FBRT 10-Q Quarterly Report March 31, 2014

FRANKLIN BSP REALTY TRUST, INC.

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10-Q 1 arcrft-20140331x10q.htm 10-Q ARCRFT-2014.03.31-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2014



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

Commission file number: 333-186111

ARC Realty Finance Trust, Inc.

(Exact Name of Registrant as Specified in its Charter)



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)

(212) 415-6500

(Registrant’s Telephone Number, Including Area Code)

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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

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



Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

(Do not check if a 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 o No x

The number of shares of the registrant's common stock, $0.01 par value, outstanding as of April 30, 2014 was 3,575,407 .

TABLE OF CONTENTS



	Page
PART I
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013	1
Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	2
Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended March 31, 2014 (Unaudited)	3
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	4
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	5
Notes to the Consolidated Financial Statements (Unaudited)	6
Item 2. Management's Discussion and Analysis	21
Item 3. Quantitative and Qualitative Disclosures about Market Risk	33
Item 4. Controls and Procedures	33
PART II
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3. Defaults upon Senior Securities	34
Item 4. Mine Safety Disclosures	34
Item 5. Other Information	34
Item 6. Exhibits	35
Signatures	36

PART I

Item 1. Financial Statements.

ARC REALTY FINANCE TRUST, INC.

CONSOLIDATED BALANCE SHEETS



	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

The accompanying notes are an integral part of these statements.

ARC REALTY FINANCE TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	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

__________________________________________________________

NM - Not Meaningful

The accompanying notes are an integral part of these statements.

ARC REALTY FINANCE TRUST, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY



	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

The accompanying notes are an integral part of this statement.

ARC REALTY FINANCE TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	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		$	—

The accompanying notes are an integral part of this statement.

ARC REALTY FINANCE TRUST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	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	)

The accompanying notes are an integral part of these statements.

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

Note 1 — Organization and Business Operations

ARC Realty Finance Trust, Inc. (the “Company”) was incorporated in Maryland on November 15, 2012 and conducts its operations to qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2013. The Company is offering for sale a maximum of $2.0 billion of common stock, $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 (the "Securities Act"). The Offering also covers the offer and sale of up to approximately $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. On May 14, 2013, the Company commenced business operations after raising in excess of $2.0 million of equity, the amount required for the Company to release equity proceeds from escrow.

For at least until February 12, 2015, the per share purchase price in the Offering will be up to $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 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, or the NAV pricing 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.

The Company has sold 8,888 shares of the Company's common stock to ARC Realty Finance Special Limited Partnership, LLC (the “Special Limited Partner”), an entity controlled by American Realty Capital VIII, LLC (the “Sponsor”) for $22.50 per share or a total of $0.2 million . Substantially all of the Company's business is 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 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 contributed $2,020 to the OP in exchange for 90 units of limited partner interests in the aggregate OP ownership, which represents 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.

The Company was formed to 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 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 REITs, debt or equity securities of other publicly traded real estate companies and collateralized debt obligations (“CDOs”).

The Company has no paid employees. The Company has retained the Advisor to manage its affairs on a day-to-day basis. Realty Capital Securities, LLC (the “Dealer Manager”), an affiliate 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, acquisition, operational and liquidation stages.

Note 2 — Summary of Significant Accounting Policies

Basis of Accounting

The accompanying consolidated financial statements and related footnotes are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (‘‘GAAP’’) for interim financial statements. The consolidated financial statements of the Company are prepared on an accrual basis of accounting. In the opinion of management, the interim data includes all adjustments, of a normal and recurring nature, necessary for a fair statement of the results for the periods presented. Interim period results may not be indicative of full year or future results. The

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

unaudited consolidated financial statements do not include all information and notes required in annual audited financial statements in conformity with GAAP.

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All intercompany 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.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding classification of investments, fair value measurements, credit losses and impairments of investments, and derivative financial instruments and hedging activities, as applicable.

Real Estate Debt Investments

Commercial real estate debt investments are intended to be held until maturity and, accordingly, are carried at cost, net of unamortized acquisition expenses, discounts or premiums and unfunded commitments. Real estate debt investments that are deemed to be impaired will be carried at amortized cost less a specific allowance for loan losses. Interest income is recorded on the accrual basis and related discounts, premiums, and acquisition expenses on investments are amortized over the life of the investment using the effective interest method. Amortization is reflected as an adjustment to interest income in the Company’s consolidated statements of operations.

Allowance for Loan Losses

The allowance for loan losses reflects management's estimate of loan losses inherent in the loan portfolio as of the balance 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.

The general reserve component covers performing loans. General reserves are recorded when (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the portfolio and (ii) the amount of the loss can be reasonably estimated. The formula-based general reserve is derived from estimated principal default probabilities and loss severities applied to groups of loans based upon assigned risk ratings for loans with similar risk characteristics during the Company's quarterly loan portfolio assessment. During this assessment, the Company performs a comprehensive analysis of its loan portfolio and assigns risk ratings to loans that incorporate management's current judgments about their credit quality based on all known and relevant internal and external factors that may affect collectability. The Company considers, among other things, payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional economic factors. This methodology results in loans being segmented by risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. Ratings range from "1" to "5" with "1" representing the lowest risk of loss and "5" representing the highest risk of loss. The Company currently estimates loss rates based on historical realized losses experienced in the industry and takes into account current economic conditions affecting the commercial real estate market when establishing appropriate time frames to evaluate loss experience.

The asset-specific reserve component relates to reserves for losses on individual impaired loans. The Advisor considers a loan to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due under the contractual terms of the loan 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 investment 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 payments expected to be received, observable market

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

prices, or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) is lower than the carrying value of that loan.

For collateral dependent impaired loans, impairment is measured using the estimated fair value of collateral less the estimated 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.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring ("TDR"). A TDR occurs when a concession is granted and the debtor is experiencing financial difficulties. Impairments on TDR loans are generally measured based on the present value of expected future cash flows discounted at the effective interest rate of the original loan.

Income recognition will be suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the 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.

Real Estate Securities

On the acquisition date, all of the Company’s commercial real estate securities will be classified as available for sale, and will be carried at fair value, with any unrealized gains or losses reported as a component of accumulated other comprehensive income or loss. However, the Company may elect the fair value option for certain of its available for sale securities, and as a result, any unrealized gains or losses on such securities will be recorded as unrealized gains or losses on investments in the Company’s consolidated statement of operations. Premiums or discounts on commercial real estate securities will be recognized using the effective interest method and recorded as an adjustment to interest income.

