to pay a termination fee of $25.6 million.
The Company and AFIN each are sponsored, directly or indirectly, by AR Global. AR Global and its affiliates provide services to us and AFIN pursuant to written advisory agreements.
The completion of the Mergers is subject to the approval of our and AFIN's stockholders as well as satisfaction of customary closing conditions. A joint preliminary proxy statement/prospectus describing the proposed Mergers was filed on Form S-4 with the Securities and Exchange Commission (the “SEC”) in October 2016. If approved, the Mergers are expected to close in the first quarter of 2017. However, as of the filing of this Quarterly Report on Form 10-Q, the approval of the Mergers has not yet occurred, and we cannot assure that the Mergers will be completed based on the terms of the Merger Agreement or at all.
Significant Accounting Estimates and Critical Accounting Policies
 Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Because many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rents receivable that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease is executed. We defer the revenue related to lease payments received from tenants in advance of their due dates.
We own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, we defer the recognition of contingent rental income until the specified target that triggers the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. Contingent rental income is included in rental income on the consolidated statements of operations and comprehensive loss.
We continually review receivables related to rent and unbilled rents receivable and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. If a receivable is deemed uncollectible, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations and comprehensive loss.

29

Cost recoveries from tenants are included in operating expense reimbursements in our consolidated statements of operations and comprehensive loss in the period the related costs are incurred, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates.
In allocating non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations prepared by independent valuation firms. We also consider information and other factors including: market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental rates, tenant credit profile, store profitability and the importance of the location of the real estate to the operations of the tenant’s business.
Real estate investments that are intended to be sold are designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on our operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all applicable periods. As of December 31, 2015, we had $0.5 million of land held for sale. There were no assets held for sale as of September 30, 2016.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.

30

Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Recently Adopted Accounting Pronouncements
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are VIEs or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. We elected to adopt this guidance effective January 1, 2016. We have evaluated the impact of the adoption of the new guidance on our consolidated financial statements and have determined the OP is considered a VIE. However, we meet the disclosure exemption criteria as we are the primary beneficiary of the VIE and our partnership interest is considered a majority voting interest in a business and the assets of the OP can be used for purposes other than settling its obligations, such as paying distributions. As such, the new guidance did not have a material impact on our consolidated financial statements.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We elected to adopt this guidance effective January 1, 2016. As a result, we reclassified $1.4 million and $1.7 million of deferred issuance costs related to our mortgage notes payable from deferred costs, net to mortgage notes payable in our consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively. As permitted under the revised guidance, we elected to not reclassify the deferred debt issuance costs associated with our Credit Facility. The deferred debt issuance costs associated with the Credit Facility, net of accumulated amortization, and deferred leasing costs, net of accumulated amortization, are included in deferred costs, net on our accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015.
In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We have adopted the provisions of this guidance beginning January 1, 2016, electing to account for forfeitures when they occur, and determined that there was no impact to our consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. We have not yet selected a transition method and are currently evaluating the impact of the new guidance.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. We are currently evaluating the impact of the new guidance.

31

In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance.
In March 2016, the FASB issued an update on the accounting for derivative contracts. Under the new guidance, the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods therein. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of this new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In October 2016, the FASB issued guidance relating to interest held through related parties that are under common control, where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
Properties
As of September 30, 2016, we owned 35 properties, comprised of 7.5 million rentable square feet that were 92.9% leased with a weighted-average remaining lease term of 5.2 years.

32

Our portfolio is comprised of the following real estate properties as of September 30, 2016:
Property
 
Acquisition Date
 
Property Type
 
Rentable
Square
Feet
 
Percentage Leased
 
Remaining Lease
Term (1)
 
 
 
 
 
 
 
 
 
 
 
Liberty Crossing
 
Jun. 2012
 
Power Center
 
105,779

 
94.0%
 
2.8
San Pedro Crossing
 
Dec. 2012
 
Power Center
 
201,965

 
96.7%
 
3.8
Tiffany Springs MarketCenter
 
Sep. 2013
 
Power Center
 
264,952

 
76.1%
 
5.3
The Streets of West Chester
 
Apr. 2014
 
Lifestyle Center
 
236,842

 
92.1%
 
5.1
Prairie Towne Center
 
Jun. 2014
 
Power Center
 
289,277

 
95.3%
 
7.6
Southway Shopping Center
 
Jun. 2014
 
Power Center
 
181,809

 
99.3%
 
3.8
Stirling Slidell Centre
 
Aug. 2014
 
Power Center
 
134,276

 
77.2%
 
3.8
Northwoods Marketplace
 
Aug. 2014
 
Power Center
 
236,078

 
95.9%
 
3.5
Centennial Plaza
 
Aug. 2014
 
Power Center
 
233,797

 
100.0%
 
2.7
Northlake Commons
 
Sep. 2014
 
Lifestyle Center
 
109,112

 
93.1%
 
4.5
Shops at Shelby Crossing
 
Sep. 2014
 
Power Center
 
236,107

 
97.0%
 
2.5
Shoppes of West Melbourne
 
Sep. 2014
 
Power Center
 
144,484

 
95.8%
 
4.6
The Centrum
 
Sep. 2014
 
Power Center
 
270,747

 
93.5%
 
3.1
Shoppes at Wyomissing
 
Oct. 2014
 
Lifestyle Center
 
103,064

 
100.0%
 
3.0
Southroads Shopping Center
 
Oct. 2014
 
Power Center
 
436,936

 
71.7%
 
4.8
Parkside Shopping Center
 
Nov. 2014 & Dec. 2015 (2)
 
Power Center
 
181,612

 
93.1%
 
6.2
West Lake Crossing
 
Nov. 2014
 
Power Center
 
75,928

 
90.2%
 
4.6
Colonial Landing
 
Dec. 2014
 
Power Center
 
263,559

 
81.6%
 
4.9
The Shops at West End
 
Dec. 2014
 
Lifestyle Center
 
381,831

 
82.5%
 
8.8
Township Marketplace
 
Dec. 2014
 
Power Center
 
298,630

 
96.2%
 
2.7
Cross Pointe Centre
 
Mar. 2015
 
Power Center
 
226,089

 
100.0%
 
10.4
Towne Center Plaza
 
Apr. 2015
 
Power Center
 
94,096

 
100.0%
 
6.3
Harlingen Corners
 
May 2015
 
Power Center
 
227,772

 
96.3%
 
5.5
Bison Hollow
 
Jun. 2015
 
Power Center
 
134,798

 
100.0%
 
6.1
Pine Ridge Plaza
 
Jun. 2015
 
Power Center
 
239,492

 
95.2%
 
3.1
Village at Quail Springs
 
Jun. 2015
 
Power Center
 
100,404

 
100.0%
 
2.5
Jefferson Commons
 
Jun. 2015
 
Power Center
 
205,918

 
93.4%
 
9.3
Northpark Center
 
Jun. 2015
 
Power Center
 
318,327

 
99.2%
 
4.1
Anderson Station
 
Jul. 2015
 
Power Center
 
243,550

 
98.4%
 
2.7
Patton Creek
 
Aug. 2015
 
Power Center
 
491,294

 
94.5%
 
4.9
North Lakeland Plaza
 
Sep. 2015
 
Power Center
 
171,397

 
100.0%
 
4.0
Riverbend Marketplace
 
Sep. 2015
 
Power Center
 
142,617

 
97.2%
 
6.5
Montecito Crossing
 
Sep. 2015
 
Power Center
 
179,721

 
97.4%
 
5.1
Best on the Boulevard
 
Sep. 2015
 
Power Center
 
204,568

 
100.0%
 
5.3
Shops at RiverGate South
 
Sep. 2015
 
Power Center
 
140,703

 
97.8%
 
9.0
Portfolio, September 30, 2016
 
 
 
