Edgar Filing: American Realty Capital Trust, Inc.

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended March 31, 2011

	OR

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

For the transition period from _________ to __________

Commission file number: 333-145949

AMERICAN REALTY CAPITAL TRUST, INC.

(Exact name of registrant as specified in its charter)

Maryland		71-1036989
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

106 York Road Jenkintown, PA		19046
(Address of principal executive offices)		(Zip Code)

(215) 887-2189

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x	(Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

The number of outstanding shares of the registrant’s common stock on April 30, 2011 was 100,176,556 shares.

AMERICAN REALTY CAPITAL TRUST, INC.

INDEX

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010	1
Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (Unaudited)	2
Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2011 (Unaudited)	3
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)	4
Notes to Consolidated Financial Statements (Unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
Item 4. Controls and Procedures	49
PART II — OTHER INFORMATION	49
Item 1. Legal Proceedings	49
Item 1A. Risk Factors	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3. Defaults Upon Senior Securities	49
Item 4. Reserved	49
Item 5. Other Information	49
Item 6. Exhibits	49
Signatures	50

AMERICAN REALTY CAPITAL TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	March 31,			December 31,
	2011			2010
	(Unaudited)
ASSETS
Real estate investments, at cost:
Land	$	215,832		$	142,401
Buildings, fixtures and improvements		905,049			631,999
Acquired intangible lease assets		153,699			108,193
Total real estate investments, at cost		1,274,580			882,593
Less accumulated depreciation and amortization		(42,640	)		(32,777	)
Total real estate investments, net		1,231,940			849,816
Cash and cash equivalents		19,583			31,985
Restricted cash		3,525			90
Prepaid expenses and other assets		22,363			12,049
Investment in joint venture with affiliate		11,762			11,945
Deferred financing costs, net		11,661			8,169
Total assets	$	1,300,834		$	914,054

LIABILITIES AND EQUITY
Mortgage notes payable	$	542,713		$	372,755
Mortgage discount and premium, net		788			1,163
Long-term notes payable		12,720			12,790
Below-market lease liabilities, net		8,378			8,454
Derivatives, at fair value		4,401			5,214
Accounts payable and accrued expenses		6,245			3,638
Deferred rent and other liabilities		3,482			3,858
Distributions payable		4,954			3,518
Total liabilities		583,681			411,390
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.01 par value; 240,000,000 shares authorized, 87,864,496 and 61,824,238 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		879			618
Additional paid-in capital		760,864			529,740
Accumulated other comprehensive loss		(3,176	)		(3,878	)
Accumulated deficit		(63,794	)		(46,464	)
Total stockholders’ equity		694,773			480,016
Non-controlling interests		22,380			22,648
Total equity		717,153			502,664
Total liabilities and equity	$	1,300,834		$	914,054

The accompanying notes are an integral part of these financial statements

AMERICAN REALTY CAPITAL TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended March 31,
	2011			2010
Revenues:
Rental income	$	20,718		$	7,428
Operating expense reimbursements		139			—
Total revenues		20,857			7,428
Expenses:
Fees to affiliate		600			—
Acquisition and transaction related		7,132			341
Property expenses		213			—
General and administrative		524			224
Depreciation and amortization		9,943			3,785
Total operating expenses		18,412			4,350
Operating income		2,445			3,078
Other income (expenses):
Interest expense		(6,785	)		(3,673	)
Other income		38			11
Gains (losses) on derivative instruments		142			(152	)
Loss on disposition of property		(44	)		—
Gains (losses) on sale to non-controlling interestholders, net of taxes		(102	)		335
Income from joint venture with affiliate		24			—
Total other expenses		(6,727	)		(3,479	)
Net loss		(4,282	)		(401	)
Net (income) loss attributable to non-controlling interests		(238	)		12
Net loss attributable to stockholders	$	(4,520	)	$	(389	)
Basic and diluted net loss per share	$	(0.07	)	$	(0.02	)

The accompanying notes are an integral part of these financial statements

AMERICAN REALTY CAPITAL TRUST, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Three Months Ended March 31, 2011

(Dollar amounts in thousands)

(Unaudited)

	Common Stock					Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stock- holders’ Equity			Non-controlling Interests			Total Equity
	Number of Shares			Par Value
Balance, December 31, 2010		61,824,238		$	618	$	529,740		$	(3,878	)	$	(46,464	)	$	480,016		$	22,648		$	502,664
Issuance of common stock		25,561,135			256		251,908			—			—			252,164			—			252,164
Offering costs, commissions and dealer manager fees		—			—		(24,518	)		—			—			(24,518	)		—			(24,518	)
Common stock issued through distribution reinvestment plan		516,247			5		4,899			—			—			4,904			—			4,904
Distributions declared		—			—		—			—			(12,810	)		(12,810	)		—			(12,810	)
Common stock redemptions		(37,124	)		—		(1,520	)		—			—			(1,520	)		—			(1,520	)
Amortization of restricted shares		—			—		355			—			—			355			—			355
Distributions to non-controlling interest holders		—			—		—			—			—			—			(506	)		(506	)
Designated derivatives, fair value adjustment		—			—		—			702			—			702			—			702
Net income (loss)		—			—		—			—			(4,520	)		(4,520	)		238			(4,282	)
Total comprehensive income (loss)		—			—		—			—			—			(3,818	)		238			(3,580	)
Balance, March 31, 2011		87,864,496		$	879	$	760,864		$	(3,176	)	$	(63,794	)	$	694,773		$	22,380		$	717,153

The accompanying notes are an integral part of these financial statements

AMERICAN REALTY CAPITAL TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net loss	$	(4,282	)	$	(401	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		7,818			3,074
Amortization of intangibles		2,125			711
Amortization of deferred financing costs		628			168
Amortization of mortgage discounts and premiums, net		(44	)		—
Amortization of restricted stock grants		355			—
Accretion of below-market lease liability		(76	)		(79	)
Loss on disposition of property		44			—
(Gain) loss on derivative instruments		(142	)		152
Gain on sales to non-controlling interest holders		—			(511	)
Income from unconsolidated joint venture		(24	)		—
Changes in assets and liabilities:
Prepaid expenses and other assets		(4,047	)		(1,177	)
Accounts payable and accrued expenses		1,451			(12	)
Due to affiliated entity		—			(76	)
Deferred rent and other liabilities		(376	)		211
Net cash provided by operating activities		3,430			2,060
Cash flows from investing activities:
Investment in real estate and other assets		(380,568	)		(81,438	)
Distributions from joint venture investments		207			—
Proceeds from disposition of real estate and other assets		581			—
Net cash used in investing activities		(379,780	)		(81,438	)
Cash flows from financing activities:
Proceeds from mortgage notes payable		155,430			41,735
Payments on mortgage notes payable		(1,222	)		(428	)
Payments on long-term notes payable		(70	)		—
Payments on short-term bridge funds		—			(15,878	)
Contributions from non-controlling interest holders		—			5,035
Distributions to non-controlling interest holders		(506	)		(126	)
Proceeds from issuance of common stock, net		226,222			49,479
Payments of financing costs		(8,957	)		(848	)
Distributions paid		(6,470	)		(1,815	)
Redemptions paid		(364	)		—
Restricted cash		(115	)		(8	)
Net cash provided by financing activities		363,948			77,146
Net decrease in cash and cash equivalents		(12,402	)		(2,232	)
Cash and cash equivalents, beginning of period		31,985			5,010
Cash and cash equivalents, end of period	$	19,583		$	2,778