Impairment Analysis of Securities

Commercial real estate securities for which the fair value option has not been elected will be periodically evaluated for other-than-temporary impairment. If 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 (i) the Advisor has the intent to sell the impaired security; (ii) it is more likely than not the Company will be required to sell the security; or (iii) the Advisor does not expect to recover the entire amortized cost of the security. If the Advisor determines that an other-than-temporary impairment exists and a sale is likely to occur, the impairment charge will be recognized as an “Impairment of assets” on the Company's consolidated statement of operations and comprehensive income (loss). If a sale is not expected to occur, the portion of the impairment charge related to credit factors will be recorded as an “Impairment of assets” on the Company's consolidated statement of operations and comprehensive income (loss) with the remainder recorded as an unrealized gain or loss on investments reported as a component of accumulated other comprehensive income or loss.

Commercial real estate securities for which the fair value option has 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 and comprehensive income (loss).

Fair Value of Financial Instruments

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, accrued interest receivable, and accounts payable and accrued expenses approximate their carrying value on the accompanying consolidated balance sheets due to the monthly terms.

As of March 31, 2014 , the Company had 9 loan investments. All of the Company's loan investments were performing as of March 31, 2014 . Therefore, the carrying value approximates the fair value as of March 31, 2014 . The Company recorded a general allowance for loan losses as of March 31, 2014 in the amount of $ 86,462 . For the purpose of this calculation, loans underwritten within 45 days of the balance sheet date are excluded as they were recently underwritten. The remaining loans were then applied a percentage based a rolling average of commercial loan default data and the risk rating of each investment. There are no specifically reserved loans in the portfolio as of March 31, 2014 .

As of March 31, 2014 , the Company had 3 CMBS investments. These investments are available for sale debt securities which are recorded at fair value at March 31, 2014 .

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

As of March 31, 2014 , the Company had $3.3 million outstanding under its revolving line of credit with an affiliate, which bears interest at a fixed rate of 3.25% (See Note 5 — Revolving Line of Credit with Affiliate). As of March 31, 2014 , the Company believes the carrying value of its revolving line of credit with its affiliate approximates fair value.

As of March 31, 2014 , the Company had $4.0 million outstanding under its Master Repurchase Agreement (the "MRA") with JP Morgan Securities, LLC ("JPM"), which bears interest at a floating rate of London Interbank Offered Rate ("LIBOR") + 1.20% ( 1.356% at March 31, 2014) (See Note 6 — Repurchase Agreement). As of March 31, 2014 , the Company believes the carrying value of the JPM MRA approximates fair value due to the month-to-month term of the repurchase agreements.

Cash and Cash Equivalents

Cash includes cash in bank accounts. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company up to an insurance limit. Cash equivalents include short-term, liquid investments in a money market fund.

Restricted Cash

Restricted cash may primarily consist of escrow deposits for future debt service payments, taxes, insurance, property maintenance or other amounts collected with mortgage loan originations.

Share Repurchase Program

The Company has 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 conditions described below, if such repurchase does not impair the Company's capital or operations.

Prior to the time that the Company’s shares are listed on a national securities exchange and until the Company begins to calculate its NAV, the repurchase price per share will depend on the length of time investors have held such shares as follows: after one year from the purchase date — the lower of $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 and 95.0% of the amount they actually paid for each share; after three years from the purchase date — the lower of $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 and 100% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations).

Once the Company begins to calculate its NAV, the price per share that the Company will pay to repurchase shares of the Company’s common stock on any business day will be the Company's per share NAV for the quarter, calculated after the close of business on the first business day of each 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.

Until the Company begins to calculate its NAV, the Company is only authorized to repurchase shares pursuant to the SRP using the proceeds received from the DRIP and will limit the amount spent to repurchase shares in a given quarter to the amount of proceeds received from the DRIP in that same quarter. In addition, the board of directors may reject a request for redemption, at any time. Due to these limitations, the Company cannot guarantee that it will be able to accommodate all repurchase requests. Purchases under the SRP by the Company will be limited in any calendar year to 5% of the weighted average number of shares outstanding during the prior year.

After the Company begins to calculate its NAV, purchases under the SRP will be limited in any calendar year to 1.25% of Company's NAV as of the last day of the previous calendar quarter, or approximately 5% of the Company's NAV in any 12 month period. If the Company reaches the 1.25% limit on redemptions during any quarter, the Company will not accept any additional redemption requests for the remainder of such quarter. The SRP will automatically resume on the first day of the next calendar quarter, unless our board of directors determines to suspend the SRP.

When a stockholder requests redemption and the redemption is approved, the Company will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares repurchased under the SRP will have the status of authorized but unissued shares. At March 31, 2014 , no shares were eligible to be redeemed.

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

Distribution Reinvestment Plan

Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP. Participants purchasing shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the Offering. The board of directors may designate that certain cash or other distributions be excluded from the DRIP. The Company has the right to amend any aspect of the DRIP or terminate the DRIP with ten days’ notice to participants. Shares issued under the DRIP are recorded to equity in the balance sheet in the period distributions are declared. There have been 19,136 shares issued under the DRIP as of March 31, 2014 .

Derivative Instruments

The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions.

The Company 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 the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any changes in the fair value of these derivative instruments will be recognized immediately in gains (losses) on derivative instruments in the Company's consolidated statement of 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.

Offering and Related Costs

Offering and related costs include all expenses incurred in connection with the Company’s Offering. Offering costs (other than selling commissions and the dealer manager fee) of the Company may be paid by the Advisor, the Dealer Manager or their affiliates on behalf of the Company. Offering costs were reclassified from deferred costs to stockholders' equity on the day the Company commenced its operations. Offering costs 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, notwithstanding 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 the Offering exceed 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% of the gross proceeds determined at the end of the Offering (See Note 10 — Related Party Transactions and Arrangements).

Share-Based Compensation

The Company has a stock-based incentive award plan which is accounted for under the guidance for share based payments. The expense for such awards will be included in general and administrative expenses and will be recognized over the vesting period or when the requirements for exercise of the award have been met (See Note 12 — Share-Based Compensation).

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

Income Taxes

The Company conducts its operations to qualify as a real 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. However, 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.

Per Share Data

The Company calculates basic earnings per share by dividing net income attributable to the Company for the period by the weighted-average of shares of common stock outstanding for that period. Diluted earnings per share reflects the potential dilution that that could occur from shares issuable in connection with the restricted stock plan and OP units, except when doing so would be anti-dilutive.

Reportable Segments

The Company conducts its business through the following segments:


•	The real estate debt business which 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.


•	The real estate securities business which 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.

See Note 15 - Segment Reporting for further information regarding the Company's segments.

