| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2014
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Maryland | 46-1406086 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
405 Park Avenue New York, New York | 10022 | |
| (Address of Principal Executive Office) | (Zip Code) | |
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o | Smaller reporting company x | |
ARC REALTY FINANCE TRUST, INC.
(A Maryland Corporation in the Development Stage)
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013
TABLE OF CONTENTS
| Page | ||
| PART I | ||
| Consolidated Balance Sheets as of March 31, | ||
| Consolidated Statements of Operations | ||
| Consolidated | ||
| Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 | ||
| Consolidated Statements of Comprehensive Income (Loss) for the | ||
| Notes to the Consolidated Financial Statements (Unaudited) | ||
| PART II | ||
March 31, 2014 December 31, 2013 (Unaudited) ASSETS Cash $ 352,418 $ 178,030 Loans receivable, net 54,826,643 30,831,571 Mortgage-backed securities, at fair value 14,504,900 5,005,000 Accrued interest receivable 324,369 126,118 Prepaid expenses and other assets 1,423,043 229,117 Total assets $ 71,431,373 $ 36,369,836 LIABILITIES AND STOCKHOLDERS' EQUITY Revolving line of credit with affiliate $ 3,300,000 $ 7,305,000 Repurchase agreement 4,000,000 — Accounts payable and accrued expenses 1,831,638 1,737,882 Distributions payable 469,160 215,747 Interest payable 11,974 14,633 Due to affiliate — 1,077,765 Total liabilities 9,612,772 10,351,027 Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding at March 31, 2014 and December 31, 2013 — — Common stock, $0.01 par value, 300,000,000 shares authorized, 2,984,616 and 1,330,669 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively 29,807 13,267 Additional paid-in capital 63,216,414 26,620,266 Accumulated other comprehensive loss (4,750 ) (9,578 ) Accumulated deficit (1,422,870 ) (605,146 ) Total stockholders' equity 61,818,601 26,018,809 Total liabilities and stockholders' equity $ 71,431,373 $ 36,369,836 Three Months Ended March 31, 2014 Three Months Ended March 31, 2013 Net Interest Income: Interest income $ 976,834 $ 1 Interest expense 21,036 — Net interest income 955,798 1 Expenses: Board expenses 46,687 — Insurance expense 55,000 — Professional fees 113,160 5,020 Acquisition fees 259,000 — Other expenses 169,703 — Loan loss provision 86,462 — Total expenses 730,012 5,020 Net Income (Loss) $ 225,786 $ (5,019 ) Basic net income per share $ 0.11 NM Diluted net income per share $ 0.11 NM Basic weighted average shares outstanding 2,025,934 8,888 Diluted weighted average shares outstanding 2,030,023 8,888
| March 31, 2013 | December 31, 2012 | |||||||
| ASSETS | (Unaudited) | |||||||
| Cash | $ | 6,000 | $ | 573 | ||||
| Deferred costs | - | 940,618 | ||||||
| Total assets | $ | 6,000 | $ | 941,191 | ||||
| LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) | ||||||||
| Accounts payable and accrued expenses | $ | 1,200,207 | $ | 635,216 | ||||
| Due to affiliates | 896,500 | 121,500 | ||||||
| Total liabilities | 2,096,707 | 756,716 | ||||||
| Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding | - | - | ||||||
| Common stock, $0.01 par value, 300,000,000 shares authorized, 8,888 shares issued and outstanding as of March 31, 2013 and December 31, 2012 | 89 | 89 | ||||||
| Additional paid-in capital | (2,070,251 | ) | 199,911 | |||||
| Accumulated deficit during the development stage | (20,544 | ) | (15,525 | ) | ||||
| Total stockholder's equity (deficit) | (2,090,706 | ) | 184,475 | |||||
| Total liabilities and stockholder's equity (deficit) | $ | 6,000 | $ | 941,191 | ||||
these statements. 2014 On May 14, 2013, the Company commenced business operations after raising in excess of individual impaired loans. The original loan. or loss. operations and comprehensive income (loss). and Cash Equivalents Cash equivalents include short-term, liquid investments in a money market fund. SRP. 2014 anti-dilutive. Credit with Affiliate). There were no fees incurred from the Dealer Manager associated with the Offering during the three months ended consolidated statement of operations. In addition, the Company incurred During the three months ended operations of the Company incurred during the three months ended costs of the Advisor were reimbursed for any period in connection with the operations of the Company. 2013. contributions. Compensation). 2014 years 2014: Advisor. On May 14, 2013, we commenced business operations after raising in excess of Significant Accounting Estimates and Critical Accounting Policies The reserve is increased through the "Loan loss provision" on our consolidated statements of operations and is decreased by charge-offs when losses are confirmed through the receipt of assets such as cash in a pre-foreclosure sale or via ownership control of the underlying collateral in full satisfaction of the loan upon foreclosure or when significant collection efforts have ceased. We use a uniform process for determining its allowance for loan losses. The allowance for loan losses includes a general, formula-based component and an asset-specific component. or loss. portfolio provided $51,814 of accretion which is included in our $976,834 of interest income. The Loans had weighted-average coupon of 9.10% and a weighted-average remaining life of 6.5 years and our CMBS investments had a weighted-average coupon of 3.04% (based on one month LIBOR of 0.17% at Common Stock Number of Shares Par Value Additional Paid-Capital Additional Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity Balance, December 31, 2013 1,330,669 $ 13,267 $ 26,620,266 $ (9,578 ) $ (605,146 ) $ 26,018,809 Issuance of common stock 1,642,767 16,428 40,827,192 — — 40,843,620 Net income — — — — 225,786 225,786 Distributions declared — — — — (1,043,510 ) (1,043,510 ) Common stock issued through distribution reinvestment plan 11,180 112 265,409 — — 265,521 Share-based compensation — — 4,437 — — 4,437 Common stock offering costs, commissions and dealer manager fees — — (4,500,890 ) — — (4,500,890 ) Other comprehensive income — — — 4,828 — 4,828 Balance, March 31, 2014 (Unaudited) 2,984,616 $ 29,807 $ 63,216,414 $ (4,750 ) $ (1,422,870 ) $ 61,818,601 ARC REALTY FINANCE TRUST, INC.(A Maryland Corporation in the Development Stage)CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the three months ended March 31, 2013 Period from November 2012 (Date of Inception) to March 31, 2013 (Unaudited) Revenues Other income $ 1 $ 1 Total Revenues 1 1 Expenses: Professional fees 5,020 20,545 Total expenses 5,020 20,545 Net Loss $ (5,019 ) $ (20,544 ) Comprehensive loss $ (5,019 ) $ (20,544 ) For the Three Months Ended March 31, 2014 For the Three Months Ended March 31, 2013 Cash flows from operating activities: Net income (loss) $ 225,786 $ (5,019 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Discount accretion, net (51,814 ) — Share-based compensation 4,437 — Loan loss provision 86,462 — Changes in assets and liabilities: Accrued interest receivable (198,251 ) — Prepaid expenses and other assets (1,193,926 ) — Accounts payable and accrued expenses 92,015 — Interest payable (2,659 ) 5,019 Net cash used in operating activities: (1,037,950 ) — Cash flows from investing activities: Loan investments (24,065,595 ) — Mortgage-backed securities investments (9,497,001 ) — Principal repayments received on loan investments 37,804 — Net cash used in investing activities (33,524,792 ) — Cash flows from financing activities: Proceeds from issuances of common stock 40,843,620 — Payments of offering costs and fees related to common stock issuances (4,500,890 ) (413,061 ) Common stock repurchase — — Borrowings on revolving line of credit with affiliate 3,300,000 — Repayments of revolving line of credit with affiliate (7,305,000 ) — Borrowings on repurchase agreement 4,010,000 Repayments on repurchase agreement (10,000 ) Advances from (repayments to) affiliate (1,077,765 ) 418,488 Dividends paid (522,835 ) Net cash provided by financing activities: 34,737,130 5,427 Net change in cash 174,388 5,427 Cash, beginning of period 178,030 573 Cash, end of period $ 352,418 $ 6,000 Interest paid $ 23,695 $ — Distributions payable $ 469,160 $ — Common stock issued through distribution reinvestment plan $ 265,521 $ — Common Stock Accumulated
Deficit
During Total Number of Shares Par Value Additional Paid-Capital the