The accompanying notes are an integral part of these financial statements

AMERICAN REALTY CAPITAL TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)

(In thousands)

(Unaudited)

		Three Months Ended March 31,
		2011		2010
Supplemental Disclosures:
Cash paid for interest	$	5,813	$	3,467
Cash paid for income taxes		492		317
Non-Cash Investing and Financing Activities:
Common stock issued through distribution reinvestment plan		4,904		1,407
Mortgages assumed in real estate acquisitions		12,430		—

The accompanying notes are an integral part of these financial statements

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 1 — Organization

American Realty Capital Trust, Inc. (the “Company”), incorporated on August 17, 2007, is a Maryland corporation that qualifies as a real estate investment trust (“REIT”) for federal income tax purposes. On January 25, 2008, the Company commenced an initial public offering on a “best efforts” basis of up to 150.0 million shares of common stock offered at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (the “Registration Statement”) filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended. The Registration Statement also covers up to 25.0 million shares available pursuant to a distribution reinvestment plan (the “DRIP”) under which the Company’s stockholders may elect to have their distributions reinvested in additional shares of the Company’s common stock at the greater of $9.50 per share or 95% of the estimated value of a share of common stock.

On August 5, 2010, the Company filed a registration statement on Form S-11 to register 32.5 million shares of common stock in connection with a follow-on offering. The initial public offering was originally set to expire on January 25, 2011, three years after its effective date. However, as permitted by Rule 415 of the Securities Act, the Company will now continue its initial public offering until the earlier of July 25, 2011 or the date that the SEC declares the registration statement for the follow-on offering effective.

As of March 31, 2011, the Company issued approximately 87.9 million shares of common stock. Total gross proceeds from these issuances were $859.1 million. As of March 31, 2011, the aggregate value of all share issuances and subscriptions outstanding was $870.7 million based on a per share value of $10.00 (or $9.50 for shares issued under the distribution reinvestment plan, or DRIP). As of March 31, 2011, approximately 0.3 million shares of common stock had been redeemed under the stock repurchase program at a value of $2.9 million and an additional 0.2 million shares with a redemption value of $1.6 million were accrued for redemption as of March 31, 2011. The Company is dependent upon the net proceeds from the offering to conduct its proposed operations.

The Company intends to use the proceeds of the on-going initial public offering to acquire and manage a diverse portfolio of real estate properties consisting primarily of freestanding, single-tenant properties net leased to investment grade and other creditworthy tenants throughout the United States and Puerto Rico. The Company typically funds acquisitions with a combination of equity and debt and in certain cases may use only equity capital or fund a portion of the purchase price through investments from unaffiliated third parties. The Company expects to arrange long-term financing on both a secured and unsecured fixed rate basis. The Company intends to continue to grow existing relationships and develop new relationships throughout the various markets the Company serves, which is expected to lead to further acquisition opportunities.

As of March 31, 2011, the Company owned 318 properties with approximately 8.2 million square feet, 100% leased with a weighted average remaining lease term of 14.8 years. In constructing the portfolio, the Company is committed to diversification (industry, tenant and geography). As of March 31, 2011, rental revenues derived from investment grade tenants (rated BBB- or better by Standard & Poors) approximated 75.5%. The strategy encompasses receiving the majority of revenue from investment grade tenants as the Company further acquires properties and enters into (or assumes) long-term lease arrangements.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 1 — Organization – (continued)

Substantially all of the Company’s business is conducted through American Realty Capital Operating Partnership, L.P. (the “OP”), a Delaware limited partnership. The Company is the sole general partner of and owns a 99.01% partnership interest in the OP. American Realty Capital Advisors, LLC, (the “Advisor”) is the sole limited partner and owner of 0.99% (minority interest) of the partnership interests of the OP. The limited partner interests have the right to convert OP units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.

The Company has no paid employees. The Company is managed by the Advisor and American Realty Capital Properties, LLC, which serves as its property manager (the “Property Manager”). The Advisor and the Property Manager are affiliated entities that receive compensation and fees for services related to the on-going initial public offering and for the investment and management of the Company’s assets. These entities receive fees during the Company’s offering, acquisition, operational and liquidation stages. The compensation levels during the offering, acquisition and operational stages are discussed in Note 10 — Related Party Transactions and Arrangements.

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its common stock until its shares are listed for trading. In the event it does not obtain listing prior to the tenth anniversary of the completion or termination of the offering, its charter requires that it either: (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

Note 2 — Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to the consolidated financial statements in the Company’s Form 10-K for the year ended December 31, 2010. There have been no significant changes to these policies during the three months ended March 31, 2011.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 3 — Real Estate Investments

The following table presents the allocation of the assets acquired and liabilities assumed during the periods presented (amounts in thousands):

	Three Months Ended March 31,
	2011			2010
Real estate investments, at cost:
Land	$	73,524		$	11,077
Buildings, fixtures and improvements		273,578			59,040
Total tangible assets		347,102			70,117
Acquired intangibles:
In-place leases		45,565			11,321
Mortgage assumed		(12,430	)		—
Mortgage (discount) premium, net		331			—
Total assets acquired, net	$	380,568		$	81,438
Number of properties purchased		60			20

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 3 — Real Estate Investments (continued)

The Company acquires and operates commercial properties. All such properties may be acquired and operated by the Company alone or jointly with another party. As of March 31, 2011, all of the properties the Company owned were 100% occupied. The Company acquired the following properties during the three months ended March 31, 2011 (dollar amounts in thousands):

Property	Acquisition Date	No. of Buildings		Square Feet		Ownership Percentage			Remaining Lease Term (1)		Base Purchase Price (2)				Capitalization Rate (3)		Annualized Rental Income (4)

Portfolio as of December 31, 2010:			259		5,310,215	various				15.5	$	879,215	(5)	(6)		8.41%	$	72,971

Acquisitions for the three months ended March 31, 2011:

Lowes(7)	January 2011		1		141,393		100	%		15.3		10,018				6.74%		675
Citizens	January 2011		2		14,307		100	%		7.8		3,811				9.11%		347
QuickTrip	January 2011		1		4,555		100	%		12.9		3,330				8.74%		291
Dillons	January 2011		1		56,451		100	%		8.6		5,075				7.80%		396
Wawa	January 2011		2		12,433		100	%		16.1		17,209				7.00%		1,205
Walgreens	January 2011		9		122,963		100	%		23.8		54,569				6.86%		3,742
DaVita Dialysis II	February 2011		4		23,154		100	%		11.2		8,013				8.90%		713
CVS III	February 2011		1		13,338		100	%		25.9		5,199				7.25%		377
Citigroup, Inc.	February 2011		1		64,036		100	%		14.5		27,275				7.00%		1,910
Coats & Clark	February 2011		1		401,512		100	%		9.8		9,523				9.84%		937
Walgreens VIII	February 2011		1		13,569		100	%		22.6		5,460				7.34%		401
Express Scripts	March 2011		2		416,141		100	%		8.2		51,281				9.02%		4,623
DaVita Dialysis III	March 2011		1		18,185		100	%		12.2		6,565				7.72%		507
Dollar General V	March 2011		6		55,363		100	%		14.8		5,195				8.84%		459
Wal-Mart	March 2011		1		183,442		100	%		8.1		12,633				7.15%		903
Kohl's	March 2011		1		88,408		100	%		14.9		10,182				7.15%		728
Texas Instruments	March 2011		1		125,000		100	%		9.7		32,000				7.88%		2,522
Sam's Club(7)	March 2011		1		141,583		100	%		14.4		12,602				6.75%		851
CVS IV	March 2011		1		13,225		100	%		23.9		5,330				7.95%		424
Walgreens X	March 2011		2		27,760		100	%		19.3		9,000				7.46%		671
CVS V	March 2011		1		12,900		100	%		22.9		5,759				7.29%		420

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Property	Acquisition Date	No. of Buildings		Square Feet		Ownership Percentage			Remaining Lease Term (1)		Base Purchase Price (2)		Capitalization Rate (3)		Annualized Rental Income (4)

Provident Bank	March 2011		1		2,950		100	%		22.9	$	2,589		9.15%	$	237
Dillion II	March 2011		1		63,858		100	%		10.5		6,420		7.49%		481
FedEx X	March 2011		1		105,109		100	%		7.6		9,050		8.29%		750
3M	March 2011		1		650,760		100	%		10.1		44,800		7.35%		3,295
Bojangles	March 2011		13		47,865		100	%		12.1		24,789		8.85%		2,193
Tractor Supply II	March 2011		2		38,194		100	%		15.1		5,103		9.09%		463

Disposition for the three months ended March 31, 2011:

PNC	January 2011		1		1,992		100	%		7.9		680		6.91%		47

Total			318		8,166,677					14.8	$	1,271,315		8.21%	$	103,445

Annualized average rental income per square foot				$	12.67

(1)	Remaining lease term as of March 31, 2011, in years. If the portfolio has multiple locations with varying lease expirations, remaining lease term is calculated on a weighted-average basis.

(2)	Contract purchase price excluding acquisition and transaction-related costs. Acquisition and transaction-related costs include legal costs, acquisition fees paid to the Advisor and closing costs on the property.

(3)	Annualized rental income on a straight-line basis divided by base purchase price.

(4)	Annualized rental income for the property portfolio on a straight-line basis as of March 31, 2011, which includes the effect of tenant concessions such as free rent, as applicable.

(5)	Base purchase price for acquisitions prior to January 1, 2009 includes acquisition costs which were capitalized as required by GAAP guidance prior to that date. Acquisition and transaction related costs include legal costs, acquisition fees paid to the Advisor and closing costs on the property.

(6)	Includes a $12.0 million investment in a joint venture.

(7)	Property is a parcel of land with a ground lease which contains a building that will be conveyed to the Company at the end of the ground lease. Square footage and number of buildings refers to the building that is constructed on the parcel of land.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 3 — Real Estate Investments – (continued)

Future Lease Payments Table

The following table presents future minimum base rental cash payments due to the Company over the next five years and thereafter as of March 31, 2011 (amounts in thousands):

Year	Future Minimum Base Rent Payments
April 1, 2011 to December 31, 2011	$	71,019
2012		95,464
2013		96,267
2014		98,044
2015		99,123
Thereafter		1,031,331
Total	$	1,491,248

These amounts exclude contingent rentals 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.

The following table lists tenants whose annualized rental income on a straight-line basis represented greater than 10% of consolidated annualized income as of March 31, 2011 and 2010:

	2011			2010

FedEx		13	%		11	%
Walgreens		12	%		1	%
CVS		10	%		25	%
PNC		3	%		11	%
BSFS		4	%		11	%

No other tenant represented more than 10% of the annualized rental income for the periods presented. The termination, delinquency or non-renewal of one of the above tenants may have a material adverse effect on revenues.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 4 — Revolving Credit Facilities

At March 31, 2011 and December 31, 2010, the Company had available a $10.0 million revolving line of credit unsecured bridge facility with an affiliated entity. There were no amounts outstanding under this facility at March 31, 2011 or December 31, 2010. There are no unused borrowing fees associated with this facility.

In July 2010, the Company obtained a secured revolving credit facility with Capital One, N.A. (“Capital One”) for an aggregate maximum principal amount of $30.0 million. The proceeds of loans made under the credit agreement will be used to finance the acquisition of net leased, investment or non-investment grade properties. The initial term of the credit agreement is 30 months, which may be extended by 12 months, subject to satisfaction of certain conditions, including payment of an extension fee.

Any loan made under the Capital One credit agreement shall bear floating interest at per annum rates equal to either one month LIBOR plus 3.25% or three month LIBOR plus 3.25%, at the Company’s option. In the event of a default, Capital One has the right to terminate its obligations under the credit agreement, including the funding of future loans, and to accelerate the payment on any unpaid principal amount of all outstanding loans. The line of credit requires a fee of 0.25% on the unused balance.

In August 2010, the Company obtained a secured revolving credit facility with U.S. Bank, N.A. (“U.S. Bank”) for an aggregate maximum principal amount of $20.0 million, which increased to $30.0 million as of March 31, 2011. The proceeds of loans made under the credit agreement will be used to finance the acquisition of net leased, investment or non-investment grade properties. The initial term of the credit agreement is 24 months, with a one-time extension option of 12 months, subject to satisfaction of certain conditions, including payment of an extension fee.

Any loan made under the U.S. Bank credit agreement shall bear floating interest at a per annum rate equal to one month LIBOR plus 3.25%. In the event of a default, U.S. Bank has the right to suspend the funding of future loans and to accelerate the payment on any unpaid principal amount of the outstanding loans. The Company intends to collateralize the line of credit with certain properties which are currently owned or will be acquired. The line of credit requires a fee of 0.25% on the unused balance.

The Company must collateralize the Capital One and U.S. Bank lines of credit with certain of its properties in addition to meeting certain minimum cash deposit requirements. The Company has drawn on these lines of credit from time to time to finance the purchase price of acquisitions on a short-term basis. There are no amounts outstanding on these lines of credit as of March 31, 2011 or December 31, 2010.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 5 — Mortgage Notes Payable

The Company’s mortgage notes payable consist of the following (dollar amounts in thousands):

	Encumbered Properties	Outstanding Loan Amount		Weighted Average Effective Interest Rate(1)	Weighted Average Maturity(2)
March 31, 2011	244	$	542,713	5.44%		5.26
December 31, 2010	196	$	372,755	5.73%		6.15

	(1)	Mortgage notes payable are fixed rate mortgages or mortgages with rates that are fixed through the use of interest rate hedging instruments. Effective interest rates range from 4.09% to 6.97% at March 31, 2011 and 4.36% to 6.97% at December 31, 2010.
	(2)	Weighted average remaining years until maturity as of the periods presented.