Note 3 — Loans Receivable

The following is a summary of the Company's loans receivable by class (in thousands):



	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

As of March 31, 2014 , the Company has invested $54.9 million in nine loan investments. For the three months ended March 31, 2014 the Company received scheduled principal repayments of $37,804 on the loans.

The Company recorded a general allowance for loan losses as of March 31, 2014 in the amount of $ 86,462 . For the purpose of this calculation, loans originated or acquired within 45 days of the balance sheet date are excluded as they were recently underwritten. For loans held longer than 45 days, a reserve was derived from estimated principal default probabilities and loss severities applied to groups of loans based upon assigned risk ratings. T here are no impaired or specifically reserved loans in the portfolio as of March 31, 2014 .

The following table presents the activity in our provision for loan losses (in thousands):



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

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

The Company's loan receivable portfolio was comprised of the following at March 31, 2014 (in thousands):



Description	Location	Date of Investment	Maturity Date	Coupon	Original Face Amount		Face Amount		Premium (Discount) ⁽¹⁾			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

__________________________________________________________

⁽¹⁾ Includes acquisition fees and expenses where applicable.

Credit Characteristics —As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. The loans are scored on a scale of 1 to 5 as follows:


Investment Rating	Summary Description


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.

All investments are assigned an initial risk rating of 2 . As of March 31, 2014 , the weighted average risk rating of loans was 2.0 . As of March 31, 2014 , the Company had no non-performing, non-accrual or impaired loans.

For the three months ended March 31, 2014 , the activity in our loan portfolio was as follows (in thousands):



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

During the three months ended March 31, 2014 , the Company invested $24,065,495 in three loans including $128,350 of capitalized acquisition expenses.

Note 4 — Investment Securities

The following is a summary of the Company's investment securities by class (in thousands):

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)



	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 , the Company had three CMBS investments with a par value of approximately $14.5 million .

The Company classified its CMBS investments as available-for-sale as of March 31, 2014 . These investments are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (loss). The table below represents the fair value adjustment as described above (in thousands):



	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

Note 5 — Revolving Line of Credit with Affiliate

On May 15, 2013, the Company entered into a credit agreement for an unsecured $5.0 million revolving line of credit with AR Capital, LLC, the parent of the Sponsor (the “Revolver”). The Revolver bears interest at a per annum fixed rate of 3.25% and provides for quarterly interest payments. The Revolver matures in 1 year, subject to two successive extension terms of one year each. Principal may be drawn or repaid from time-to-time, in whole or in part, without premium or penalty and there are no unused facility fees. On July 17, 2013, the Company entered into an amendment to its Revolver. The amendment increased the aggregate financing available under the Revolver from $5.0 million to $10.0 million . The amendment did not change any of the other terms of the Revolver.

As of March 31, 2014 , $ 3.3 million was outstanding under the Revolver, and $ 6.7 million was available to be borrowed. The Company incurred $9,413 in interest expense on the Revolver for the three months ended March 31, 2014 on a weighted average outstanding balance of $1.2 million .

Note 6 — Repurchase Agreement

On January 2, 2014, the Company entered into the MRA with JPM. The MRA provides the company with the ability to sell securities to JPM for liquidity while providing a fixed repurchase price for the same securities in the future.

As of March 31, 2014 , the Company had $4.0 million outstanding under the MRA. The repurchase contracts on each security under the MRA mature each month and terms are adjusted for the following month as necessary. As of March 31, 2014 , the repurchase contract outstanding under the MRA was priced at LIBOR + 1.20% ( 1.356% at March 31, 2014).

Note 7 — Net Income (Loss) Per Share

The following is a summary of the basic and diluted net income (loss) per share computation for the three months ended March 31, 2014 :



	Three Months Ended March 31, 2014
Basic 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

__________________________________________________________

NM - Not Meaningful

The Company had 4,089 common share equivalents as of March 31, 2014 , which were comprised of 3,999 unvested restricted shares and 90 OP units. Diluted net income per share assumes the conversion of all common share equivalents into an equivalent number of common shares, unless the effect is antidilutive. The common share equivalents were dilutive by $0.000224 per share for the three months ended March 31, 2014 . For the three months ended March 31, 2013 , the calculation of

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

net income per share is not presented because it is not a meaningful measure of the Company’s performance as the Company had not commenced operations.

Note 8 — Common Stock

As of March 31, 2014 , the Company had 2,984,616 shares of common stock outstanding, including shares issued pursuant to the DRIP and unvested restricted shares, and had received total proceeds of $ 73.2 million excluding shares issued pursuant to the DRIP.

Distributions

In order to maintain its election to qualify as a REIT, the Company must currently distribute, at a minimum, an amount equal to 90% of its taxable income, without regard to the deduction for 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.

On May 13, 2013, the Company's board of directors authorized, and the Company declared a distribution, which is calculated based on stockholders of record each day during the applicable period at a rate of $ 0.00565068493 per day, based on a price of $25.00 per share of common stock. The Company's distributions are payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month. The first distribution payment was made on June 3, 2013, relating to the period from May 30, 2013 ( 15 days after the date of the first asset acquisition) through May 31, 2013. Distributions payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distributions payments are not assured.

The below table shows the distributions paid during the three months ended March 31, 2014 .



Payment Date	Weighted Average Shares Outstanding ⁽¹⁾	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

__________________________________________________________________________

⁽¹⁾ This represents the weighted average shares outstanding for the period related to the respective payment date.

For the three months ended March 31, 2014 , the Company paid cash dividends of $522,835 and had net income of $225,786 . As of March 31, 2014 , the Company had a distribution payable of $467,128 for dividends accrued in the month of March 2014 and has a additional distribution payable of $2,032 accrued for the three months ended March 31, 2014 on all unvested restricted shares.

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.

Note 10 — Related Party Transactions and Arrangements

As of March 31, 2014 , an entity wholly owned by the Sponsor owned 8,888 shares of the Company’s outstanding common stock.

The Company entered into the Revolver with an affiliate on May 15, 2013 (See Note 5 — Revolving Line of Credit with Affiliate).

Fees Paid in Connection with the Offering

The Dealer Manager receives fees and compensation in connection with the sale of the Company’s common stock in the Offering. The Dealer Manager receives 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, the Dealer Manager receives up to 3.0% of the gross proceeds from the sale of shares, before reallowance to participating broker-dealers, as a dealer manager fee. The Dealer Manager may reallow its dealer manager fee to such participating broker-dealers. A

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

participating broker-dealer may elect to receive a fee equal to 7.5% of the gross proceeds from the sale of shares (not including selling commissions and dealer manager fees) by such participating broker-dealer, 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 (not including selling commissions and dealer manager fees).