Development Stage Stockholder's Equity (Deficit) Balance, November 15, 2012 - $ - $ - $ - $ - Issuance of common stock 8,888 89 199,911 - 200,000 Net loss - - - (15,525 ) (15,525 ) Balance, December 31, 2012 8,888 $ 89 $ 199,911 $ (15,525 ) $ 184,475 Net loss - - - (5,019 ) (5,019 ) Offering costs - - (2,270,162 ) - (2,270,162 ) Balance, March 31, 2013 (Unaudited) 8,888 $ 89 $ (2,070,251 ) $ (20,544 ) $ (2,090,706 ) Three Months Ended March 31, 2014 Three Months Ended March 31, 2013 Net income (loss) $ 225,786 $ (5,019 ) Other comprehensive income (net change by component): Unrealized gain on available-for-sale securities 4,828 — Total other comprehensive income 4,828 — Comprehensive income (loss) attributable to ARC Realty Finance Trust, Inc. $ 230,614 $ (5,019 ) this statement.ARC REALTY FINANCE TRUST, INC.(A Maryland Corporation in the Development Stage)CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 2013 Period from November 2012 (Date of Inception) to March 31, 2013 (Unaudited) Cash flows from operating activities: Net loss $ (5,019 ) $ (20,544 ) Adjustments to reconcile net loss to net cash used in operating activities Change in accounts payable and accrued expenses 5,019 20,544 Net cash used in operating activities $ - $ - Cash flows from financing activities: Proceeds from issuance of common stock $ - $ 200,000 Payments of offering costs (413,061 ) (733,989 ) Advance from affiliate 418,488 539,989 Net cash provided by financing activities $ 5,427 $ 6,000 Net change in cash $ 5,427 $ 6,000 Cash, beginning of period 573 - Cash, end of period $ 6,000 $ 6,000 The accompanying notes are an integral part of this statement.(A Maryland Corporation in the Development Stage)2013formed to primarily acquire, originate and manage a diversified portfolio of commercial real estate debt secured by properties located both within and outside the United States. The Company may also investincorporated in commercial real estate securities, and commercial real estate properties. Commercial real estate debt investments may include first mortgage loans, subordinated mortgage loans, mezzanine loans and participations in such loans. Commercial real estate securities may include commercial mortgage-backed securities (“CMBS”), senior unsecured debt of publicly traded real estate investment trusts (“REITs”) and other publicly traded real estate companies and collateralized debt obligations (“CDOs”). As of March 31, 2013, the Company had not acquired any real estate debt or other investments.The Company was incorporatedMaryland on November 15, 2012 as a Maryland corporation that intendsand conducts its operations to qualify as a REITreal estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2013. The Company intends to offeris offering for sale a maximum of $2.0$0.01$0.01 par value per share, on a “reasonable best efforts” basis, pursuant to a registration statement on Form S-11 (the “Offering”) filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended.amended (the "Securities Act"). The Offering also covers the offer and sale of up to $400.0approximately $400.0 million in shares of common stock pursuant to a distribution reinvestment plan (the “DRIP”) under which common stockholders may elect to have their distributions reinvested in additional shares of the Company’s common stock.$25.00$25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP will be based on the greater of $23.75$23.75 per share or 95% of the estimated value of a share of common stock. As of March 31, 2014, the aggregate value of all the common stock outstanding was $74.6 million based on a per share value of $25.00 (or $23.75 for shares issued under DRIP). Within six months after February 12, 2015, (the “NAVor the NAV pricing date”)date, the Company will begin offering shares in the Offering at a per share purchase price that will vary quarterly and will be equal to the net asset value (“NAV”) divided by the number of shares outstanding as of the end of business on the first day of each fiscal quarter after giving effect to any share purchases or repurchases effected in the immediately preceding quarter (“per share NAV”) and applicable selling commissions and dealer manager fees will be added to the per share price for shares in the Company’s primary offering but not for the DRIP.wholly ownedcontrolled by American Realty Capital VIII, LLC (the “Sponsor”) for $22.50$22.50 per share or a total of $0.2 million.$0.2 million. Substantially all of the Company's business will beis conducted through ARC Realty Finance Operating Partnership, L.P. (the “OP”), a Delaware limited partnership. ARC Realty Finance Advisors, LLC (the “Advisor”), is the Company’s affiliated advisor. The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP (“OP units”). Additionally, the Special Limited Partner through the Advisor, expects to contribute $2,020contributed $2,020 to the OP in exchange for 90 units of limited partner interestinterests in the aggregate OP ownership, which will representrepresents a nominal percentage of the aggregate OP ownership. The limited partner interests have the right to convert OP units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, as allowed by the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP’s assets.entity under common ownership withaffiliate of the Sponsor, serves as the dealer manager of the Offering. The Advisor and Dealer Manager are related parties and will receive compensation and fees for services related to the Offering and the investment and management of the Company's assets. The Advisor and Dealer Manager will receive fees during the offering,Offering, acquisition, operational and liquidation stages.ARC REALTY FINANCE TRUST, INC.(A Maryland Corporation in the Development Stage)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2013Note 2 — Summary of Significant Accounting PoliciesBasis of AccountingThe accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with GAAP.Development Stage CompanyThe Company complies with the reporting requirements of development stage enterprises. Pursuant to the terms of the Offering, the Company must receive proceeds of $2.0 million in connection with the sale of common stock in order to break escrow and commence operations. As of March 31, 2013, the Company had not reached such threshold, acquired or originated any commercial real estate debt, commercial real estate securities, or commercial real estate properties or earned any income.inter-companyintercompany accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.Organizational CostsOrganizational costs may include accounting, legal and regulatory fees incurred related to the formation of the Company. Organizational costs are expensed as incurred.will beare carried at cost, net of unamortized origination fees, acquisition fees,expenses, discounts or premiums and unfunded commitments unless such loan or investment is deemed to be impaired.commitments. Real estate debt investments that are deemed to be impaired will be carried at amortized cost less a specific allowance for loan loss reserve.losses. Interest income is recorded on the accrual basis and related discounts, premiums, origination costs and feesacquisition expenses on investments are amortized over the life of the investment using the effective interest method. The amortization will beAmortization is reflected as an adjustment to interest income in the Company’s consolidated statements of operations.6
Allowance for Loan LossesARC REALTY FINANCE TRUST, INC.(A Maryland CorporationDevelopment Stage)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2013Real Estate SecuritiesOn the acquisition date, allloan portfolio as of the Company’sbalance sheet date. The reserve is increased through the "Loan loss provision" on the Company's consolidated statements of operations and is decreased by charge-offs when losses are confirmed through the receipt of assets such as cash in a pre-foreclosure sale or via ownership control of the underlying collateral in full satisfaction of the loan upon foreclosure or when significant collection efforts have ceased. The Company uses a uniform process for determining its allowance for loan losses. The allowance for loan losses includes a general, formula-based component and an asset-specific component.securities will be classified as availablemarket when establishing appropriate time frames to evaluate loss experience.sale, and will be carried at fair value, with any unrealized gains (losses) reported as a component of accumulated other comprehensive income (loss) in the Company’s consolidated statement of stockholder's equity. However, the Company may elect the fair value option for certain of its available for sale securities, and as a result, any unrealized gains (losses)losses on such securities will be recorded in unrealized gains (losses) on investments in the Company’s consolidated statement of operations. Interest income on commercial real estate securities will be recognized using the effective interest method with any purchased premium or discount recorded as an adjustment to interest income.Credit Losses and Impairment on InvestmentsReal Estate Debt InvestmentsCompany will maintainAdvisor considers a loan loss reserve on its commercial real estate debt investments, if appropriate. A provision willto be establishedimpaired when, the Companybased upon current information and events, it believes a loan is impaired, which is whenthat it is deemed probable that the Company will not be ableunable to collect principal and interestall amounts due according tounder the contractual terms. The Company will assess the credit qualityterms of the portfolioloan agreement. This assessment is made on a loan-by-loan basis each quarter based on such factors as payment status, lien position, borrower financial resources and adequacyinvestment in collateral, collateral type, project economics and geographical location as well as national and regional economic factors. A reserve is established for an impaired loan when the present value of reserves on at least a quarterly basis. To determine if a commercial real estate debt investment is impaired, the Company will considerpayments expected to be received, observable marketnet recoverablefair value of the loan as well as other factors, including but not limited tocollateral (for loans that are dependent on the collateral for repayment) is lower than the carrying value of that loan.any collateral less the amountestimated cost to sell. The Advisor generally will use the income approach through internally developed valuation models to estimate the fair value of the collateral for such loans. In more limited cases, the Advisor will obtain external "as is" appraisals for loan collateral, generally when third party participations exist. Valuations will be performed or obtained at the time a loan is determined to be impaired and designated non-performing, and they will be updated if circumstances indicate that a significant change in value has occurred.statusdebtor is experiencing financial difficulties. Impairments on TDR loans are generally measured based on the present value of any senior debt,expected future cash flows discounted at the prospects for the borrower and the economic situationeffective interest rate of the region where the borrower does business. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the balance sheet date.Company,Advisor, a full recovery of income and principal becomes doubtful. Income recognition will be resumed when the suspended loan becomes contractually current and performance is demonstrated to be resumed. A loan will be written off when it is no longer realizable and legally discharged.ishas not been elected will be periodically evaluated for other-than-temporary impairment. A security whereIf the fair value of a security is less than its amortized cost, the security will be considered impaired. Impairment of a security will be considered to be other-than-temporary when:when (i) the holderAdvisor has the intent to sell the impaired security; (ii) it is more likely than not the holderCompany will be required to sell the security; or (iii) the holderAdvisor does not expect to recover the entire amortized cost of the security. If it is determinedthe Advisor determines that an other-than-temporary impairment exists and a sale is likely to occur, the portion related to credit losses, where the Company does not expect to recover its entire amortized cost basis,impairment charge will be recognized as an “Impairment of assets” on the Company's consolidated statement of operations.operations and comprehensive income (loss). If a sale is not expected to occur, the Company does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security, but the security has suffered a credit loss,portion of the impairment charge will be separated. Therelated to credit loss component of the impairmentfactors will be recorded as an “Impairment of assets” on the Company's consolidated statement of operations and comprehensive income (loss) with the remainder will be recorded in “accumulatedas an unrealized gain or loss on investments reported as a component of accumulated other comprehensive income (loss)” on the Company's consolidated balance sheet.ARC REALTY FINANCE TRUST, INC.(A Maryland Corporation in the Development Stage)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2013washas been elected will not be evaluated for other-than-temporary impairment as changes in fair value are recorded in the Company’s consolidated statement of operations.Deferred CostsDeferred costs may consist primarily of deferred financing costs or deferred offering costs. Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining commitments for financing. These costs will be amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs will be expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close will be expensed in the period in which it is determined that the financing will not close.Deferred offering costs may represent professional fees, fees paid to various regulatory agencies, and other costs incurred in connection with the registration and sale of shares of the Company's common stock. As of December 31, 2012, such costs totaled $0.9 million. On the day the Company commenced its Offering, deferred offering costs were reclassified to stockholder’s equity (deficit).will havehas a Share Repurchase Program (“SRP”) that enables stockholders to sell their shares to the Company. Under the SRP, stockholders may request that the Company redeem all or any portion of their holdings, subject to certain minimum conditions described below, if such repurchase does not impair the Company's capital or operations.$23.13 or $23.13 and 92.5% of the amount they actually paid for each share; after two years from the purchase date — the lower of $23.75 or $23.75 and 95.0% of the amount they actually paid for each share; after three years from the purchase date — the lower of $24.38 or $24.38 and 97.5% of the amount they actually paid for each share; and after four years from the purchase date — the lower of $25.00 or $25.00 and 100% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations).quarter, plus applicable selling commissions and dealer manager fees.quarter. Subject to limited exceptions, stockholders who redeem their shares of the Company's common stock within the first four months from the date of purchase will be subject to a short-term trading fee of 2% of the aggregate per share NAV of the shares of common stock received. Because the Company's per share NAV will be calculated quarterly, the redemption price may fluctuate between the redemption request day and the date on which the Company pays redemption proceeds.ARC REALTY FINANCE TRUST, INC.(A Maryland Corporation in the Development Stage)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2013share repurchase plan.2013, 2014, no shares were eligible to be redeemed.no19,136 shares issued under the DRIP as of March 31, 2013.operations.operations and comprehensive income (loss). If the derivative is designated and qualifies for hedge accounting treatment the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.ARC REALTY FINANCE TRUST, INC.(A Maryland Corporation in the Development Stage)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2013will bewere reclassified from deferred costs to stockholder'sstockholders' equity whenon the day the Company commencescommenced its operations. Offering and willcosts include all expenses incurred by the Company in connection with its Offering as of such date. These costs include but are not limited to (i) legal, accounting, printing, mailing and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Dealer Manager for amounts it may pay to reimburse the bona fide diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. The Company is obligated to reimburse the Advisor or its affiliates, as applicable, for organizational and offering costs paid by them on behalf of the Company, not withstandingnotwithstanding that the Advisor is obligated to reimburse the Company to the extent organizational and offering costs (excluding selling commissions and the dealer manager fee) incurred by the Company in its offeringthe Offering exceed 2.00%2% of gross offering proceeds. As a result, these costs are only a liability of the Company to the extent aggregate selling commissions, the dealer manager fees and other offering costs do not exceed 12.00%12% of the gross proceeds determined at the end of offeringthe Offering (See Note 410 — Related Party Transactions and Arrangements).612 — Share-Based Compensation).intendsconducts its operations to make an election to be taxedqualify as a REIT under Sections 856 through 860 of the Internal Revenue Code commencingreal estate investment trust for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2013. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax as long as it distributes at least 90% of its REIT taxable income to its stockholders. REITs are subject to a number of other organizational and operational requirements. EvenHowever, even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.will calculatecalculates basic incomeearnings per share by dividing net income attributable to the Company for the period by the weighted-average of shares of its common stock outstanding for a respectivethat period. Diluted incomeearnings per share takes into accountreflects the effect of dilutive instruments, such as stock options and unvestedpotential dilution that that could occur from shares issuable in connection with the restricted stock plan and other securities which are convertible to common stock, but uses the average share price for the period in determining the number of incremental shares that are toOP units, except when doing so would be added to the weighted-average number of shares outstanding. For the three months ended March 31, 2013, the calculation of net income per share is not presented because it is not a meaningful measure of the Company’s performance as the Company has not commenced operations.will conductconducts its business through the following segments:will bewhich is focused on originating, acquiring and asset managing commercial real estate debt investments, including first mortgage loans, subordinate mortgages, mezzanine loans and participations in such loans.will bewhich is focused on investing in and asset managing commercial real estate securities primarily consisting of CMBS and may include unsecured REIT debt, CDO notes and other securities. March 31, 2014 December 31, 2013 (Unaudited) Mezzanine loans $ 44,918 $ 30,832 Subordinated loans 9,995 — Total