 
 
7,507,531

 
92.9%
 
5.2
_____________________
(1)
Remaining lease term in years as of September 30, 2016, calculated on a weighted-average basis.
(2)
Parkside Shopping Center was purchased in November 2014 with two additional parcels purchased in December 2015.
Results of Operations
 We purchased our first property and commenced active operations in June 2012. As of September 30, 2016, we owned 35 properties, which were acquired for investment purposes, with an aggregate base purchase price of $1.2 billion, comprised of 7.5 million rentable square feet that were 92.9% leased.

33

Comparison of the Three Months Ended September 30, 2016 to Three Months Ended September 30, 2015
As of July 1, 2015, we owned 28 properties (our "Three Month Same Store") with an aggregate base purchase price of $903.7 million, comprised of 5.8 million rentable square feet. We have acquired seven properties and two additional parcels at an existing property since July 1, 2015 for an aggregate base purchase price of $283.1 million, comprised of 1.7 million rentable square feet (our "Acquisitions Since July 1, 2015"). Accordingly, our results of operations for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 reflect significant increases in most categories.
The following table summarizes our leasing activity during the three months ended September 30, 2016:
 
 
Three Months Ended September 30, 2016
 
 
 
Number of Leases
 
Rentable Square Feet
 
Annualized Straight-Line Rental Income (SLR)
 
Average Annualized SLR Per Rentable Square Foot
 
 
 
 
 
 
 
(in thousands)
 
 
 
New leases (1)
 
8

 
70,241

 
$
1,185

 
$
16.87

 
Lease renewals (1)
 
19

 
128,207

 
$
1,667

 
$
13.00

(2) 
Lease terminations
 
5

 
18,051

 
$
312

 
$
17.28

 
_________________________________
(1)
New leases reflect leases in which a new tenant took possession of the space during the three months ended September 30, 2016. Lease renewals reflect leases in which an existing tenant executed terms to extend the life of the lease during the three months ended September 30, 2016. The one-time cost of entering into new leases and executing lease renewals was $42.88 per rentable square foot and $2.00 per rentable square foot, respectively, including leasing commissions, tenant improvement costs and tenant concessions.
(2)
Prior to the lease renewals, the average annualized rental income on a straight-line basis for these leases was $11.63 per rentable square foot.
Rental Income
Rental income increased $3.9 million to $25.4 million for the three months ended September 30, 2016, compared to $21.5 million for the three months ended September 30, 2015. This increase was primarily due to our Acquisitions Since July 1, 2015, which resulted in an increase in rental income of $4.4 million for the three months ended September 30, 2016. This increase in rental income was partially offset by a decrease in our Three Month Same Store rental income of $0.5 million, primarily due to $0.3 million of below-market lease liabilities written off at Southway Shopping Center and $0.2 million of below-market lease liabilities written off at The Shops at West End during the three months ended September 30, 2015, due to tenant turnover. No such write-offs occurred at those properties during the three months ended September 30, 2016.
Operating Expense Reimbursements
Operating expense reimbursements from tenants increased $1.2 million to $7.6 million for the three months ended September 30, 2016, compared to $6.3 million for the three months ended September 30, 2015. This increase in operating expense reimbursements was primarily due to our Acquisitions Since July 1, 2015, which resulted in a $1.0 million increase for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. In addition, Three Month Same Store operating expense reimbursements increased $0.2 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015, as a result of the increase in Three Month Same Store property operating expenses. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent.
Asset Management Fees to Related Party
Asset management fees to related party increased $0.5 million to $2.3 million for the three months ended September 30, 2016, compared to $1.8 million for the three months ended September 30, 2015. This increase is due to our Acquisitions Since July 1, 2015, as the amount of asset management fees to related party is based on the cost of our assets. See Note 11 — Related Party Transactions and Arrangements for more information on fees payable to our Advisor pursuant to the advisory agreement.
Property Operating Expenses
Property operating expenses increased $1.6 million to $10.6 million for the three months ended September 30, 2016, compared to $9.0 million for the three months ended September 30, 2015. This increase in property operating expenses was primarily due to our Acquisitions Since July 1, 2015, which resulted in a $1.3 million increase for the three months ended September 30, 2016. Additionally, our Three Month Same Store property operating expenses increased $0.3 million, primarily driven by an increase in real estate taxes. Property operating expenses primarily relate to the costs associated with maintaining our properties, including property management fees incurred from Lincoln, real estate taxes, utilities, and repairs and maintenance.

34

Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses decreased $3.5 million to $2.1 million for the three months ended September 30, 2016, compared to $5.6 million for the three months ended September 30, 2015. Acquisition and transaction related expenses for the three months ended September 30, 2016 were primarily due to costs incurred in connection with the pending Mergers. These costs include fees to the special committee of the board of directors for their review of the Mergers, as well as fees to the special committee's financial advisor and legal counsel. Acquisition and transaction related expenses for the three months ended September 30, 2015 primarily related to our acquisition of seven properties with an aggregate base purchase price of $279.6 million.
General and Administrative Expenses
General and administrative expenses increased $1.0 million to $2.9 million for the three months ended September 30, 2016, compared to $1.9 million for the three months ended September 30, 2015. This increase primarily related to our accrual of $0.8 million for settlement of a lawsuit during the three months ended September 30, 2016. See Note 10 — Commitments and Contingencies for more information related to the lawsuit.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $1.5 million to $15.1 million for the three months ended September 30, 2016, compared to $13.6 million for the three months ended September 30, 2015. This increase was primarily attributable to $2.7 million of additional depreciation and amortization expense from our Acquisitions Since July 1, 2015. This increase was partially offset by a decrease in our Three Month Same Store depreciation and amortization expense of $1.2 million, which is primarily due to accelerated amortization of certain in-place lease assets associated with tenant turnover during the three months ended September 30, 2015. The base 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 $1.1 million to $3.2 million for the three months ended September 30, 2016, compared to $2.1 million for the three months ended September 30, 2015. This increase primarily related to an increase in our weighted-average mortgage notes payable outstanding as well our weighted-average borrowings on our Credit Facility. The following table presents the weighted-average balances of our fixed-rate debt and Credit Facility borrowings outstanding, associated interest expense and corresponding weighted-average interest rates for the three months ended September 30, 2016 and 2015, as well as the amortization of deferred financing costs and mortgage premiums for such periods:
 
 
Three Months Ended September 30,
 
 
2016
 
2015
(Dollar amounts in thousands)
 
