Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the fiscal year ended December 31, 2017
 OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________
Commission file number: 000-55197
https://cdn.kscope.io/7e5524e566cbd7d5bc23c2ec76afd0a5-arct5logocolornotickera01.jpg
American Finance Trust, Inc.
(Exact name of registrant as specified in its charter) 
Maryland
  
90-0929989
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
405 Park Ave., 4th Floor, New York, New York
  
10022
(Address of principal executive offices)
  
(Zip Code)
(212) 415-6500   
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common stock, $0.01 par value per share (Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 ¨
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
Emerging growth company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x
There is no established public market for the registrant’s shares of common stock.
As of February 28, 2018, the registrant had 105,107,778 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be delivered to stockholders in connection with the registrant’s 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.


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EXPLANATORY NOTE


This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) amends American Finance Trust Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on March 19, 2018 (the “Original Filing”). This Amendment No. 1 is being filed solely to include a statement inadvertently omitted by KPMG LLP (“KPMG”) from the filed version of KPMG’s report included in the Original Filing that states the Company was not required to have, nor did KPMG audit the Company’s internal control over financial reporting. The change to the filed version of KPMG’s report included in the Original Filing does not affect KPMG’s unqualified opinion on the Company’s consolidated financial statements included in the Original Filing and this Amendment No. 1.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Amendment No. 1 includes a new consent of KPMG LLP (Exhibit 23.1), new certifications from the Company’s principal executive officer (Exhibit 31.1) and principal financial officer (Exhibit 31.2) and new Section 1350 certifications (Exhibit 32) dated as of the date of filing of this Amendment No. 1.
This Amendment No. 1 amends the Original Filing, making only the amendments described above. No other amendments have been made to the Original Filing and the Company is not amending its consolidated financial statements or any other part of, or otherwise updating any other disclosures made in, the Original Filing. This Amendment No. 1 speaks as of the original filing date of the Original Filing and does not reflect any events that may have occurred subsequent to the original filing date. Accordingly, this Amendment No. 1 should be read in conjunction with our other filings made with the SEC subsequent to the filing of the Original Filing, including any amendments to those filings.




AMERICAN FINANCE TRUST, INC.

FORM 10-K/A
Year Ended December 31, 2017

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART II
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K/A.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)    Financial Statement Schedules
See the Index to Consolidated Financial Statements at page F-1 of this report.
The following financial statement schedules are included herein beginning at page F-40 of this report:
Schedule III — Real Estate and Accumulated Depreciation — Part I
Schedule III — Real Estate and Accumulated Depreciation — Part II
(b)    Exhibits

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EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K/A for the year ended December 31, 2017 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No.
  
Description
2.1 (4)
 
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 (2)
 
Articles of Amendment and Restatement
3.2 (1)
 
Third Amended and Restated Bylaws
3.3 (7)
 
Articles Supplementary relating to election to be subject to Section 3-803 of MGCL.
4.1 (4)
 
Amended and Restated Agreement of Limited Partnership of American Finance Operating Partnership, L.P., dated as of September 6, 2016
4.2 (5)
 
Amendment No. 1 to Amended and Restated Limited Partnership Agreement of American Finance Operating Partnership, L.P., dated as of February 16, 2017
4.3 (9)
 
Amended and Restated Distribution Reinvestment Plan
4.4 (10)
 
First Amendment to Amended and Restated Distribution Reinvestment Plan
10.1 (4)
 
Third Amended and Restated Advisory Agreement, dated as of September 6, 2016, by and among American Finance Trust, Inc., American Finance Operating Partnership, L.P. and American Finance Advisors, LLC

10.2 (4)
 
Amended and Restated Property Management Agreement, dated as of September 6, 2016, by and among American Finance Trust, Inc. and American Finance Properties, LLC (as assignee of American Realty Capital Retail Advisor, LLC)
10.3 (4)
 
Amended and Restated Leasing Agreement, dated as of September 6, 2016, by and among American Finance Trust, Inc. and American Finance Properties, LLC (as assignee of American Realty Capital Retail Advisor, LLC)
10.4 (4)
 
Amended and Restated Property Management and Leasing Agreement, dated as of September 6, 2016, by and among American Finance Trust, Inc., American Finance Trust Operating Partnership, L.P. and American Finance Properties, LLC
10.5 (1)
 
Amended and Restated Employee and Director Incentive Restricted Share Plan of the Company
10.6 (3)
 
Form of Restricted Stock Unit Award Agreement Pursuant to the Employee and Director Incentive Restricted Share Plan of American Finance Trust, Inc.
10.7 (1)
 
Indemnification Agreement by and among the Company, Peter M. Budko, Robert H. Burns, David Gong, William M. Kahane, Stanley R. Perla, Nicholas Radesca, Nicholas S. Schorsch, Edward M. Weil, Jr., American Realty Capital Advisors V, LLC, AR Capital, LLC and RCS Capital Corporation, dated December 31, 2014
10.8 (1)
 
Indemnification Agreement by and between the Company and Herbert Vederman, dated May 14, 2015
10.9 (2)
 
Indemnification Agreement by and between the Company, Donald MacKinnon, Donald R. Ramon and Andrew Winer, dated May 26, 2015
10.10 (2)
 
Indemnification Agreement by and between the Company and Lisa D. Kabnick, dated August 3, 2015
10.11 (6)
 
Agreement for Purchase and Sale of Real Property, dated as of October 12, 2016, by and between ARC DB5PROP001, LLC, American Finance Operating Partnership, L.P. and Capital Commercial Investments, Inc.
10.12 (6)
 
First Amendment to Agreement for Purchase and Sale of Real Property, dated as of November 11, 2016, by and between ARC DB5PROP001, LLC, American Finance Operating Partnership, L.P. and Capital Commercial Investments, Inc.
10.13 (6)
 
Second Amendment to Agreement for Purchase and Sale of Real Property, dated as of November 18, 2016, by and between ARC DB5PROP001, LLC, American Finance Operating Partnership, L.P. and Capital Commercial Investments, Inc.
10.14 (6)
 
Third Amendment to Agreement for Purchase and Sale of Real Property, dated as of November 23, 2016, by and between ARC DB5PROP001, LLC, American Finance Operating Partnership, L.P. and Capital Commercial Investments, Inc.
10.15 (6)
 
Reinstatement and Fourth Amendment to Agreement for Purchase and Sale of Real Property, dated as of December 1, 2016, by and between ARC DB5PROP001, LLC, American Finance Operating Partnership, L.P. and Capital Commercial Investments, Inc.
10.16 (5)
 
Second Amendment to Amended and Restated Credit Agreement, Assumption, Joinder and Reaffirmation of Guaranties, dated as of February 16, 2017, among American Finance Operating Partnership, L.P., as successor to American Realty Capital Operating Partnership, L.P., Genie Acquisition, LLC as successor to American Realty Capital - Retail Centers of America, Inc., American Finance Trust, Inc., the guarantors party thereto, the lenders party thereto and BMO Harris Bank N.A.

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Exhibit No.
  