The following table summarizes the scheduled aggregate principal repayments for the five years subsequent to March 31, 2011 and thereafter (amounts in thousands):

Year	Total
April 1, 2011 to December 31, 2011	$	5,418
2012		3,383
2013		59,290
2014		33,858
2015		119,932
Thereafter		320,832
Total	$	542,713

The Company’s sources of recourse financing generally require financial covenants, including restrictions on corporate guarantees, the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of March 31, 2011, the Company was in compliance with the debt covenants under the mortgage loan agreements.

Note 6 — Long-Term Notes Payable

As of March 31, 2011 and December 31, 2010, the Company had $12.7 million and $12.8 million, respectively, of outstanding long-term notes payable (the “Notes”) from a private placement pursuant to Rule 506 of Regulation D promulgated under the Securities Act. The proceeds of the private placement were used to repay outstanding short-term bridge equity fund draws.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 6 — Long-Term Notes Payable (continued)

The Notes bear interest at 9.0% annually, provided that the interest rate would be adjusted to 9.57% annually for Notes on which the Company did not incur a selling commission. The Company will pay interest-only monthly payments to subscribers of the Notes until the maturity on December 15, 2011. The Company has the right to extend the maturity date for two additional one-year periods.

The Company shall have the right to repay the amount due under the Notes in whole or in part without penalty within 360 days of the maturity date. The Company will not have the right to prepay the amount due under the notes during the two optional extension periods. The Notes are unsecured. The Company is required to prepay the Notes out of any proceeds derived from the sale or refinancing of the PNC Bank properties after any required payments of the principal and interest due under the mortgage notes payable on those properties (see Note 5 — Mortgage Notes Payable). Such prepayment is subject to the prepayment premiums described above.

The Company anticipates repaying the long-term notes payable by June 30, 2011.

As of March 31, 2011, the Company was in compliance with all covenants included within the Note agreement.

Note 7 — Fair Value of Financial Instruments

The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 — Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 7 — Fair Value of Financial Instruments (continued)

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter; and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of March 31, 2011 and December 31, 2010, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments, are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the counterparties.

The following table presents information about the Company’s assets (including derivatives that are presented net) measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those instruments fall (amounts in thousands):

	Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
March 31, 2011:
Total derivatives, net	$	—	$	4,401	$	—	$	4,401
December 31, 2010:
Total derivatives, net	$	—	$	5,214	$	—	$	5,214

The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, other receivables, accounts payable, and distributions payable approximates

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 7 — Fair Value of Financial Instruments (continued)

their carrying value on the consolidated balance sheet due to their short-term nature. The fair value of mortgage notes payable are obtained by calculating the present value at current market rates.

The fair values of the Company’s remaining financial instruments that are not reported at fair value on the consolidated balance sheet are reported below (amounts in thousands):

	Carrying Amount at March 31, 2011		Fair Value at March 31, 2011		Carrying Amount at December 31, 2010		Fair Value at December 31, 2010
Mortgage notes payable (1)	$	543,501	$	558,135	$	373,918	$	388,984
Other long-term notes payable	$	12,720	$	12,720	$	12,790	$	12,790

(1)	Carrying amount includes premiums and discounts on mortgage notes payable.

Note 8 — Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and collars as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 8 — Derivatives and Hedging Activities

for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.

Derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $1.9 million will be reclassified from other comprehensive income as an increase to interest expense.

As of March 31, 2011, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):

Interest Rate Derivative	Number of Instruments		Notional
Interest Rate Swaps		4	$	63,296
Interest Rate Collars		1		4,115

As of December 31, 2010, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):

Interest Rate Derivative	Number of Instruments		Notional
Interest Rate Swaps		4	$	63,532
Interest Rate Collars		1		4,115

Non-Designated Hedges

Derivatives not designated as hedges are not speculative. These derivatives are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements to be classified as hedging instruments. The Company has one interest rate collar contract outstanding, with an aggregate notional amount of $23.1 and $23.2 million at March 31, 2011 and December 31, 2010, respectively, with an established ceiling and floor for the underlying variable rate at 4.125% and 3.54%, respectively. This contract was not able to be designated as a hedging instrument as it does not qualify for hedge accounting based on the results of the net written option test. As such, all changes in the fair value of the interest rate collar have been included in the Company’s statements of operations for the three months ended March 31, 2011 and 2010.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 8 — Derivatives and Hedging Activities

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of March 31, 2011 and December 31, 2010 (dollar amounts in thousands):

		March 31, 2011			December 31, 2010
	Balance Sheet Location
Derivatives designated as hedging instruments:
Interest Rate Products	Derivatives, at fair value	$	(3,195	)	$	(3,828	)
Derivatives not designated as hedging instruments:
Interest Rate Products	Derivatives, at fair value	$	(1,206	)	$	(1,386	)

Derivatives in Cash Flow Hedging Relationships

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three months ended March 31, 2011 and 2010 (dollar amounts in thousands):

	Three Months Ended March 31,
	2011			2010
Amount of gain (loss) recognized in accumulated other comprehensive income as interest rate derivatives (effective portion)	$	154		$	(1,144	)
Amount of loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion)	$	(547	)	$	(424	)
Amount of loss recognized in income on derivative as loss on derivative instruments (ineffective portion and amount excluded from effectiveness testing)	$	(73	)	$	—

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 8 — Derivatives and Hedging Activities

Derivatives Not Designated as Hedging Instruments

The table below details the amount and location in the financial statements of the gain or loss recognized on derivatives not designated as hedging instruments for the three months ended March 31, 2011 and 2010 (dollar amounts in thousands):

	Three Months Ended March 31,
	2011			2010
Location of Gain or (Loss) Recognized in Income on Derivative:
Interest expense	$	(2	)	$	(200	)
Gains (losses) on derivative instruments		142			(152	)
Total	$	140		$	(352	)

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

As of March 31, 2011, the fair value of derivatives in a net liability position, related to these agreements was $4.4 million. As of March 31, 2011, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions it could have been required to settle its obligations under the agreements at their aggregate termination value of $4.7 million at March 31, 2011.

Note 9 — Commitments and Contingencies

Litigation

In the ordinary course of business, the Company may become subject to litigation or claims. There are no material legal proceedings pending or known to be contemplated against the Company.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 9 — Commitments and Contingencies (continued)

Environmental Matters

In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and the Company is not aware of any other environmental condition that it believes will have a material adverse effect on the consolidated results of operations.

Guarantee of the Debt of Others

In conjunction with entering into a joint venture agreement with an affiliated entity where the Company invested $12.0 million for an ownership percentage of five retail condominium units, the Company agreed to provide a guarantee on a mortgage note payable obtained from a third party in connection with the property acquisition. The guarantee will be in place until the affiliated entity achieves a net worth of $40.0 million. At March 31, 2011, the balance of the mortgage note payable was $21.3 million. The net worth of the affiliated company at March 31, 2011 was $26.9 million. The leverage ratio on the property, defined as mortgage note payable balance divided by the purchase price of the property, was 62.6% as of March 31, 2011. In addition, the properties are leased on long-term leases which fully cover debt service requirements. Therefore the Company believes that it is unlikely that it would be required to make payments on behalf of the affiliated entity under this arrangement and therefore the fair value of the guarantee is not material.