gross carrying value of loans 54,913 30,832 Provision for loan losses 86 — Total loans receivable, net $ 54,827 $ 30,832 Provision for loan losses at January 1, 2014 $ — Provision for loan losses 86 Charge-offs — Recoveries — Provision for loan losses at March 31, 2014 $ 86 (A Maryland Corporation in the Development Stage)Description Location Date of Investment Maturity Date Coupon Original Face Amount Face Amount Carrying Value W Hotel Minneapolis, MN May 2013 May 2023 Fixed $ 6,500 $ 6,431 $ (2,395 ) $ 4,036 Regency Park Apartments Austin, TX September 2013 September 2018 Fixed 5,000 5,000 50 5,050 121 West Trade Office Charlotte, NC September 2013 September 2016 Floating 9,000 9,000 73 9,073 545 Madison Avenue New York, NY December 2013 January 2024 Fixed 5,000 5,000 74 5,074 Hampton Inn LaGuardia East Elmhurst, NY December 2013 August 2023 Fixed 4,981 4,966 (1,411 ) 3,555 Southern US Student Housing Various December 2013 January 2024 Fixed 4,000 4,000 59 4,059 Burger King Portfolio Various March 2014 March 2024 Fixed 10,000 10,000 (5 ) 9,995 Four Seasons Las Colinas Irving, TX March 2014 March 2016 Floating 11,000 11,000 48 11,048 Element Hotel Irving, TX March 2014 August 2018 Fixed 3,000 3,000 23 3,023 Total $ 58,481 $ 58,397 $ (3,484 ) $ 54,913 Investment Rating 1 Investment exceeding fundamental performance expectations and/or capital gain expected. Trends and risk factors since time investment are favorable. 2 Performing consistent with expectations and a full return of principal and interest expected. Trends and risk factors are neutral to favorable. 3 Performing investments requiring closer monitoring. Trends and risk factors show some deterioration. 4 Underperforming investment - some loss of interest or dividend expected, but still expecting a positive return on investment. Trends and risk factors are negative. 5 Underperforming investment with expected loss of interest and some principal. Balance at December 31, 2013 $ 30,832 Acquisitions/Originations 24,065 Principal Repayments (38 ) Discount Accretion/Premium Amortization 54 Provision for loan losses (86 ) Balance at March 31, 2014 $ 54,827 March 31, 2014 December 31, 2013 CMBS $ 14,505 $ 5,005 Total fair value of securities $ 14,505 $ 5,005 As of March 31, 2014 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Net Fair Value Adjustment Fair Value CMBS $ 14,510 $ — $ (5 ) $ (5 ) $ 14,505 Total $ 14,510 $ — $ (5 ) $ (5 ) $ 14,505 Three Months Ended
March 31, 2014Basic and diluted net income (loss) $ 225,786 Basic weighted average shares outstanding 2,025,934 Diluted weighted average shares outstanding 2,030,023 Basic net income per share $ 0.11 Diluted net income per share $ 0.11 Once operations the calculation ofcommence, revenues and expenses will be allocatedhad not commenced operations.two segmentsDRIP and unvested restricted shares, and had received total proceeds of $73.2 million excluding shares issued pursuant to the DRIP.requireda REIT, the Company must currently distribute, at a minimum, an amount equal to 90% of its taxable income, without regard to the deduction for financial disclosure purposes.dividends paid and excluding net capital gains. The Company must distribute 100% of its taxable income (including net capital gains) to avoid paying corporate federal income taxes.Payment Date Amount Paid in Cash Amount Issued under DRIP January 2, 2014 1,458,470 $ 140,164 $ 73,844 February 3, 2014 1,973,014 170,660 85,496 March 3, 2014 2,693,391 212,011 106,181 Total $ 522,835 $ 265,521 39 — Commitments and Contingencies410 — Related Party Transactions and Arrangements2013,2014, an entity wholly owned by the Sponsor owned 8,888 shares of the Company’s outstanding common stock.Advisor and its affiliates may incur and pay costs and feesCompany entered into the Revolver with an affiliate on behalfMay 15, 2013 (See Note 5 — Revolving Line of the Company. As of March 31, 2013, the Company had a payable of $0.9 million payable to affiliated entities for services provided and advances received to fund the payment of regulatory filing fees and other offering costs.will receivereceives fees and compensation in connection with the sale of the Company’s common stock.stock in the Offering. The Dealer Manager will receivereceives a selling commission of up to 7.0% of the per share purchase price of the Company's offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, it is expected that the Dealer Manager will receivereceives up to 3.0% of the gross proceeds from the sale of shares, before reallowance to participating broker-dealers, as a dealer-managerdealer manager fee. The Dealer Manager may reallow its dealer-managerdealer manager fee to such participating broker-dealers. A1%1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option is elected, it is expected that the dealer manager fee will be reduced to 2.5% of gross proceeds (not including selling commissions and dealer manager fees). No such have been incurred from the Dealer Manager associated with the Offering during the three months ended March 31, 2014 and the associated payable as of March 31, 2014 and December 31, 2013. Three Months Ended March 31, 2014 Payable as of March 31, 2014 Payable as of December 31, 2013 Total commissions and fees incurred from the Dealer Manager $ 3,851 $ 94 $ 12 and its affiliates mayand entities under common ownership with the Advisor receive compensation and reimbursement for services relating to the Offering. All offering costs incurredOffering, including transfer agency services provided by the Company or its affiliated entities on behalfan affiliate of the Company are initially chargedDealer Manager. The table below shows compensation and reimbursement the Advisor and its affiliates incurred for services relating to deferred costs on the accompanying balance sheet, and will subsequently be charged to additional paid-in capital once the Offering commences. Duringduring the three months ended March 31, 2013,2014 and the Company has not incurred any offering cost reimbursementsassociated payable as of March 31, 2014 and December 31, 2013. There was no compensation or reimbursement to the Advisor and Dealer Manager. its affiliates for services relating to the Offering incurred during the three months ended March 31, 2013 (in thousands): Three Months Ended March 31, 2014 Payable as of March 31, 2014 Payable as of December 31, 2013 Total compensation and reimbursement for services provided by the Advisor and affiliates $ 360 $ 1,333 $ 1,047 offering,Offering, excluding commissions and dealer manager fees, up to a maximum of 2.00%2.0% of gross proceeds received from its ongoing Offering of common stock, measured at the end of the Offering. Organizational and offering costs in excess of the 2.00%2.0% cap as of the end of the offeringOffering are the Advisor's responsibility. As of March 31, 2013,2014, organizational and offering costs exceeded 2.00%2.0% of gross proceeds received from the Offering by $2.3$2.4 million, due to the on-goingongoing nature of the offering processOffering and that many expenses were paid before the offeringOffering commenced.will receivereceives an acquisition fee of 1.0% of the principal amount funded by the Company to acquire or originate commercial real estate debt or the amount invested in the case of other commercial real estate investments. The Advisor may be also be reimbursed for acquisition expenses incurred related to selecting, evaluating, originating and acquiring investments on the Company's behalf which is expected to be approximately 0.5% of the principal amount funded byand the Company to acquire or originate commercial real estate debt or the amount invested in the case of other commercial real estate investments.may incur third party acquisition expenses. In no event will the total of all acquisition fees and acquisition expenses payable with respect to a particular investment exceed 4.5% of the principal amount funded by the Company to acquire or originate commercial real estate debt or the amount invested in the case of other commercial real estate investments. Once the proceeds from the Offering have been fully invested, the aggregate amount of acquisition fees shall not exceed 1.5% of the principal amount funded by the Company to acquire or originate commercial real estate debt or the amount invested in the case of other commercial real estate investments, as applicable, for all of the assets acquired.ARC REALTY FINANCE TRUST, INC.(A Maryland Corporation During the three months ended Development Stage)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2013properties, loans receivable and equity andother debt investments). FFO, as adjusted, is not the same as FFO.will reimburseamortizes the Advisor’s costscost of providing administrative services, subject to$0.9 million associated with this agreement into other expense on the limitation thatconsolidated statements of operations over the Company will not reimburse the Advisor for any amount by which the Company's operating expenses (including the asset management fee) at the endestimated remaining life of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assetsOffering.