Global Net Lease, Inc. - Annual Report: 2014 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | ||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _________ to __________
Commission file number: 000-55202
American Realty Capital Global Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 45-2771978 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
405 Park Ave., 14th Floor New York, NY | 10022 | |
(Address of principal executive offices) | (Zip Code) | |
(212) 415-6500 | ||
(Registrant’s telephone number, including area code) | ||
Securities registered pursuant to section 12(b) of the Act: None | ||
Securities registered pursuant to section 12(g) of the Act: Common stock, $0.01 par value per share (Title of class) | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer x | (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No
There is no established public market for the registrant's shares of common stock. The registrant completed its initial public offering of its shares of common stock pursuant to its Registration Statement on Form S-11 (File No. 333-177563) on June 30, 2014, which shares were being sold at $10.00 per share, with discounts available for certain categories of purchasers. The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of June 30, 2014, the last business day of the registrant's most recently completed second fiscal quarter, was $1.7 billion based on a per share value of $10.00 (or $9.50 for shares issued under the distribution reinvestment plan).
On March 13, 2015, the registrant had 179,725,378 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be delivered to stockholders in connection with the registrant’s 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.
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AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
FORM 10-K
Year Ended December 31, 2014
Page | ||
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Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Realty Capital Global Trust, Inc. (the "Company," "we," "our" or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
• | All of our executive officers are also officers, managers and/or holders of a direct or indirect controlling interest in American Realty Capital Global Advisors, LLC (the "Advisor"), our dealer manager, Realty Capital Securities, LLC (the "Dealer Manager") and other American Realty Capital-affiliated entities. As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by American Realty Capital affiliates and conflicts in allocating time among these investment programs and us. These conflicts could result in unanticipated actions. |
• | Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital- advised investment programs, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders. |
• | No public market currently exists, or may exist, for shares of our common stock and our shares are, and may continue to be, illiquid. |
• | We may be unable to pay or maintain cash distributions or increase distributions over time. |
• | We are obligated to pay fees which may be substantial to our Advisor and its affiliates. |
• | We depend on tenants for our rental revenue and, accordingly, our rental revenue is dependent upon the success and economic viability of our tenants. |
• | Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders. |
• | We are permitted to pay distributions from unlimited amounts of any source. Until substantially all the proceeds from our initial public offering ("IPO" or "offering") are invested, we may use proceeds from our IPO and financings to fund distributions until we have sufficient cash flow. There are no established limits on the amounts of net proceeds and borrowings that we may use to fund such distribution payments, except in accordance with our organizational documents and Maryland law. |
• | Any of these distributions may reduce the amount of capital we ultimately invest in properties and other permitted investments and negatively impact the value of our common stock. |
• | We have not generated cash flows sufficient to pay our distributions to stockholders, as such we may be forced to borrow at unattractive rates or depend on our Advisor to waive reimbursement of certain expenses and fees to fund our operations. There is no assurance that our Advisor will waive reimbursement of expenses or fees. |
• | We are subject to risks associated with our international investments, including risks associated with compliance with and changes in foreign laws, fluctuations in foreign currency exchange rates and inflation. |
• | We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in the credit markets of the United States of America and Europe from time to time. |
• | We may fail to qualify, or continue to qualify, to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes, which would result in higher taxes, may adversely affect operations and would reduce our NAV and cash available for distributions. |
• | We may be deemed to be an investment company under the Investment Company Act of 1940, as amended ("the Investment Company Act"), and thus subject to regulation under the Investment Company Act. |
• | We may be exposed to risks due to a lack of tenant diversity, investment types and geographic diversity. |
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• | We may be exposed to changes in general economic, business and political conditions, including the possibility of intensified international hostilities, acts of terrorism, and changes in conditions of United States or international lending, capital and financing markets. |
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of this annual report on Form 10-K.
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PART I
Item 1. Business.
The Company was incorporated on July 13, 2011 as a Maryland corporation and has elected and qualified to be taxed as a REIT for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2013. On April 20, 2012, the Company commenced its IPO on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-177563), as amended from time to time (the "Registration Statement") filed with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended. The Registration Statement also covered up to 25.0 million shares of common stock issuable pursuant to a distribution reinvestment plan (the "DRIP") under which the Company's common stockholders could elect to have their distributions reinvested in additional shares of the Company's common stock. On June 13, 2014, as permitted, the Company announced the reallocation of 23.8 million shares, which represented all remaining unsold shares available pursuant to the DRIP. Concurrent with such reallocation, on June 17, 2014, the Company registered an additional 25.0 million shares to be issued under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-196829).
The Company's IPO closed on June 30, 2014. As of December 31, 2014, the Company had 177.9 million shares of stock outstanding, including unvested restricted shares and shares issued under the DRIP and had received total gross proceeds from the IPO of $1.8 billion including the DRIP.
The Company was formed to primarily acquire a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. The Company may also originate or acquire first mortgage loans secured by real estate. The Company's primary geographic target is the United States, although up to 40% of its portfolio may consist of properties purchased in Europe with an additional 10% allocation to properties purchased elsewhere internationally. All such properties may be acquired and operated by the Company alone or jointly with another party. As of December 31, 2014, the Company owned 307 properties consisting of 16.3 million rentable square feet, which were 100.0% leased, with an average remaining lease term of 11.6 years. 255 of these properties are located in the United States and Puerto Rico, with an average remaining lease term of 10.5 years, 40 of these properties are located in the United Kingdom, with an average remaining lease term of 15.2 years and 12 of these properties are located across continental Europe, with an average remaining lease term of 12.4 years.
Substantially all of the Company's business is conducted through American Realty Capital Global Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP ("OP units"). American Realty Capital Global Special Limited Partner, LLC (the "Special Limited Partner"), an entity controlled by AR Capital Global Holdings, LLC (the "Sponsor"), contributed $200 to the OP in exchange for 22 OP units, which represents a nominal percentage of the aggregate OP ownership. A holder of OP units has 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, in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited 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 have no direct employees. Our Advisor has been retained to manage the Company's affairs on a day-to-day basis. The properties are managed and leased by American Realty Capital Global Properties, LLC (the "Property Manager"). Realty Capital Securities, LLC (the "Dealer Manager") serves as the dealer manager of the IPO. The Advisor, Property Manager, Special Limited Partner and Dealer Manager are under common control with the parent of the Sponsor, as a result of which they are related parties, and may have received or will receive compensation, fees and expense reimbursements for services related to the IPO and for the investment and management of the Company's assets. These entities received or will receive fees, distributions and other compensation during the offering, acquisition, operational and liquidation stages. The Advisor has entered into a service provider agreement with Moor Park Capital Partners LLP (the "Service Provider"). The Service Provider is not affiliated with the Company, the Advisor or the Sponsor. Pursuant to the service provider agreement, the Service Provider provides, subject to the Advisor's oversight, certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence, and arranging debt financing and equity investment syndicates, solely with respect to investments in Europe. Pursuant to the service provider agreement, 50.0% of the fees payable by the Company to the Advisor and a percentage of the fees paid to the Property Manager are paid or assigned to the Service Provider, solely with respect to the Company's foreign investments in Europe. Such fees are deducted from fees paid to the Advisor.
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Investment Objectives
Our investment objectives are:
• | to acquire a portfolio of commercial properties that is diversified with respect to the credit risk associated with any one tenant or any one tenant industry; |
• | to acquire primarily commercial properties and lease the properties back to the seller-occupants pursuant to triple net leases with a focus, with respect to investments in the United States, on acquisitions of net lease properties with tenants in the office, industrial and special purpose sectors; |
• | to preserve, protect and return investors’ capital contributions; |
• | to generate cash flow that will support a stable distribution to investors with potential for growth through leases with rent escalations such as inflation adjustments; |
• | to diversify our assets by investing in different geographic areas both in the United States, Europe and elsewhere internationally; and |
• | to seek investments through a European service provider of up to 40% of our capital in Europe and 10% elsewhere internationally that have an opportunity for greater asset diversity, a broader range of investments, and, in the case of European investments, an opportunity to make real estate investments through leases that may be indexed to an inflation index. |
Acquisition and Investment Policies
Primary Investment Focus
We have focused and intend to continue to focus our investment activities on single tenant net-leased commercial properties, with an emphasis on sale-leaseback transactions. Our primary geographic target is the United States, although up to 40% of our portfolio may consist of properties purchased in Europe and up to an additional 10% may consist of properties purchased elsewhere internationally. The real estate debt we originate or acquire is expected to be primarily first mortgage debt but may also include bridge loans, mezzanine loans, preferred equity or securitized loans.
As of December 31, 2014, the Company owned 307 properties, including 255 properties located in the United States and Puerto Rico, 40 properties located in the United Kingdom and 12 properties located across continental Europe.
Investing in Real Property
We have invested and expect to continue to invest in single tenant net-leased commercial properties. When evaluating prospective investments in real property, our management, our Advisor and our Service Provider, with respect to foreign investments, consider relevant real estate and financial factors, including the location of the property, the leases and other agreements affecting the property, the creditworthiness of major tenants, its income producing capacity, its physical condition, its prospects for appreciation, its prospects for liquidity, tax considerations and other factors. In this regard, our Advisor or Service Provider has substantial discretion with respect to the selection of specific investments, subject to board approval.
The following table lists the tenants whose annualized rental income on a straight-line basis represented greater than 10% of total annualized rental income for all properties on a straight-line basis as of December 31, 2014, 2013 and 2012.
December 31, | ||||||
Tenant | 2014 | 2013 | 2012 | |||
Encanto Restaurants, Inc. | * | 19.4% | —% | |||
Western Digital Corporation | * | 14.6% | —% | |||
Thames Water Utilities Limited | * | 11.7% | —% | |||
McDonald's Property Company Limited | * | * | 100% | |||
_______________________________________________________________________
* Tenant's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.