Weighted-Average Carrying Value
 
Interest Expense
 
Weighted-Average Interest Rate
 
Weighted-Average Carrying Value
 
Interest Expense
 
Weighted-Average Interest Rate
Mortgage Notes Payable
 
$
128,257

 
$
1,536

 
4.76
%
 
$
107,968

 
$
1,167

 
4.57
%
Credit Facility
 
$
304,000

 
1,442

 
1.84
%
 
$
153,000

 
594

 
1.54
%
Amortization of deferred financing costs
 
 
 
510

 
 
 
 
 
486

 
 
Amortization of mortgage premiums
 
 
 
(248
)
 
 
 
 
 
(99
)
 
 
Interest Expense
 
 
 
$
3,240

 
 
 
 
 
$
2,148

 
 
Gain on Involuntary Conversion
During the three months ended September 30, 2016, we recognized a gain on involuntary conversion of $0.2 million arising from insurance proceeds related to roof damage sustained at San Pedro Crossing as a result of a hailstorm. The gain recognized was measured as the difference between the insurance proceeds allocated to replacing the affected roofs and the net book value of the roofs that will be replaced.
Comparison of the Nine Months Ended September 30, 2016 to the Nine Months Ended September 30, 2015
As of January 1, 2015, we owned 20 properties (our "Nine Month Same Store") with an aggregate base purchase price of $715.6 million, comprised of 4.3 million rentable square feet. We have acquired 15 properties and two additional parcels at an existing property since January 1, 2015 for an aggregate base purchase price of $485.6 million, comprised of 3.2 million rentable square feet (our "Acquisitions Since January 1, 2015"). Accordingly, our results of operations for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 reflect significant increases in most categories.

35

The following table summarizes our leasing activity during the nine months ended September 30, 2016:
 
 
Nine Months Ended September 30, 2016
 
 
 
Number of Leases
 
Rentable Square Feet
 
Annualized Straight-Line Rental Income (SLR)
 
Average Annualized SLR Per Rentable Square Foot
 
 
 
 
 
 
 
(in thousands)
 
 
 
New leases (1)
 
16

 
90,084

 
$
1,579

 
$
17.53

 
Lease renewals (1)
 
51

 
331,978

 
$
4,915

 
$
14.81

(2) 
Lease terminations
 
18

 
128,405

 
$
1,347

 
$
10.49

 
_________________________________
(1)
New leases reflect leases in which a new tenant took possession of the space during the nine months ended September 30, 2016. Lease renewals reflect leases in which an existing tenant executed terms to extend the life of the lease during the nine months ended September 30, 2016. The one-time cost of entering into new leases and executing lease renewals was $37.80 per rentable square foot and $1.82 per rentable square foot, respectively, including leasing commissions, tenant improvement costs and tenant concessions.
(2)
Prior to the lease renewals, the average annualized rental income on a straight-line basis for these leases was $13.60 per rentable square foot.
Rental Income
Rental income increased $21.1 million to $76.5 million for the nine months ended September 30, 2016, compared to $55.4 million for the nine months ended September 30, 2015. This increase in rental income was primarily due to our Acquisitions Since January 1, 2015, which resulted in an increase in rental income of $22.8 million for the nine months ended September 30, 2016. This increase in rental income was partially offset by a decrease in our Nine Month Same Store rental income of $1.7 million, primarily due to certain lease terminations at The Shops at West End and Tiffany Springs MarketCenter. The percentage of rentable square feet leased at The Shops at West End decreased from 92.6% as of January 1, 2015 to 82.5% as of September 30, 2016. The percentage of rentable square feet leased at Tiffany Springs MarketCenter decreased from 89.4% as of January 1, 2015 to 76.1% as of September 30, 2016.
Operating Expense Reimbursements
Operating expense reimbursements from tenants increased $6.4 million to $22.7 million for the nine months ended September 30, 2016, compared to $16.3 million for the nine months ended September 30, 2015. This increase in operating expense reimbursements was primarily due to our Acquisitions Since January 1, 2015, which resulted in a $5.7 million increase for the nine months ended September 30, 2016. In addition, Nine Month Same Store operating expense reimbursements increased $0.7 million for the nine months ended September 30, 2016. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent.
Asset Management Fees to Related Party
Asset management fees to related party increased $3.5 million to $6.7 million for the nine months ended September 30, 2016, compared to $3.2 million for the nine months ended September 30, 2015. This increase is partially due to our Acquisitions Since January 1, 2015, as the amount of asset management fees to related party is based on the cost of our assets. In addition, there were no asset management fees to related party during the three months ended March 31, 2015, as we caused the OP to issue to the Advisor performance-based restricted partnership units of the OP ("Class B Units") in lieu of asset management fees prior to April 1, 2015. See Note 11 — Related Party Transactions and Arrangements for more information on fees payable to our Advisor pursuant to the advisory agreement.
Property Operating Expenses
Property operating expenses increased $7.5 million to $31.2 million for the nine months ended September 30, 2016, compared to $23.7 million for the nine months ended September 30, 2015. This increase in property operating expenses was primarily due to our Acquisitions Since January 1, 2015, which resulted in a $7.2 million increase for the nine months ended September 30, 2016. In addition, Nine Month Same Store property operating expenses increased by $0.3 million, which primarily related to an increase in real estate taxes, partially offset by rent receivables written off during the nine months ended September 30, 2015 in connection with an unsuccessful contractual arrangement associated with the acquisition of The Shops at West End. Property operating expenses primarily relate to the costs associated with maintaining our properties, including property management fees incurred from Lincoln, real estate taxes, utilities, and repairs and maintenance.

36

Impairment Charges
We incurred $4.4 million of impairment charges during the nine months ended September 30, 2015. These charges related to the write-off of intangible assets in connection with an unsuccessful contractual arrangement associated with the acquisition of The Shops at West End. No impairment charges were incurred during the nine months ended September 30, 2016.
Fair Value Adjustment to Contingent Purchase Price Consideration
During the nine months ended September 30, 2016, we recorded a $1.8 million fair value adjustment related to previously unrecognized contingent purchase price consideration in connection with the acquisition of Harlingen Corners. During the nine months ended September 30, 2015, we recorded a $13.8 million fair value adjustment to contingent purchase price consideration in connection with an unsuccessful contractual arrangement associated with the acquisition of The Shops at West End.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses decreased $7.1 million to $2.5 million for the nine months ended September 30, 2016, compared to $9.6 million for the nine months ended September 30, 2015. Acquisition and transaction related expenses for the nine months ended September 30, 2016 were primarily due to costs incurred in connection with the pending Mergers. These costs include fees to the special committee of the board of directors for their review of the Mergers, as well as fees to the special committee's financial advisor and legal counsel. Acquisition and transaction related expenses for the nine months ended September 30, 2015 primarily related to our acquisition of 15 properties with an aggregate base purchase price of $481.6 million.
General and Administrative Expenses
General and administrative expenses increased $1.2 million to $7.3 million for the nine months ended September 30, 2016, compared to $6.1 million for the nine months ended September 30, 2015. This was primarily due to an increase in reimbursements of operational and administrative costs to our Advisor of $1.3 million, which the Advisor began requesting beginning in the third quarter of 2015, as well as an accrual of $0.8 million for settlement of a lawsuit during the nine months ended September 30, 2016. See Note 10 — Commitments and Contingencies for more information related to the lawsuit. These increases were partially offset by a decrease in legal fees of $0.7 million and a decrease in audit fees of $0.5 million.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $13.5 million to $47.5 million for the nine months ended September 30, 2016, compared to $34.0 million for the nine months ended September 30, 2015. This increase was primarily attributable to our Acquisitions Since January 1, 2015, which resulted in an increase in depreciation and amortization expenses of $14.0 million for the nine months ended September 30, 2016. This increase was partially offset by a decrease in our Nine Month Same Store depreciation and amortization expense of $0.5 million, which is primarily due to the accelerated amortization of certain in-place lease assets associated with tenant turnover during the nine months ended September 30, 2015. The base 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 $9.6 million for the nine months ended September 30, 2016, compared to $5.3 million for the nine months ended September 30, 2015. This increase primarily related to an increase in our weighted-average mortgage notes payable outstanding as well our weighted-average borrowings on our Credit Facility. The following table presents the weighted-average balances of our fixed-rate debt and Credit Facility borrowings outstanding, associated interest expense and corresponding weighted-average interest rates for the nine months ended September 30, 2016 and 2015, as well as the amortization of deferred financing costs and mortgage premiums for such periods:
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
(Dollar amounts in thousands)
 