Description
10.17 (5)
 
Indemnification Agreement, dated as of February 16, 2017, by and between American Finance Trust, Inc. and Leslie D. Michelson and Edward G. Rendell
 
Indemnification Agreement between American Finance Trust, Inc. and Katie P. Kurtz
10.19 (11)
 
Loan Agreement dated as of December 8, 2017 among Societe Generale and UBS AG as Lenders and certain subsidiaries of American Finance Operating Partnership, LP, as Borrowers
10.20 (11)
 
Guaranty of Recourse Obligations dated as of December 8, 2017 by American Finance Trust, Inc. in favor of Societe Generale and UBS AG
10.21 (11)
 
First Amendment to Amended and Restated Property Management Agreement, dated as of December 8, 2017, by and among American Finance Trust, Inc. and American Finance Properties, LLC and certain subsidiaries of American Finance Operating Partnership, LP
10.22 (11)
 
Form of Property Management Agreement by and between American Finance Properties, LLC and certain subsidiaries of American Finance Operating Partnership, LP
21.1 (11)
 
List of Subsidiaries
23.1 *
 
Consent of KPMG LLP
31.1 *
 
Certification of the Principal Executive Officer of American Finance Trust, Inc. 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 American Finance Trust, Inc. 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 American Finance Trust, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 (8)
 
Second Amended and Restated Share Repurchase Program
101 *
 
XBRL (eXtensible Business Reporting Language). The following materials from American Finance Trust, Inc.’s Annual Report on Form 10-K/A for the year ended December 31, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive (Loss) Income, (iii) the Consolidated Statements 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 Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on May 15, 2015.
(2)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 filed with the SEC on August 11, 2015.
(3)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on August 11, 2016.
(4)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on September 7, 2016.
(5)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on February 21, 2017.
(6)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 13, 2017.
(7)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed with the SEC on November 13, 2017.
(8)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on June 14, 2017.
(9)
Filed as Appendix A to the Company’s Registration Statement on Form S-3 filed with the SEC on April 1, 2016.
(10)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on June 30, 2016.
(11)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 19, 2018.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized this 8th day of June, 2018.
 
AMERICAN FINANCE TRUST, INC.
 
By:
/s/ EDWARD M. WEIL, JR.
 
 
EDWARD M. WEIL, JR.
 
 
CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
 
Capacity
 
Date
 
 
 
 
 
/s/ Edward M. Weil, Jr.
 
Chief Executive Officer, President and Chairman of the Board of Directors
(Principal Executive Officer)
 
June 8, 2018
Edward M. Weil, Jr.
 
 
 
 
 
 
 
 
/s/ Katie P. Kurtz
 
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
 
June 8, 2018
Katie P. Kurtz
 
 
 
 
 
 
 
 
/s/ Lisa D. Kabnick
 
Lead Independent Director
 
June 8, 2018
Lisa D. Kabnick
 
 
 
 
 
 
 
 
/s/ Stanley Perla
 
Independent Director
 
June 8, 2018
Stanley Perla
 
 
 
 
 
 
 
 
 
/s/ Leslie D. Michelson
 
Independent Director
 
June 8, 2018
Leslie D. Michelson
 
 
 
 
 
 
 
 
/s/ Edward G. Rendell
 
Independent Director
 
June 8, 2018
Edward G. Rendell
 
 
 

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AMERICAN FINANCE TRUST, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
Financial Statement Schedules:
 
 
 

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Stockholders and Board of Directors
American Finance Trust, Inc.:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of American Finance Trust, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes and financial statement schedules titled Schedule III - Real Estate and Accumulated Depreciation - Part I, as of December 31, 2017, and Schedule III - Real Estate and Accumulated Depreciation - Part II, for the three-year period ended December 31, 2017 (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles

Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2015.

New York, New York
March 16, 2018

F-2

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AMERICAN FINANCE TRUST, INC.

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

 
December 31,
 
2017
 
2016
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
607,675

 
$
328,656

Buildings, fixtures and improvements
2,449,020

 
1,395,602

Acquired intangible lease assets
454,212

 
300,129

Total real estate investments, at cost
3,510,907

 
2,024,387

Less: accumulated depreciation and amortization
(408,194
)
 
(287,090
)
Total real estate investments, net
3,102,713

 
1,737,297

Cash and cash equivalents
107,666

 
131,215

Restricted cash
19,588

 
7,890

Commercial mortgage loan, held for investment, net

 
17,175

Derivative assets, at fair value
23

 

Deposits for real estate acquisitions
565

 

Prepaid expenses and other assets
50,859

 
29,513

Goodwill
1,605

 

Deferred costs, net
8,949

 
3,767

Assets held for sale
4,682

 
137,602

Total assets
$
3,296,650

 
$
2,064,459

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Mortgage notes payable, net
$
1,303,433

 
$
1,032,956

Credit facility
95,000

 

Market lease liabilities, net
108,772

 
13,915

Accounts payable and accrued expenses (including $3,169 and $910 due to related parties as of December 31, 2017 and 2016, respectively)
27,355

 
13,553

Deferred rent and other liabilities
9,421

 
9,970

Distributions payable
11,613

 
9,199

Total liabilities
1,555,594

 
1,079,593

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

 

Common stock, $0.01 par value per share, 300,000,000 shares authorized, 105,172,185 and 65,805,184 shares issued and outstanding as of December 31, 2017 and 2016, respectively
1,052

 
658

Additional paid-in capital
2,393,237

 
1,449,662

Accumulated other comprehensive income
95

 

Accumulated deficit
(657,874
)
 
(465,454
)
Total stockholders’ equity
1,736,510

 
984,866

Non-controlling interests
4,546

 

Total equity
1,741,056

 
984,866

Total liabilities and stockholders’ equity
$
3,296,650

 
$
2,064,459


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

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AMERICAN FINANCE TRUST, INC.

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

 
Year Ended December 31,
 
2017
 
2016
 
2015
Revenues:
 
 
 
 
 
Rental income
$
240,264

 
$
164,386

 
$
160,865

Operating expense reimbursements
29,560

 
12,232

 
11,495

Interest income from debt investments
1,086

 
1,050

 
2,138

Total revenues
270,910

 
177,668

 
174,498

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Asset management fees to related party
20,908

 
18,000

 
13,009

Property operating
42,594

 
13,614

 
13,258

Impairment charges
25,049

 
27,299

 

Acquisition and transaction related
9,356

 
7,063

 
2,220

General and administrative
20,614

 
11,168

 
11,314

Depreciation and amortization
154,027

 
101,143

 
101,546

Total operating expenses
272,548

 
178,287

 
141,347

Operating income (loss)
(1,638
)
 
(619
)
 
33,151

Other (expense) income:
 
 
 
 
 
Interest expense
(60,305
)
 
(54,253
)
 
(40,891
)
Loss on extinguishment of debt

 

 
(7,564
)
Loss on sale of commercial mortgage-backed securities

 

 
(1,585
)
Distribution income from other real estate securities

 

 
363

Gain on sale of other real estate securities, net

 

 
738

Gain on sale of real estate investments
15,128

 
454

 

Loss on commercial mortgage loans held for sale

 

 
(5,476
)
Other income
238

 
163

 
147

Total other expense, net
(44,939
)
 
(53,636
)
 
(54,268
)
Net loss
(46,577
)
 
(54,255
)
 
(21,117
)
Net loss attributable to non-controlling interests
83

 

 

Net loss attributable to stockholders
(46,494
)
 
(54,255
)
 
(21,117
)
 