The termination, delinquency or non-renewal of leases by any of the above tenants may have a material adverse effect on revenues.
Opportunistic Investments
We believe that our Advisor’s and our Service Provider’s presence in the commercial real estate marketplace may present attractive opportunities to invest in properties other than long-term net leased properties from corporations and other owners due
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to our market presence in the corporate real estate marketplace. These assets may differ significantly in character from our traditional net leased real estate assets. For example, we may acquire partially leased properties, multi-tenanted properties, vacant or undeveloped properties, properties subject to short-term net leases, mortgage loans secured by commercial real properties, subordinated interests in first mortgage real estate loans, mezzanine loans related to commercial real estate as well as equity and debt securities (including collateralized mortgage-backed securities ("CMBS"), preferred equity and other higher-yielding structured debt and equity investments) and other interests issued by entities that are engaged in real estate-related businesses, including real estate funds and other REITs. We believe we may find attractive opportunities to make investments in these assets as they may either be part of a larger sale-leaseback transaction, an existing relationship with the owner or from some other source where our market presence and reputation may give us an advantage over certain other investors. As of December 31, 2014, we are not invested in any of these types of opportunistic investments.
Mortgage Loans Secured by Commercial Real Properties
We may invest in commercial mortgages and other commercial real estate interests consistent with the requirements for qualification as a REIT. We may originate or acquire interests in mortgage loans, which may pay fixed or variable interest rates or have “participating” features. Our loans may include first mortgage loans, second mortgage loans and leasehold mortgage loans. Loans will usually not be insured or guaranteed by the U.S. government, its agencies or anyone else. They usually will be non-recourse, which means they will not be the borrower’s personal obligations.
We may also invest in secured corporate loans, which are loans collateralized by real property, personal property connected to real property (i.e., fixtures) and/or personal property, on which another lender may hold a first priority lien. The value of the collateral against which we lend may or may not be valued by an appraisal.
Loans with “participating” features may allow us to participate in the economic benefits of any increase in the value of the property securing repayment of the loan as though we were an equity owner of a portion of the property. The forms and extent of the participations may vary depending on factors such as the equity investment, if any, of the borrower, credit support provided by the borrower, the interest rate on our loans and the anticipated and actual cash flow from the underlying real property.
Subordinated Interests in First Mortgage Real Estate Loans, or B Notes
We may purchase from third parties, and may retain from mortgage loans we originate and securitize or sell, subordinated interests referred to as B Notes. B Notes are loans secured by a first mortgage and subordinated to a senior interest, referred to as an A Note. The subordination of a B Note is generally evidenced by a co-lender or participation agreement between the holders of the related A Note and the B Note. In some instances, the B Note lender may require a security interest in the stock or partnership interests of the borrower as part of the transaction. B Note lenders have the same obligations, collateral and borrower as the A Note lender, but typically are subordinated in recovery upon a default. B Notes share certain credit characteristics with second mortgages, in that both are subject to the greater credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or A Note, and inconsequence generally carry a higher rate of interest. If we acquire or originate B Notes, we may earn income in addition to interest payable on the B Note, in the form of fees charged to the borrower under that note. If we originate first mortgage loans, we may divide them, securitizing or selling the A Note and holding the B Note for investment. We believe that the B Note market will continue to grow with the expansion of the commercial mortgage securitization market.
We may also retain or acquire interests in A Notes and notes sometimes referred to as “C Notes,” which are junior to the B Notes.
Mezzanine Loans Related to Commercial Real Estate
We may invest in mezzanine loans that are senior to the borrower’s common and preferred equity in, and subordinate to a first mortgage loan on, a commercial property. These loans are secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property. Mezzanine loans may have elements of both debt and equity instruments, offering fixed returns in the form of interest payments and principal payments associated with senior debt, while providing lenders an opportunity to participate in the capital appreciation of a borrower, if any, through an equity interest. Due to their higher risk profile, and often less restrictive covenants, as compared to senior loans, mezzanine loans generally earn a higher return than senior secured loans. Mezzanine loans also may include a “put” feature, which permits the holder to sell its equity interest back to the borrower at a price determined through an agreed upon formula.
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Commercial Mortgage-Backed Securities
We may invest in mortgage-backed securities and other mortgage related or asset-backed instruments, including CMBS, mortgage-backed securities issued or guaranteed by agencies or instrumentalities of the U.S. Government, non-agency mortgage instruments, and collateralized mortgage obligations that are fully collateralized by a portfolio of mortgages or mortgage-related securities to the extent consistent with the requirements for qualification as a REIT. Mortgage-backed securities are instruments that directly or indirectly represent a participation in, or are secured by and payable from, one or more mortgage loans secured by real estate. In most cases, mortgage-backed securities distribute principal and interest payments on the mortgages to investors. Interest rates on these instruments can be fixed or variable. Some classes of mortgage-backed securities may be entitled to receive mortgage prepayments before other classes do. Therefore, the prepayment risk for a particular instrument may be different than for other mortgage-related securities.
Equity and Debt Securities of Companies Engaged in Real Estate Activities, including other REITs
We may invest in equity and debt securities (including common and preferred stock, as well as limited partnership or other interests) of companies engaged in real estate activities, including for the purpose of exercising control over such entities. Such investments may be an attractive alternative to direct investments in property. Companies engaged in real estate activities and real estate related investments may include, for example, companies engaged in the net lease business, REITs that either own properties or make construction or mortgage loans, real estate developers, companies with substantial real estate holdings and other companies whose products and services are related to the real estate industry, such as building supply manufacturers, mortgage lenders or mortgage servicing companies. Such securities may or may not be readily marketable and may or may not pay current dividends or other distributions. We may acquire all or substantially all of the securities or assets of companies engaged in real estate related activities where such investment would be consistent with our investment policies and our status as a REIT. In any event, we do not intend that our investments in securities will require us to register as an “investment company” under the Investment Company Act, and we intend to generally divest appropriate securities before any such registration would be required.
Acquisition Structure
We have acquired and anticipate we will continue acquiring fee interests in properties (a “fee interest” is the absolute, legal possession and ownership of land, property, or rights), although other methods of acquiring a property, including acquiring leasehold interests (a “leasehold interest” is a right to enjoy the exclusive possession and use of an asset or property for a stated definite period as created by a written lease), may be utilized if we deem it to be advantageous. For example, we may acquire properties through the acquisition of substantially all of the interests of an entity which in turn owns the real property. We also may make preferred equity investments in an entity that owns real property.
Development and Construction of Properties
We do not plan to acquire undeveloped land, develop new real estate, or substantially re-develop existing real estate. However, we may pursue “build-to-suit” development projects for single tenants who enter into long-term leases with us prior to our commencing the development project.
Joint Ventures
We may enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. Some of the potential reasons to enter into a joint venture would be to acquire assets we could not otherwise acquire, to reduce our capital commitment to a particular asset, or to benefit from certain expertise that a partner might have. As of December 31, 2014, we have not invested in any joint ventures.
Our general policy is to invest in joint ventures only when we will have a right of first refusal to purchase the co-venturer’s interest in the joint venture if the co-venturer elects to sell such interest. If the co-venturer elects to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the property held by the joint venture. If any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specially allocated based upon the respective proportion of funds invested by each co-venturer in each such property.
Financing Strategies and Policies
We may obtain financing for acquisitions and investments at the time an asset is acquired or an investment is made or at a later time. In addition, debt financing may be used from time to time for property improvements, tenant improvements, leasing commissions and other working capital needs. The form of our indebtedness will vary and could be long-term or short-term, secured or unsecured, or fixed-rate or floating rate. We will not enter into interest rate swaps or caps, or similar hedging transactions or derivative arrangements for speculative purposes but may do so in order to manage or mitigate our interest rate risks on variable rate debt.
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Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total “net assets” (as defined in our charter) 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 not more than 45% of the aggregate fair market value of our assets, 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 our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. As of December 31, 2014, our aggregate borrowings are equal to 12.2% of the aggregate fair market value of assets.
We will not borrow from our Advisor or its affiliates unless a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties, based on the terms of such loans between affiliated parties in comparison to the terms of loans in comparable amounts and for equivalent acquisitions that we have borrowed from, or that are available from, third-parties.
Except with respect to the borrowing limits contained in our charter, we may reevaluate and change our financing policies without a stockholder vote. Factors that we would consider when reevaluating or changing our debt policy include: then-current economic conditions, the relative cost and availability of debt and equity capital, our expected investment opportunities, the ability of our investments to generate sufficient cash flow to cover debt service requirements and other similar factors.
Tax Status
We qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2013. Commencing with such taxable year, we were organized and operate in such a manner as to qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. In order to qualify and continue to qualify for taxation as a REIT, we must, among other things, distribute annually at least 90% of our REIT taxable income. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain federal, state, local and foreign taxes on our income and assets, including alternative minimum taxes, taxes on any undistributed income and state, local or foreign income, franchise, property and transfer taxes. Any of these taxes decrease our earnings and our available cash.
In addition, our international assets and operations, including those designated as direct or indirect qualified REIT subsidiaries or other disregarded entities of a REIT, continue to be subject to taxation in the foreign jurisdictions where those assets are held or those operations are conducted.
Competition
The commercial property real estate market is highly competitive. We compete for tenants in all of our markets with other owners and operators of real estate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and to locate tenants and purchasers for our properties. These competitors include American Realty Capital Global Trust II, Inc., a REIT sponsored by our Sponsor with substantially the same investment strategy as us, other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There are also other REITs with asset acquisition objectives similar to ours and others may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to our company. Therefore, we compete for institutional investors in a market where funds for real estate investment may decrease.