(b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Additionally, the Company will reimburse the Advisor for personnel costsreimbursements in connection with other services during the operational stage, in addition to paying an asset management fee; however,operations of the Company will not reimbursefor the Advisor for personnel coststhree months ended March 31, 2014 and the associated payable as of March 31, 2014 and December 31, 2013. There were no related party fees and reimbursements in connection with services for which the Advisor receives acquisition fees or real estate commissions. Three Months Ended March 31, 2014 Payable as of March 31, 2014 Payable as of December 31, 2013 Acquisition fees and expenses $ 397 $ 239 $ 202 Advisory and investment banking fee 135 — 316 Total related party fees and reimbursements $ 532 $ 239 $ 518 generalcosts. The Advisor did not absorb any expenses during the three months ended March 31, 2014 or March 31, 2013, respectively. The Advisor did not waive any fees during the three months ended March 31, 2014 or 2013, respectively.costs.As of The Advisor did not contribute capital to enhance the Company's cash position for working capital or distribution purposes during the three months ended 2013, no fees or reimbursements were incurred or waived for any period in connection with the operations of the Company2014 and no capital contributions were made by the Advisor.of:of (i) 1.0% of the principal amount of the debt prior to such transaction; or (ii) the amount of the fee paid by the borrower in connection with such transaction. If the Company takesARC REALTY FINANCE TRUST, INC.(A Maryland Corporation in the Development Stage)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 201315%15.0% of the excess of the Company's total return to stockholders in any year, which such total return exceeds 6.0% per annum, provided that in no event will the annual subordinated performance fee exceed 10.0% of the aggregate total return for such year. This fee will be payable only upon the sale of assets, distributions or other event which results in the return on stockholders’ capital exceeding 6.0% per annum.intends towill pay a subordinated participation in the net sale proceeds of the sale of real estate assets of 15.0% of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 6.0% cumulative, pre-tax non-compounded return on the capital contributed by investors. Company's Advisor shall be entitled to receive distributions from the OP, pursuant to a special limited partnership interest, equal to 15%15.0% of the amount by which the sum of the Company's adjusted market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6%6.0% cumulative, pre-tax non-compounded return to investors. In addition, the Company's Advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.As of in the above, agreements but the Advisor will not be entitled to the subordinated performance fee, subordinated participation in net sale proceeds, subordinated incentive listing distribution or subordinated distribution upon termination of the advisory agreement unless investors have received a 6.0% cumulative, pre-tax non-compounded return on their capital contributionswillhas also establishestablished a restricted stock awardshare plan for the benefit of employees (if the Company ever has employees), directors, employees of the Advisor and its affiliates. Seeaffiliates (See Note 612 — Share-Based Compensation.511 — Economic Dependencyor will engage the Advisor, and its affiliates and entities under common ownership with the Advisor to provide certain services that are essential to the Company, including asset management services, asset acquisition and disposition decisions, transfer agency services, 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, transaction management and investor relations.612 — Share-Based Compensation(A Maryland Corporation in the Development Stage)2013years.five-yearfive-year period following the first anniversary of the date of grant in increments of 20.0% per annum.Thereno restricted shares issuedclassified as Level II due to the observable nature of many of the market inputs. Total Level I Level II Level III CMBS $ 14,505 $ — $ 14,505 $ — Total $ 14,505 $ — $ 14,505 $ — there was no compensation expense related to restricted sharesLiabilities Gross Amounts Not Offset on the Balance Sheet Repurchase Agreements Gross Amounts of Recognized Assets Gross Amounts of Recognized (Liabilities) Gross Amounts Offset on the Balance Sheet Net Amounts of Assets (Liabilities) presented on the Balance Sheet Financial Instruments Cash Collateral Received (Posted) Net Amount March 31, 2014 $ 5,010 $ (4,000 ) $ — $ 1,010 $ — $ — $ 1,010 2013. Real Estate Real Estate Total Debt Securities Interest Income $ 925,020 $ 886,241 $ 38,779 Discount (Premium) Amortization 51,814 53,743 (1,929 ) Interest Expense 21,036 9,412 11,624 Net Income 225,786 348,931 (123,145 ) Total Assets 71,431,373 56,913,244 14,518,129 716 — Subsequent Eventsthe filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements except for the following transactions:On May 14, 2013,received and accepted aggregate subscriptions equal to the minimum of $2.0 million inhad 3,575,407 shares of common stock issuedoutstanding, including unvested restricted shares, toand had raised total proceeds from the SponsorOffering of $89.3 million. As of April 30, 2014, the aggregate value of all share issuances in the amount of $1.0Offering was $89.3 million at a purchase price of $22.50 per share and broke the general escrow requirements of the IPO. As of May 14, 2013, the Company had 97,778 shares outstanding.On May 13, 2013, the Company's board of directors authorized, and the Company declared, a distribution rate, which will be calculated based on stockholders of record each day during the applicable period at a rate of $0.00565068493per day based on a priceper share value of$25.00 (or $23.75 per share for shares issued under the DRIP).Source of Capital March 31, 2014 April 1 to April 30, 2014 Total Common stock $ 74,591 $ 14,661 $ 89,253 common stock. The distributions will begin to accrue commencing with the earlier to occur of: (i) June 15, 2013; and (ii) 15 days following the Company's initial portfolio investment. The distributions will be payable by the 5th day following each month end$467,128 to stockholders of record at the close of business each day during the prior month. Distributions payments are dependent onmonth of March 2014. Approximately $304,405 of the availability of funds.distribution was paid in cash, while $162,723 was used to purchase 6,852 shares for those stockholders that chose to reinvest dividends through the DRIP.board of directors may reduce the amount of distributions paid or suspend distribution paymentsloan bears interest at any time12.00% and therefore distributions payments are not assured.has a five year term.Adviser,Advisors, LLC (the “Adviser”“Advisor”) and its subsidiaries. ARC Realty Finance Trust, Inc. isWe are externally managed by the Adviser.·our use of the proceeds of the offering;·our business and investment strategy;·our ability to make investments in a timely manner or on acceptable terms;·current credit market conditions and our ability to obtain long-term financing for our property investments in a timely manner and on terms that are consistent with what we project when we invest in the property;·the effect of general market, real estate market, economic and political conditions, including the recent economic slowdown and dislocation in the global credit markets;·our ability to make scheduled payments on our debt obligations;·our ability to generate sufficient cash flows to make distributions to our stockholders;·the degree and nature of our competition;·the availability of qualified personnel;·our ability to qualify and maintain our qualification as a REIT; and·other factors set forth under the caption ��‘Risk Factors’’ in our registration statement on Form S-11 (File No. 333-186111)We were formed to primarily acquire, originate and manage a diversified portfolio of commercial real estate debt secured by properties located both within and outside the United States. We may also invest in commercial real estate securities, and commercial real estate properties. Commercial real estate debt investments may include first mortgage loans, subordinated mortgage loans, mezzanine loans and participations in such loans. Commercial real estate securities may include commercial mortgage-backed securities (“CMBS”), senior unsecured debt of publicly traded real estate investment trusts (“REITs”) and other publicly traded real estate companies and collateralized debt obligations (“CDOs”). As of March 31, 2013, we had not acquired any real estate debt or other investments.as a Maryland corporation that intendsand conduct our operations to qualify as a REITreal estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2013. We are offering for sale a maximum of $2.0$2.0 billion of common stock, $0.01$0.01 par value per share, on a “reasonable best efforts” basis, pursuant to a registration statement on Form S-11 (the “Offering”) filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended.amended (the "Securities Act"). The Offering also covers the offer and sale of up to $400.0approximately $400.0 million in shares of common stock pursuant to a distribution reinvestment plan (the “DRIP”) under which common stockholders may elect to have their distributions reinvested in additional shares of the ourCompany’s common stock.