 
 
 
 
 
Other comprehensive gain (loss) income:
 
 
 
 
 
Change in unrealized gain on derivative
95

 

 

Change in unrealized loss on investment securities

 

 
(463
)
Other comprehensive gain (loss)
95

 

 
(463
)
 
 
 
 
 
 
Comprehensive loss attributable to stockholders
$
(46,399
)
 
$
(54,255
)
 
$
(21,580
)
 
 
 
 
 
 
Basic and diluted weighted-average shares outstanding
99,649,471

 
65,450,432

 
66,028,245

Basic and diluted net loss per share attributable to stockholders
$
(0.47
)
 
$
(0.83
)
 
$
(0.32
)
 

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

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AMERICAN FINANCE TRUST, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-in
Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Non-controlling Interests
 
Total Equity
Balance, December 31, 2014
65,257,954

 
$
653

 
$
1,437,147

 
$
463

 
$
(173,098
)
 
$
1,265,165

 
$

 
$
1,265,165

Common stock issued through distribution reinvestment plan
1,469,319

 
15

 
34,791

 

 

 
34,806

 

 
34,806

Common stock repurchases
(1,769,738
)
 
(18
)
 
(42,695
)
 

 

 
(42,713
)
 

 
(42,713
)
Share-based compensation, net of forfeitures
3,721

 

 
51

 

 

 
51

 

 
51

Distributions declared

 

 

 

 
(108,980
)
 
(108,980
)
 

 
(108,980
)
Net loss

 

 

 

 
(21,117
)
 
(21,117
)
 

 
(21,117
)
Other comprehensive loss

 

 

 
(463
)
 

 
(463
)
 

 
(463
)
Balance, December 31, 2015
64,961,256

 
650

 
1,429,294

 

 
(303,195
)
 
1,126,749

 

 
1,126,749

Common stock issued through distribution reinvestment plan
848,059

 
8

 
20,491

 

 

 
20,499

 

 
20,499

Common stock repurchases
(7,854
)
 

 
(190
)
 

 

 
(190
)
 

 
(190
)
Share-based compensation
3,723

 

 
67

 

 

 
67

 

 
67

Distributions declared

 

 

 

 
(108,004
)
 
(108,004
)
 

 
(108,004
)
Net loss

 

 

 

 
(54,255
)
 
(54,255
)
 

 
(54,255
)
Balance, December 31, 2016
65,805,184

 
658

 
1,449,662

 

 
(465,454
)
 
984,866

 

 
984,866

Issuance of common stock
38,210,213

 
382

 
916,664

 

 

 
917,046

 

 
917,046

Common stock issued through distribution reinvestment plan
2,373,256

 
24

 
55,829

 

 

 
55,853

 

 
55,853

Common stock repurchases
(1,225,365
)
 
(12
)
 
(29,046
)
 

 

 
(29,058
)
 

 
(29,058
)
Share-based compensation, net of forfeitures
8,897

 

 
128

 

 

 
128

 

 
128

Distributions declared

 

 

 

 
(145,926
)
 
(145,926
)
 

 
(145,926
)
Issuances of operating partnership units

 

 

 

 

 

 
4,887

 
4,887

Distributions to non-controlling interest holders

 

 

 

 

 

 
(258
)
 
(258
)
Net loss

 

 

 

 
(46,494
)
 
(46,494
)
 
(83
)
 
(46,577
)
Other comprehensive income

 

 

 
95

 

 
95

 

 
95

Balance, December 31, 2017
105,172,185

 
$
1,052

 
$
2,393,237

 
$
95

 
$
(657,874
)
 
$
1,736,510

 
$
4,546

 
$
1,741,056


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

F-5

Table of Contents
AMERICAN FINANCE TRUST, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 
Year Ended December 31,
 
2017
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(46,577
)
 
$
(54,255
)
 
$
(21,117
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
Depreciation
85,175

 
66,831

 
66,946

Amortization of in-place lease assets
68,477

 
34,247

 
34,600

Amortization (including accelerated write-off) of deferred costs
7,068

 
8,716

 
12,663

Accretion of mortgage premiums on borrowings
(4,096
)
 
(4,211
)
 
(7,208
)
Discount accretion and premium amortization on investments, net
(25
)
 
(40
)
 
(96
)
Amortization (accretion) of market lease intangibles, net
(5,173
)
 
477

 
1,666

Share-based compensation
128

 
67

 
51

Gain on sale of real estate investments
(15,128
)
 
(454
)
 

Impairment charges
25,049

 
27,299

 

Mark-to-market adjustments
(130
)
 

 

Loss on sale of commercial mortgage-backed securities

 

 
1,585

Gain on sale of other real estate securities, net

 

 
(738
)
Loss on commercial mortgage loans held for sale

 

 
5,476

Changes in assets and liabilities:
 
 
 
 
 
Prepaid expenses and other assets
(5,169
)
 
(8,882
)
 
(7,878
)
Accounts payable and accrued expenses
(7,780
)
 
3,173

 
1,177

Deferred rent and other liabilities
(9,355
)
 
401

 
2,331

Net cash provided by operating activities
92,464

 
73,369

 
89,458

Cash flows from investing activities:
 
 
 
 
 
Origination of commercial mortgage loans

 

 
(79,410
)
Proceeds from sale of commercial mortgage loans

 
56,884

 

Proceeds from sale of commercial mortgage-backed securities

 

 
28,624

Proceeds from the settlement of CMBS
17,200

 

 

Purchase of commercial mortgage-backed securities

 

 
(30,198
)
Capital expenditures
(8,917
)
 

 

Investments in real estate and other assets
(149,337
)
 
(34,244
)
 

Proceeds from sale of real estate investments
190,801

 
15,190

 

Deposits for real estate acquisitions
(565
)
 

 

Proceeds from sale of other real estate securities

 

 
19,266

Cash paid in merger transaction
(94,504
)
 

 

Cash acquired in merger transaction
26,163

 

 

Net cash (used in) provided by investing activities
(19,159
)
 
37,830

 
(61,718
)
Cash flows from financing activities:
 
 
 

 
 
Proceeds from mortgage notes payable
267,350

 

 
780,000

Payments on mortgage notes payable
(21,841
)
 
(1,014
)
 
(196,431
)
Proceeds from credit facility
85,000

 

 

Payments on credit facility
(294,000
)
 

 
(423,000
)
Payments of financing costs
(4,948
)
 
(5,709
)
 
(18,806
)
Common stock repurchases
(29,058
)
 
(16,253
)
 
(31,725
)
Distributions paid
(87,659
)
 
(87,505
)
 
(74,151
)
Net cash (used in) provided by financing activities
(85,156
)
 
(110,481
)
 
35,887

Net change in cash, cash equivalents and restricted cash
(11,851
)
 
718

 
63,627

Cash, cash equivalents and restricted cash, beginning of period
139,105

 
138,387

 
74,760

Cash, cash equivalents and restricted cash, end of period
$
127,254

 
$
139,105

 
$
138,387

Supplemental Disclosures:
 
 
 
 
 
Cash paid for interest
$
57,017

 
$
49,140

 
$
42,696

Cash paid for income taxes
$
827

 
$
739

 
$
877

Accrued common stock repurchases
$

 
$

 
$
16,063

 
 