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Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It also may result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms. In addition, competition for desirable investments could delay the investment in desirable assets, which may in turn reduce our earnings per share and negatively affect our ability to maintain distributions to stockholders.
Regulations
Our investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our investments.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments and foreign governments at various levels. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future. As part of our efforts to mitigate these risks, we typically engage third parties to perform assessments of potential environmental risks when evaluating a new acquisition of property, and we frequently require sellers to address them before closing or obtain contractual protection (indemnities, cash reserves, letters of credit, or other instruments) from property sellers, tenants, a tenant’s parent company, or another third party to address known or potential environmental issues.
Employees
As of December 31, 2014, we had no direct employees. Instead, the employees of our Service Provider, Property Manager, Advisor and other affiliates of our Sponsor perform a full range of real estate services for us, including acquisitions, property management, accounting, legal, asset management, wholesale brokerage, transfer agent, and investor relations services.
We are dependent on these third parties and affiliates for services that are essential to us, including asset acquisition decisions, property management and other general administrative responsibilities. In the event that any of these companies were unable to provide these services to us, we would be required to provide such services ourselves or obtain such services from other sources at potentially higher cost.
Financial Information About Industry Segments
Our current business consists of owning, managing, operating, leasing, acquiring, investing in and disposing of real estate assets. All of our consolidated revenues are derived from our consolidated real estate properties. We internally evaluate operating performance on an individual property level and view all of our real estate assets as one industry segment, and, accordingly, all of our properties are aggregated into one reportable segment.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the SEC. We also filed with the SEC our Registration Statement in connection with our offering. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet address at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC may be obtained from the website maintained for us and our affiliates at www.americanrealtycap.com. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Form 10-K.
Item 1A. Risk Factors
Risks Related to Our Properties and Operations
Various risks and uncertainties, including the conditions listed below, could have a material adverse effect on our results of operations, financial condition, business, ability to pay distributions and the value of an investment in us. The list below is not exhaustive.
We have a limited prior operating history and the prior performance of other real estate investment programs sponsored by affiliates of our Advisor may not be an indication of our future results.
We have a limited operating history. Since our inception in July 2011, we have incurred net losses (calculated in accordance with GAAP) equal to $61.0 million. The extent of our future operating losses and the timing of the profitability are highly uncertain, and we may never achieve or sustain profitability.
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The past performance of other real estate investment programs sponsored by affiliates of our Advisor may not predict our future results. Accordingly, the prior performance of real estate investment programs sponsored by affiliates of our Advisor may not be indicative of our future results.
Moreover, other than our revolving credit facility, borrowings secured by our properties and the proceeds from our IPO, we do not have any established financing sources. If our capital resources are insufficient to support our operations, we will not be successful.
To be successful in this market, we must, among other things:
• | identify and acquire investments that further our investment strategies; |
• | increase awareness of the American Realty Capital Global Trust, Inc. name within the investment products market; |
• | attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations; |
• | respond to competition for our targeted real estate properties and other investments as well as for potential investors; |
and
• | continue to build and expand our operations structure to support our business. |
We cannot guarantee that we will succeed in achieving these goals.
Stockholders may be more likely to sustain a loss on their investment because our Sponsor does not have as strong an economic incentive to avoid losses as does a sponsor who has made significant equity investments in its company.
Our Sponsor has invested $1.2 million in us through the purchase of 133,333 shares of our common stock at $9.00 per share. Our Sponsor or any affiliate may not sell this initial investment while our Sponsor remains a sponsor but may transfer the shares to other affiliates. After reimbursement of our Sponsor for our significant organization and offering expenses, our Sponsor will have little exposure to loss in the value of our shares. Without this exposure, our investors may be at a greater risk of loss because our Sponsor may have less to lose from a decrease in the value of our shares as does a sponsor that makes more significant equity investments in the company it sponsors.
There is no established trading market for our shares and there may never be one; therefore, it will be difficult for investors to sell shares. Although we intend to list our shares for trading on a national securities exchange, there is no assurance we will satisfy the listing standards or otherwise be listed on a public market.
There currently is no established trading market for our shares and there may never be one. Even if a stockholder is able to find a buyer for his or her shares, the stockholder may not sell his or her shares unless the buyer meets applicable suitability and minimum purchase standards and the sale does not violate state securities laws. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of our outstanding shares of stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock by a single investor, unless exempted by our board of directors, which may inhibit large investors from desiring to purchase our shares. Moreover, our share repurchase program includes numerous restrictions that limit a stockholder's ability to sell shares to us. Our board of directors may reject any request for repurchase of shares, or amend, suspend or terminate our share repurchase program upon 30 days’ notice. Therefore, it will be difficult for stockholder's to sell shares promptly or at all.
If we fail to satisfy initial listing requirements for a national stock exchange, or if we fail to maintain our qualification for listing, our stockholders may have to hold their shares for an indefinite period of time or, if stockholders are able to sell your shares, they likely would have to sell them at a substantial discount to the price they paid for the shares. There can be no assurance that we will be able to achieve a listing.
If we, through our Advisor or any service provider, are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay distributions, which would adversely affect the value of an investment in our shares.
Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of our Advisor, and any service provider, in acquiring our investments, selecting tenants for our properties and securing independent financing arrangements. As of December 31, 2014, we owned 307 properties and have identified a limited number of other properties to acquire. We cannot be sure that our Advisor or any service provider will be successful in obtaining suitable investments on financially attractive terms or that, if it makes investments on our behalf, our objectives will be achieved.
Generally, we may fund distributions from unlimited amounts of any source, which may include borrowing funds, using proceeds from our offering, issuing additional securities or selling assets in order to fund distributions if we are unable to make distributions with our cash flows from our operations. Paying distributions from these sources reduces the amount of cash we have available to invest in income producing assets.
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If we internalize our management functions, we may be unable to obtain key personnel, and our ability to achieve our investment objectives could be delayed or hindered, which could adversely affect our ability to pay distributions to our stockholders and the value of an investment in our shares.
We may engage in an internalization transaction and become self-managed in the future. If we internalize our management functions, certain key employees of the Advisor and its affiliates may not become our employees but may instead remain employees of our Advisor or its affiliates. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management’s attention could be diverted from most effectively managing our investments, which could result in us being sued and incurring litigation-associated costs in connection with the internalization transaction.
If our Advisor or any Service Provider loses or is unable to obtain key personnel, including in the event another American Realty Capital-sponsored program internalizes its advisor, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to make distributions and the value of our common stock.
Our success depends to a significant degree upon the contributions of our executive officers and other key personnel of our Advisor and any service provider, each of whom would be difficult to replace. None of we, our Advisor or any service provider has an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with us or our Advisor or any service provider. If any of our key personnel were to cease their affiliation with our Advisor or any service provider, our operating results could suffer. Further, we do not intend to separately maintain key person life insurance on any person. We believe that our future success depends, in large part, upon the ability of our Advisor or any service provider to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and there can be no assurance that our Advisor or any service provider will be successful in attracting and retaining such skilled personnel. If our Advisor or any service provider loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of an investment in our shares may decline.
We may be unable to pay or maintain cash distributions to our stockholders or increase distributions over time, which could adversely affect the return on an investment in our shares.
There are many factors that can affect the availability and timing of cash distributions to stockholders. Distributions are based principally on cash available from our operations. The amount of cash available for distributions is affected by many factors, such as our ability to buy properties, rental income from such properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We cannot give any assurance that we will be able to pay or maintain our current level of distributions or that distributions will increase over time. We also cannot give any assurance that rents from the properties will increase, that the securities we buy will increase in value or provide constant or increased distributions over time, or that future acquisitions of real properties, mortgage, bridge or mezzanine loans or any investments in securities will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rate to stockholders. We may not have sufficient cash from operations to make a distribution required to qualify for or maintain our REIT status, which may materially the value of an investment in our shares.
We may pay distributions from unlimited amounts of any source, including proceeds of our offering, which reduces the amount of capital we are able to invest and may reduce the value of an investment in our shares.
All of our distributions to date have been paid from offering proceeds. We may pay distributions from unlimited amounts of any source, which may include borrowing funds, issuing additional securities or selling assets. We have not established any limit on the amount of proceeds from the IPO that may be used to fund distributions, except in accordance with our organizational documents and Maryland law. Distributions from the proceeds of our offering or from borrowings also could reduce the amount of capital we ultimately invest in properties and other permitted investments. This, in turn, would reduce the value of an investment in our shares.
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Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect the value of an investment in our shares.
Our cash flows used in operations were $9.7 million for the year ended December 31, 2014. During the year ended December 31, 2014, we paid distributions of $35.4 million, all of which was funded from proceeds from the issuance of common stock. During the year ended December 31, 2014, cash flows from operations included an increase in accounts payable and accrued expenses of $15.7 million, as reflected on the statement of cash flows. Accordingly, if these accounts payable and accrued expenses had been paid during the year ended December 31, 2014, there would have been $15.7 million less in cash flow from operations. Additionally, we may in the future continue to pay distributions from sources other than from our cash flows from operations.
In the future, we still may not generate sufficient cash flows from operations to pay distributions. Our inability to acquire additional properties or other real estate-related investments may result in a lower return then expected by our stockholders. If we have not generated sufficient cash flows from our operations and other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and/or our Advisor’s deferral, suspension and/or waiver of its fees and expense reimbursements, in order to fund distributions, we will continue to use the proceeds from our IPO. Moreover, our board of directors may change our distribution policy, in its sole discretion, at any time. Distributions made from offering proceeds are a return of capital to stockholders, from which we will have already paid offering expenses in connection with our IPO. We have not established any limit on the amount of proceeds from our IPO that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to qualify as a REIT.