Weighted-Average Carrying Value
 
Interest Expense
 
Weighted-Average Interest Rate
 
Weighted-Average Carrying Value
 
Interest Expense
 
Weighted-Average Interest Rate
Mortgage Notes Payable
 
$
128,534

 
$
4,592

 
4.76
%
 
$
95,301

 
$
3,009

 
4.41
%
Credit Facility
 
$
304,000

 
4,207

 
1.81
%
 
$
61,200

 
1,023

 
1.54
%
Amortization of deferred financing costs
 
 
 
1,529

 
 
 
 
 
1,429

 
 
Amortization of mortgage premiums
 
 
 
(741
)
 
 
 
 
 
(116
)
 
 
Interest Expense
 
 
 
$
9,587

 
 
 
 
 
$
5,345

 
 

37

Gain on Involuntary Conversion
During the nine months ended September 30, 2016, we recognized a gain on involuntary conversion of $0.2 million arising from insurance proceeds related to roof damage sustained at San Pedro Crossing as a result of a hailstorm. The gain recognized was measured as the difference between the insurance proceeds allocated to replacing the affected roofs and the net book value of the roofs that will be replaced.
Cash Flows for the Nine Months Ended September 30, 2016
Cash flows provided by operating activities of $41.7 million during the nine months ended September 30, 2016 primarily related to net loss adjusted for non-cash items of $41.1 million (net loss of $7.2 million adjusted for depreciation and amortization of tangible and intangible real estate assets, fair value adjustment to contingent purchase price consideration, impairment charges, amortization of deferred costs, share-based compensation, the ineffective portion of derivative, bad debt expense and loss on disposition of land, partially offset by amortization of mortgage premium and accretion of net below-market lease liability, totaling $48.3 million) and an increase in accounts payable and accrued expenses of $7.1 million. Operating cash flows were partially offset by an increase in prepaid expenses and other assets of $5.8 million and an increase in restricted cash of $0.6 million.
Net cash used in investing activities during the nine months ended September 30, 2016 of $5.6 million included $6.4 million related to capital expenditures. Investing cash outflows were partially offset by proceeds from the disposition of land of $0.5 million and $0.3 million related to restricted cash released for capital expenditures.
Net cash used in financing activities during the nine months ended September 30, 2016 of $31.0 million primarily related to cash distributions of $25.2 million, common stock repurchases based on requests made during 2015 and completed during the first quarter of 2016 of $5.1 million and principal payments on our mortgage notes of $0.8 million.
Cash Flows for the Nine Months Ended September 30, 2015
Cash flows provided by operating activities of $23.7 million during the nine months ended September 30, 2015 primarily related to net loss adjusted for non-cash items of $23.4 million (net loss of $1.1 million adjusted for depreciation and amortization of tangible and intangible real estate assets, impairment charges, amortization of deferred costs, share-based compensation, the ineffective portion of derivative and bad debt expense, partially offset by fair value adjustment to contingent purchase price consideration, amortization of mortgage premium and accretion of net below-market lease liability, totaling $24.5 million), an increase in accounts payable and accrued expenses of $12.4 million and an increase in deferred rent and other liabilities of $1.6 million. Operating cash flows were partially offset by an increase in restricted cash of $1.4 million and an increase in prepaid expenses and other assets of $12.3 million.
Net cash used in investing activities during the nine months ended September 30, 2015 of $426.7 million included $434.2 million related to our acquisition of 15 properties, $6.3 million related to capital expenditures, $0.4 million related to deposits for future real estate acquisitions and $0.8 million related to cash restricted for capital expenditures. Cash outflows were partially offset by proceeds from contingent consideration of $15.0 million.
Net cash provided by financing activities during the nine months ended September 30, 2015 of $277.3 million primarily related to proceeds from our credit facility of $304.0 million, partially offset by cash distributions of $19.5 million, payments related to offering costs of $1.2 million, common stock repurchases of $4.8 million, payments of deferred financing costs of $0.8 million and payments on mortgage notes of $0.4 million.
Liquidity and Capital Resources
As of September 30, 2016, we had cash and cash equivalents of $45.2 million. In the normal course of business, our principal demands for funds will continue to be for capital expenditures, the payment of operating expenses, distributions to our stockholders and the payment of principal and interest on our outstanding indebtedness.
We expect to meet our future short-term operating liquidity requirements through a combination of cash on hand, net cash provided by our current property operations and proceeds from our Credit Facility. We have historically generated some of our working capital by issuing shares through the DRIP. The DRIP was suspended on August 30, 2016. Management expects that in the future, as we continue to optimize our portfolio and leasing activity at our properties, cash flows from our properties will be sufficient to fund operating expenses and the payment of our monthly distribution. Other potential future sources of capital include proceeds from public and private offerings and proceeds from the sale of properties. Generally, capital needs for property acquisitions have been funded with the net proceeds received from our IPO, proceeds from secured financings and proceeds from our Credit Facility.