 
 
 
 

F-6

Table of Contents
AMERICAN FINANCE TRUST, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 
Year Ended December 31,
 
2017
 
2016
 
2015
Non-Cash Investing and Financing Activities:
 
 
 
 
 
Equity issued in the merger transaction
$
921,930

 
$

 
$

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

 
$

 
$

Mortgage notes payable released in connection with disposition of real estate
$
(103,041
)
 
$
(14,867
)
 
$

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

 
$

 
$

Premiums on assumed mortgage notes payable
$
4,143

 
$

 
$

Common stock issued through distribution reinvestment plan
$
55,853

 
$
20,499

 
$
34,806

Accrued capital expenditures
$
933

 
$

 
$


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

F-7

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017


Note 1 — Organization
American Finance Trust, Inc. (the “Company”) is a diversified REIT with a retail focus. The Company owns a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants and, as a result of the Mergers (as defined below), a portfolio of retail properties consisting primarily of power centers and lifestyle centers. The Company intends to focus its future acquisitions primarily on net leased retail properties. As of December 31, 2017, the Company owned 540 properties, comprised of 19.4 million rentable square feet, which were 95.2% leased, including 505 net leased commercial properties (465 of which are retail properties) and 35 retail properties which were acquired in the Mergers.
The Company, incorporated on January 22, 2013, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes (“REIT”) beginning with the taxable year ended December 31, 2013. Substantially all of the Company’s business is conducted through American Finance Operating Partnership, L.P. (the “OP”), a Delaware limited partnership, and its wholly-owned subsidiaries. As of December 31, 2017, the Company had 105.2 million shares of common stock outstanding, including unvested restricted shares of common stock (“restricted shares”) and shares issued pursuant to the Company’s distribution reinvestment plan (the “DRIP”).
The Company has no employees. The Company has retained American Finance Advisors, LLC (the “Advisor”) to manage the Company’s affairs on a day-to-day basis. American Finance Properties, LLC (the “Property Manager”) serves as the Company’s property manager. The Advisor and the Property Manager are wholly owned subsidiaries of AR Global Investments, LLC (the successor business to AR Capital, LLC, “AR Global”), as a result of which, they are related parties of the Company, and each have received or may receive, as applicable, compensation, fees and expense reimbursements for services related to managing the Company’s business.
On August 8, 2017, the Company’s application to list its common stock on The NASDAQ Global Select Market (“NASDAQ”) under the symbol “AFIN” (the “Listing”) was approved by NASDAQ, subject to the Company being in compliance with all applicable listing standards on the date its common stock begins trading on NASDAQ. While the Company intends to list its common stock at a time yet to be determined by its board of directors, there can be no assurance as to when or if the Company’s common stock will commence trading or of the price at which the Company’s common stock may trade.
Note 2 — Merger Transaction
On February 16, 2017, the Company and the OP completed (a) the merger of American Realty Capital — Retail Centers of America, Inc. (“RCA”) with and into a subsidiary of the Company referred to as the “Merger Sub,” with the Merger Sub surviving as a wholly owned subsidiary of the Company (the “Merger”) and (b) the merger of American Realty Capital Retail Operating Partnership, L.P. (the “RCA OP”) with and into the OP, with the OP as the surviving entity (the “Partnership Merger”, and together with the Merger, the “Mergers”). Pursuant to the terms and subject to the conditions set forth in the Agreement and Plan of Merger (the “Merger Agreement”) entered into by the Company and the OP with RCA, the RCA OP and the Merger Sub, at the effective time of the Mergers on February 16, 2017 (the “Effective Time”), each outstanding share of common stock of RCA, $0.01 par value per share (“RCA Common Stock”) (including any restricted shares of RCA Common Stock and fractional shares), was converted into (x) 0.385 shares of the Company’s common stock (the “Stock Consideration”) and (y) cash from the Company, in an amount equal to $0.95 per share (the “Cash Consideration,” and together with the Stock Consideration, the “Merger Consideration”).
In addition, at the Effective Time, (i) each unit of partnership interest of the RCA OP designated as an OP unit issued and outstanding immediately prior to the Effective Time (other than those held by RCA as described in clause (ii) below) was automatically converted into 0.424 validly issued units of limited partnership interest of the OP (the “Partnership Merger Consideration”); (ii) each unit of partnership interest of the RCA OP designated as either an OP unit or a GP unit held by RCA and issued and outstanding immediately prior to the Effective Time was automatically converted into 0.385 validly issued units of limited partnership interest of the OP; (iii) each unit of partnership interest of the RCA OP designated as a Class B Unit held by RCA’s advisor and a sub-advisor issued and outstanding immediately prior to the Effective Time was converted into the Partnership Merger Consideration (the “Class B Consideration,” and together with the Partnership Merger Consideration and the Merger Consideration, the “Total Merger Consideration”), and (iv) the interest of American Realty Capital Retail Advisor, LLC, the special limited partner of the RCA OP (the “RCA Advisor”), in the RCA OP was redeemed for a cash payment, determined in accordance with the existing terms of the RCA OP’s agreement of limited partnership.

F-8

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

In addition, as provided in the Merger Agreement, all outstanding restricted shares of RCA Common Stock previously issued by RCA became fully vested and entitled to receive the Merger Consideration.
The Company issued 38.2 million shares of its common stock as Stock Consideration and paid $94.5 million in Cash Consideration.
Prior to the Mergers, the Company and RCA each were sponsored, directly or indirectly, by AR Global. AR Global and its affiliates provide investment and advisory services to the Company, and previously provided such services to RCA, pursuant to written advisory agreements. In connection with, and subject to the terms and conditions of the Merger Agreement, RCA OP units held by AR Global and its affiliates were exchanged for limited partner interests in the OP designated as OP units (“OP Units”) and certain special limited partner interests in the RCA OP held by AR Global and its affiliates were, consistent with the terms of the RCA OP partnership agreement, redeemed for a cash payment of approximately $2.8 million.
The Advisor informed the Company that the Advisor engaged Lincoln Retail REIT Services, LLC (“Lincoln”) as an independent service provider to provide real estate-related services similar to the services provided by Lincoln to the RCA Advisor prior to the Effective Time. Lincoln will continue to provide, subject to the Advisor’s or its affiliates’ oversight, asset management, property management and leasing services for those multi-tenant properties acquired by the Company from RCA in the Mergers. The Advisor informed the Company that the Advisor agreed to pass through to Lincoln a portion of the fees and/or other expense reimbursements otherwise payable to the Advisor or its affiliates by the Company for services rendered by Lincoln. The Company has no direct obligation to Lincoln.
Accounting Treatment for the Mergers
The Mergers were accounted for under the acquisition method for business combinations pursuant to accounting principles generally accepted in the United States of America (“GAAP”), with the Company as the accounting acquirer of RCA. The consideration transferred by the Company to acquire RCA established a new accounting basis for the assets acquired, liabilities assumed and any non-controlling interests, measured at their respective fair value as of the Effective Time. In determining the fair value of the consideration transferred, including the Stock Consideration and any non-controlling interests, the Company utilized multiple sources including real estate valuations prepared by independent valuation firms and market sales data. The fair value of the Total Merger Consideration that exceeded the fair value of net assets acquired, was recorded as goodwill.