When we fund distributions from the proceeds of our IPO, we have less funds available for acquiring properties or other real estate-related investments. As a result, the value of our common stock is reduced. Funding distributions from borrowings may also restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets or the proceeds of our IPO will affect our ability to generate cash flows. Funding distributions from offering proceeds dilutes stockholders' interest in us. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability and/or affect the distributions payable to stockholders upon a liquidity event, any or all of which would have an adverse effect an investment in our shares.
Commencing with the NAV pricing date, the offering price for shares in our primary offering and pursuant to our DRIP, as well as the repurchase price for our shares under our share repurchase program, will vary quarterly and will be based on NAV, which will be based upon subjective estimates, judgments, assumptions and opinions about future events, and also may not accurately reflect the value of our assets and liabilities at a particular time for other reasons.
Commencing with the NAV pricing date, the offering price for shares in our primary offering (to the extent we are still offering shares in our primary offering) and pursuant to our DRIP, as well as the repurchase price for our shares under our share repurchase program, will vary quarterly and will be based on NAV. Our Advisor, with the assistance of an independent third party valuer, will calculate NAV quarterly by estimating the market value of our assets and liabilities, many of which may be illiquid. calculating NAV, our Advisor will consider an estimate provided by an independent valuer of the market value of our real estate assets. Our Advisor will review such valuation for consistency with its determinations of value and our valuation guidelines and the reasonableness of the independent valuer’s conclusions. The final determination of value may be made by a valuation committee comprised of our independent directors if our Advisor determines that the appraisals of the independent valuer are materially higher or lower than its valuations. The valuations used by the independent valuer, our Advisor and our board of directors may not be precise because the valuation methodologies used to value a real estate portfolio involve subjective judgments, assumptions and opinions about future events, such as comparable sales, rental and operating expense data, capitalization or discount rate, and projections of future rent and expenses. If different judgments, assumptions or opinions were used, a different estimate would likely result.
Each property will be appraised at least annually and appraisals will be spread out over the course of a year so that approximately 25% of all properties are appraised each quarter. Because each property will be appraised only annually, there may be changes in the course of the year that are not fully reflected in the quarterly NAV. As a result, the published NAV may not fully reflect changes in value that may have occurred since the prior quarterly valuation. Moreover, appraised value of a particular property may be greater or less than its potential realizable value, which would cause our estimated NAV to be greater or less than the potential realizable NAV. Any resulting disparity may benefit the selling or non-selling stockholders or purchasers. Further, valuations do not necessarily represent the price at which we would be able to sell an asset.
In addition, our NAV may suddenly change if the appraised values of our properties materially change or the actual operating results differ from what we originally budgeted for that quarter. For example, if a material lease is unexpectedly terminated or renewed, or a property experiences an unanticipated structural or environmental event, the value of a property
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may materially change. Furthermore, if we cannot immediately quantify the financial impact of any extraordinary events, our NAV as published on any given quarter will not reflect such events. As a result, the NAV published after the announcement of a material event may differ significantly from our actual NAV until we are able to quantify the financial impact of such events and our NAV is appropriately adjusted on a going forward basis.
NAV does not represent the fair value of our assets less liabilities under GAAP. NAV is not a representation, warranty or guarantee of: (a) what a stockholder would ultimately realize upon a liquidation of our assets and settlement of our liabilities or upon any other liquidity event, (b) that the shares of our common stock would trade at NAV on a national securities exchange, (c) what any third party in an arm’s-length transaction would offer to purchase all or substantially all of our shares of common stock at NAV, and (d) that NAV would equate to a market price for an open-end real estate fund. We will not retroactively adjust the valuation of such assets, the price of our common stock, the price we paid to repurchase shares of our common stock or NAV-based fees we paid to our Advisor and Dealer Manager.
Prior to the NAV pricing date, stockholders will not be able to determine the NAV of their shares.
We will not publish our NAV until the NAV pricing date because the price stockholders will pay for shares of our common stock in this offering, and the price at which shares may be repurchased by us pursuant to our share repurchase program, will be based on our estimated NAV commencing with the NAV pricing date, stockholders may pay more than realizable value or receive less than realizable value for their investment.
Stockholders’ interest in us may be diluted if the price we pay in respect of shares repurchased under our share repurchase program exceeds the net asset value, at such time as we calculate the NAV of our share.
The prices we may pay for shares repurchased under our share repurchase program may exceed the NAV of such shares at the time of repurchase, which may reduce the NAV of the remaining shares.
Our rights and the rights of our stockholders to recover claims against our officers, directors and our Advisor are limited, which could reduce any recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for monetary damages and requires us to indemnify our directors, officers and Advisor and our Advisor’s affiliates and permits us to indemnify our employees and agents. We have entered into an indemnification agreement formalizing our indemnification obligations with respect to our officers and directors and certain former officers and directors. However, our charter provides that we may not indemnify a director, our Advisor or an affiliate of our Advisor for any loss or liability suffered by any of them or hold harmless such indemnitee for any loss or liability suffered by us unless: (1) the indemnitee determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests, (2) the indemnitee was acting on behalf of or performing services for us, (3) the liability or loss was not the result of (A) negligence or misconduct, in the case of a director (other than an independent director), the Advisor or an affiliate of the Advisor, or (B) gross negligence or willful misconduct, in the case of an independent director, and (4) the indemnification or agreement to hold harmless is recoverable only out of our net assets and not from our stockholders. Although our charter does not allow us to indemnify or hold harmless an indemnitee to a greater extent than permitted under Maryland law and the North American Securities Administrators Association REIT Guidelines, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce any recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor and its affiliates in some cases which would decrease the cash otherwise available for distribution to stockholders.
We rely significantly on major tenants and therefore are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants.
As of December 31, 2014 the following two major tenants had annualized rental income on a straight-line basis, which represented 5.0% or more of our consolidated annualized rental income on a straight-line basis including, for this purpose, all affiliates of such tenants:
Tenant | Number of Properties | December 31, 2014 | ||
RWE AG | 3 | 6.1% | ||
Government Services Administration (GSA I - IX) | 11 | 6.0% | ||
The financial failure of a major tenant is likely to have a material adverse effect on our results of operations and our financial condition. In addition, the value of our investment in a real estate asset is historically driven by the credit quality of the underlying tenant, and an adverse change in a major tenant’s financial condition or a decline in the credit rating of such tenant may result in a decline in the value of our investments and have a material adverse effect on our results of operations.
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A high concentration of our properties in a particular geographic area magnifies the effects of downturns in that geographic area and could have a disproportionate adverse effect on the value of our investments.
If we have a concentration of our properties in any particular geographic area, any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio. As of December 31, 2014, the following countries and states had concentrations of properties where annualized rental income on a straight-line basis represented 5.0% or greater of our consolidated annualized rental income on a straight-line basis:
Country | December 31, 2014 | |
United Kingdom | 22.0% | |
Germany | 10.9% | |
United States | ||
California | 6.8% | |
Michigan | 8.8% | |
Texas | 10.4% | |
Any adverse situation that disproportionately affects the states and countries listed above may have a magnified adverse effect on our portfolio. Factors that may negatively affect economic conditions in these states or countries include:
• | business lay offs, downsizing or relocations; |
• | industry slowdowns; |
• | changing demographics; |
• | increased telecommuting and use of alternative work places; |
• | infrastructure quality; |
• | any oversupply of, or reduced demand for, real estate; |
• | concessions or reduced rental rates under new leases for properties where tenants defaulted; and |
• | increased insurance premiums. |
We are subject to additional risks from our international investments.
Our primary geographic target is the United States, but we have and expect to continue to invest in real estate outside of the United States, including up to 40% of our capital in Europe, and up to an additional 10% elsewhere internationally. We own several properties outside the United States, primarily in the United Kingdom, Germany, Netherlands, Finland and the Commonwealth of Puerto Rico. We may purchase others and may make or purchase loans or participations in loans secured by property located outside the United States or in Europe, the United Kingdom or in other countries. These investments may be affected by factors peculiar to the laws and business practices of the jurisdictions in which the properties are located. These laws and business practices may expose us to risks that are different from and in addition to those commonly found in the United States. Foreign investments pose several risks, including the following:
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• | the burden of complying with a wide variety of foreign laws; |
• | changing governmental rules and policies, including changes in land use and zoning laws, more stringent environmental laws or changes in such laws; |
• | existing or new laws relating to the foreign ownership of real property or loans and laws restricting the ability of foreign persons or companies to remove profits earned from activities within the country to the person's or company's country of origin; |
• | the potential for expropriation; |
• | possible currency transfer restrictions; |
• | imposition of adverse or confiscatory taxes; |
• | changes in real estate and other tax rates and changes in other operating expenses in particular countries; |
• | possible challenges to the anticipated tax treatment of the structures that allow us to acquire and hold investments; |
• | adverse market conditions caused by terrorism, civil unrest and changes in national or local governmental or economic conditions; |
• | the willingness of domestic or foreign lenders to make loans in certain countries and changes in the availability, cost and terms of loan funds resulting from varying national economic policies; |
• | general political and economic instability in certain regions; |
• | the potential difficulty of enforcing obligations in other countries; |
• | our limited experience and expertise in foreign countries relative to our experience and expertise in the United States; and |
• | our dependence on the Service Provider. |
Investments in properties or other real estate investments outside the United States subject us to foreign currency risks.
Investments we make outside the United States generally subject us to foreign currency risk due to fluctuations in exchange rates between foreign currencies and the U.S. dollar. Revenues generated from any properties or other real estate investments we acquire are generally denominated in the local currency. We also may borrow in local currencies when we purchase properties outside the Unites States. As a result, changes in exchange rates of any such foreign currency to U.S. dollars may affect our revenues, operating margins and distributions and may also affect the book value of our assets and the amount of stockholders' equity.