38

Availability of borrowings under our Credit Facility for any period is based on the lower of (i) 60% of the asset value pool of eligible unencumbered real estate assets that comprises our borrowing base, (ii) the amount that would cause the debt service coverage ratio of the borrowing base for the last four fiscal quarters to exceed 1.5 times, and (iii) the aggregate commitments under the Credit Facility, which allow for up to $325.0 million in borrowings with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility, subject to certain conditions. Through an uncommitted “accordion feature,” the OP may increase commitments under the Credit Facility to up to $575.0 million under certain circumstances and to the extent agreed to by our lenders. As of September 30, 2016, our unused borrowing capacity was $12.7 million, based on the aggregate commitments under the Credit Facility. As of September 30, 2016 and December 31, 2015, we had $304.0 million outstanding under the Credit Facility.
The Credit Facility provides for quarterly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period (though no longer than three months) with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Credit Facility will mature on December 2, 2018, provided that the OP, subject to certain conditions, may elect to extend the maturity date one year to December 2, 2019. The Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. We, certain of our wholly-owned subsidiaries and certain wholly-owned subsidiaries of the OP guarantee the obligations under the Credit Facility.
We also expect to use proceeds from secured and unsecured financings from banks or other lenders as a source of capital. Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total "net assets" (as defined by our charter) as of the date of any borrowing, which is equal to 75% of the cost of our investments. We may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments.
Our borrowings are also restricted by covenants in our existing indebtedness. In addition, it is currently our intention to limit our aggregate borrowings to approximately 50% of the aggregate fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation does not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
As of September 30, 2016, our leverage ratio (total debt divided by total assets) approximated 34.7%.
Our board of directors adopted a share repurchase program (as amended and restated, the "SRP") that enabled our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requested a repurchase, we, subject to certain conditions, could repurchase the shares presented for repurchase for cash to the extent we had sufficient funds available. On September 6, 2016, in contemplation of the Mergers, the board of directors determined to suspend the SRP, effective September 8, 2016. During the nine months ended September 30, 2016, 3.1 million shares were requested for repurchase and were not fulfilled. Due to the suspension of the SRP, these shares will not be considered for repurchase. See Note 9 — Common Stock for more information on terms and conditions of the SRP.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

39

We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures, if any, are calculated to reflect FFO on the same basis. We also adjust FFO to eliminate gains on involuntary conversion as, for the purposes of calculating FFO, we consider such gains to be similar to gains or losses from sales of property and real estate related impairments.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and amortize acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the “IPA”), an industry trade group, published a standardized measure of performance known as modified funds from operations (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisitions fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition fees and expenses, amounts relating to deferred rent receivables and accretion of market lease and other intangibles, net (in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), contingent purchase price consideration, accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. In calculating MFFO, we also exclude transaction-related fees and expenses (which include costs associated with the Mergers), as they are not related to our property operations.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant and accurate measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.

40

Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guideline or the SEC or another regulatory body could standardize the allowable adjustments across the a publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
The below table reflects the items deducted from or added to net loss in our calculation of FFO and MFFO for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended September 30, 2016
(In thousands)
 
March 31, 2016
 
June 30, 2016
 
September 30, 2016
 
Net loss (in accordance with GAAP)
 
$
(2,979
)
 
$
(1,214
)
 
$
(2,986
)
 
$
(7,179
)
Loss on disposition of land
 
4

 
—

 
—

 
4

Gain on involuntary conversion
 
—

 
—

 
(193
)
 
(193
)
Depreciation and amortization
 
16,092

 
16,259

 
15,137

 
47,488

FFO
 
13,117

 
15,045

 
11,958

 
40,120

Acquisition and transaction related fees and expenses
 
63

 
399

 
2,064

 
2,526

Amortization of mortgage premiums
 
(247
)
 
(246
)
 
(248
)
 
(741
)
Accretion of market lease and other intangibles, net
 
(759
)
 
(727
)
 
(908
)
 
(2,394
)
Mark-to-market adjustments
 
3

 
—

 
(2
)
 
1

Straight-line rent
 
(603
)
 
(569
)
 
(567
)
 
(1,739
)
Fair value adjustment to contingent purchase price consideration
 
1,784

 
—

 
—

 
1,784

MFFO
 
$
13,358

 
$
13,902

 
$
12,297

 
$
39,557

Distributions
In September 2011, our board of directors authorized, and we declared, a distribution payable on a monthly basis to stockholders of record on each day at a rate equal to $0.0017534247 per day, which is equivalent to $0.64 per annum, per share of common stock. Distributions began to accrue on June 8, 2012, the date of our initial property acquisition. In March 2016, our board of directors ratified the existing distribution amount equivalent to $0.64 per annum, and, for calendar year 2016, affirmed a change to the daily distribution amount to $0.0017486339 per day per share of common stock, effective January 1, 2016, to reflect that 2016 is a leap year.
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
During the nine months ended September 30, 2016, distributions paid to common stockholders totaled $47.2 million, inclusive of $22.0 million of distributions that were reinvested in additional shares of our common stock through our DRIP. During the nine months ended September 30, 2016, cash used to pay distributions was generated from cash flows from operations and proceeds received from common stock issued under the DRIP.

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The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock, for the period indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31, 2016
 
June 30, 2016
 
September 30, 2016
 
September 30, 2016
(In thousands)
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
Distributions
 
$
15,505

 
 
 
$
15,779

 
 
 
$
15,923

 
 
 
$
47,207

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source of distribution coverage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations
 
$
12,028

 
77.6
%
 
$
7,524

 
47.7
%
 
$
10,637

 
66.8
%
 
$
30,189

 
64.0
%
Proceeds from common stock issued through the DRIP
 
3,477

 
22.4
%
 
8,255

 
52.3
%
 
5,286

 
33.2
%
 
17,018

 
36.0
%
Total source of distribution coverage
 
$
15,505

 
100.0
%
 
$
15,779

 
100.0
%
 
$
15,923

 
100.0
%
 
$
47,207

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations (GAAP basis)
 
$
13,613

 
 
 
$
13,511

 
 
 
$
14,625

 
 
 
$
41,749

 
 
Net loss (in accordance with GAAP)
 
$
(2,979
)
 
 
 
$
(1,214
)
 
 
 
$
(2,986
)
 
 
 
$
(7,179
)
 
 
For the nine months ended September 30, 2016, cash flows provided by operations were $41.7 million. As shown in the table above, we funded distributions with cash flows provided by operations and proceeds received from common stock issued under the DRIP.
We may not generate sufficient cash flow from operations in 2016 to pay distributions at our current level and we may not generate sufficient cash flows from operations to pay future distributions. The amount of cash available for distributions is affected by many factors, such as rental income from acquired properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We cannot give any assurance that future acquisitions of real properties, if any, will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing a distribution rate to stockholders.
If we do not generate sufficient cash flows from our operations, we expect to use a portion of our cash on hand to pay distributions. Historically, we have used proceeds received from common stock issued under the DRIP to fund a portion of our distributions. The DRIP was suspended on August 30, 2016. If these sources are insufficient, we may use other sources, such as from borrowings, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, as to which it has no obligation, to fund distributions.
To the extent we pay distributions in excess of cash flows provided by operations, our stockholders' investment may be adversely impacted. Since inception, our cumulative distributions have exceeded our cumulative FFO and our cash flows from operations.
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 require us to comply with specific reporting covenants. As of September 30, 2016, we were in compliance with the financial covenants under our loan agreements.
Our Advisor may, with approval from our independent board of directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third parties on a case-by-case basis as acquisition opportunities present themselves. We view the use of short-term borrowings as an efficient and accretive means of acquiring real estate. As of September 30, 2016, our leverage ratio (total debt divided by total assets) was 34.7%.