F-9

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

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

Fair value of the Stock Consideration (2)
 
917,046

Fair value of the Partnership Merger Consideration
 
2

Fair value of the Class B Consideration
 
4,882

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

 
 
 
Assets Acquired at Fair Value
 
 
Land
 
$
282,063

Buildings, fixtures and improvements
 
1,079,944

Acquired intangible lease assets
 
178,634

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

Cash and cash equivalents
 
21,922

Restricted cash
 
4,241

Prepaid expenses and other assets (1)
 
18,959

Goodwill (1)
 
1,605

Total assets acquired at fair value
 
1,587,368

Liabilities Assumed at Fair Value
 
 
Mortgage notes payable
 
127,651

Mortgage premiums
 
4,143

Credit facility
 
304,000

Market lease liabilities
 
104,840

Derivatives
 
203

Accounts payable and accrued expenses
 
21,291

Deferred rent and other liabilities
 
8,806

Total liabilities assumed at fair value
 
570,934

Net assets acquired
 
$
1,016,434

_________________________________
(1)
Prepaid expenses and other assets includes a measurement period adjustment of $0.5 million that was recognized during the third quarter of 2017. As a result, goodwill was increased by $0.5 million.
(2)
Valued at $24.00 as of the date of the Merger.
As a result of the Merger, the Company recorded goodwill of $1.6 million, which is primarily attributable to expected synergies from combining operations of the Company and RCA.
Note 3 — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

F-10

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation, specifically the presentation of mortgage premiums, net, related to mortgage notes payable which is presented as a reduction of the carrying amount of mortgage notes payable.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity (“VIE”) for which the Company is the primary beneficiary. The Company has determined the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company’s assets and liabilities are held by the OP.
Purchase Accounting
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired, including those acquired in the Mergers, based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company’s analysis of comparable properties in the Company’s portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates and the value of in-place leases as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 24 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below-market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company’s pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Any excess of purchase price over the fair values of assets acquired and liabilities assumed are recorded as goodwill. Alternatively, if the fair value of net assets acquired exceeds the fair value of consideration paid, the transaction results in a bargain purchase gain that the Company recognizes immediately in earnings.
Reportable Segment
The Company has one reportable segment, income-producing properties, which consists of activities related to investing in real estate. 

F-11

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, and fair value measurements, 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.
The Company evaluates 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.
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, the Company utilizes a number of sources, including real estate valuations, prepared by independent valuation firms. The Company also considers 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 the Company’s 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.
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.

F-12

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If an impairment exists, due to the inability to recover the carrying value of a property, the Company would recognize an impairment loss in the consolidated statement of operations to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss recorded would equal the adjustment to fair value less estimated cost to dispose of the asset.
Goodwill
Goodwill, which is not amortized, represents the difference between the purchase price and the fair value of identifiable net assets acquired in a business combination. We review goodwill for impairment indicators throughout the year and test for impairment annually in the fourth quarter. Impairment indicators may be an event or circumstance that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For 2017, the Company used a qualitative assessment approach to determine whether it is more likely than not that the fair value of the reporting unit, which contains the Company’s goodwill, is less than its carrying value. Based on our assessment we determined that the Company’s goodwill was not impaired as of December 31, 2017, and no further analysis was required.
Derivative Instruments
The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any change in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the accompanying consolidated statement of operations and comprehensive loss. If the derivative is designated and qualifies for hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.
Non-controlling interests
The non-controlling interests represent the portion of the equity in the OP that is not owned by the Company. Non-controlling interests are presented as a separate component of equity on the consolidated balance sheets and presented as net loss attributable to non-controlling interests on the consolidated statements of operations and comprehensive loss. Non-controlling interests are allocated a share of net loss based on their share of equity ownership.

F-13

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

Non-controlling interests resulted from the issuance of OP Units in conjunction with the Mergers and were recognized at fair value as of the Effective Time. In determining the fair value of the non-controlling interests, the Company utilized multiple sources including real estate valuations prepared by independent valuation firms and market sales data. Please see Note 2 — Merger Transaction for additional information on the Mergers.
Commercial Mortgage Loans
Commercial mortgage loans held for investment purposes are anticipated to be held until maturity, and accordingly, are carried at cost, net of unamortized acquisition fees and expenses capitalized, discounts or premiums and unfunded commitments. Commercial mortgage loans that are deemed to be impaired will be carried at amortized cost less a specific allowance for loan losses. Interest income is recorded on the accrual basis and related discounts, premiums and capitalized acquisition fees and expenses on investments are amortized over the life of the investment using the effective interest method. Amortization is reflected as an adjustment to interest income from debt investments in the Company’s consolidated statements of operations and comprehensive loss. Guaranteed loan exit fees payable by the borrower upon maturity are accreted over the life of the investment using the effective interest method. The accretion of guaranteed loan exit fees is recognized in interest income from debt investments in the Company’s consolidated statements of operations and comprehensive loss.
Acquisition fees and expenses incurred in connection with the origination and acquisition of commercial mortgage loan investments are evaluated based on the nature of the expense to determine if they should be expensed in the period incurred or capitalized and amortized over the life of the investment.
Cash and Cash Equivalents
Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less and funds in overnight sweeps, in which excess funds over an established threshold are swept daily. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company (the “FDIC”) up to an insurance limit. As of December 31, 2017, the Company had cash and cash equivalents of $107.7 million of which $105.9 million were in excess of the amount insured by the FDIC. As of December 31, 2016, the Company had cash and cash equivalents of $131.2 million of which $130.7 million were in excess of the amount insured by the FDIC. Although the Company bears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result thereof.
Deferred Costs, Net
Deferred costs, net consists of deferred leasing costs, net of accumulated amortization. Deferred leasing costs consist primarily of lease commissions and payments made to execute new leases and are deferred and amortized over the term of the lease.
Revenue Recognition
The Company’s revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Because many of the Company’s leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rents receivable that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When the Company acquires a property, acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease is executed. The Company defers the revenue related to lease payments received from tenants in advance of their due dates.
The Company owns certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant’s sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, the Company defers the recognition of contingent rental income, until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. For the year ended December 31, 2017, approximately $0.8 million in contingent rental income is included in rental income on the accompanying consolidated statements of operations and comprehensive loss.
The Company continually reviews receivables related to rent and unbilled rents receivable and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company records an increase in the Company’s allowance for uncollectible accounts or records a direct write-off of the receivable in the Company’s consolidated statements of operations and comprehensive loss.