Note 10 — Related Party Transactions and Arrangements

Fees Paid in Connection with Common Stock Offering

The Company’s affiliated Dealer Manager receives selling commissions of 7% of the gross offering proceeds from the sale of the Company’s common stock (as well as sales of long-term notes and exchange transactions) before reallowance of commissions earned by participating broker-dealers. The Dealer Manager re-allows 100% of commissions earned to participating broker-dealers. In addition, the Dealer Manager receives Dealer Manager fees of 3% of the gross offering proceeds before reallowance to participating broker-dealers. The Dealer Manager may re-allow all or a portion of its dealer manager fee to participating broker-dealers. No selling commissions or dealer-manager fees are paid to the Dealer Manager with respect to shares sold under the DRIP.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 10 — Related Party Transactions and Arrangements (continued)

The following table details the results of such activities related to the Dealer Manager (amounts in thousands):

	Three Months Ended March 31,
	2011			2010
Total Commissions paid to Dealer Manager	$	22,029		$	5,357
Less:
Commissions to participating broker dealers		(14,689	)		(3,765	)
Reallowance to participating broker dealers		(2,166	)		(605	)
Net to affiliated Dealer Manager (1)	$	5,174		$	987

(1)

The Dealer Manager is responsible for commission payments due to their employees as well as its general overhead and various selling related expenses.

The Company will reimburse the Advisor up to 1.5% of its gross offering proceeds. The following table details the results of such activities related to organizational and offering costs reimbursed to the Advisor (amounts in thousands):

	Three Months Ended March 31,
	2011		2010
Organizational and offering expense reimbursements	$	870	$	1,103

At March 31, 2011 and December 31, 2010 the Company had a payable to the Dealer Manager and the Advisor of $0.5 million and $0.4 million, respectively, for commissions and reimbursements for expenses.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 10 — Related Party Transactions and Arrangements (continued)

Fees Paid in Connection With the Operations of the Company

The Advisor receives an acquisition fee of 1.0% of the contract purchase price of each acquired property and is reimbursed for acquisition costs incurred in the process of acquiring properties, but not to exceed 0.5% of the contract purchase price. In no event will the total of all acquisition and advisory fees and acquisition expenses payable with respect to a particular investment exceed 4% of the contract purchase price.

The Company will pay the Advisor a yearly fee of up to 1% of the contract purchase price of each property plus costs and expenses incurred by the Advisor in providing asset management services, payable semiannually, based on assets held by the Company on the measurement date, adjusted for appropriate closing dates for individual property acquisitions.

For the management and leasing of its properties, the Company will pay to an affiliate of its Advisor, a property management fee of (a) 2% of gross revenues from its single tenant properties and (b) 4% of gross revenues from its multi-tenant properties, plus, in each case, market-based leasing commissions applicable to the geographic location of the property. The Company also will reimburse the affiliate costs of managing the properties. The affiliate may also receive a fee for the initial leasing of newly constructed properties, which would generally equal one month’s rent. In the unlikely event that the affiliate assists a tenant with tenant improvements, a separate fee may be charged to, and payable by the Company. This fee will not exceed 5% of the cost of the tenant improvements. The aggregate of all property management and leasing fees paid to its affiliates plus all payments to third parties for such fees will not exceed the amount that other nonaffiliated management and leasing companies generally charge for similar services in the same geographic location as determined by a survey of brokers and agents in such area.

The Company will reimburse its Advisor’s costs of providing administrative services, subject to the limitation that it will not reimburse its Advisor for any amount by which its operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of (a) 2% of average invested assets, or (b) 25% of net income other than any additions to reserves for depreciation, bad debt or other similar noncash reserves and excluding any gain from the sale of assets for that period. Additionally, the Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or real estate commissions. No such fees were incurred or paid for the three months ended March 31, 2011 or 2010.

If the Company’s Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains, and use to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 1% of the amount available and/or outstanding under such financing, subject to certain limitations.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 10 — Related Party Transactions and Arrangements (continued)

The following table details amounts paid and reimbursed to affiliates as well as amounts contractually due to the Advisor which were forgiven in connection with the operations related services described above (amounts in thousands):

	Three Months Ended March 31,
	2011				2010
	Paid		Forgiven		Paid		Forgiven
One-time fees:
Acquisition fees and related cost reimbursements	$	6,214	$	—	$	798	$	—
Financing coordination fees and related cost reimbursements		1,860		—		417		—
On-going fees:
Asset management fees		600		1,864		—		891
Property management and leasing fees		—		389		—		140
Total operations fees and reimbursements	$	8,674	$	2,253	$	1,215	$	1,031

In accordance with the asset management agreement, $6.3 million and $4.4 million was prepaid to the Advisor as of March 31, 2011 and December 31, 2010, respectively.

Fees Paid in Connection with the Liquidation or listing of the Company’s Real Estate Assets.

The Company will pay a brokerage commission on the sale of property, not to exceed the lesser of one-half of reasonable, customary and competitive real estate commission or 3% of the contract price for property sold (inclusive of any commission paid to outside brokers), in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale.

The Company will pay a subordinated participation in the net sales proceeds of the sale of real estate assets of 15% of remaining net sale proceeds after return of capital contributions plus payment to investors of a 6% cumulative, non-compounded return on the capital contributed by investors. The Company cannot assure that it will provide this 6% return but the Advisor will not be entitled to the subordinated participation in net sale proceeds unless its investors have received a 6% cumulative non-compounded return on their capital contributions. No such fees were incurred or paid for the three months ended March 31, 2011 or 2010.

The Company will pay a subordinated incentive listing fee of 15% of the amount by which the adjusted market value of real estate assets plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6% cumulative, non-compounded annual return to investors. The Company cannot

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 10 — Related Party Transactions and Arrangements (continued)

assure that it will provide this 6% return but the Advisor will not be entitled to the subordinated incentive listing fee unless its investors have received a 6% cumulative non-compounded return on their capital contributions. No such fees were incurred or paid for the three months ended March 31, 2011 or 2010.

The following table details amounts paid to affiliates in connection with liquidation of a property described above (amounts in thousands):

	Three Months Ended March 31,
	2011		2010
Real estate commissions	$	19	$	—

Financing

The OP entered into an agreement with the principals of the Advisor whereby the OP can obtain up to $10.0 million of bridge equity from the principals from time to time as needed to provide short-term bridge equity for property acquisitions or for general working capital purposes. Such bridge equity advances need to be satisfied within a one year period and will accrue a yield of 8%. There were no amounts outstanding under this facility as of March 31, 2011 and December 31, 2010. There was no interest expense for this facility during the three months ended March 31, 2011 or 2010.