$25.00$25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP will be based on the greater of $23.75$23.75 per share or 95% of the estimated value of a share of common stock. As of March 31, 2014, the aggregate value of all the common stock outstanding was $74.6 million based on a per share value of $25.00 (or $23.75 for shares issued under DRIP). Within six months after February 12, 2015, (the “NAVor the NAV pricing date”)date, we will begin offering shares in the Offering at a per share purchase price that will vary quarterly and will be equal to the net asset value (“NAV”) divided by the number of shares outstanding as of the end of business on the first day of each fiscal quarter after giving effect to any share purchases or repurchases effected in the immediately preceding quarter (“per share NAV”) and applicable. Applicable selling commissions and dealer manager fees will be added to the per share price for shares in the our primary offering but not for the DRIP.wholly ownedcontrolled by American Realty Capital VIII, LLC (the “Sponsor”) for $22.50 per share or a total of $0.2 million. Substantially all of our business will be conducted through ARC Realty Finance Operating Partnership, L.P. (the “OP”), a Delaware limited partnership. ARC Realty Finance Advisors, LLC (the “Advisor”), is the Company’s affiliated advisor. We are the sole general partner and hold substantially all of the units of limited partner interests in the OP (“OP units”). Additionally, the Special Limited Partner through the Advisor, expects to contributecontributed $2,020 to the OP in exchange for 90 units of limited partner interestinterests in the aggregate OP ownership, which will represent a nominal percentage of the aggregate OP ownership. The limited partner interests have the right to convert OP units for the cash value of a corresponding number of shares of common stock or, at the option of the OP, a corresponding number of shares of common stock, as allowed by the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP’s assets.entity under common ownership withaffiliate of the Sponsor, serves as the dealer manager of the Offering. The Advisor and Dealer Manager are related parties and will receive compensation and fees for services related to the Offering and the investment and management of our assets. The Advisor and Dealer Manager will receive fees during the offering, acquisition, operational and liquidation stages.16will beare carried at cost, net of unamortized origination fees, acquisition fees,expenses, discounts or premiums and unfunded commitments unless such loan or investment is deemed to be impaired.commitments. Real estate debt investments that are deemed to be impaired will be carried at amortized cost less a specific allowance for loan loss reserve.losses. Interest income is recorded on the accrual basis and related discounts, premiums, origination costs and feesacquisition expenses on investments are amortized over the life of the investment using the effective interest method. The amortization will beAmortization is reflected as an adjustment to interest income in the our consolidated statements of operations.Real Estate SecuritiesOn the acquisition date, allour commercial real estate securities will be classified as available for sale, and will be carried at fair value, with any unrealized gains (losses) reported as a component of accumulated other comprehensive income (loss)loan losses inherent in our consolidated statement of stockholder's equity. However, we may elect the fair value option for certain of its available for sale securities, and as a result, any unrealized gains (losses) on such securities will be recorded in unrealized gains (losses) on investments in our consolidated statement of operations. Interest income on commercial real estate securities will be recognized using the effective interest method with any purchased premium or discount recorded as an adjustment to interest income.Credit Losses and Impairment on InvestmentsReal Estate Debt InvestmentsWe will maintain a loan loss reserve on our commercial real estate debt investments, if appropriate. A provision will be established when we believe a loan is impaired, which is when it is deemed probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We will assess the credit quality of the portfolio and adequacy of reserves on at least a quarterly basis. To determine if a commercial real estate debt investment is impaired, we will consider the estimated net recoverable value of the loan as well as other factors, including but not limited to fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the economic situation of the region where the borrower does business. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying valueportfolio as of the balance sheet date.ourthe opinion of the Advisor, a full recovery of income and principal becomes doubtful. Income recognition will be resumed when the suspended loan becomes contractually current and performance is demonstrated to be resumed. A loan will be written off when it is no longer realizable and legally discharged.ishas not been elected will be periodically evaluated for other-than-temporary impairment. A security whereIf the fair value of a security is less than its amortized cost, the security will be considered impaired. Impairment of a security will be considered to be other-than-temporary when:when (i) the holderAdvisor has the intent to sell the impaired security; (ii) it is more likely than not the holderwe will be required to sell the security; or (iii) the holderAdvisor does not expect to recover the entire amortized cost of the security. If it is determinedthe Advisor determines that an other-than-temporary impairment exists and a sale is likely to occur, the portion related to credit losses, where we do not expect to recover its entire amortized cost basis,impairment charge will be recognized as an “Impairment of assets” on our consolidated statement of operations. If we doa sale is not intendexpected to selloccur, the security and it is more likely than not that the entity will not be required to sell the security, but the security has suffered a credit loss,portion of the impairment charge will be separated. Therelated to credit loss component of the impairmentfactors will be recorded as an “Impairment of assets” on our consolidated statement of operations andwith the remainder will be recorded in “accumulatedas an unrealized gain or loss on investments reported as a component of accumulated other comprehensive income (loss)” on our consolidated balance sheet.washas been elected will not be evaluated for other-than-temporary impairment as changes in fair value are recorded in our consolidated statement of operations.Derivative Instrumentsmay use derivative financial instrumentsconduct our operations to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.We will 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 qualifyingqualify 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 netreal estate investment in a foreign operation. Hedge accounting generally providestrust for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. 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.The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. If we elect not to apply hedge accounting treatment, any changes in the fair value of these derivative instruments will be recognized immediately in gains (losses) on derivative instruments in our consolidated statement of operations. If the derivative is designated and qualifies for hedge accounting treatment the change in the estimated fair value of the derivative is recorded in other comprehensiveU.S. federal income (loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.Income TaxesWe intend to make an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencingtax purposes beginning with the taxable year ending December 31, 2013. If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax as long as we distributeit distributes at least ourits REIT taxable income to ourits stockholders. REITs are subject to a number of other organizational and operational requirements. EvenHowever, even if we qualifyqualifiy for taxation as a REIT, weit may be subject to certain state and local taxes on ourits income and property, and federal income and excise taxes on ourits undistributed income.ResultsOperationsCurrently,commenced business operations. Becausesold any investments.have not acquired any assets, our management is not awarereceived scheduled principal repayments of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting our targeted portfolio and real estate generally, which may be reasonably anticipated to$37,804 on the Loans. Our CMBS investments have a material impactweighted average spread of 3.04% (based on one month London Interbank Offered Rate ("LIBOR") of 0.17% at March 31, 2014) and 2.92% (based on one month LIBOR of 0.17% at December 31, 2013) as of March 31, 2014 and December 31, 2013, respectively. Our CMBS investments have a remaining life of 2.1 and 1.9 years as of March 31, 2014 and December 31, 2013, respectively. We recorded interest income of $38,779 on our CMBS investments for the three months ended March 31, 2014, excluding any amortization of discounts or premiums. capital resourcespar value of the investments as of March 31, 2014 and December 31, 2013.