Changes in foreign currency exchange rates used to value a REIT's foreign assets may be considered changes in the value of the REIT's assets. These changes may adversely affect our status as a REIT.
Foreign exchange rates may be influenced by many factors, including:
• | changing supply and demand for a particular currency; |
• | monetary policies of governments (including exchange control programs, restrictions on local exchanges or markets and imitations on foreign investment in a country or an investment by residents of a country in other countries); |
• | changes in balances of payments and trade; |
• | trade restrictions; and |
• | currency devaluations and revaluations. |
Also, governments from time to time intervene in the currency markets, directly and by regulation, in order to influence prices. These events and actions are unpredictable. In particular, sovereign debt issues in Europe could lead to further significant, and potentially longer-term, devaluation of the euro against the U.S. dollar, which could adversely impact our European investments and revenue, operating expenses, and net income related to such European investments as expressed in U.S. dollars.
If we are unsuccessful in hedging these, or any other potential losses related to our exposure to foreign currencies, our operating results could be negatively impacted and our cash flows could be reduced. In some cases, as part of our risk management strategies, we may choose not to hedge such risks. If we misjudge these risks, there could be a material adverse effect on our operating results and financial position.
Recent events in Europe have called into question the viability of a common European currency. The failure of the euro and/or disruptions in the economies of European countries could negatively impact our business, results of operations and financial condition.
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In early 2010, Greece and certain other European Union countries with high levels of sovereign debt had difficulty refinancing their debt and central bank intervention was required, causing significant devaluation of the euro relative to other currencies, such as the U.S. dollar, and concerns that sovereign defaults could lead to devaluation or abandonment of the common currency. Sovereign debt issues could lead to further significant, and potentially longer-term, devaluation of the euro against the U.S. dollar, which could adversely impact our European investments and revenues, operating expenses, and net income related to such European investments as expressed in U.S. dollars. In addition, many governments around the world, including the U.S. government, are operating at very large financial deficits. Disruptions in the economies of such governments could cause, contribute to or be indicative of, deteriorating macro-economic conditions. Furthermore, governmental austerity measures aimed at reducing deficits could impair the economic recovery.
We may be exposed to foreign currency gains and losses resulting from the current volatility and uncertainty concerning the euro. If we are unsuccessful in hedging these potential losses, our operating results could be negatively impacted and our cash flows could be significantly reduced. In some cases, as part of our risk management strategies, we may choose not to hedge such risks. If we misjudge these risks, there could be a material adverse effect on our operating results and financial position.
Foreign exchange rates may also be influenced by: changing supply and demand for a particular currency; monetary policies of governments (including exchange control programs, restrictions on local exchanges or markets and limitations on foreign investment in a country or on investment by residents of a country in other countries); changes in balances of payments and trade; trade restrictions; and currency devaluations and revaluations. Also, governments from time to time intervene in the currency markets, directly and by regulation, in order to influence prices directly. These events and actions are unpredictable. The resulting volatility in the U.S. dollar/euro exchange rate could materially and adversely affect our performance.
Inflation in foreign countries may have an adverse effect on our investments.
Certain countries have in the past experience extremely high rates of inflation. Inflation, along with governmental measures to curb inflation, coupled with public speculation about the possible future governmental measures to be adopted, has had significant negative effects on these international economies in the past and this could occur again in the future.
High inflation could cause our revenue from leases that do not contain indexed escalation provisions to decline and erode the value of long-term leases. High inflation in the countries in which we purchase real estate or make other investments could also increase our expenses, and we may not be able to pass these increased costs onto our tenants. An increase in our expenses or a decrease in our revenues could adversely impact our results of operations. As of December 31, 2014, all of our leases for properties in foreign countries contain upward adjustments to fair market value every five years or contain capped indexed escalation provisions, but there can be no assurance that future leases on properties in foreign countries will contain such provisions or that such provisions will protect us from all potential adverse effects of inflation.
A high concentration of tenants of our properties in a similar industry magnifies the effects of downturns in that industry and would have a disproportionate adverse effect on the value of our investments.
If tenants of our properties are concentrated in a certain industry category, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio. For the year ended December 31, 2014, the following industries had concentrations of properties where annualized rental income on a straight-line basis represented 5.0% or greater of our consolidated annualized rental income on a straight-line basis:
Industry | December 31, 2014 | |
Financial Services | 11.4% | |
Discount Retail | 10.0% | |
Technology | 8.9% | |
Utilities | 7.2% | |
Healthcare | 6.8% | |
Government | 6.1% | |
Energy | 5.9% | |
Freight | 5.2% | |
Pharmaceuticals | 5.1% | |
Any adverse situation that disproportionately affects the industries listed above may have a magnified adverse effect on our portfolio.
Our business and operations would suffer in the event of system failures.
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Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could results in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions.
The occurrence of cyber incidents, or a deficiency in our cyber security, could negatively impact our business by causing a disruption to our operations, a compromise of corruption of our confidential information, and/or damages to our business relationships, all of which could negatively impact our financial results.
In addition, the risk of a cyber incident, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and instructions from around the world have increased. Our remediation costs and lost revenues could be significant if we fall victim to a cyber incident. We may be required to expend significant resources to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches. Security breaches could also result in and could subject us to significant liability or loss that may not be covered by insurance, damage to our reputation, or a loss of confidence in our security measures, which could harm our business. We also may be found liable for any stolen assets or misappropriated confidential information. Although we intend to continue to implement industry-standard security measures, we cannot assure you that those measures will be sufficient.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We may enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.
Disclosures made by American Realty Capital Properties, Inc. ("ARCP"), an entity previously sponsored by the Parent of our Sponsor, may adversely affect our ability to raise substantial funds.
On October 29, 2014, ARCP announced that its audit committee had concluded that the previously issued financial statements and other financial information contained in certain public filings should no longer be relied upon. This conclusion was based on the preliminary findings of an investigation conducted by ARCP’s audit committee which concluded that certain accounting errors were made by ARCP personnel that were not corrected after being discovered, resulting in an overstatement of AFFO and an understatement of ARCP’s net loss for the three and six months ended June 30, 2014. ARCP also announced the resignation of its chief accounting officer and its chief financial officer. ARCP’s former chief financial officer is one of the non-controlling owners of the Parent of our Sponsor, but does not have a role in managing our business or our Sponsor’s business. In December 2014, ARCP announced the resignation of its executive chairman, who was also the executive chairman of our board of directors until his resignation on December 29, 2014. This individual also is one of the controlling members of the Parent of our Sponsor.
On March 2, 2015, ARCP announced the completion of its audit committee’s investigation and filed amendments to its Form 10-K for the year ended December 31, 2013 and its Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014. According to these filings, these amendments corrected errors in ARCP’s financial statements and in its calculation of AFFO that resulted in overstatements of AFFO for the years ended December 31, 2011, 2012 and 2013 and the quarters ended March 31, 2013 and 2014 and June 30, 2014 and described certain results of its investigations, including matters relating to payments to, and transactions with, affiliates of the parent of our Sponsor and certain equity awards to certain officers and directors. In addition, ARCP disclosed that the audit committee investigation had found material weaknesses in ARCP’s internal control over financial reporting and its disclosure controls and procedures. ARCP also disclosed that the SEC has commenced a formal investigation, that the United States Attorney’s Office for the Southern District of New York contacted counsel for both ARCP’s audit committee and ARCP with respect to the matter and that the Secretary of the Commonwealth of Massachusetts has issued a subpoena for various documents. On March 30, 2015, ARCP filed its form 10-K for the year ended December 31, 2014. ARCP’s filings with the SEC are available at the internet site maintained by the SEC, www.sec.gov.
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Since the initial announcement in October, a number of participating broker-dealers temporarily suspended their participation in the distribution of offerings of public, non-listed REITs sponsored directly or indirectly by the parent of our Sponsor. Although certain of these broker-dealers have reinstated their participation, we cannot predict the length of time the remaining temporary suspensions will continue or whether all participating broker-dealers will reinstate their participation. Although we have completed our initial public offering, we may seek to raise additional capital in connection with the operation of our business. As a result, our ability to raise substantial funds may be adversely impacted.
Risks Related to Conflicts of Interest
Our Advisor and our Service Provider face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
We rely on our Sponsor and the executive officers and other key real estate professionals at our Advisor and our Service Provider to identify suitable investment opportunities for us. Several of the other key real estate professionals of our Advisor are also the key real estate professionals at the parent of our Sponsor and their other public programs. Many investment opportunities that are suitable for us may also be suitable for other programs sponsored directly or indirectly by the parent of our Sponsor. For example, American Realty Capital Global Trust II, Inc. seeks, like us, to a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties, in the United States and Europe. The investment opportunity allocation agreement we have entered into with American Realty Capital Global Trust II, Inc. may result in us not being able to acquire certain properties identified by our Advisor and its affiliates. Thus, the executive officers and real estate professionals of our Advisor or our Service Provider could direct attractive investment opportunities to other entities or investors. Such events could result in us investing in properties that provide less attractive returns, which may reduce our ability to make distributions.
We and other programs sponsored directly or indirectly by the parent of our Sponsor also rely on these real estate professionals, and our Service Provider, to supervise the property management and leasing of properties. Our executive officers and key real estate professionals, and our Sponsor and our Service Provider, are not prohibited from engaging, directly or indirectly, in any business or from possessing interests in other business venture or ventures, including businesses and ventures involved in the acquisition, development, ownership, leasing or sale of real estate investments.
Our Advisor faces conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to the other venture partners at our expense and adversely affect the value of our common stock.
We may enter into joint ventures with other American Realty Capital-sponsored programs for the acquisition, development or improvement of properties. Our Advisor may have conflicts of interest in determining which American Realty Capital-sponsored program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Because our Advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceeds the percentage of our investment in the joint venture.