Joint Venture Investment

In December 2010, the Company entered into a joint venture agreement with an affiliate to invest in a portfolio of five retail condominium units. The Company’s initial investment in this joint venture was $12.0 million and a 1.0% fee was paid to the Company by the affiliate. This initial investment will be adjusted by distributions of the profit and loss of the investment properties in accordance with the joint venture agreement to be received monthly. For the three months ended March 31, 2011, the Company’s share of the net profit and loss on the property was $24,000. In addition the Company received cash distributions of $0.2 million for the three months ended March 31, 2011. No fees were paid to the Advisor in connection with this agreement.

Note 11 — Economic Dependency

Under various agreements, the Company has engaged or will engage the Advisor and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 11 — Economic Dependency (continued)

As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies were unable to provide the Company with the respective services, the Company would be required to find alternative providers of these services.

Note 12 — Share-Based Compensation

Stock Option Plan

The Company has a stock option plan (the “Plan”), which authorizes the grant of nonqualified stock options to the Company’s independent directors, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan will be fixed at $10.00 per share until the termination of the Company’s initial public offering, and thereafter the exercise price for stock options granted to its independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. As of March 31, 2011 and December 31, 2010, the Company had granted options to purchase 27,000 shares at $10.00 per share, each with a two year vesting period and an expiration of 10 years. A total of 1.0 million shares have been authorized and reserved for issuance under the Plan.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

During the three months ended March 31, 2011 and 2010, no options were forfeited or were exercised and none and 4,500 shares became vested during the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010, unvested options to purchase 18,000 at $10.00 per share remained outstanding with a weighted average contractual remaining life of 8.0 and 8.3 years, respectively. The total compensation charge relating to these option grants is immaterial.

Restricted Share Plan

On January 22, 2010, the Board of Directors adopted an employee and director incentive restricted share plan (the “RSP”). The RSP provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further action by the Company’s board of directors or the stockholders, on the date of each annual stockholder’s meeting. Restricted stock issued to independent directors will vest over a five-year period following the first anniversary of the date of grant in increments of 20% annually. The employee and director incentive restricted share plan provides the Company with the ability to grant awards of restricted shares to the Company’s directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain of its consultants and certain consultants to the Advisor and its affiliates or to entities that provide services to the Company. The total number of common shares reserved for issuance under the RSP is equal to 1.0% of its authorized shares.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 12 — Share-Based Compensation – (continued)

In April 2011, the Board of Directors approved the modification of the RSP to provide that, for as long as the Company remains a non-traded REIT, the aggregate value of the asset management fees paid by the Company over the life of the offering plus the value of all restricted shares issued by the Company pursuant to its RSP cannot exceed 1% of the contract purchase price of all the properties based on assets held by the Company on the measurement date, adjusted for appropriate closing dates for individual property acquisitions. For purposes of this calculation, the value of the restricted stock granted to the Advisor and its employees will be the value of the Company’ s common stock on the date of such grant.

Restricted share awards entitle the recipient to common shares from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Shares issued under the RSP vest immediately upon a change of control of the company or sale of the companies assets. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient’s employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in common shares shall be subject to the same restrictions as the underlying restricted shares. As of March 31, 2011 and December 31, 2010, 9,000 shares had been issued to independent Directors under this plan at a fair value of $10.00 per share. The fair value of the shares will be expensed ratably over the five-year vesting period.

In June 2010, the Company’s independent Directors approved and authorized the issuance of up to 1.5 million common restricted shares to the Advisor equaling 1% of authorized shares under the primary offering, subject to certain terms and conditions. On September 13, 2010, the Advisor granted 1.4 million restricted shares to key executives. Of the total shares granted, 50% vest over a five year period commencing with the two year anniversary of the grant date and remaining 50% vest only to the extent the Company’s net asset value plus distributions paid to stockholders equals 106% of the original selling price of the Company’s common stock.

For the three months ended March 31, 2011, $0.4 million of compensation expense was recorded for restricted shares. There were no restricted shares outstanding at March 31, 2010.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 13 — Net Loss Per Share

The following is a summary of the basic and diluted net loss per share computation for the three months ended March 31, 2011 and 2010 (in thousands, except share and per share amounts):

	Three Months Ended March 31,
	2011			2010
Net loss	$	(4,520	)	$	(389	)
Less: distributions paid on unvested restricted stock		(242	)		—
	$	(4,762	)	$	(389	)
Weighted average common shares outstanding		72,741,135			17,845,489
Net loss per share, basic and diluted	$	(0.07	)	$	(0.02	)

As of March 31, 2011 and 2010, 27,000 and 18,000 stock options, respectively and at March 31, 2011, 1.4 million unvested restricted shares were outstanding which were not included in the calculation of diluted earnings per share since the inclusion is anti-dilutive.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 14 — Non-controlling Interests

The Company has investment arrangements with unaffiliated third parties whereby the investor receives an ownership interest in the property and is entitled to receive a proportionate share of the net operating cash flow derived from the property. Upon disposition of the property, the investor will receive a proportionate share of the net proceeds from the sale of the property. The investor has no recourse to any other assets of the Company. Due to the nature of the Company’s involvement with each of the arrangements described below and the significance of its investment in relation to the investment of the other interest holders, the Company has determined that it is the primary beneficiary in each of these arrangements and therefore the entities related to these arrangements are consolidated with the Company’s financial statements.

								As of March 31, 2011
Property/Portfolio Name	No. of Buildings		Investment Date	Net Investment Amount		Third Party Ownership Percentage		Total Assets Subject to Investment Agreement		Total Liabilities Subject to Investment Agreement		Distributions Three Months Ended March 31, 2011			Distributions Three Months Ended March 31, 2010
Walgreens		1	Jul. 2009	$	1,068	44.0	%	$	3,581	$	1,550	$	(20	)	$	(20	)
FedEx/PNC Bank		2	Jul. 2009 to Jan. 2010		2,002	49.0	%		11,705		8,944		(42	)		(42	)
PNC Bank		1	Sep. 2009		444	35.2	%		3,422		2,339		(9	)		(9	)
CVS		3	Jan. 2010 to Mar. 2010		2,577	49.0	%		10,991		6,728		(49	)		(30	)
Rickett Benckiser		1	Feb. 2010		2,400	14.6	%		29,485		14,836		(51	)		(25	)
FedEx III		1	Apr. 2010		3,000	15.4	%		32,287		15,000		(62	)		—
BSFS		6	Jun. 2010 to Sep. 2010		6,468	49.0	%		12,362		—		(127	)		—
Brown Shoe/Payless		2	Oct. 2010		6,000	9.0	%		67,496		28,200		(133	)		—
Jared Jewelry		1	May 2010		500	24.9	%		1,635		—		(13	)		—
Total		18		$	24,459			$	172,964	$	77,597	$	(506	)	$	(126	)

Note 15 — Subsequent Events

The Company has evaluated subsequent events through the filing of this 10-Q, and determined that there have not been any events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except for the following:

On April 8, 2011, the Company announced its intention to initiate the process of interviewing investment banking firms and other advisory firms to provide its board of directors with recommendations in exploring various strategic actions to maximize shareholder value, including the assessment of various liquidity alternatives, in connection with the pending July 25, 2011 close of the Company’s initial public offering.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 15 — Subsequent Events (continued)

Completion of Acquisitions of Assets

The following table presents certain information about the properties that the Company acquired from April 1, 2011 to May 6, 2011 (dollar amounts in thousands):

	No. of Buildings		Square Feet		Base Purchase Price (1)
Total Portfolio – March 31, 2011		318		8,166,677	$	1,271,315
Acquisitions		11		1,202,270		63,276
Total portfolio – May 6, 2011		329		9,368,947	$	1,334,591

(1)	Contract purchase price, excluding acquisition and transaction related costs.