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Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

Cost recoveries from tenants are included in operating expense reimbursements on the accompanying consolidated statements of operations and comprehensive loss in the period the related costs are incurred, as applicable.
Share-Based Compensation
The Company has a stock-based award plan, which is accounted for under the guidance for share based payments. The expense for such awards is included in general and administrative expenses and is recognized in accordance with the service period required or when the requirements for exercise of the award have been met (See Note 16Share-Based Compensation).
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the taxable year ended December 31, 2013. The Company believes that, commencing with such taxable year, it has been organized and has operated in a manner so that it qualifies for taxation as a REIT under the Code. The Company intends to continue to operate in such a manner, but no assurance can be given that the Company will operate in a manner so as to remain qualified as a REIT. In order to continue to qualify for taxation as a REIT, the Company must distribute annually at least 90% of its REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law by the U.S. President. The Company is not aware of any provision in the final tax reform legislation or any pending tax legislation that would adversely affect its ability to operate as a REIT or to qualify as a REIT for U.S. federal income tax purposes. However, new legislation, as well as new regulations, administrative interpretations, or court decisions may be introduced, enacted, or promulgated from time to time, that could change the tax laws or interpretations of the tax laws regarding qualification as a REIT, or the federal income tax consequences of that qualification, in a manner that is adverse to the Company’s qualification as a REIT. If the Company continues to qualify for taxation as a REIT, it generally will not be subject to federal corporate income tax on that portion of its REIT taxable income that it distributes to its stockholders. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and properties, as well as federal income and excise taxes on its undistributed income.
The amount of distributions payable to the Company’s stockholders is determined by the board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable, and annual distribution requirements needed to qualify and maintain the Company’s status as a REIT under the Code.
The following table details from a tax perspective, the portion of distributions classified as return of capital and ordinary dividend income, per share per annum, for the years ended December 31, 2017, 2016 and 2015:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Return of capital
 
82.7
%
 
$
1.22

 
76.0
%
 
$
1.25

 
89.9
%
 
$
1.48

Ordinary dividend income
 
17.3
%
 
0.25

 
24.0
%
 
0.40

 
10.1
%
 
0.17

Total
 
100.0
%
 
$
1.47

 
100.0
%
 
$
1.65

 
100.0
%
 
$
1.65

Per Share Data
Basic net loss per share of common stock is calculated by dividing net loss by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net loss per share of common stock considers the effect of potentially dilutive instruments outstanding during such period.
Recently Issued Accounting Pronouncements
Adopted as of December 31, 2017:
In October 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) No. 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control, which provides guidance relating to interests 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 provisions of this guidance became effective on January 1, 2017, and the adoption did not have an impact on the Company’s consolidated financial statements.

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Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which provides guidance on the classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The amendments are effective for fiscal years beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The Company adopted this guidance effective December 31, 2017, using a retrospective transition method. As a result, the Company adjusted it statements of cash flows for the years ended December 31, 2016 and 2015 to include $7.9 million restricted cash, in each of those years, in the beginning and ending cash balances and remove transfers of $3,000 and $7.9 million, respectively, between cash and restricted cash from financing activities.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments in this update modify the concept of impairment from the condition that exists to when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The revised guidance is effective for reporting periods beginning after December 15, 2019, and the amendments will be applied prospectively. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted the new guidance effective January 1, 2017 and the adoption had no impact on the Company’s consolidated financial statements.
Pending Adoption as of December 31, 2017:
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts with Customers (Topic 606), and has since issued several additional amendments thereto (collectively referred to herein as “ASC 606”). ASC 606 establishes a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under ASC 606, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A reporting entity may apply the amendments in ASC 606 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. The Company adopted this guidance effective January 1, 2018 using the modified retrospective approach and it did not have an impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10), that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The Company adopted this guidance effective January 1, 2018 and there was no impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”). ASC 842 originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, the FASB issued an exposure draft in January 2018 (2018 Exposure Draft) which, if adopted as written, would allow lessors a practical expedient by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is consistent with the Company’s existing policies. ASU 2016-02 originally required a modified retrospective method of adoption, however, the 2018 Exposure Draft indicates that companies may be permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The pronouncement allows some optional practical expedients. The Company does not expect this guidance to impact its existing lessor revenue recognition pattern.
The Company is a lessee for some properties in which it has ground leases as of December 31, 2017. For these leases, the Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining lease payments upon adoption of this update. The new standard requires lessees to apply a dual lease classification approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.

F-16

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

The Company is continuing to evaluate any differences in the timing, measurement, or presentation of lessor revenues as well as the impact of the new lessee accounting model on the Company’s consolidated financial position, results of operations and disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. The amendments may be adopted early for reporting periods beginning after December 15, 2018. The company is currently evaluating the impact of this new guidance.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The Company will apply the new guidance beginning in the first quarter of 2018, with reclassification of prior period amounts where applicable, and it does not expect the provisions to have a material impact on its statement of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition of a business. This new guidance is applicable when evaluating whether an acquisition should be treated as either a business acquisition or an asset acquisition. Under the revised guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not be considered a business. The Company will adopt this guidance effective January 1, 2018, and the amendments will be applied prospectively. The Company has assessed this revised guidance and expects, based on historical property acquisitions, that in most cases, a future property acquired after adoption would be treated as an asset acquisition rather than a business acquisition, which would result in the capitalization of related transaction costs.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update states that modification accounting should be used unless the fair value of the award, the vesting terms of the award and the classification of the award as either equity or liability, all do not change as a result of the modification. The Company adopted this guidance effective January 1, 2018. The Company expects that any future modifications to its issued share-based awards will be accounted for using modification accounting, unless the modification meets all of the exception criteria noted above. As a result, the modification would be treated as an exchange of the original award for a new award, with any incremental fair value being treated as additional compensation cost.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to better align cash flow and fair value hedge accounting with the corresponding risk management activities. Among other things, the amendments expand which hedging strategies are eligible for hedge accounting, align the timing of recognition of hedge results with the earnings effect of the hedged item and allow companies to include the change in fair value of the derivative in the same income statement line item as the earnings effect of the hedged item. Additionally, for cash flow hedges that are highly effective, the update allows for all changes in fair value of the derivative to be recorded in other comprehensive income. The revised guidance is effective for reporting periods beginning after December 15, 2018. Early application is permitted. The Company is currently evaluating the impact of this new guidance.

F-17

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

Note 4 — Real Estate Investments
The Company owned 540 properties, which were acquired for investment purposes, as of December 31, 2017. The following table presents the allocation of assets acquired and liabilities assumed during the years ended December 31, 2017 and 2016. No properties were acquired during the year ended December 31, 2015.
(Dollar amounts in thousands)
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
Real estate investments, at cost:
 
 
 
 
Land
 
$
313,423

 
$
1,729

Buildings, fixtures and improvements
 
1,176,909

 
29,664

Total tangible assets
 
1,490,332

 
31,393

Acquired intangibles: (1)
 
 
 
 
In-place leases
 
177,152

 
3,162

Above-market lease assets
 
22,934

 
548

Below-market ground lease asset
 
1,233

 

Above-market ground lease liability
 

 
(85
)
Below-market lease liabilities
 
(106,513
)
 
(774
)
Total intangible assets, net
 
94,806

 
2,851

Credit facility assumed in the Merger
 
(304,000
)
 

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

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

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

 

Consideration paid for acquired real estate investments, net of liabilities assumed
 
$
1,165,771


$
34,244

Number of properties purchased
 
110

 
4

_____________________________________
(1) Weighted-average remaining amortization periods for in-place leases, above-market lease assets, below-market ground lease asset, and below-market lease liabilities acquired during the year ended December 31, 2017 were 7.5 years, 9.2 years, 38.5 years, and 18.9 years, respectively, as of each property’s respective acquisition date.
Total acquired intangible lease assets and liabilities consist of the following as of the dates presented:
 
 
December 31, 2017
 
December 31, 2016
(In thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
In-place leases
 