The table below shows the fees 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 . There were no fees incurred from the Dealer Manager associated with the Offering 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 commissions and fees incurred from the Dealer Manager	$	3,851	$	94	$	12

The Advisor, its affiliates and entities under common ownership with the Advisor receive compensation and reimbursement for services relating to the Offering, including transfer agency services provided by an affiliate of the Dealer Manager. The table below shows compensation and reimbursement the Advisor and its affiliates incurred for services relating to the Offering during the three months ended March 31, 2014 and the associated payable as of March 31, 2014 and December 31, 2013 . There was no compensation or reimbursement to the Advisor and 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

The payables as of March 31, 2014 and December 31, 2013 in the table above are included in accounts payable and accrued expenses on the Company's consolidated balance sheets.

The Company is responsible for organizational and offering costs from the ongoing Offering, excluding commissions and dealer manager fees, up to a maximum of 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 2.0% cap as of the end of the Offering are the Advisor's responsibility. As of March 31, 2014 , organizational and offering costs exceeded 2.0% of gross proceeds received from the Offering by $2.4 million , due to the ongoing nature of the Offering and that many expenses were paid before the Offering commenced.

Fees Paid in Connection with the Operations of the Company

The Advisor receives 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 and the Company 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. During the three months ended March 31, 2014 , the acquisition fee of 1.0% resulted in $259,000 of acquisition fees recognized in the consolidated statement of operations. In addition, the Company incurred $137,850 of acquisition expenses which are capitalized and amortized over the life of each investment using the effective interest method. Both the acquisition fees of $259,000 and expenses of $137,850 described above are paid to the Advisor.

The Company will pay the Advisor an annual asset management fee equal to 0.75% of the cost of the Company's assets. Once the Company begins to calculate NAV, the asset management fee will be based on the lower of 0.75% of the costs of the Company's assets and 0.75% of the quarterly NAV. The amount of the asset management fee will be reduced to the extent that the amount of dividends declared during the six month period ending on the last day of the calendar quarter immediately preceding the date such asset management fee is payable, exceeds the funds from operations (“FFO”), as adjusted, for the same period. For purposes of this determination, FFO, as adjusted, is FFO before deducting (i) acquisition fees and related expenses;

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

(ii) non-cash restricted stock grant amortization, if any; and (iii) impairments of real estate related investments, if any (including loans receivable and other debt investments). FFO, as adjusted, is not the same as FFO. During the three months ended March 31, 2014 and March 31, 2013 , no asset management fees were incurred or waived.

Effective June 1, 2013, the Company entered into an agreement with the Dealer Manager to provide strategic advisory services and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. The Company amortizes the cost of $0.9 million associated with this agreement into other expense on the consolidated statements of operations over the estimated remaining life of the Offering.

The table below depicts related party fees and reimbursements in connection with the operations of the Company for the three 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 the operations of the Company 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
Acquisition fees and expenses	$	397	$	239	$	202
Advisory and investment banking fee	135		—		316
Total related party fees and reimbursements	$	532	$	239	$	518

The payables as of March 31, 2014 and December 31, 2013 in the table above are included in accounts payable and accrued expenses on the Company's consolidated balance sheets.

In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flow from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that may be forgiven are not deferrals and accordingly, will not be paid to the Advisor in cash. In certain instances, to improve the Company’s working capital, the Advisor may elect to absorb a portion of the Company’s costs. 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.

The Company will reimburse the Advisor’s costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company's operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of (i) 2.0% of average invested assets or (ii) 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 costs in connection with other services during the operational stage, in addition to paying an asset management fee; however, the Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or disposition fees. For the three months ended March 31, 2014 and 2013 , no administrative costs of the Advisor were reimbursed for any period in connection with the operations of the Company.

The Advisor at its election may also contribute capital to enhance the Company’s cash position for working capital and distribution purposes. Any contributed capital amounts are not reimbursable to the Advisor. Further, any capital contributions are made without any corresponding issuance of common or preferred shares. The Advisor did not contribute capital to enhance the Company's cash position for working capital or distribution purposes during the three months ended March 31, 2014 and 2013 .

Fees Paid in Connection with the Liquidation of Assets or Listing of the Company's Common Stock or Termination of the Advisory Agreement

The Company will 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 a subsidiary of the Company as part of a securitization transaction. The Company will not be obligated to pay 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 transaction; or (ii) the amount of the fee paid by the borrower in connection with such transaction. If the Company takes

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

ownership of a property as a result of a workout or foreclosure of a loan, it will pay a disposition fee upon the sale of such property.

The Company may pay the Advisor an annual subordinated performance fee of 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.

If the Company is not listed on an exchange, the Company will 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.

If the Company is listed on an exchange, the Company will pay a subordinated incentive listing distribution of 15.0% 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 6.0% cumulative, pre-tax, non-compounded annual return to investors. Neither the Advisor nor any of its affiliates can earn both the subordinated participation in the net sale proceeds and the subordinated listing distribution.

Upon termination or non-renewal of the advisory agreement, the Advisor shall be entitled to receive distributions from the OP, pursuant to a special limited partnership interest, equal to 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 6.0% cumulative, pre-tax non-compounded return to investors. In addition, the Advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.

During the three months ended March 31, 2014 and 2013 , no fees were paid for any period in connection with the liquidation of assets, listing of the Company's common stock or termination of the advisory agreement.

The Company cannot assure that it will provide the 6.0% return specified above, 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 contributions.

The Company has also established a restricted share plan for the benefit of employees (if the Company ever has employees), directors, employees of the Advisor and its affiliates (See Note 12 — Share-Based Compensation).

Note 11 — Economic Dependency

Under various agreements, the Company has engaged the Advisor, 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.

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

Note 12 — Share-Based Compensation

Restricted Share Plan

The Company has an employee and director incentive restricted share plan (the “RSP”), which 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 or certain consultants to the Company and the Advisor and its affiliates. The total number of common shares granted under the RSP shall not exceed 5.0% of the Company’s authorized common shares pursuant to the Offering and in any event will not exceed 4.0 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

Restricted share awards entitle the recipient to receive 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. 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. The fair value of the restricted shares will be expensed over the vesting period of five years .

The RSP also provides for the automatic grant of 1,333 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 initial election to the board of directors and 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 20.0% per annum.

As of March 31, 2014 , the Company had granted 3,999 restricted shares to its independent directors. None of the 3,999 restricted shares granted had vested as of March 31, 2014 . Based on a share price of $22.50 , the compensation expense associated with the restricted share grants was $4,437 and $0 for the three months ended March 31, 2014 and 2013 .