The acquisitions made subsequent to March 31, 2011 were made in the normal course of business and none were individually significant to the total portfolio.

Financing Arrangements

The following table presents certain information about financing arrangements that the Company entered into from April 1, 2011 to May 6, 2011 (dollar amounts in thousands):

	Mortgage Notes Payable			Average Effective Interest Rate (1)
Total mortgage notes payable – March 31, 2011	$	542,713			5.44	%
Mortgage notes payable incurred		49,690			4.96	%

Less: principal payments		(274	)
Total mortgage notes payable – May 6, 2011	$	592,129			5.38	%
Total portfolio leverage ratio (2)		44.4	%

(1)	Weighted-average annualized interest rate.

(2)	Mortgage debt divided by base purchase price of portfolio.

AMERICAN REALTY CAPITAL TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note 15 — Subsequent Events – (continued)

Sales of Common Stock

As of May 6, 2011, the Company had issued 104.4 million shares of common stock, including shares issued under the DRIP. Total gross proceeds from these issuances were $1,023.9 million. As of May 6, 2011, the aggregate value of all share issuances was $1,035.3 million based on a per share value of $10.00 (or $9.50 per share for shares issued under the DRIP).

Total capital raised to date is as follows (amounts in thousands):

Source of Capital	Inception to March 31, 2011		April 1 to May 6, 2011		Total
Common shares	$	859,149	$	164,810	$	1,023,959
Notes payable		12,720		—		12,720
Exchange proceeds (1)		24,459		—		24,459
	$	896,328	$	164,810	$	1,061,138

(1)	Includes amounts received by the Company in connection with transactions completed through its affiliate, American Realty Capital Exchange, LLC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the accompanying financial statements of American Realty Capital Trust, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to American Realty Capital Trust, Inc., a Maryland corporation, and, as required by context, American Realty Capital Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the “OP” and to their subsidiaries. American Realty Capital Trust, Inc. is externally managed by the American Realty Capital Advisors, LLC (a Delaware limited liability company) or the “Advisor.”

Forward-Looking Statements

Certain statements included in this annual report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Realty Capital Trust, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

•	We and our Advisor have a limited operating history and our Advisor has limited experience operating a public company. This inexperience makes our future performance difficult to predict.

•

All of our executive officers are also officers, managers and/or holders of a direct or indirect controlling interest in our Advisor, our dealer manager, Realty Capital Securities, LLC (the “Dealer Manager”) and other American Realty Capital-affiliated entities. As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor’s compensation arrangements with us and other investors advised by American Realty Capital affiliates and conflicts in allocating time among these investors and us. These conflicts could result in unanticipated actions.

•

Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital-advised programs or investors, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.

•	While we are raising capital and investing the proceeds of our on-going initial public offering, the competition for the type of properties we desire to acquire may cause our distributions and the long-term returns of our investors to be lower than they otherwise would be.

•	We depend on tenants for our revenue, and, accordingly, our revenue is dependent upon the success and economic viability of our tenants.

•	Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.

•	We may not generate cash flows sufficient to pay our distributions to stockholders, as such we may be forced to borrow at higher rates or depend on our Advisor to waive reimbursement of certain expenses and fees to fund our operations.

•	No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.

•	We may be unable to pay or maintain cash distributions or increase distributions over time.

•	We are obligated to pay substantial fees to our Advisor and its affiliates.

•	We are subject to risks associated with the significant dislocations and liquidity disruptions currently existing or occurring in the United States' credit markets.

•	We may fail to qualify or continue to qualify to be treated as a real estate investment trust (“REIT”).

Overview

We are a Maryland corporation, incorporated on August 17, 2007, that elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December 31, 2008. As a REIT, we generally are not subject to corporate-level income taxes. To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates.

On January 25, 2008, we commenced an initial public offering on a “best efforts” basis of up to 150.0 million shares of common stock offered at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-145949) (the “Registration Statement”) filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended. The Registration Statement also covered up to 25.0 million shares available pursuant to a distribution reinvestment plan (the “DRIP”) under which our stockholders may elect to have their distributions reinvested in additional shares of our common stock at the greater of $9.50 per share or 95% of the estimated value of a share of common stock.

On August 5, 2010, we filed a registration statement on Form S-11 (File No. 333-168572) to register 32.5 million shares of common stock in connection with a follow-on offering. The initial public offering was originally set to expire on January 25, 2011, three years after its effective date. However, as permitted by Rule 415 of the Securities Act, we will now continue our initial public offering until the earlier of July 25, 2011 or the date that the SEC declares the registration statement for the follow-on offering effective. Total capital raised under the current registration and follow-on offering will not exceed $1.5 billion.

As of March 31, 2011, we issued approximately 87.9 million shares of common stock. Total gross proceeds from these issuances were $859.1 million. As of March 31, 2011, the aggregate value of all share issuances and subscriptions outstanding was $870.7 million based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP). We are dependent upon the net proceeds from the offering to conduct our proposed operations.

We intend to use the proceeds of our on-going initial public offering to acquire and manage a diverse portfolio of real estate properties consisting primarily of freestanding, single-tenant properties net leased to investment grade and other creditworthy tenants throughout the United States and Puerto Rico. We typically fund our acquisitions with a combination of equity and debt and in certain cases we may use only equity capital or we may fund a portion of the purchase price of an acquisition through investments from third parties. We expect to arrange long-term financing on both a secured and unsecured fixed rate basis. We intend to continue to grow our existing relationships and develop new relationships throughout various markets we serve, which we expect will lead to further acquisition opportunities. We intend to have an overall leverage ratio as it relates to long-term secured mortgage financings of approximately 45% to 50%. As of March 31, 2011, our leverage ratio was 42.9%.

As of March 31, 2011, we owned 318 properties with 8.2 million square feet, 100% leased with a weighted average remaining lease term of 14.8 years. In constructing our portfolio, we are committed to diversification (industry, tenant and geography). As of March 31, 2011, rental revenues derived from investment grade tenants (rated BBB- or better by Standard & Poor’s) approximated 75.5%. Our strategy encompasses receiving the majority of our revenue from investment grade tenants as we further acquire properties and enter into (or assume) long-term lease arrangements.

Substantially all of our business is conducted through the OP. We are the sole general partner of and owns a 99.01% partnership interest in the OP. The Advisor is the sole limited partner and owner of 0.99% (minority interest) of the partnership interests of the OP. The limited partner interests have the right to convert OP units into cash or, at our option, an equal number of our common shares, as allowed by the limited partnership agreement.