$
421,369

 
$
140,085

 
$
281,284

 
$
286,548

 
$
95,547

 
$
191,001

Above-market leases
 
31,610

 
11,309

 
20,301

 
13,581

 
8,106

 
5,475

Below-market ground lease asset
 
1,233

 
28

 
1,205

 

 

 

Total acquired intangible lease assets
 
$
454,212

 
$
151,422

 
$
302,790

 
$
300,129

 
$
103,653

 
$
196,476

 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible liabilities:
 
 

 
 

 
 
 
 
 
 
 
 
Above-market ground lease liability
 
$
85

 
$
3

 
$
82

 
$
85

 
$
1

 
$
84

Below-market lease liabilities
 
119,249

 
10,559

 
108,690

 
18,443

 
4,612

 
13,831

Total acquired intangible lease liabilities
 
$
119,334

 
$
10,562

 
$
108,772

 
$
18,528

 
$
4,613

 
$
13,915


F-18

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

The following table presents amortization expense and adjustments to revenue and property operating expense for intangible assets and liabilities for the years ended December 31, 2017, 2016 and 2015:
 
 
Year Ended December 31,
(In thousands)
 
2017
 
2016
 
2015
In-place leases
 
$
68,477

 
$
34,247

 
$
34,600

Total added to depreciation and amortization
 
$
68,477

 
$
34,247

 
$
34,600

 
 
 
 
 
 
 
Above-market leases
 
$
(6,007
)
 
$
(2,943
)
 
$
(3,006
)
Below-market lease liabilities
 
11,212

 
2,465

 
1,340

Total deducted from rental income
 
$
5,205

 
$
(478
)
 
$
(1,666
)
 
 
 
 
 
 
 
Below-market ground lease asset
 
$
(28
)
 
$

 
$

Above-market ground lease liability
 
(2
)
 
(1
)
 

Total deducted from property operating expense
 
$
(30
)
 
$
(1
)
 
$

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)
 
2018
 
2019
 
2020
 
2021
 
2022
In-place leases
 
$
53,958

 
$
43,803

 
$
34,779

 
$
29,792

 
$
25,665

Total to be added to depreciation and amortization
 
$
53,958

 
$
43,803

 
$
34,779

 
$
29,792

 
$
25,665

 
 
 
 
 
 
 
 
 
 
 
Above-market leases
 
$
(4,086
)
 
$
(3,243
)
 
$
(2,422
)
 
$
(2,092
)
 
$
(1,712
)
Below-market lease liabilities
 
9,005

 
8,308

 
7,587

 
6,876

 
6,466

Total to be added to rental income
 
$
4,919

 
$
5,065

 
$
5,165

 
$
4,784

 
$
4,754

 
 
 
 
 
 
 
 
 
 
 
Below-market ground lease asset
 
$
32

 
$
32

 
$
32

 
$
32

 
$
32

Above-market ground lease liability
 
(2
)
 
(2
)
 
(2
)
 
(2
)
 
(2
)
Total to be deducted from property operating expense
 
$
30

 
$
30

 
$
30

 
$
30

 
$
30

The following table presents unaudited pro forma information as if the acquisitions during the year ended December 31, 2017 had been consummated on January 1, 2016:
 
 
Year Ended December 31,
(In thousands, except per share data)
 
2017 (1)
 
2016
Pro forma revenues
 
$
293,768

 
$
276,972

Pro forma net loss
 
$
(38,113
)
 
$
(11,042
)
Basic and diluted pro forma net loss per share
 
$
(0.36
)
 
$
(0.11
)
_____________________
(1)
For the year ended December 31, 2017, aggregate revenues and net income derived from the Company’s 2017 acquisitions (for the Company’s period of ownership) were $121.3 million and $11.6 million, respectively.

F-19

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

The following table presents future minimum base rent payments on a cash basis due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items:
(In thousands)
 
Future Minimum
Base Rent Payments
2018
 
$
226,031

2019
 
217,134

2020
 
200,437

2021
 
188,135

2022
 
176,879

Thereafter
 
983,105

 
 
$
1,991,721

The following table lists the tenants (including, for this purpose, all affiliates of such tenants) from which the Company derives annualized rental income on a straight-line basis constituting 10.0% or more of the Company’s consolidated annualized rental income on a straight-line basis for all portfolio properties as of the dates indicated:
 
 
December 31,
Tenant
 
2017
 
2016
SunTrust Bank
 
11.2%
 
17.7%
Sanofi US
 
*
 
11.4%
C&S Wholesale Grocer
 
*
 
10.2%
_____________________
*
Tenant’s annualized rental income on a straight-line basis was not greater than or equal to 10.0% of consolidated annualized rental income for all properties as of the date specified.
The termination, delinquency or non-renewal of leases by one or more of the above tenants may have a material adverse effect on revenues. No other tenant represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of December 31, 2017 and 2016.
The following table lists the states where the Company has concentrations of properties where annualized rental income on a straight-line basis each represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of December 31, 2017 and 2016:
 
 
December 31,
State
 
2017
 
2016
New Jersey
 
*
 
20.0%
Georgia
 
*
 
11.0%
_____________________
*
State’s annualized rental income on a straight-line basis was not greater than or equal to 10.0% of consolidated annualized rental income for all properties as of the date specified.
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 December 31, 2017 and 2016.
Real Estate Held For Sale
When assets are identified by management as held for sale, the Company stops recognizing depreciation and amortization expense on the identified assets and estimates the sales price, net of costs to sell, of those assets. If the carrying amount of the assets classified as held for sale exceeds the estimated net sales price, the Company records an impairment charge equal to the amount by which the carrying amount of the assets exceeds the Company’s estimate of the net sales price of the assets.

F-20

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

As of December 31, 2017 and 2016, there were four and five properties, respectively, classified as held for sale. The disposal of these properties does not represent a strategic shift. Accordingly, the operating results of these properties remain classified within continuing operations for all periods presented.
The following table details the major classes of assets associated with the properties that have been reclassified as held for sale as of December 31, 2017 and 2016.
(Dollar amounts in thousands)
 
December 31, 2017
 
December 31, 2016
Real estate investments held for sale, at cost:
 
 
 
 
Land
 
$
1,453

 
$
7,225

Buildings, fixtures and improvements
 
4,677

 
142,798

Acquired intangible lease assets
 
1,252

 
18,145

Total real estate assets held for sale, at cost
 
7,382

 
168,168

Less accumulated depreciation and amortization
 
(2,666
)
 
(29,213
)
Total real estate investments held for sale, net
 
4,716

 
138,955

 
 
 
 
 
Impairment charges related to properties reclassified as held for sale
 
(34
)
 