Our Advisor, our Sponsor, any service provider, and our Dealer Manager and their officers and employees and certain of our executive officers and other key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
Our Advisor, our Sponsor, any service provider, and Dealer Manager and their officers and employees and certain of our executive officers and other key personnel and their respective affiliates are key personnel, general partners and sponsors of other real estate programs, including American Realty Capital-sponsored REITS, having investment objectives and legal and financial obligations similar to ours and may have other business interests as well. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. If this occurs, the returns on our investments may suffer.
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The management of multiple REITs, and other direct investment programs, especially REITs and other direct investment programs in the development stage, by our executive officers and officers of our Advisor and any Service Provider may significantly reduce the amount of time our executive officers and officers of our Advisor and any Service Provider are able to spend on activities related to us and may cause other conflicts of interest, which may cause our operating results to suffer.
Certain of our executive officers and officers of our Advisor are part of the senior management or are key personnel of other American Realty Capital-sponsored or co-sponsored REITs and their advisors. Some of the American Realty Capital-sponsored or co-sponsored REITs have registration statements that became effective in the past 18 months and currently are offering securities and none of the American Realty Capital-sponsored or co-sponsored REITs are more than five years old. American Realty Capital also sponsors American Energy Capital Partners, LP, a non-traded oil and gas limited partnership, which is currently in registration. As a result, such direct investment programs will have concurrent and/or overlapping fundraising, acquisition, operational and disposition and liquidation phases as we do, which may cause conflicts of interest to arise throughout the life of our company with respect to, among other things, finding investors, locating and acquiring properties, entering into leases and disposing of properties. The conflicts of interest each of our executive officers and each officer of our Advisor will face may delay our fund raising and investment of our proceeds due to the competing time demands and generally cause our operating results to suffer. Officers of our Service Provider may face similar conflicts of interest should they be involved with the management of multiple REITs or other direct investment programs, and especially REITs or other direct investment programs in the development stage.
We compete for investors with other programs of our Sponsor, which could adversely affect the amount of capital we have to invest.
The American Realty Capital group of companies is currently the sponsor or co-sponsor of several other offerings, primarily non-traded REITs, most of which are conducting public offerings. These programs all have filed registration statements for the offering of common stock and some form of either are or intend to elect to be taxed as REITs. Our dealer manager is the dealer manager for the other non-traded REIT offerings. We will compete for investors with these other programs, and the overlap of these offerings with our offering could adversely affect our ability to raise all the capital we seek in this offering, the timing of sales of our shares and the amount of proceeds we have to spend on real estate investments.
Our officers and directors face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to our investors.
Certain of our executive officers also are officers of our Advisor, our Property Manager, our Dealer Manager and other affiliated entities, including the other real estate programs sponsored by American Realty Capital. As a result, these individuals owe fiduciary duties to these other entities and their stockholders and limited partners, which fiduciary duties may conflict with the duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (a) allocation of new investments and management time and services between us and the other entities, (b) our purchase of properties from, or sale of properties to, affiliated entities, (c) the timing and terms of the investment in or sale of an asset, (d) development of our properties by affiliates, (e) investments with affiliates of our Advisor, (f) compensation to our Advisor, and (g) our relationship with our Dealer Manager and Property Manager. If we do not successfully implement our business strategy, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets. If these individuals act in a manner that is detrimental to our business or favor one entity over another, they may be subject to liability for breach of fiduciary duty.
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Our Advisor and our Service Provider face conflicts of interest relating to the incentive fee structure under our advisory agreement and any Service Provider agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Under our advisory agreement and our Service Provider agreement, our Advisor or its affiliates and our Service Provider are entitled to fees that are structured in a manner intended to provide incentives to our Advisor and our Service Provider to perform in our best interests and in the best interests of our stockholders. Fees payable to our Advisor or our Service Provider are based on the purchase price of the properties acquired and may create an incentive for our Advisor to accept a higher purchase price or purchase assets that may not be in the best interest of our stockholders. Furthermore, because neither our Advisor nor our Service Provider maintains a significant equity interest in us but are entitled to receive substantial minimum compensation regardless of performance, our Advisor’s and our Service Provider's interests are not wholly aligned with those of our stockholders. In that regard, our Advisor or our Service Provider could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our Advisor or our Service Provider to fees. In addition, our Advisor’s and its affiliates’ and our Service Provider's entitlement to fees upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle the Advisor or our Service Provider to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest. Our advisory agreement requires us to pay a termination fee to our Advisor or its affiliates if we terminate the advisory agreement prior to the listing of our shares for trading on an exchange or, absent such listing, in respect of its participation in net sales proceeds (a substantial portion of which may be paid to our Service Provider). To avoid paying this fee, our independent directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination fee, termination of the advisory agreement would be in our best interest. In addition, the requirement to pay the fee to the Advisor or its affiliates at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the fee to the terminated Advisor. Moreover, our Advisor will have the right to terminate the advisory agreement upon a change of control of our company and thereby trigger the payment of the termination fee, which could have the effect of delaying, deferring or preventing the change of control.
There is no separate counsel for us and certain of our affiliates, which could result in conflicts of interest, and such conflicts may not be resolved in our favor, which could adversely affect the value of our common stock.
Proskauer Rose LLP acts as legal counsel to us and also represents our Advisor and some of its affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Proskauer Rose LLP may be precluded from representing any one or all such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Proskauer Rose LLP may inadvertently act in derogation of the interest of the parties which could affect our ability to meet our investment objectives.
American National Stock Transfer, LLC, our affiliated transfer agent, has a limited operating history and a failure by our transfer agent to perform its functions for us effectively may adversely affect our operations.
Our transfer agent is a related party of the parent of our Sponsor that has been providing certain transfer agency services for programs sponsored directly or indirectly by AR Capital, LLC since 2013. Because of its limited experience, there is no assurance that our transfer agent will be able to effectively provide transfer agency and registrar services to us. Furthermore, our transfer agent will be responsible for supervising third party service providers who may, at times, be responsible for executing certain transfer agency and registrar services. If our transfer agent fails to perform its functions for us effectively, our operations may be adversely affected.
Our Dealer Manager signed a Letter of Acceptance, Waiver and Consent with Financial Industry Regulatory Authority ("FINRA"); any further action, proceeding or litigation with respect to the substance of the Letter of Acceptance, Waiver and Consent could adversely affect the offering or the pace at which we raise proceeds.
In April 2013, our Dealer Manager received notice and a proposed Letter of Acceptance, Waiver and Consent (the "AWC"), from FINRA, the self-regulatory organization that oversees broker dealers, that certain violations of SEC and FINRA rules, including Rule 10b-9 under the Exchange Act and FINRA Rule 2010, occurred in connection with its activities as a co-dealer manager for a public offering. Without admitting or denying the findings, our dealer manager submitted an AWC, which FINRA accepted on June 4, 2013. In connection with the AWC, our Dealer Manager consented to the imposition of a censure and a fine of $60,000.
To the extent any action would be taken against our Dealer Manager in connection with the above AWC, our Dealer Manager could be adversely affected.
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Risks Related to Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 350.0 million shares of stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions and limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
We disclose funds from operations and modified funds from operations, a non-GAAP financial measure, however, MFFO is not equivalent to our net income or loss as determined under GAAP, and stockholders should consider GAAP measures to be more relevant to our operating performance.
We use and disclose funds from operations, or FFO, and modified funds from operations, or MFFO. FFO and MFFO are not equivalent to our net income or loss or cash flow from operations as determined under accounting principles generally accepted in the United States ("GAAP"), and stockholders should consider GAAP measures to be more relevant to evaluating our operating performance or our ability to pay distributions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Funds from Operations and Modified Funds from Operations." FFO and MFFO and GAAP net income differ because FFO and MFFO exclude gains or losses from sales of property and asset impairment write-downs, and add back depreciation and amortization, adjusts for unconsolidated partnerships and joint ventures, and further excludes acquisition-related expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests.
Because of these differences, FFO and MFFO may not be accurate indicators of our operating performance, especially during periods in which we are acquiring properties. In addition, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and stockholders should not consider MFFO as alternatives 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 pay distributions to our stockholders.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit our stockholders ability to exit their investment.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
• | any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; |
or
• | an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation. |
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A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
• | 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
• | two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. |
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving our Advisor or any affiliate of our Advisor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any affiliate of our Advisor. As a result, our Advisor and any affiliate of our Advisor may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
The Maryland Control Share Acquisition Act provides that holders of “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by stockholders by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A “control share acquisition” means the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
Our stockholders' investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
We are not registered, and do not intend to register ourselves or any of our subsidiaries, as an investment company under the Investment Company Act. If we become obligated to register ourselves or any of our subsidiaries as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
• | limitations on capital structure; |
• | restrictions on specified investments; |
• | prohibitions on transactions with affiliates; and |
• | compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations. |
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We conduct, and intend to continue conducting, our operations, directly and through wholly or majority-owned subsidiaries, so that we and each of our subsidiaries are exempt from registration as an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, or the 40% test. “Investment securities” excludes U.S. Government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
Because we are primarily engaged in the business of acquiring real estate, we believe that we and most, if not all, of our wholly and majority-owned subsidiaries will not be considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If we or any of our wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of “investment company,” we intend to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act.
Under Section 3(c)(5)(C), the SEC staff generally requires us to maintain at least 55% of its assets directly in qualifying assets and at least 80% of the entity’s assets in qualifying assets and in a broader category of real estate-related assets to qualify for this exception. Mortgage-related securities may or may not constitute such qualifying assets, depending on the characteristics of the mortgage-related securities, including the rights that we have with respect to the underlying loans. Our ownership of mortgage-related securities, therefore, is limited by provisions of the Investment Company Act and SEC staff interpretations.