Note 13 — Fair Value of Financial Instruments

GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial instruments at fair values. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:


•	Level I - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.


•	Level II - Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.


•	Level III - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The Company has implemented valuation control processes to validate the fair value of the Company's financial instruments measured at fair value including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and the assumptions are reasonable. Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion of the Company's valuation control process.

CMBS

CMBS investments are valued utilizing both observable and unobservable market inputs. These factors include projected future cash flows, ratings, subordination levels, vintage, remaining lives, credit issues, recent trades of similar securities and the spreads used in the prior valuation. The Company obtains current market spread information where available and use this information in evaluating and validating the market price of all CMBS. Depending upon the significance of the fair value inputs used in determining these fair values, these securities are classified in either Level II or Level III of the fair value hierarchy. As of March 31, 2014 , the Company received broker quotes on each CMBS investment used in determining the fair value. As of March 31, 2014 , the Company's CMBS investments have been classified as Level II due to the observable nature of many of the market inputs.

The following table presents the Company's financial instrument carried at fair value in the consolidated balance sheet by its level in the fair value hierarchy as of March 31, 2014 (in thousands):



	Total		Level I		Level II		Level III
CMBS	$	14,505	$	—	$	14,505	$	—
Total	$	14,505	$	—	$	14,505	$	—

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

Note 14 — Offsetting Assets and Liabilities

The table below presents a gross presentation, the effects of offsetting and a net presentation of the Company's repurchase agreements within the scope of ASC 210-20, Balance Sheet—Offsetting , as of March 31, 2014 (in thousands):



										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

Note 15 — Segment Reporting

The Company conducts its business through the following segments:


•	The real estate debt business will be 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.


•	The real estate securities business will be 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.

The following table represents the Company's operations by segment for the three months ended March 31, 2014 :



			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

For the purposes of the table above, total expenses have been allocated to the business segments using a percentage derived by using total assets of each business segment as the numerator and total assets of the Company as the denominator.

Note 16 — Subsequent Events

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

Sales of Common Stock

As of April 30, 2014 , the Company had 3,575,407 shares of common stock outstanding, including unvested restricted shares, and had raised total proceeds from the Offering of $ 89.3 million . As of April 30, 2014 , the aggregate value of all share issuances in the Offering was $89.3 million based on a per share value of $25.00 (or $23.75 per share for shares issued under the DRIP).

Total capital raised to date, including shares issued under the DRIP, is as follows (in thousands):



Source of Capital	March 31, 2014		April 1 to April 30, 2014		Total
Common stock	$	74,591	$	14,661	$	89,253

Dividends Paid

On April 1, 2014 , the Company paid a distribution of $467,128 to stockholders of record during the month of March 2014 . Approximately $304,405 of the 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.

ARC REALTY FINANCE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

Loans Receivable

On April 10, 2014 , the Company funded a $7.0 million mezzanine loan secured by an office building. The loan bears interest at 12.00% and has a five year term.

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

The following discussion should be read in conjunction with the accompanying unaudited financial statements of ARC Realty Finance Trust, Inc. and the notes thereto, and other financial information included elsewhere in this Quarterly Report on Form 10-Q. As used herein, the terms “we,” “our” and “us” refer to ARC Realty Finance Trust, Inc., a Maryland corporation, and, as required by context, to ARC Realty Finance Advisors, LLC (the “Advisor”) and its subsidiaries. We are externally managed by the Advisor.

The forward-looking statements contained in this Quarterly Report on Form 10-Q may include statements as to:


•	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 investments in a timely manner and on terms that are consistent with what we project when we invest;


•	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 Annual Report on Form 10-K for the year ended December 31, 2013 (the "Form 10-K").

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason.

You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Overview

We were incorporated in Maryland on November 15, 2012 and conduct our operations to qualify as a real 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 billion of common stock, $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 (the "Securities Act"). The Offering also covers the offer and sale of up to approximately $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. On May 14, 2013, we commenced business operations after raising in excess of $2.0 million of equity, the amount required for us to release equity proceeds from escrow.

For at least until February 12, 2015, the per share purchase price in the Offering will be up to $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 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, or the NAV pricing 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”). Applicable selling commissions and dealer manager fees will be added to the per share price for shares in our primary offering but not for the DRIP.

We have sold 8,888 shares of common stock to ARC Realty Finance Special Limited Partnership, LLC (the “Special Limited Partner”), an entity controlled 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. 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 contributed $2,020 to the OP in exchange for 90 units of limited partner interests 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.

We were formed to 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 REITs, debt or equity securities in other publicly traded real estate companies and collateralized debt obligations (“CDOs”).

We have no paid employees. We have retained the Advisor to manage our affairs on a day-to-day basis. Realty Capital Securities, LLC (the “Dealer Manager”), an affiliate of the Sponsor, serves as the dealer manager of the Offering. The Advisor and Dealer Manager are related parties and receive compensation and fees for services related to the Offering and the investment and management of our assets. The Advisor and Dealer Manager receive fees during the offering, acquisition, operational and liquidation stages.

Significant Accounting Estimates and Critical Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating plans occur, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.

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

Real Estate Debt Investments

Allowance for Loan Losses

The allowance for loan losses reflects management's estimate of loan losses inherent in the loan portfolio as of the balance sheet date. 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.

The general reserve component covers performing loans. General reserves are recorded when (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the portfolio and (ii) the amount of the loss can be reasonably estimated. The formula-based general reserve is derived from estimated principal default probabilities and loss severities applied to groups of loans based upon assigned risk ratings for loans with similar risk characteristics during the our quarterly loan portfolio assessment. During this assessment, we perform a comprehensive analysis of its loan portfolio and assign risk ratings to loans that incorporate management's current judgments about their credit quality based on all known and relevant internal and external factors that may affect collectability. We consider, among other things, payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional economic factors. This methodology results in loans being segmented by risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. Ratings range from "1" to "5" with "1" representing the lowest risk of loss and "5" representing the highest risk of loss. We currently estimate loss rates based on historical realized losses experienced in the industry and takes into account current economic conditions affecting the commercial real estate market when establishing appropriate time frames to evaluate loss experience.

The asset-specific reserve component relates to reserves for losses on individual impaired loans. The Advisor considers a loan to be impaired when, based upon current information and events, it believes that it is probable that we will be unable to collect all amounts due under the contractual terms of the loan 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 investment 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 payments expected to be received, observable market prices, or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) is lower than the carrying value of that loan.