42

Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable and Credit Facility as well as minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of September 30, 2016:
 
 
 
 
October 1, 2016 to December 31, 2016
 
Years Ended December 31,
 
 
(In thousands)
 
Total
 
 
2017-2018
 
2019-2020
 
Thereafter
Principal on gross mortgage notes payable
 
$
128,121

 
$
289

 
$
65,224

 
$
40,931

 
$
21,677

Interest on mortgage notes payable
 
22,581

 
1,519

 
10,972

 
6,721

 
3,369

Credit Facility
 
304,000

 
—

 
304,000

 
—

 
—

Interest on Credit Facility
 
12,622

 
1,465

 
11,157

 
—

 
—

Ground lease rental payments due
 
11,622

 
127

 
1,038

 
1,081

 
9,376

 
 
$
478,946

 
$
3,400

 
$
392,391

 
$
48,733

 
$
34,422

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, 2012. 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, among other things, distribute annually at least 90% of our REIT taxable income to our stockholders (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. Further, we have taxable REIT subsidiaries, which are set up to conduct activities that cannot otherwise be conducted by a REIT, and are subject to corporate income tax.
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 term 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 of the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings and our Credit Facility, bears interest at fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.

43

As of September 30, 2016, our fixed-rate debt consisted of secured mortgage financings with a carrying value of $132.1 million and a fair value of $134.8 million. Changes in market interest rates on our fixed-rate debt impacts its fair value, but it has no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2016 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $3.5 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $3.5 million.
As of September 30, 2016, our variable-rate debt consisted of our Credit Facility, which had a carrying and fair value of $304.0 million. Interest rate volatility associated with this variable-rate Credit Facility affects interest expense incurred and cash flow. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2016 levels with all other variables held constant. A 100 basis point increase or decrease in variable rates on our variable-rate Credit Facility would increase or decrease our interest expense by $3.0 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of September 30, 2016 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
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 the 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, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

44

PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
The information contained under the heading "Litigation and Regulatory Matters" in Note 10 — Commitments and Contingencies to our consolidated financial statements is incorporated by reference into this Part II, Item 1. Except as set forth therein, as of the end of the period covered by this Quarterly Report on Form 10-Q, we are not a party to, and none of our properties are subject to, any material pending legal proceedings.
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, 2015.
The Mergers and related transactions are subject to certain conditions, including approval by stockholders of the Company, which if not satisfied or waived, would adversely impact AFIN’s ability to complete the transactions.
The Mergers are subject to certain conditions, including, among other things (a) the approval of the Merger by the Company’s stockholders, (b) the approval of the certain amendments to the Company’s charter by the Company’s stockholders, (c) the approval of the Merger and the issuance of AFIN common stock to the Company’s stockholders by the AFIN stockholders, (d) the accuracy of the other parties’ representations and warranties and compliance with covenants, subject in each case to materiality standards and (e) certain other conditions. There can be no assurance these conditions will be satisfied or waived, if permitted or the occurrence of any effect, event, development or change will not transpire. If these conditions are not satisfied or waived by March 6, 2017 (or April 21, 2017, if the joint proxy statement/prospectus is not declared effective before January 6, 2017), the Mergers may not be completed. Therefore, there can be no assurance with respect to the timing of the closing of the Mergers or whether the Mergers will be completed.
The Company’s stockholders’ percentage interest will be diluted by the Mergers.
The Mergers will result in the Company’s stockholders having an ownership interest in AFIN that is smaller than their current interest in the Company. The Company’s stockholders are expected to hold approximately 37% of the combined company’s common stock outstanding immediately after the Mergers. Consequently, the Company’s stockholders, as a general matter, will have less influence over the management and policies of AFIN after the Mergers than they did immediately prior to the Mergers and will own a reduced percentage of the economic interests in the combined company.
If the Mergers do not occur, the Company may incur payment obligations to AFIN.
If the Merger Agreement is terminated under certain circumstances, including following a breach by the non-terminating party or a change in recommendation of the non-terminating party, the Company may be required to pay to AFIN a termination fee equal to $25.6 million. Payment of this fee may have an adverse impact on the liquidity and capital resources of the Company.
Failure to complete the Mergers could negatively impact the future business and financial results of the Company.
If the Mergers are not completed, the ongoing businesses of the Company could be adversely affected and the Company will be subject to several risks, including the following:
•
having to pay certain costs relating to the proposed Mergers, such as legal, accounting, financial advisor, filing, printing and mailing fees;
•
having to divert management focus and resources from operational matters and other strategic opportunities while working to implement the Mergers; and
•
failing to realize the expected benefits of the Mergers.
The pendency of the Mergers could adversely affect the Company’s business and operations.
In connection with the pending Mergers, some tenants or vendors of the Company may delay or defer decisions because of uncertainty concerning the outcome of the Mergers, which could negatively impact the revenues, earnings, cash flows and expenses of the Company, regardless of whether the Mergers are completed. In addition, due to operating covenants in the Merger Agreement, the Company may be unable, during the pendency of the Mergers, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business, even if these actions would prove beneficial.

45

The Merger Agreement contains provisions that could discourage a potential competing acquiror or could result in any competing proposal being at a lower price than it might otherwise be.
Except for a 45 day go-shop period that expired on October 21, 2016, the Merger Agreement contains “no shop” provisions that, subject to limited exceptions, restrict the Company’s ability to solicit, encourage, facilitate or discuss competing third-party proposals to acquire all or a significant part of the Company. In addition, under specified circumstances, including following a breach by the non-terminating party or a change in recommendation of the non-terminating party, the Company may be required to pay to AFIN a termination fee.
These provisions could discourage a potential acquiror that might have an interest in acquiring all or a significant part of the Company from considering or proposing an acquisition, even if it were prepared to pay consideration with a higher per share cash or value than the value proposed to be received or realized in the Merger with AFIN, or might result in a potential competing acquiror proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee or expense reimbursement that may become payable in certain circumstances.
The Merger Agreement contains provisions that grant the Company’s board of directors and AFIN’s board of directors a general ability to terminate the Merger Agreement based on the exercise of the directors’ duties.
Either the Company or AFIN may terminate the Merger Agreement, subject to the terms thereof, in response to a material event, circumstance, change or development that was not known to the applicable entity’s board of directors prior to signing the Merger Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which event or circumstance, or any material consequence thereof, becomes known to the applicable entity’s board of directors prior to the effective time of the Mergers if the applicable entity’s board of directors determines in good faith, after consultation with outside legal counsel, that failure to change its recommendation with respect to the Mergers (and to terminate the Merger Agreement) would be inconsistent with the directors’ duties under applicable law. If the Mergers are not completed, the Company’s ongoing business could be adversely affected.
There may be unexpected delays in completing the Mergers, which could impact the ability to timely achieve the benefits associated with the Mergers.
The Merger Agreement grants either the Company or AFIN the right to terminate the Merger Agreement if the Mergers have not occurred by March 6, 2017 (or April 21, 2017, if the joint proxy statement/prospectus is not declared effective before January 6, 2017). Certain events may delay the closing of the Mergers. Some of the events that could delay the closing of the Mergers include difficulties in obtaining the approval of AFIN stockholders or the Company’s stockholders or satisfying the other closing conditions to which the Mergers are subject.
The current lack of liquidity for shares of AFIN common stock and the Company’s common stock could adversely affect the market price of AFIN’s common stock upon listing following the Mergers.
Stockholders of AFIN and the Company have held shares with no trading market and therefore any stockholders wishing to exit their investment have not had the opportunity to do so. The AFIN common stock to be issued in the Mergers is approved for listing but will not be listed at closing. There can be no assurance as to whether the shares of AFIN common stock will be listed. Once the AFIN common stock is listed on the New York Stock Exchange or another exchange, these stockholders will have the ability to sell their shares of AFIN common stock. Sales of substantial amounts of shares of AFIN common stock, or the perception that such sales might occur could result in downward pressure on the price of AFIN common stock. There can be no assurance that the trading price of AFIN common stock will equal or exceed AFIN’s published estimated per share net asset value as of December 31, 2015 of $24.17.
The combined company will have additional indebtedness following the Mergers and may need to incur more in the future.
The combined company will have more indebtedness than the Company following completion of the Mergers. In addition, AFIN may incur additional indebtedness in the future. The amount of this indebtedness could have material adverse consequences for the combined company, including:
•
hindering AFIN’s ability to adjust to changing market, industry or economic conditions;
•
limiting AFIN’s ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms or to fund acquisitions;
•
limiting the amount of free cash flow available for future operations, acquisitions, distributions, stock repurchases or other uses; and
•
making the combined company more vulnerable to economic or industry downturns, including interest rate increases.
In addition, the bridge loan facility or any additional indebtedness incurred could contain covenants which limit AFIN’s ability to incur secured and unsecured debt, sell assets, make restricted payments (including dividends to its stockholders), engage in mergers and consolidations and take certain other actions.