revenuepar value by maturity year for the investments in our portfolio as of March 31, 2014 and December 31, 2013.
Three Months Ended March 31, 2014 Three Months Ended March 31, 2013 Net Interest Income: Interest income $ 976,834 $ 1 Interest expenses 21,036 — Net interest income $ 955,798 $ 1 income$0.11 per basic and diluted weighted-average share. During the three months endedMarch 31, 2014, we funded five investments with an average carrying value of $6.7 million. Our portfolio was funded at a net discount to be derived frompar of $4.1 million. During the operationthree months endedMarch 31, 2014, the net discount of our assets. Three Months Ended March 31, 2014 Three Months Ended March 31, 2013 Board expenses $ 46,687 $ — Insurance expense 55,000 — Professional fees 113,160 5,020 Acquisition fees 259,000 — Other expenses 169,703 — Loan loss provision 86,462 — Total expenses $ 730,012 $ 5,020 We are offering and selling to the public in our primary offering up to 80,000,000 shares of our common stock, $0.01 par value per share, at $25.00 per share (subject to certain volume discounts). We also are offering up to 16,842,105 shares of common stock under our DRIP initially at $23.75 per share, which is 95% of the primary offering price. Commencing on the NAV pricing date, we will offer our shares in our primary offering at a price equal to our per share NAV, plus applicable selling commissions and dealer manager fees. We reserve the right to reallocate the shares of common stock we are offering between our primary offering and the DRIP. for acquisition costs, including the purchase price of any commercial real estate investments we acquire, improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations and distributions to our stockholders. Generally, we will fund our acquisitionsinvestments from the net proceeds of the Offering. We intend tocan acquire our assets with cash and mortgage or other debt, but we also may acquire assets free and clear of permanent mortgage or other indebtedness by paying the entire purchase price for the asset in cash or in OP units.Note that, currently, we have not identified anyWe continue to actively pursue lenders to initiate additional sources of financingcapital.there is no assurance that such sources of financingswe declared, a distribution, which will be availablecalculated based on favorable terms orstockholders of record each day during the applicable period at all.DistributionsAsa rate of $0.00565068493 per day based on a price of $25.00 per share of common stock. The distributions began to accrue on May 30, 2013 (Payment Date Amount Paid in Cash Amount Issued under DRIP January 2, 2014 1,458,470 $ 140,164 $ 73,844 February 3, 2014 1,973,014 170,660 85,496 March 3, 2014 2,693,391 212,011 106,181 Total $ 522,835 $ 265,521 Three Months Ended March 31, 2014 Distributions: Cash distributions paid $ 522,835 Distributions reinvested 265,521 Total distributions $ 788,356 Source of distribution coverage: Proceeds from issuance of common stock $ 522,835 66.3 % Common stock issued under DRIP 265,521 33.7 % Total sources of distributions $ 788,356 100.0 % Cash flows used in operations (GAAP) $ (1,037,950 ) Net income (GAAP) $ 225,786 have not paid any distributions. We intendhad a net loss of $5,019 offset by an increase in accounts payable and accrued expenses of $5,019.accruean affiliate offset by $0.4 million of offering costs.pay distributionslimitations, our Advisor is responsible for managing our affairs on a regularday-to-day basis beginning no laterand for identifying, originating, acquiring and asset managing investments on our behalf. For such services, to the extent permitted by law and regulations, our Advisor receives fees and reimbursements from us. Below is a description and table of the fees and reimbursements incurred to our Advisor.first calendarsale of assets for that period. Additionally, we will reimburse our Advisor for personnel costs in connection with other services during the operational stage, in addition to paying an asset management fee; however, we will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or disposition fees.afterperiod ending on the last day of the calendar month in which we make our firstquarter immediately preceding the date such asset management fee is payable, exceeds the funds from operations (“FFO”), as adjusted, for the same period.investment. debt or the amount invested in the case of other commercial real estate investments. Acquisition fees paid to our Advisor related to the origination or acquisition of commercial real estate debt investments are included in commercial real estate debt investments, net on our consolidated balance sheets and amortized to interest income over the life of the investment using the effective interest method.intendwill pay a disposition fee of 1.0% of the contract sales price of each commercial real estate loan or other investment sold, including mortgage-backed securities or collateralized debt obligations issued by our subsidiary as part of a securitization transaction. We will not be obligated to fundpay a disposition fee upon the maturity, prepayment, workout, modification or extension of commercial real estate debt unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the debt prior to such distributionstransaction; or (ii) the amount of the fee paid by the borrower in connection with such transaction. If we take ownership of a property as a result of a workout or foreclosure of a loan, we will pay a disposition fee upon the sale of such property.cash flowour Offering, all of which are reallowed to participating broker-dealers. In addition, we pay our Dealer Manager a dealer manager fee of 3.0% of gross proceeds from our Primary Offering, a portion of which may be reallowed to participating broker-dealers. A participating broker-dealer may elect to receive a selling commission equal to 7.5% of the gross proceeds from the sale of shares, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option is elected, the dealer manager fee will be reduced to 2.5% of gross proceeds. No selling commissions or dealer manager fees are paid for sales under our DRIP. Three Months Ended March 31, 2014 Payable as of March 31, 2014 December 31, 2013 Total commissions and fees incurred from the Dealer Manager in connection with the offering $ 3,851 $ 94 $ 12 Total compensation and reimbursement for services provided by the Advisor and affiliates in connection with the offering 360 1,333 1,047 Acquisition fees and related expense reimbursements in connection with operations 397 239 202 Advisory and investment banking fee 135 — 316 Total $ 4,743 $ 1,666 $ 1,577 however,("MFFO") which we believe to be appropriate supplemental measures to reflect the operating performance of a REIT. The use of FFO and MFFO is recommended by the REIT industry as supplemental performance measures. FFO and MFFO are not equivalents to our net income or loss as determined under GAAP.insufficient cash flowbeen put into effect since the establishment of NAREIT's definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. For instance, the accounting treatment for acquisition fees related to business combinations has changed from operations available for distribution until we make substantial investmentsbeing capitalized to being expensed. Additionally, publicly registered, non-listed REITs are typically different from traded REITs because they generally have a limited life followed by a liquidity event or other targeted exit strategy. Non-traded REITs typically have a significant amount of acquisition activity and we can give no assuranceare substantially more dynamic during their initial years of investment and operation as compared to later years when the proceeds from their continuous public offering have been fully invested and when the company is seeking to implement a liquidity event or other exit strategy. However, it is