Real Estate Securities

On the acquisition date, all of our commercial real estate securities will be classified as available for sale, and will be carried at fair value, with any unrealized gains or losses reported as a component of accumulated other comprehensive income or loss. However, we may elect the fair value option for certain of its available for sale securities, and as a result, any unrealized gains or losses on such securities will be recorded as unrealized gains or losses on investments in our consolidated statement of operations. Premiums or discounts on commercial real estate securities will be recognized using the effective interest method and recorded as an adjustment to interest income.

Impairment Analysis of Securities

Commercial real estate securities for which the fair value option has not been elected will be periodically evaluated for other-than-temporary impairment. If 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 (i) the Advisor has the intent to sell the impaired security; (ii) it is more likely than not we will be required to sell the security; or (iii) the Advisor does not expect to recover the entire amortized cost of the security. If the Advisor determines that an other-than-temporary impairment exists and a sale is likely to occur, the impairment charge will be recognized as an “Impairment of assets” on our consolidated statement of operations. If a sale is not expected to occur, the portion of the impairment charge related to credit factors will be recorded as an “Impairment of assets” on our consolidated statement of operations with the remainder recorded as an unrealized gain or loss on investments reported as a component of accumulated other comprehensive income or loss.

Income Taxes

We conduct our operations to qualify as a real estate investment trust for U.S. federal income tax 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 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. However, even if we qualifiy 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.

Portfolio

As of March 31, 2014 , our portfolio consisted of nine loans (the "Loans") and three investments in CMBS. The Loans had a total carrying value of $54.9 million and $30.8 million and our CMBS investments had a fair value of $14.5 million and $5.0 million as of March 31, 2014 and December 31, 2013 , respectively. The Company recorded a general allowance for loan losses as of March 31, 2014 in the amount of $ 86,462 . For the purpose of this calculation, loans originated or acquired within 45 days of the balance sheet date are excluded as they were recently underwritten. For loans held longer than 45 days, a reserve was derived from estimated principal default probabilities and loss severities applied to groups of loans based upon assigned risk ratings. There are no impaired or specifically reserved loans in the portfolio as of March 31, 2014 .

The Loans bear a weighted average coupon of 9.10% and 9.11% , and have a weighted average life of 6.5 and 7.2 years as of March 31, 2014 and December 31, 2013 , respectively. During the three months ended March 31, 2014 , we invested $24,065,495 in three loans including $128,350 of capitalized acquisition expenses. To date we have not sold any investments.

We recorded interest income of $884,545 on the Loans for the three months ended March 31, 2014 , excluding any amortization of discounts or premiums received. For the three months ended March 31, 2014 , we received scheduled principal repayments of $37,804 on the Loans. Our CMBS investments have a weighted 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.

The following charts break out our portfolio, including CMBS, by the collateral type, geographical region and coupon rate type as of March 31, 2014 and December 31, 2013 . The breakout is based on the par value of the investments as of March 31, 2014 and December 31, 2013 .

The following chart shows the par value by maturity year for the investments in our portfolio as of March 31, 2014 and December 31, 2013 .

Results of Operations

Net interest income for the three months ended March 31, 2014 and March 31, 2013 were made up of the following:



	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

During the three months ended March 31, 2014 , we generated net income of $225,786 , or $0.11 per basic and diluted weighted-average share. During the three months ended March 31, 2014 , we funded five investments with an average carrying value of $6.7 million . Our portfolio was funded at a net discount to par of $4.1 million . During the three months ended March 31, 2014 , the net discount of our 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 March 31, 2014 ) and a weighted-average remaining life of 2.1 years. During the three months ended March 31, 2014 , we incurred interest expense of $21,036 . Interest expense incurred is mainly driven by our revolving line of credit with AR Capital, LLC, the parent of the Sponsor (the "Revolver") which has a 3.25% fixed rate and had $3.3 million outstanding as of March 31, 2014 . Interest expense incurred was further driven by our Master Repurchase Agreement with JP Morgan Securities LLC (the "JPM MRA") which has a floating interest rate of LIBOR + 1.20% ( 1.356% at March 31, 2014) and had $4.0 million outstanding as of March 31, 2014 .

Operating expenses for the three months ended March 31, 2014 and March 31, 2013 were made up of the following:



	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

During the three months ended March 31, 2014 , we incurred operating expenses of $730,012 . Our total operating expenses were 2.30% of our average invested assets for the three months ended March 31, 2014 and 76.38% of our net interest income for the same period. Our operating expenses primarily related to asset acquisition fees, board of directors expenses,

ongoing directors and officers insurance expense, accounting and other professional expenses. Professional fees in connection with organizing the Company were the only expenses during the three months ended March 31, 2013 .

Liquidity and Capital Resources

Our principal demands for cash will be acquisition costs, including the purchase price of any investments we acquire, the payment of our operating and administrative expenses, continuing debt service obligations and distributions to our stockholders. Generally, we will fund our investments from the net proceeds of the Offering. We can acquire our assets with cash or debt, but we also may acquire assets free and clear of indebtedness by paying the entire purchase price for the asset in cash or in OP units.

On May 15, 2013, we entered into an unsecured $5.0 million Revolver. The Revolver bears interest at a per annum fixed rate of 3.25%. The Revolver matures in one year, subject to two successive extension terms of one year each, and provides for quarterly interest-only payments with all principal and interest outstanding being due on the maturity date. The Revolver may be prepaid from time to time and at any time, in whole or in part, without premium or penalty and there are no unused facility fees. On July 17, 2013, the Company entered into an amendment to the Revolver, which increased the aggregate financing available under the Revolver from $5.0 million to $10.0 million. The amendment did not change any of the other terms of the Revolver. As of March 31, 2014 , there was $3.3 million of principal outstanding on the Revolver.

On January 2, 2014 we entered into the JPM MRA. The JPM MRA provides us with the ability to sell securities for liquidity while providing a fixed repurchase price for the same securities in the future. On January 14, 2014, we received $4.0 million of proceeds for CMBS securities sold under the MRA. As of March 31, 2014 , there was $4.0 million of principal outstanding on the JPM MRA.

We expect to use additional debt financing as a source of capital. Under our charter, the maximum amount of our total indebtedness shall not exceed 300% of our total ‘‘net assets’’ (as defined by the NASAA REIT Guidelines) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, it is currently our intention to limit our aggregate borrowings to 45% of the aggregate fair market value of our assets (calculated after the close of this offering and once we have invested substantially all the proceeds of this offering), unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation, however, will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under the NASAA REIT Guidelines. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. We anticipate that adequate cash will be generated from operations to fund our operating and administrative expenses, continuing debt service obligations and the payment of distributions.

