American Realty Capital Trust

12 Months Ended

Dec. 31, 2013

American Realty Capital Trust

American Realty Capital Trust

4.         American Realty Capital Trust

A.  Acquisition

On January 22, 2013, we completed our acquisition of ARCT for approximately $3.2 billion.  Each outstanding share of ARCT common stock was converted into the right to receive a combination of: (i) $0.35 in cash and (ii) 0.2874 shares of our common stock, resulting in the issuance of a total of 45,573,144 shares of our common stock to ARCT shareholders, valued at a per share amount of $44.04, which was the closing price of our common stock on January 22, 2013.  In connection with the closing of the ARCT acquisition, we repaid and terminated the amounts then outstanding of approximately $552.9 million under ARCT’s revolving credit facility and term loan.

The acquisition of ARCT provided benefits to Realty Income, including accretion to net earnings, growth in the size of our real estate portfolio, diversification of industries and property type, and increase in the percentage of investment grade tenants.

With this acquisition, we added 515 properties to our portfolio.  The final allocation of the purchase price reflects aggregate consideration of approximately $2.1 billion, as calculated below (in thousands):

Consideration associated with equity issued (1)	$	2,027,753
Cash consideration paid to previous owners of ARCT (2)	56,216
Total purchase consideration	$	2,083,969

(1)Includes the value associated with the issuance of the Tau Operating Partnership units discussed in 4.C. below.

(2)Includes a $55.5 million cash payment on 158,505,108 ARCT common shares outstanding at the acquisition date.

We have accounted for the ARCT acquisition in accordance with ASC 805, Business Combinations.  The following table summarizes our final purchase price allocation, which represents our acquisition date fair values of the assets acquired and liabilities assumed (in thousands):

Assets:
Real estate	$	2,674,464
Acquired lease intangible assets	561,289
Cash and cash equivalents, accounts receivable, and other assets, net	41,371
Total Assets	3,277,124
Liabilities:
Lines of credit payable	317,207
Term loan	235,000
Mortgages payable	538,960
Acquired lease intangible liabilities	79,690
Accounts payable, accrued expenses, and other liabilities, net	22,298
Total Liabilities	1,193,155
Fair value of net assets acquired	$	2,083,969

The final allocation of the purchase price was based on our assessment of the fair value of the acquired assets and liabilities using both Level 2 and 3 inputs.

Investments in Real Estate Properties. We determined the fair value generally by applying an income approach methodology using both direct capitalization and discounted cash flow analysis. Key assumptions include capitalization and discount rates. Our valuations were based, in part, on valuations prepared by an independent valuation firm.

Acquired Lease Intangibles. The fair value of in-place leases was calculated based upon our estimate of the costs to obtain tenants in each of the applicable markets. An asset or liability was recognized for acquired leases with favorable or unfavorable rents based on our estimate of current market rents in each of the applicable markets. Our valuations of the intangible assets were based, in part, on valuations prepared by an independent valuation firm.

Debt. The fair value of debt was estimated based on contractual future cash flows discounted using borrowing spreads and market interest rates that would be available to us for the issuance of debt with similar terms and remaining maturities.

B.  Transaction Costs

In connection with our acquisition of ARCT, we incurred total merger-related transaction costs of approximately $21 million, which include, but are not limited to, advisor fees, legal fees, accounting fees, printing fees and transfer taxes. During 2013, we incurred $13.0 million of the $21 million of total merger-related transaction costs, which are included in income from continuing operations.  In 2012, we incurred $7.9 million of these total merger-related transaction costs.

C. Noncontrolling interests and preferred units

Consideration associated with equity issued includes the value of common and preferred partnership units issued in Tau Operating Partnership, L.P., or Tau Operating Partnership, the consolidated subsidiary which owns properties acquired through the ARCT acquisition.  Since the date of acquisition, Realty Income and its subsidiaries hold a 99.3% interest in the Tau Operating Partnership.

The common units do not have voting rights, are entitled to monthly distributions equal to the amount paid to common stockholders of Realty Income, and are redeemable in cash or Realty Income common stock at our option and at a conversion ratio of one to one.  Noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the balance sheet was appropriate.  We evaluated this guidance and determined that the common units meet the requirements to qualify for presentation as permanent equity.  See note 12 for the change in the carrying value of these common units from January 22, 2013 through December 31, 2013.

The Tau Operating Partnership preferred units have also been recorded at fair value as of the date of acquisition.  Since they are redeemable at a fixed price on a determinable date, we have classified them in other liabilities on our consolidated balance sheet.  Payments on these preferred units are made monthly at a rate of 2% per annum and are included in interest expense.  As of December 31, 2013, the preferred units have a carrying value of $6.75 million.

D.  Litigation

In connection with our acquisition of ARCT, one action remains pending in the Supreme Court of the State of New York for New York, New York under the consolidated caption In re American Realty Capital Trust Shareholders Litigation, No. 65330-2012 (the “New York Action”).  On November 9, 2012, the Court granted defendants’ motion to stay the New York Action, which currently remains stayed.  We believe this pending matter will not have a material impact on our financial position or results of operations.