likely that we will pay distributions solelymake investments past the acquisition stage, albeit at a substantially lower pace.during overearly stageslife of our operations or at any pointcompany. Acquisition fees paid to our Advisor in connection with the origination and acquisition of debt investments are amortized over the life of the investment as an adjustment to interest income under GAAP and are therefore, included in the future.computation of net income (loss) and income (loss) from operations, both of which are performance measures under GAAP. Acquisition fees paid to our Advisor in connection with the acquisition of properties are characterized as operating expenses in determining operating net income. All such acquisition fees are paid in cash that would otherwise be available to distribute to our stockholders. In the event that proceeds from our cash flow from operations isoffering are not sufficient to fully fund our distributions, our organizational documents permit us to pay distributions from any source, including loans, offering proceeds and our advisor’s advances and deferralthe payment or reimbursement of acquisition fees and expenses reimbursements.to our Advisor, such fees would be paid from other sources, including new financing, operating cash flow, net proceeds from the sale of investments or from other cash flows. We havebelieve that acquisition fees incurred by us negatively impact our operating performance during the period in which such investments are originated or acquired by reducing cash flows and therefore the potential distributions to stockholders.established a limitfundamental attribute of the business plan, unrealized gains or losses from fair value adjustments on real estate securities, including commercial mortgage backed securities and other securities, interest rate swaps and other derivatives not deemed to be hedges and foreign exchanges holdings; unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we will be responsible for managing interest rate, hedge and foreign exchange risk, we expect to retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of our core operations.proceeds weany senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business. Fair value is typically estimated based upon discounting the expected future cash flows of the underlying collateral taking into consideration the discount rate, capitalization rate, occupancy, creditworthiness of major tenants and many other factors. This requires significant judgment and because it is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may usediffer materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the loan, a specific allowance for loan losses is recorded. In the case of securities, all or a portion of a deemed impairment may be recorded. Due to our limited life, any allowance for loan losses or impairment of securities recorded may be difficult to recover.distributions. Our boardcash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of directors will determine the amountour performance, as an alternative to cash flows from operations as an indication of theour liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. The board’s determination willFFO and MFFO should be based on a numberreviewed in conjunction with other GAAP measurements as an indication of factors, including funds available from operations, our capital expenditure requirements, requirements of Maryland law and the annual distribution requirements necessary to maintain our REIT status under the Code. As a result, our distribution rate and payment frequency may vary from time to time. However, to qualifyperformance. MFFO has limitations as a REIT, we must annually distribute to our stockholdersperformance measure in an offering such as ours where the price of a share of common stock is initially a stated value and there will not be a per share NAV determination for at least 90%two years after the commencement of the Offering. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after our per share NAV is disclosed, as well as after our offering and acquisition stages are completed. FFO and MFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO or MFFO.taxable income (which does not equalindustry and we would have to adjust our calculation and characterization of FFO or MFFO.as calculated(loss) in accordance with GAAP), determined without regard toour calculation of FFO and MFFO for the deduction for dividends paidthree months ended March 31, 2014 and excluding net capital gains.March 31, 2013. Three Months Ended
March 31, 2014 Three Months Ended March 31, 2013 Funds From Operations: Net income (loss) $ 225,786 $ (5,019 ) Funds from operations $ 225,786 $ (5,019 ) Modified Funds From Operations: Funds from operations $ 225,786 $ (5,019 ) Amortization of premiums, discounts and fees on investments and borrowings, net (51,814 ) — Acquisition fees and expenses 396,850 — Loan loss provision 86,462 — Modified funds from operations $ 657,284 $ (5,019 )
Currently,not commenced business operations. Because we have not acquired any assets, borrowed any funds or purchased or sold any derivative,foreign denominated investments, and thus, we are currently not exposed to foreign currency fluctuations.or foreign currency market risks.sensitivity.Change in Interest Rates Estimated Change in Interest Income Net of Interest Expense Estimated Percentage Change in Interest Income Net of Interest Expense $ (351 ) (0.04 )% Base Interest Rate $ — — % (+) 50 Basis Points $ 14,364 1.50 % (+) 100 Basis Points $ 28,728 3.01 %
thethis Quarterly Report on Form 10-Q.Change in Internal Control Over Financial Reportingcontrolcontrols over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)15(d)-15(f) of the Exchange Act) during the three months ended March 31, 20132014 that has materially affected, or is reasonably likely to materially affect, our internal controlcontrols over financial reporting.ARC REALTY FINANCE TRUST, INC.
We currentlysubjecta party to any material, pending legal proceedings.
Not applicable.
Not applicable. As of March 31, 2014 Selling commissions and dealer manager fees $ 3,888 Other offering expenses 6,556 Total offering expenses $ 10,444
20132014 (and are numbered in accordance with Item 601 of Regulation S-K).Exhibit No. Description 1.1*Amended and Restated Exclusive Dealer Manager Agreement, dated as of April 9, 2013, among the Company, ARC Realty Finance Advisors, LLC and Realty Capital Securities, LLC3.1*Articles of Amendment and Restatement4.1*Agreement of Limited Partnership of ARC Realty Finance Operating Partnership, L.P., dated as of February 12, 201310.1*Amended and Restated Subscription Escrow Agreement, dated as of March 13, 2013, among Realty Capital Securities, LLC, the Company and UMB Bank, N.A.10.2*Advisory Agreement, dated as of February 12, 2013, by and among the Company, ARC Realty Finance Operating Partnership, L.P. and ARC Realty Finance Advisors, LLC10.3*Employee and Director Incentive Restricted Share Plan of the Company10.5*First Amendment to Advisory Agreement, entered into as of March 11, 2013, by and among the Company, ARC Realty Finance Operating Partnership, L.P. and ARC Realty Finance Advisors, LLC10.6*Form of Restricted Share Award Agreement Pursuant to the Employee and Director Incentive Restricted Share Plan of the Company14*Code of Ethics31.1* Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 * Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 * Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101 * March 31,September 30, 2013, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss,Income (Loss), (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this information inis furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934* Filed herewith ARC REALTY FINANCE TRUST, INC. Dated: May 9, 2014 /s/ Nicholas S. Schorsch Dated: May 9, 2014 /s/ Nicholas Radesca Date: May 15, 201324