We have no paid employees. We are managed by our Advisor, and American Realty Capital Properties, LLC, which serves as our property manager (the “Property Manager”). The Advisor and the Property Manager are affiliated entities that receive compensation and fees for services related to the on-going initial public offering and for the investment and management of our assets. These entities receive fees during our offering, acquisition, operational and liquidation stages.

Real estate-related investments are higher-yield and higher-risk investments that our Advisor will actively manage, if we elect to acquire such investments. The real estate-related investments in which we may invest include: (i) mortgage loans; (ii) equity securities such as common stocks, preferred stocks and convertible preferred securities of real estate companies; (iii) debt securities, such as mortgage-backed securities, commercial mortgages, mortgage loan participations and debt securities issued by other real estate companies; and (iv) certain types of illiquid securities, such as mezzanine loans and bridge loans. While we may invest in any of these real estate-related investments, our Advisor, with the support of our board of directors, has elected to suspend all activities relating to acquiring real estate-related investments for an indefinite period based on the current adverse climate affecting the capital markets. Since our inception, we have not acquired any real estate-related investments.

Significant Accounting Estimates and Critical Accounting Policies

Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates include:

Revenue Recognition

Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease.

We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations.

Investments in Real Estate

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. Depreciation is computed using the straight-line method over the estimated useful lives of up to forty years for buildings and improvements, fifteen for land improvements, five to ten years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented, Properties that are intended to be sold are to be designated as “held for sale” on the balance sheet.

Long-lived assets are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted or when they are designated as held for sale. Valuation of real estate is considered a “critical accounting estimate” because the evaluation of impairment and the determination of fair values involve a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate. Additionally, decisions regarding when a property should be classified as held for sale are also highly subjective and require significant management judgment.

Events or changes in circumstances that could cause an evaluation for impairment include the following:

•	a significant decrease in the market price of a long-lived asset;

•	a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;

•	a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator;

•	an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; and

•	a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset.

We review our portfolio on an on-going basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability 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 expected, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income.

Purchase Price Allocation

We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. We utilize 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. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.

Amounts allocated to land, land improvements, buildings, improvements and fixtures are based on cost segregation studies performed by independent third-parties or on our analysis of comparable properties in our portfolio. Depreciation is computed using the straight-line method over the estimated lives of fifteen years for land improvements, forty years for buildings, five to fifteen years for building improvements and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements.

The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by us in our 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, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period, which typically ranges from six to 18 months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.

Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease. The capitalized below-market lease values will be amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, we initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined 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.

The aggregate value of intangibles assets related to customer relationships, as applicable, is measured based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors.

The value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from 2 to 20 years. The value of customer relationship intangibles, as applicable, is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.

In making estimates of fair values for purposes of allocating purchase price, we utilize 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. We also consider information obtained about each property as a result of our pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed. The allocations presented in the accompanying consolidated balance sheets are substantially complete; however, there are certain items that we will finalize once we receive additional information. Accordingly, these allocations are subject to revision when final information is available, although we do not expect future revisions to have a significant impact on our financial position or results of operations.

Derivative Instruments

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.

We record 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 we have 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 is attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.

Recently Issued Accounting Pronouncements

Recently issued accounting pronouncements are described in Note 2 to the financial statements for the year ended December 31, 2010 filed with the SEC. There have been no significant changes during the three months ended March 31, 2011.

Results of Operations

As of March 31, 2011 we owned 318 properties which were 100% leased, compared to 146 properties at March 31, 2010. Accordingly, our results of operations for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 reflect significant increases in most categories.

Comparison of Three Months Ended March 31, 2011 to Three Months Ended March 31, 2010

Rental Income

Rental income increased $13.3 million to $20.7 million for the three months ended March 31, 2011, compared to $7.4 million for the year ended March 31, 2010. The increase in rental income was driven by our acquisition of $865.9 million of net leased property subsequent to March 31, 2010 with total square footage of 5.6 million square feet. These properties, acquired at an average 8.17% capitalization rate, defined as annualized rental income on a straight-line basis divided by base purchase price, are leased from 4 to 25 years primarily to investment grade tenants. All properties were 100% leased in both periods. Rent per square foot was $12.67 at March 31, 2011 compared to $13.12 at March 31, 2010.

Operating Expense Reimbursement

Operating expense reimbursement was $0.1 million for the three months ended March 31, 2011. Operating expense reimbursement represents reimbursements for taxes, property maintenance and other charges contractually due from tenants per their respective lease agreements. There were no property expense reimbursements for the three months ended March 31, 2010.

Fees to Affiliate

Asset Management Fee:

Our Advisor is entitled to fees for the management of our properties as well as fees for purchases and sales of properties. The Advisor was paid $0.6 million and $0 for the three months ended March 31, 2011 and 2010, respectively, and has elected to waive $1.9 million and $0.9 million of asset management fees for the three months ended March 31, 2011 and 2010, respectively.

Property Management Fee:

Our affiliated Property Manager has elected to waive the property management fees for the three months ended March 31, 2011 and 2010 in order to improve our working capital. Such fees represent amounts that had they not been waived, would have been paid to our Property Manager to manage and lease our properties. For the three months ended March 31, 2011 and 2010, we would have incurred property management fees of $0.4 million and $0.1 million, respectively, had the fees not been waived.

Acquisition and Transaction Related Costs

Acquisition and transaction related costs increased $6.8 million to $7.1 million for the three months ended March 31, 2011, compared to $0.3 million for the three months ended March 31, 2010. The increase in acquisition and transaction related costs was driven by our increase in acquisition related activity during 2011 as compared to 2010.

Property Expenses

Property expenses were $0.2 million for the three months ended March 31, 2011 and are mainly real estate taxes, ground lease rent, insurance and repairs and maintenance expenses. There were no property expenses for the three months ended March 31, 2010.

General and Administrative Expenses

General and administrative expenses increased $0.3 million to $0.5 million for the three months ended March 31, 2011, compared to $0.2 million for the three months ended March 31, 2010. The majority of the general and administrative expenses for the three months ended March 31, 2011 included $0.4 million of board member compensation and restricted stock compensation expense and $0.1 million of professional fees. The increase from the three months ended March 31, 2010 is mainly due to increases in restricted stock compensation expense and professional fees and other expenses to support our larger real estate portfolio.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $6.1 million to $9.9 million for the three months ended March 31, 2011, compared to $3.8 million for the three months ended March 31, 2010. The increase in depreciation and amortization expense was the result of our acquisition of real estate subsequent to March 31, 2010. These properties were placed into service when acquired and are being depreciated for the period held.

Interest Expense

Interest expense increased $3.1 million to $6.8 million for the three months ended March 31, 2011, compared to $3.7 million for the three months ended March 31, 2010. The increase in interest expense was mainly the result of a higher debt balance due to the financing of a portion of our property acquisitions. The average first mortgage debt balance for the three months ended March 31, 2011 and 2010 was $437.0 million and $210.1 million, respectively. The increase in the average mortgage debt balance was partially offset by a decrease in the average interest rate on debt to 5.44% at March 31, 2011 from 6.17% at March 31, 2010. We view these secured financing sources as an efficient and accretive means to acquire properties.

Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the level of proceeds raised in the offering, the cost of borr