(1,353
)
Assets held for sale
 
$
4,682

 
$
137,602

Real Estate Sales
During the year ended December 31, 2017, the Company closed on the sale of 25 properties, including 18 properties operated by SunTrust Banks, Inc. (“SunTrust”) (as discussed below), for an aggregate contract price of $291.5 million, exclusive of closing costs. These sales resulted in aggregate gains of $14.9 million, which is reflected in gain on sale of real estate investments on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2017. The Company recorded impairment charges of $4.5 million upon reclassification of properties to assets held for sale to adjust the properties to their fair value less estimated cost of disposal, which are recorded in impairment charges in the Company’s consolidated statement of operations and comprehensive loss.
During the year ended December 31, 2016, the Company closed on the sale of 12 properties operated by SunTrust for an aggregate contract price of $30.2 million, exclusive of closing costs. The sale of these properties resulted in impairment charges of $1.3 million and a gain on sale of real estate investments of $0.5 million.
The disposal of these properties did not represent a strategic shift. Accordingly, the operating results of the properties sold remained classified within continuing operations for all periods presented until the date of disposal.
Impairment of Held for Use Real Estate Investments
As of December 31, 2017 and 2016, the Company owned 41 and 57 held for use single-tenant net lease properties operated by SunTrust, respectively, which had lease terms set to expire between December 31, 2017 and March 31, 2018. As a result, the Company reconsidered its intended holding period for these properties and evaluated the impact on its ability to recover the carrying value of such properties based on the expected cash flows over its intended holding period. The Company primarily used a market approach to estimate the future cash flows expected to be generated. This approach involved evaluating comparable sales of properties in the same geographic region as the SunTrust properties in order to generate an estimated sale price. The Company made certain assumptions in this approach including, among others, that the properties in the comparable sales used in the analysis share similar characteristics to the SunTrust properties, and that market and economic conditions at the time of any potential sales of these SunTrust properties, such as discount rates, demand for space, competition for tenants, changes in market rental rates, and costs to operate the property, would be similar to those in the comparable sales analyzed. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analysis may not be achieved, and actual losses or impairment may be realized in the future.
For some of the held for use SunTrust properties noted above, the Company has executed a non-binding letter of intent (“LOI”) or a definitive purchase and sale agreement (“PSA”) to sell the properties. In those instances, the Company used the sale price from the applicable LOI or PSA to estimate the future cash flows expected to be generated. The Company made certain assumptions in this approach as well, mainly that the sale of these properties would close at the terms specified in the LOI or PSA. There can be no guarantee that the sales of these properties will close under these terms or at all.

F-21

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

As a result of its consideration of impairment its SunTrust and other held for use properties, the Company recognized impairment charges of $20.5 million, which included impairments of $16.2 million on 32 of the 41 held for use SunTrust properties during the year ended December 31, 2017 as their carrying value exceeded their estimated fair values. As of December 31, 2016, the carrying value of 43 of the 57 held for use SunTrust properties noted above exceeded their estimated fair values and recognized an aggregate impairment charge of $24.7 million during the year ended December 31, 2016. No impairment was recognized on properties held for use during the year ended December 31, 2015. These amounts are recorded in impairment charges in the Company’s consolidated statement of operations and comprehensive loss.
Property Damage
During the year ended December 31, 2017, one of the Company’s properties, Southroads Shopping Center, sustained damage from a tornado. The property is covered by insurance for property damage, subject to normal deductibles. Accordingly, damage will be covered by insurance proceeds, and the Company does not expect any significant exposure to loss related to this property. As a result of the damage, the Company wrote off the carrying value of the damages to the property, which was estimated to be $5.6 million, and has received an insurance reimbursement of approximately $4.6 million as of December 31, 2017.
Note 5 — Commercial Mortgage Loans
The following table is a summary of the Company’s commercial loan portfolio as of December 31, 2016. The Company did not own any commercial mortgage loans as of December 31, 2017.
 
 
 
 
December 31, 2016
Loan Type
 
Property Type
 
Par Value
 
Percentage
 
 
 
 
(In thousands)
 
 
Senior (1)
 
Student Housing — Multifamily
 
$
17,200

 
100.0
%
 
 
 
 
$
17,200

 
100.0
%
_____________________________________
(1)
This loan was repaid by the borrower during the year ended December 31, 2017.
For the years ended December 31, 2017 and 2016, the activity in the Company’s commercial mortgage loans, held for investment, was as follows:
(In thousands)
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
Beginning balance
 
$
17,175

 
$
17,135

Discount accretion and premium amortization (1)
 
25

 
40

Principal repayments
 
(17,200
)
 

Ending balance
 
$

 
$
17,175

_____________________________________
(1)
Includes amortization of capitalized origination fees and expenses.
Note 6 — Commercial Mortgage-Backed Securities
The following table details the realized loss on commercial mortgage-backed securities (“CMBS”) sold during the year ended December 31, 2015. No CMBS were acquired or sold during the years ended years ended December 31, 2017 and 2016:
(In thousands)
 
Amortized Cost
 
Sale Price
 
Realized Loss
Year Ended December 31, 2015
 
$
30,209

 
$
28,624

 
$
1,585

The Company did not have any investments in CMBS as of December 31, 2017 or 2016.

F-22

Table of Contents
AMERICAN FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017

Note 7 — Other Real Estate Securities
The following table details the realized gains on sale of the Company’s other real estate securities, which consisted of redeemable preferred stock, during the year ended December 31, 2015. There were no other real estate securities sold during the years ended December 31, 2017 and 2016:
(In thousands)
 
Aggregate Cost Basis
 
Sale Price
 
Realized Gain, Net
Year Ended December 31, 2015
 
$
18,528

 
$
19,266

 
$
738

As of December 31, 2017 and 2016, the Company had no investments in other real estate securities.
Note 8 — Mortgage Notes Payable
The Company’s mortgage notes payable as of December 31, 2017 and 2016 consisted of the following:
 
 
 
 
Outstanding Loan Amount as of
 
Effective Interest Rate as of
 
 
 
 
 
 
 
 
 
 
December 31,
 
December 31,
 
 
 
 
 
 
Portfolio
 
Encumbered Properties
 
2017
 
2016
 
2017
 
Interest Rate
 
Maturity
 
Anticipated Repayment
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
 
 
SAAB Sensis I
 
1
 
$
7,470

 
$
7,841

 
5.93
%
 
Fixed
 
Apr. 2025
 
Apr. 2025
SunTrust Bank II
 
27
 
21,243

 
25,000

 
5.50
%
 
Fixed
 
Jul. 2031
 
Jul. 2021
C&S Wholesale Grocer I (1)
 
 

 
82,313

 
%
 
Fixed
 
Apr. 2037
 
Apr. 2017
SunTrust Bank III
 
100
 
79,729

 
88,567

 
5.50
%
 
Fixed
 
Jul. 2031
 
Jul. 2021
SunTrust Bank IV
 
27
 
22,756

 
21,243

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

 
125,000

 
5.16
%
 
Fixed
 
Jul. 2026
 
Jan. 2021
Stop & Shop I
 
4
 
37,562

 
38,271

 
5.63
%
 
Fixed
 
Jun. 2041
 
Jun. 2021
Mortgage Loan I
 
264
 
638,115

 
649,532

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

 

 
4.66
%
 
Fixed
 
Jul. 2018
 
Jul. 2018
Tiffany Springs MarketCenter
 
1
 
33,802

 

 
3.92
%
 
Fixed (3)
 
Oct. 2018
 
Oct. 2018
Shops at Shelby Crossing
 
1
 
23,002

 

 
4.97
%
 
Fixed
 
Mar. 2024
 
Mar. 2024
Patton Creek
 
1
 
40,858

 

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

 

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

 

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

 

 
4.12
%
 
Fixed
 
Jan. 2028
 
Jan. 2028
Gross mortgage notes payable
 
485
 
1,307,887

 
1,037,767

 
4.62
%
(2) 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization (4)