Potential future sources of capital include secured or unsecured financings from banks or other lenders, establishing additional lines of credit, proceeds from the sale of properties and undistributed cash flow. We continue to actively pursue lenders to initiate additional sources of capital.

Distributions

On May 13, 2013, our board of directors authorized, and we declared, a distribution, which will be calculated based on stockholders of record each day during the applicable period at a 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 ( 15 days after the date of the first asset acquisition) and will be payable by the fifth day following the end of each month to stockholders of record at the close of business each day during the prior month.

The below table shows the distributions paid on shares outstanding during the three months ended March 31, 2014 .



Payment Date	Weighted Average Shares Outstanding ⁽¹⁾	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

______________________________________________________________________________________________

⁽¹⁾ Represents the weighted average shares outstanding for the period related to the respective payment date.

The following table shows the sources for the payment of distributions to common stockholders for the periods presented:



	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

Cash Flows

Cash Flows for the three months ended March 31, 2014

Net cash used in operating activities for the three months ended March 31, 2014 was $ 1.0 million . Cash outflows were primarily driven by an increase in prepaid and other assets of $1.2 million , which mainly consisted of common share sales on March 31, 2014 which were receivable at quarter end, an increase in accrued interest receivable of $0.2 million and a decrease in accounts payable and accrued expenses of $0.1 million partially offset by net income of $0.2 million .

Net cash used in investing activities for the three months ended March 31, 2014 was $33.5 million . Cash outflows were primarily driven by originations and acquisitions with $24.1 million and $9.5 million representing our investment in three new loans and two new CMBS positions, respectively. These cash outflows were minimally offset by $37,804 of principal collections on our amortizing investment positions.

Net cash provided by financing activities for the three months ended March 31, 2014 was $34.7 million . Cash inflows for the period of $40.8 million from the issuance of common stock and $4.0 million from net borrowings on the JPM MRA were partially offset by the payment of $4.5 million of offering costs, $4.0 million of net repayments on our Revolver and a repayment of $1.1 million previously advanced from an affiliate.

Cash Flows for the three months ended March 31, 2013

During the three months ended March 31, 2013 , we had a net loss of $5,019 offset by an increase in accounts payable and accrued expenses of $5,019 .

Net cash provided by financing activities for the three months ended March 31, 2013 was $5,427 . Cash inflows for the periods were $0.4 million from an increase in amount due to an affiliate offset by $0.4 million of offering costs.

Related Party Arrangements

ARC Realty Finance Advisors, LLC

Subject to certain restrictions and limitations, our Advisor is responsible for managing our affairs on a day-to-day basis and 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.

Organization and Offering Costs

Our Advisor, or its affiliates, is entitled to receive reimbursement for costs paid on our behalf in connection with our Offering. We are obligated to reimburse our Advisor, or its affiliates, as applicable, for organization and offering costs to the extent the organization and offering costs do not exceed 2.0% of gross proceeds from our Offering. Our Advisor does not expect reimbursable organization and offering costs, excluding selling commissions and dealer manager fees, to exceed $40.0 million, or 2.0% of the total proceeds available to be raised from our Offering. We shall not reimburse our Advisor for any organization and offering costs that our independent directors determine are not fair and commercially reasonable to us.

Operating Costs

We will reimburse our Advisor’s costs of providing administrative services, subject to the limitation that we will not reimburse the Advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of (i) 2.0% of average invested assets or (ii) 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, 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.

Asset Management Fee

Our Advisor, or its affiliates, receives a monthly asset management fee equal to one-twelfth of 0.75% of the cost of our assets. The amount of the asset management fee will be reduced to the extent that the amount of dividends declared during the six month period ending on the last day of the calendar quarter immediately preceding the date such asset management fee is payable, exceeds the funds from operations (“FFO”), as adjusted, for the same period.

Asset Acquisition Fee

Our Advisor, or its affiliates, also receives an acquisition fee equal to 1.0% of the principal amount funded by us to acquire or originate commercial real estate 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.

Asset Acquisition Expense

From time to time, our Advisor, or its affiliates, may receive reimbursements for acquisition expenses incurred related to selecting, evaluating, originating and acquiring investments on our behalf. Acquisition expenses paid to our Advisor related to the origination or acquisition of commercial real estate debt investments are included in loan receivable, net on our consolidated balance sheets and amortized to interest income over the life of the investment using the effective interest method.

Asset Disposition Fee

We will 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 pay 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 transaction; 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.

Realty Capital Securities, LLC and its Affiliates

Selling Commissions and Dealer Manager Fees

Pursuant to a dealer manager agreement, we pay our Dealer Manager selling commissions of up to 7.0% of gross proceeds from our 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.

Additional Fees Incurred to the Dealer Manager and its Affiliates

We incur fees for the following services provided by the Dealer Manager and its affiliates: transfer agency services provided by an affiliate of the Dealer Manager; ongoing registration maintenance and transaction management services provided by an affiliate of the Dealer Manager; and ongoing strategic advisory services and investment banking services required in the ordinary course of the Company’s business performed by the Dealer Manager. The Dealer Manager’s strategic advisory services include the performance of financial analysis, the evaluation of publicly traded comparable companies and the development of a portfolio composition strategy and capitalization structure to optimize future liquidity options and structuring operations.

Total Costs Incurred Due to Related Party Arrangements

The table below shows the costs incurred due to related party arrangements during the three months ended March 31, 2014 and the associated payable as of March 31, 2014 and December 31, 2013 . See Note 10 — Related Party Transactions and Arrangements for further detail (in thousands):



	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

The payables as of March 31, 2014 and December 31, 2013 in the table above are included in accounts payable and accrued expenses on the Company's consolidated balance sheets.

Off Balance Sheet Arrangements

We currently have no off balance sheet arrangements.

Non-GAAP Financial Measures

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts ("NAREIT") and the Investment Program Association ("IPA") industry trade groups, have each promulgated measures respectively known as FFO and modified funds from operations ("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.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT's policy described above. We believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

Changes in the accounting and reporting rules under GAAP that have been 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 being 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 are 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 make investments past the acquisition stage, albeit at a substantially lower pace.

The origination and acquisition of debt investments and the corresponding acquisition fees paid to our Advisor (and any offsetting origination fees received from our borrowers) associated with such activity is a key operating feature of our business plan that results in generating income and cash flow in order to make distributions to stockholders. Therefore, the exclusion for acquisition fees may be of limited value in calculating operating performance because acquisition fees affect our overall long-term operating performance and may be recurring in nature as part of net income (loss) and income (loss) from operations over

the life of our company. 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 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 offering are not sufficient to fund the payment or reimbursement of acquisition fees and expenses 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 believe 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.