46

Moreover, to respond to competitive challenges, the combined company may be required to raise additional capital to execute its business strategy. AFIN’s ability to arrange additional financing will depend on, among other factors, AFIN’s financial position and performance, as well as prevailing market conditions and other factors beyond AFIN’s control.
The Company and AFIN expect to incur substantial expenses related to the Mergers and may be unable to realize the anticipated benefits of the Mergers or do so within the anticipated timeframe.
The Company and AFIN expect to incur substantial expenses in connection with completing the Mergers, including fees to the financial advisors to the special committees of the Company and AFIN and expenses relating to accounting and legal fees and cost reimbursements. There are a number of factors beyond the Company’s and AFIN’s control that could affect the total amount or the timing of these transaction expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction expenses associated with the Mergers could, particularly in the near term, exceed the savings that the combined company expects to achieve following the completion of the Mergers.
The Mergers involve the combination of two companies that currently operate as independent public companies. Even though the companies are operationally similar, management of the combined company will be required to devote attention and resources to integrating the properties and operations of the Company and AFIN. There is no assurance that the combined company will achieve the anticipated benefits of the Mergers, including G&A synergies and eliminating duplicative costs and functions.
After the Mergers are completed, the Company’s stockholders who receive AFIN common stock in the Mergers will have different rights that may be less favorable than their current rights as the Company’s stockholders.
After completing the Mergers, the Company’s stockholders will have different rights than they currently have as the Company’s stockholders. For example, the Company’s bylaws require the approval of holders of a majority of the shares of stock of the Company entitled to vote who are present in person or by proxy at a meeting at which a quorum is present to elect a director, whereas a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director under AFIN’s bylaws. Also, a special meeting of the Company may be called by the Company’s stockholders holding at least 10% of the votes entitled to be cast, whereas a special meeting of AFIN may be called by AFIN stockholders holding at least a majority of the votes entitled to be cast.
An adverse judgment in a lawsuit challenging the Mergers may prevent the Mergers from becoming effective or from becoming effective within the expected timeframe.
There may be lawsuits filed challenging the Mergers, which could, among other things, result in the Company incurring costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims. Further, an injunction could be issued, prohibiting the parties from completing the Mergers on the agreed-upon terms in the expected time frame, or may prevent it from being completed altogether. This type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect the operation of the Company’s business.
Counterparties to certain significant agreements with the Company have consent rights that may be triggered in connection with the Mergers.
Certain of the Company’s debt obligations, aggregating $432.1 million, give the counterparty certain rights, including consent rights, in connection with “change in control” transactions. Under these agreements, the Mergers constitute a “change in control” and, therefore, the counterparty may assert its rights in connection with the Mergers. These consents have not yet been received. AFIN has obtained a commitment for a $360.0 million bridge loan facility, which, subject to entering into a loan agreement, may be drawn, in addition to cash on hand, to repay such loans if the change in control provisions are invoked at or subsequent to the Mergers closing. The Company and AFIN are endeavoring to have the change in control provisions waived, however, these waivers are outside of their control. Any such counterparty may request modifications of its agreements as a condition to granting a waiver or consent under those agreements and there can be no assurance that such counterparties will not exercise their rights under the agreements, including termination rights where available. While AFIN has a commitment for a bridge loan facility and requires the financing under the bridge loan facility to repay certain indebtedness, the closing of the Mergers are not conditioned on closing of the bridge loan facility and there can be no assurance that the bridge loan facility will close. If consent is not obtained and such loans are not prepaid out of the proceeds of the bridge loan facility or otherwise, the failure to obtain consent under one agreement may be a default under agreements and, thereby, trigger rights of the counterparties to such other agreements, including termination rights where available.
The combined company may incur adverse tax consequences if the Company fails to qualify as a REIT for U.S. federal income tax purposes.
If the Company fails to qualify as a REIT for U.S. federal income tax purposes and the Mergers are completed, AFIN may inherit significant tax liabilities and could lose its REIT status should disqualifying activities continue after the Mergers.