The method we use to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than ten years ago. No assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for an exclusion from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exclusion from the definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act.
A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of “investment company” and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register the Company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.
If we were required to register the Company as an investment company but failed to do so, we would be prohibited from engaging in our business, and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Rapid changes in the values of our investments in real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or our exception from the Investment Company Act.
If the market value or income generated by our real estate-related investments declines, including as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income or liquidate our non-qualifying assets in order to maintain our REIT qualification or our exception from registration under the Investment Company Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-real estate assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT and Investment Company Act considerations.
Our stockholders are bound by the majority vote on matters on which they are entitled to vote, and therefore, their vote on a particular matter may be superseded by the vote of others.
Stockholders may vote on certain matters at any annual or special meeting of stockholders, including the election of directors. However, stockholders will be bound by the majority vote on matters requiring approval of stockholders entitled to cast a majority of all the votes entitled to be cast even if those stockholders do not vote with the majority on any such matter.
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Our board of directors may change our investment policies without stockholder approval, which could alter the nature of our portfolio.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of the stockholders. These policies may change over time. The methods of implementing our investment policies also may vary, as new real estate development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of a stockholder's investment could change without the consent of stockholders.
Because our Advisor is wholly owned by our Sponsor through the Special Limited Partner, the interests of the Advisor and the Sponsor are not separate and as a result the Advisor may act in a way that is not necessarily in the interest of stockholders.
Our Advisor is indirectly wholly owned by our Sponsor through the Special Limited Partner. Therefore, the interests of our Advisor and our Sponsor are not separate and the Advisor’s decisions may not be independent from the Sponsor and may result in the Advisor making decisions to act in ways that are not in the interests of stockholders.
A stockholder's interest in us will be diluted if we issue additional shares, which could adversely affect the value of our common stock.
Stockholders and potential investors in any future offering do not have preemptive rights to any shares issued by us in these offerings. Our charter currently authorizes us to issue 350.0 million shares of stock, of which 300.0 million shares are classified as common stock and 50.0 million are classified as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of any class or series of stock, or may classify or reclassify any unissued shares without the necessity of obtaining stockholder approval. All such shares may be issued in the discretion of our board of directors, except that the issuance of preferred stock must be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. Stockholders and investors purchasing shares in our offering likely will suffer dilution of their equity investment in us, including: (a) shares issued pursuant to our distribution reinvestment plan; (b) securities that are convertible into shares of our common stock; (c) shares issued in respect of restricted share awards to our directors; (d) shares issued to our Advisor or its successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory agreement; or (e) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our OP. In addition, the partnership agreement for our OP contains provisions that would allow, under certain circumstances, other entities, including other American Realty Capital-sponsored programs, to merge into or cause the exchange or conversion of their interest for interests of our OP. Because the limited partnership interests of our OP may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between our OP and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders.
Future offerings of equity securities which are senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the per share trading price of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of equity securities. Under our charter, we may issue, without stockholder approval, preferred stock or other classes of common stock with rights that could dilute the value of our shares of common stock. Any issuance of preferred stock must be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. Upon liquidation, holders of our shares of preferred stock will be entitled to receive our available assets prior to distribution to the holders of our common stock. Additionally, any convertible, exercisable or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the per share trading price of our common stock and diluting their interest in us.
Payment of fees to our Advisor and its affiliates reduces cash available for investment and distributions to our stockholders.
Our Advisor and its affiliates perform services for us in connection with the offer and sale of the shares, the selection and acquisition of our investments, the management of our properties, the servicing of our mortgage, bridge or mezzanine loans, if any, and the administration of our other investments (a substantial portion of these fees may be paid to a service provider). They are paid substantial fees for these services, which reduces the amount of cash available for investment in properties or distribution to stockholders.
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Because of our holding company structure, we depend on our operating subsidiary and its subsidiaries for cash flow and we are structurally subordinated in right of payment to the obligations of such operating subsidiary and its subsidiaries, which could adversely affect our ability to make distributions to our stockholders.
We are a holding company with no business operations of our own. Our only significant asset is and will be the general partnership interests of our operating partnership. We conduct, and intend to conduct, all of our business operations through our operating partnership. Accordingly, our only source of cash to pay our obligations is distributions from our operating partnership and its subsidiaries of their net earnings and cash flows. There is no assurance that our operating partnership or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations. Each of our operating partnership’s subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from such entities. In addition, because we are a holding company, stockholders claims will be structurally subordinated to all existing and future liabilities and obligations of our operating partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be able to satisfy stockholder claims as stockholders only after all of our and our operating partnerships and its subsidiaries liabilities and obligations have been paid in full.
Stockholders are limited in their ability to sell their shares pursuant to our share repurchase program and may have to hold their shares for an indefinite period of time.
Our board of directors may amend the terms of our share repurchase program without stockholder approval. Our board of directors also is free to suspend or terminate the program upon 30 days’ notice or to reject any request for repurchase. In addition, the share repurchase program includes numerous restrictions that limit a stockholders' ability to sell its shares. Prior to the NAV pricing date, unless waived by our board of directors, stockholders must have held shares for at least one year in order to participate in our share repurchase program. Prior to the NAV pricing date, subject to funds being available, the purchase price for shares repurchased under our share repurchase program will be as set forth below (unless such repurchase is in connection with a stockholder’s death or disability): (a) for stockholders who have continuously held their shares of our common stock for at least one year, the price will be 92.5% of the amount paid for each such share, (b) for stockholders who have continuously held their shares of our common stock for at least two years, the price will be 95.0% of the amount paid for each such share, (c) for stockholders who have continuously held their shares of our common stock for at least three years, the price will be 97.5% of the amount paid for each such share, and (d) for stockholders who have held their shares of our common stock for at least four years, the price will be 100.0% of the amount paid for each share (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). These limits might prevent us from accommodating all repurchase requests made in any year. These restrictions severely limit a stockholders ability to sell shares even if the stockholder requires liquidity and limit a stockholders ability to recover the fair market value of our shares.
Risks Related to Net Lease Sale-Leaseback Investments
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
With respect to properties acquired in sale-leaseback transactions, we will use commercially reasonable efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a "true lease" for tax purposes, thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. However, we cannot assure our stockholders that the Internal Revenue Service (the "IRS") will not challenge such characterization. In the event that any such sale-leaseback transaction is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification "asset tests" or "income tests" and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year.
Our leases may permit tenants to purchase a property at a predetermined price, which could limit our realization of any appreciation.
We may enter into leases that include provisions under which the tenant will have a right to purchase the property it leases. The purchase price may be a fixed price, may be based on a formula or may be based on market value at the time of exercise. If a tenant exercises its right to purchase the property and the property’s market value has increased beyond that price, we would be limited in fully realizing the appreciation on that property. Additionally, if the price at which the tenant can purchase the property is less than our purchase price or carrying value (for example, where the purchase price is based on an appraised value), we may incur a loss. As of December 31, 2014, we are not party to any leases that permit the tenant with any rights to purchase the property it leases.
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If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition and ability to make distributions to our stockholders could be adversely affected.
We may enter into sale-leaseback transactions whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant from whom we acquired a commercial property in a sale-leaseback transaction, the transaction may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If such a plan is confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to our stockholders.
Highly leveraged tenants may have a higher possibility of filing for bankruptcy or insolvency.
Highly leveraged tenants that experience downturns in their operating results due to adverse changes to their business or economic conditions may have a higher possibility of filing for bankruptcy or insolvency. In bankruptcy or insolvency, a tenant may have the option of vacating a property instead of paying rent. Until such a property is released from bankruptcy, our revenues may be reduced and could cause us to reduce distributions to stockholders.
If a tenant declares bankruptcy or becomes insolvent, we may be unable to collect balances due under relevant leases, which could adversely affect our financial condition and ability to make distributions to our stockholders.
Any of our tenants, or any guarantor of a tenant’s lease obligations, could become insolvent or be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. A bankruptcy filing of our tenants or any guarantor of a tenant’s lease obligations would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured claims.
Insolvency laws outside of the United States may not be as favorable to reorganization or to the protection of a debtor’s rights as tenants under a lease as are the laws in the United States. Our rights to terminate a lease for default may be more likely to be enforceable in countries other than the United States, in which a debtor/ tenant or its insolvency representative may be less likely to have rights to force continuation of a lease without our consent. Nonetheless, such laws may permit a tenant or an appointed insolvency representative to terminate a lease if it so chooses.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. A tenant or lease guarantor bankruptcy could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to our stockholders. In the event of a bankruptcy, there can be no assurance that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to stockholders may be adversely affected.
As of December 31, 2014, none of our tenants have declared bankruptcy or become insolvent.
The credit profile of our tenants may create a higher risk of lease defaults and therefore lower revenues.
Generally, no credit rating agencies evaluate or rank the debt or the credit risk of many of our tenants. Our long-term leases with certain of these tenants may therefore pose a higher risk of default than would long-term leases with tenants whose credit potential has already been recognized by the market.
Long term leases may result in income lower than short term leases.
We have and intend to continue entering into long term leases with many of our property tenants. Leases of long duration, or with renewal options that specify a maximum rate increase, may not result in fair market lease rates over time if we do not accurately judge the potential for increases in market rental rates. In that case, our income may be lower than if we had not entered into such leases.
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Some of our leases may not contain rental increases over time. Therefore, the value of the property to a potential purchaser may not increase over time, which may restrict our ability to sell a property, or if we are able to sell that property, may lead to a sale price less than the price that we paid to purchase the property.