We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010 - 01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; fair value adjustments on real estate related investments such as commercial real estate securities or derivative investments included in net income; impairments of real estate related investments, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses 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.

Our MFFO calculation excludes impairments of real estate related investments, including loans. We assess the credit quality of our investments and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. For loans classified as held-for-investment, we establish and maintain a general allowance for loan losses inherent in our portfolio at the reporting date and, where appropriate, a specific allowance for loan losses for loans we have determined to be impaired at the reporting date. An individual loan is considered impaired when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Real estate related securities are evaluated for other-than-temporary impairment when the fair value of a security falls below its net amortized cost. Significant judgment is required in this analysis. We consider the estimated net recoverable value of the loan or security as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any 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 differ 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.

MFFO is a metric used by management to evaluate our performance against other non-traded REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter and is not intended to be used as a liquidity measure. Although management uses the MFFO metric to evaluate future operating performance, this metric excludes certain key operating items and other adjustments that may affect our overall operating performance. MFFO is not equivalent to net income (loss) as determined under GAAP. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are funded from the proceeds of this Offering and other financing sources and not

from operations. By excluding impairments for real estate related investment and amortized or expensed acquisition costs, the use of MFFO provides information consistent with management's analysis of the operating performance of our investments. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates for the collateral securing our debt investments, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which investments are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are making our investments and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our investments have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-traded REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisition stages are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and investments have been made, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which investments are made.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. MFFO has limitations as a performance 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 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.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

The table below reflects the items deducted or added to net income (loss) in our calculation of FFO and MFFO for the three months ended March 31, 2014 and 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	)

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our market risk arises primarily from interest rate risk relating to interest rate fluctuations. Many factors including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control contribute to interest rate risk. To meet our short and long-term liquidity requirements, we may borrow funds at fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. During the periods covered by this report, we did not engage in interest rate hedging activities. We do not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign denominated investments, and thus, we are not exposed to foreign currency fluctuations.

As of March 31, 2014 , our portfolio included five variable rate investments based on LIBOR for various terms. Borrowings under our repurchase agreements are also based on LIBOR. The following table quantifies the potential changes in interest income net of interest expense should interest rates increase by 50 or 100 basis points or decrease by 25 basis points, assuming that our current balance sheet was to remain constant and no actions were taken to alter our existing interest rate sensitivity.



Change in Interest Rates	Estimated Change in Interest Income Net of Interest Expense			Estimated Percentage Change in Interest Income Net of Interest Expense
(-) 25 Basis Points ⁽¹⁾	$	(351	)	(0.04	)%
Base Interest Rate	$	—		—	%
(+) 50 Basis Points	$	14,364		1.50	%
(+) 100 Basis Points	$	28,728		3.01	%

______________________________________________________

⁽¹⁾ Reduction cannot cause LIBOR rates to fall below zero.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that our disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15(d)-15(f) of the Exchange Act) during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II

Item 1. Legal Proceedings.

At the end of the period covered by this Quarterly Report on Form 10-Q, we are not a party to any material, pending legal proceedings.

Item 1A. Risk Factors.

Our potential risks and uncertainties are presented in the section entitled "Risk Factors" contained in the Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

We did not sell any equity securities that were not registered under the Securities Act during the three months ended March 31, 2014 .

On February 12, 2013, the SEC declared effective our Registration Statement on Form S-11 (File No. 333-186111) filed under the Securities Act and we commenced our Offering on a “reasonable best efforts” basis of up to a maximum of $2.0 billion of common stock, consisting of up to 80.0 million shares. The Registration Statement also registers approximately 16.8 million shares of common stock pursuant the DRIP under which common stockholders may elect to have their distributions reinvested in additional shares of common stock. As of March 31, 2014 , we have issued 2,984,616 shares of our common stock, including shares issued pursuant to the DRIP, and have raised $74.1 million of offering proceeds excluding shares pursuant to the DRIP.

The following table reflects the offering costs associated with the issuance of common stock (in thousands):



	As of March 31, 2014
Selling commissions and dealer manager fees	$	3,888
Other offering expenses	6,556
Total offering expenses	$	10,444

The Dealer Manager may reallow the selling commissions and a portion of the dealer manager fees to participating broker-dealers.

We are responsible for the organizational and offering costs of the Offering, excluding commissions and dealer manager fees, up to a maximum of 2.0% of the gross proceeds received from the Offering, measured at the end of the Offering. Organizational and offering costs in excess of the 2.0% cap as of the end of the Offering are the Advisor's responsibility. As of March 31, 2014 , organizational and offering costs exceeded 2.0% of gross proceeds received from the Offering by $2.4 million , due to the ongoing nature of the offering process and because many expenses were paid before the Offering commenced.

As of March 31, 2014 , our net offering proceeds, after deducting the total offering expenses outlined above, were approximately $63.6 million. We used the net offering proceeds from the Offering and the Revolver to acquire three loan investments with a carrying amount of $24.1 million as of March 31, 2014 .

As of March 31, 2014 , no shares were eligible to be redeemed under the SRP.

Item 3. Defaults upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

EXHIBITS INDEX

The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (and are numbered in accordance with Item 601 of Regulation S-K).



Exhibit No.		Description
31.1*		Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *		Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 *		Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 *		XBRL (eXtensible Business Reporting Language). The following materials from ARC Realty Finance Trust, Inc.'s Quarterly Report on Form 10-Q for the three months ended September 30, 2013, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive 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 is 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.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	ARC REALTY FINANCE TRUST, INC.

Dated: May 9, 2014	By: /s/ Nicholas S. Schorsch Name: Nicholas S. Schorsch Title: Chairman and Chief Executive Officer (Principal Executive Officer)

Dated: May 9, 2014	By: /s/ Nicholas Radesca Name: Nicholas Radesca Title: Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)

TABLE OF CONTENTS

Part I Item 1. Financial Statements Note 1 Organization and Business Operations Note 2 Summary Of Significant Accounting Policies Note 3 Loans Receivable Note 4 Investment Securities Note 5 Revolving Line Of Credit with Affiliate Note 6 Repurchase Agreement Note 7 Net Income (loss) Per Share Note 8 Common Stock Note 9 Commitments and Contingencies Note 10 Related Party Transactions and Arrangements Note 11 Economic Dependency Note 12 Share-based Compensation Note 13 Fair Value Of Financial Instruments Note 14 Offsetting Assets and Liabilities Note 15 Segment Reporting Note 16 Subsequent Events Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

FBRT 10-Q Quarter ended March 31, 2014