47

If the Mergers fail to qualify as a reorganization under the Code, there will be adverse tax consequences.
The parties intend that the Mergers will be treated as a reorganization within the meaning of Section 368(a) of the Code, and it is a condition to the obligations of both the Company and AFIN to complete the Mergers that they each receive an opinion from Proskauer Rose LLP to that effect. This tax opinion will be based on factual representations made by the Company and AFIN, and on customary assumptions. This tax opinion represents the legal judgment of outside counsel to the Company and AFIN and is not binding on the IRS.
If the Mergers were to fail to qualify as a reorganization, then a stockholder of the Company generally would recognize gain or loss, as applicable, equal to the difference between (1) the sum of the amount of cash received (including cash received in lieu of a fractional AFIN common share) and the fair market value of the AFIN common shares received in the Mergers (determined at the effective time of the Mergers) and (2) the stockholder’s adjusted tax basis in the Company’s shares deemed surrendered in the Mergers. Moreover, the Company would be treated as selling, in a taxable transaction, all of its assets to AFIN, with the result that the Company would generally recognize gain or loss on the deemed transfer of its assets to AFIN and, unless the Company has made distributions (which would be deemed to include for this purpose the cash and fair market value of the AFIN common shares issued pursuant to the Mergers) to the Company’s stockholders in an amount at least equal to the net income or gain on the deemed sale of its assets to AFIN, the Company could incur a significant current tax liability, for which, as a result of the Mergers, AFIN would be liable.
Following the Mergers, the combined company may be unable to integrate the businesses of the Company and AFIN successfully and realize the anticipated economies of scale and other benefits of the Mergers or do so within the anticipated timeframe.
The Mergers involve the combination of two public companies that currently operate independently of one another. The combined company is expected to benefit by eliminating duplicative costs associated with operating a public reporting company. However, the combined company will be required to devote significant management attention and resources to integrating the business practices and operations of the Company and AFIN. Potential difficulties the combined company may encounter in the integration process include the following:
•
the inability to successfully combine the businesses of the Company and AFIN in a manner that permits the combined company to achieve the cost savings anticipated to result from the Merger, including the anticipated $10.9 million of annual savings in 2017;
•
the complexities of combining two companies with different property types and tenant bases;
•
potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Mergers; or
•
performance shortfalls as a result of diverting management’s time and attention to integrating each company’s operations.
Each of these may result in the anticipated benefits of the Mergers not being realized in the timeframe currently anticipated or at all. In addition, the integration process could distract management’s focus, disrupting the combined company’s ongoing business, which could, among other things, adversely affect the ability of the combined company to maintain relationships with tenants and vendors or to achieve the anticipated benefits of the Mergers.
The aggregate value of the combined company’s common stock may be lower than the combined aggregate value of the Company and AFIN on a standalone basis.
The value of the combined company’s common stock may be lower than the combined aggregate value of the Company and AFIN on a standalone basis as a result of the Mergers if the combined company does not achieve the perceived benefits of the Mergers as rapidly or to the extent anticipated by the management of AFIN and AFIN’s advisor (“AFIN Management”), or if the effect of the Mergers on AFIN’s financial results is not consistent with the expectations of AFIN Management.
In addition, following the effective time of the Mergers, AFIN stockholders and former stockholders of the Company will own interests in a combined company operating an expanded business with a different mix of properties, risks and liabilities. Either or both of the Company’s and AFIN’s portfolios may have a lower value as part of a diversified company than they would on a standalone basis. There can be no assurance that the trading price of AFIN common stock will equal or exceed AFIN’s published estimated per share net asset value as of December 31, 2015 of $24.17.

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There is no assurance that AFIN will continue paying distributions at the current rate or at all.
There is no assurance that AFIN will be able to continue paying monthly distributions in the same per share amount, if at all, following the Mergers. Cash available for distributions may vary substantially from estimates for a number of reasons including:
•
as a result of the Mergers and the issuance of shares of AFIN common stock in connection with the Mergers, the total amount of cash required for AFIN to pay distributions at its current rate will increase;
•
changes in AFIN’s cash requirements, capital spending plans, cash flow or financial position;
•
rents from properties may decrease as a result of lease expirations, rent delinquencies or other factors, and future acquisitions of properties, real estate-related debt or real estate-related securities may produce less cash available for distribution than expected;
•
decisions on whether, when and in which amounts to make any future distributions will remain at all times entirely at the discretion of AFIN’s board of directors, which reserves the right to change AFIN’s distribution practices at any time and for any reason; and
•
AFIN may desire to retain cash to maintain or improve its credit ratings.
The future results of the combined company will suffer if the combined company does not effectively manage its expanded portfolio and operations following the Mergers.
Following the Mergers, the combined company will have an expanded portfolio with new property types and operations and is expected to continue to expand its operations through additional acquisitions and other strategic transactions, some of which may involve complex challenges. The future success of the combined company will depend, in part, upon its ability to manage its expansion opportunities, integrate new operations into its existing business in an efficient and timely manner, successfully monitor its operations, costs, regulatory compliance and service quality, and maintain other necessary internal controls. The combined company cannot assure that its expansion or acquisition opportunities will be successful, or that the combined company will realize its expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.
If AFIN internalizes its management functions, AFIN may be unable to obtain key personnel, and AFIN’s ability to achieve its investment objectives could be delayed or hindered.
AFIN may terminate its agreement with AFIN’s advisor and decide to become self-managed after January 1, 2018, according to the terms of AFIN’s amended advisory agreement. If AFIN internalizes its management functions, certain key employees of AFIN’s advisor may not become employees of AFIN but may instead remain employees of AFIN’s advisor or its affiliates. An inability to hire certain key employees of AFIN’s advisor could result in AFIN incurring costs and suffering deficiencies in AFIN’s disclosure controls and procedures or AFIN’s internal control over financial reporting. An inability to manage an internalization effectively could, among other things, divert management’s attention from most effectively managing AFIN’s investments. Additionally, if AFIN internalizes its management functions, AFIN could have difficulty integrating these functions. Currently, the officers of AFIN’s advisor and its affiliates perform asset management and general and administrative functions, including accounting and financial reporting, for multiple entities. In addition, there is no agreement between AFIN and either AFIN’s advisor or employees of AFIN’s advisor that provides that such personnel will become employees of AFIN if AFIN internalizes its management functions. AFIN may fail to properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone entity and may have to hire officers that are not familiar with AFIN or its investments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities.
Recent Sale of Unregistered Securities
On July 28, 2016, we issued 6,000 shares of restricted stock that vest over a period of five years to our independent directors, pursuant to our employee and director incentive restricted share plan. No selling commissions or other consideration will be paid in connection with such issuances, which were made without registration under the Securities Act in reliance upon the exemption from registration in Section 4(a)(2) of the Securities Act as transactions not involving any public offering.
Issuer Purchases of Equity Securities
Our board of directors adopted the SRP that enabled our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requested a repurchase, we, subject to certain conditions, could repurchase the shares presented for repurchase for cash to the extent we had sufficient funds available. On September 6, 2016, in contemplation of the Merger, the board of directors determined to suspend the SRP, effective September 8, 2016.

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The following table summarizes the repurchases of shares under the SRP cumulatively through September 30, 2016:
 
 
Number of Shares Repurchased
 
Weighted-Average Price per Share
Cumulative repurchase requests as of December 31, 2015
 
1,355,162

 
$
9.48

Nine months ended September 30, 2016
 
2,500

 
10.00

Cumulative repurchases as of September 30, 2016
 
1,357,662

 
$
9.48

During the nine months ended September 30, 2016, 3.1 million shares were requested for repurchase and were not fulfilled. The SRP was suspended effective as of September 8, 2016.
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 REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.
 
By:
/s/ Edward M. Weil, Jr.
 
 
Edward M. Weil, Jr.
 
 
Chief Executive Officer, President and Chairman of the Board of Directors
(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 14, 2016

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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, 2016 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit
No.
  
Description
2.1 (1)
 
Agreement and Plan of Merger, dated as of September 6, 2016, among American Finance Trust, Inc., American Finance Operating Partnership, L.P., Genie Acquisition, LLC, American Realty Capital — Retail Centers of America, Inc. and American Realty Capital Retail Operating Partnership, L.P.
3.1 (1)
 
Amended and Restated Bylaws of the Company
31.1 *
 
Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *
 
Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 *
 
Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 *
 
XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital — Retail Centers of America, Inc.'s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Stockholders' 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 September 7, 2016.

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