General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and there can be no assurance that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
• | changes in general economic or local conditions; |
• | changes in supply of or demand for similar or competing properties in an area; |
• | changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive; |
• | changes in tax, real estate, environmental and zoning laws; and |
• | periods of high interest rates and tight money supply. |
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
Many of our properties will depend upon a single tenant for all or a majority of their rental income, and our financial condition and ability to make distributions may be adversely affected by the bankruptcy or insolvency, a downturn in the business, or a lease termination of a single tenant.
Most of our properties are occupied by only one tenant or derive a majority of their rental income from one tenant and, therefore, the success of those properties is materially dependent on the financial stability of such tenants. Lease payment defaults by tenants could cause us to reduce the amount of distributions we pay. A default of a tenant on its lease payments to us would cause us to lose the revenue from the property and force us to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by a tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration, could have an adverse effect on our financial condition and our ability to pay distributions.
Properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return on an investment in our shares.
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash to be distributed to stockholders. In addition, because properties’ market values depend principally upon the value of the properties’ leases, the resale value of properties with prolonged vacancies could suffer, which could further reduce our return to stockholders.
We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property, which could adversely affect our financial condition and ability to make distributions to stockholders.
The seller of a property often sells its property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all our invested capital in the property as well as the loss of rental income from that property.
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We may be unable to secure funds for future tenant improvements or capital needs, which could adversely impact our ability to make distributions to our stockholders.
When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. In addition, we will likely be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops, even if our leases with tenants require tenants to pay routine property maintenance costs. If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flow from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.
Our inability to sell a property when we desire to do so could adversely impact our ability to make distributions to our stockholders.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. There can be no assurance that we will have funds available to correct such defects or to make such improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
We may acquire or finance properties with lock-out provisions which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties, which could have an adverse effect on the value of our common stock.
Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to convert our investments into cash and thus affect cash available for distributions to our stockholders. Lock out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders. As of December 31, 2014, we have not acquired or financed any properties with lock-out provisions.
Rising expenses could reduce cash flow and could adversely affect our ability to make future acquisitions and to pay cash distributions to our stockholders.
Any properties that we own now or buy in the future are and will be subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. We expect that many of our properties will require the tenants to pay all or a portion of these costs and expenses and, accordingly, if the tenants are unable to pay these costs and expenses, we will have to pay these costs and expenses. We may, however, enter into leases or renewals of leases that do not require tenants to pay these costs and expenses. Renewals of leases or future leases may not be negotiated on that basis, in which event we may have to pay those costs. If we are unable to lease properties on a triple-net-lease basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs which could adversely affect funds available for future acquisitions or cash available to pay distributions.
Losses relating to real property or excessively expensive premiums for insurance coverage, including due to the non-renewal of the Terrorism Risk Insurance Act of 2002, or the TRIA, could reduce our cash flows and the return on our stockholders’ investments.
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There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with such catastrophic events could sharply increase the premiums we pay for coverage against property and casualty claims.
This risk is particularly relevant with respect to potential acts of terrorism. The TRIA, under which the U.S. federal government bore a significant portion of insured losses caused by terrorism, will expire on December 31, 2020, and there can be no assurance that Congress will act to renew or replace the TRIA following its expiration. In the event the TRIA is not renewed or replace, terrorism insurance may become difficult or impossible to obtain at reasonable costs or at all, which may result in adverse impacts and additional costs to us.
Changes in the cost or availability of insurance due to the non-renewal of the TRIA or for other reasons could expose us to uninsured casualty losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss, which may reduce the value of our stockholders’ investments. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders.
Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses. The Terrorism Risk Insurance Act of 2002, which was extended to the end of 2020 by the Terrorism Risk Insurance Program Reauthorization Act of 2015, is designed for a sharing of terrorism losses between insurance companies and the federal government.. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
Real estate related taxes may increase and if these increases are not passed on to tenants, our income will be reduced, which could adversely affect our ability to make distributions to our stockholders.
Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. Generally, from time to time our property taxes increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. There is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income, cash available for distributions, and the amount of distributions to our stockholders.
Properties may be subject to restrictions on their use that affect our ability to operate a property, which may adversely affect our operating costs and reduce the amount of funds available to make distributions to our stockholders.
Some of our properties may be contiguous to other parcels of real property, comprising part of the same commercial center. In connection with these properties, there are significant covenants, conditions and restrictions, known as “CC&Rs”), restricting the operation of these properties and any improvements on these properties, and related to granting easements on these properties. Moreover, the operation and management of the contiguous properties may impact these properties. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions.
Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.
We do not plan to acquire undeveloped land, develop new real estate, or substantially re-develop existing real estate. However, we pay pursue "build-to-suit" development projects for single tenants who enter into long-term leases with us prior to our commencing the development project. We will be subject to uncertainties associated with re-zoning for development, environmental concerns of governmental entities and/or community groups, and our builder’s ability to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance also may be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate pre-construction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
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We may invest in unimproved real property. For purposes of this paragraph, “unimproved real property” does not include properties acquired for the purpose of producing rental or other operating income, properties under development or construction, and properties under contract for development or in planning for development within one year. Returns from development of unimproved properties are also subject to risks associated with re-zoning the land for development and environmental concerns of governmental entities and/or community groups. If we invest in unimproved property other than property we intend to develop, we will be subject to the risks associated with investments in unimproved real property.
Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on a stockholder's investment.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. Larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties and other investments, our profitability will be reduced and stockholders may experience a lower return on their investment.
Our properties and our tenants may face competition that may affect tenants’ ability to pay rent and the amount of rent paid to us may affect the cash available for distributions and the amount of distributions.
Our properties typically are, and we expect properties we acquire in the future will be, located in developed areas. Therefore, there are and will be numerous other properties within the market area of each of our properties that will compete with us for tenants. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents charged. We could be adversely affected if additional competitive properties are built in locations competitive with our properties, causing increased competition for customer traffic and creditworthy tenants. Tenants may also face competition from such properties if they are leased to tenants in a similar industry. For example, retail tenants face competition from numerous retail channels such as discount or value retailers, factory outlet centers and wholesale clubs. Retail tenants may additional face competition from alternative retail channels as mail order catalogs and operators, television shopping networks and shopping via the Internet. Competition that we face from other properties within our market areas, and competition our tenants face from tenants in such properties could result in decreased cash flow from tenants and may require us to make capital improvements to properties that we would not have otherwise made, thus affecting cash available for distributions, and the amount available for distributions to our stockholders.
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations, and various foreign laws and regulations, relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Environmental laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. State and federal laws in this area are constantly evolving. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions and may reduce the value of our common stock.
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Although we intend to hire third parties to conduct environmental reviews of the real property that we purchase, we may not obtain an independent third-party environmental assessment for every property we acquire. In addition, any assessment that we do obtain may not reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims would materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution our stockholders.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows, and our ability to make distributions to our stockholders.
In some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.
Our recovery of an investment in a mortgage, bridge or mezzanine loan that has defaulted may be limited, resulting in losses to us and reducing the amount of funds available to pay distributions to our stockholders.
There is no guarantee that the mortgage, loan or deed of trust securing an investment will, following a default, permit us to recover the original investment and interest that would have been received absent a default. The security provided by a mortgage, deed of trust or loan is directly related to the difference between the amount owed and the appraised market value of the property. Although we intend to rely on a current real estate appraisal when we make the investment, the value of the property is affected by factors outside our control, including general fluctuations in the real estate market, rezoning, neighborhood changes, highway relocations and failure by the borrower to maintain the property. In addition, we may incur the costs of litigation in our efforts to enforce our rights under defaulted loans.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distributions.
Our domestic properties are subject to the Americans with Disabilities Act of 1990, or the Disabilities Act. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. However, there can be no assurance that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for Disabilities Act compliance may affect cash available for distributions and the amount of distributions to our stockholders.
Economic conditions may adversely affect our income and we could be subject to risks associated with acquiring discounted real estate assets.
U.S. and international markets are currently experiencing increased levels of volatility due to a combination of many factors, including decreasing values of home prices, limited access to credit markets, higher fuel prices, less consumer spending and fears of a national and global recession. The effects of the current market dislocation may persist as financial institutions continue to take the necessary steps to restructure their business and capital structures. As a result, this economic downturn has reduced demand for space and removed support for rents and property values. Since we cannot predict when the real estate markets will recover, the value of our properties may decline if current market conditions persist or worsen.
In addition, we will be subject to the risks generally incident to the ownership of discounted real estate assets. Such assets may be purchased at a discount from historical cost due to, among other things, substantial deferred maintenance, abandonment, undesirable locations or markets, or poorly structured financing of the real estate or debt instruments underlying the assets, which has since lowered their value. Further, the continuing instability in the financial markets has limited the availability of lines of credit and the degree to which people and entities have access to cash to pay rents or debt service on the underlying the assets. Such illiquidity has the effect of increasing vacancies, increasing bankruptcies and weakening interest rates commercial entities can charge consumers, which can all decrease the value of already discounted real estate assets. Should conditions persist or worsen, the continued inability of the underlying real estate assets to produce income may weaken our return on our investments, which, in turn, may weaken return on an investment on our shares.
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Further, irrespective of the instability the financial markets may have on the return produced by discounted real estate assets, the evolving efforts to correct the instability make the valuation of these assets highly unpredictable. The fluctuations in market conditions make judging the future performance of these assets difficult. There is a risk that we may not purchase real estate assets at absolute discounted rates and that these assets may continue to decline in value.
Market and economic challenges experienced by the U.S. and global economies may adversely impact aspects of our operating results and operating condition.
Our business may be affected by market and economic challenges experienced by the U.S. and global economies. While the U.S. economy has improved after the significant distress experienced during, and during the years following, the financial crisis of 2008, considerable economic uncertainty remains. In addition, there has also been an increase in international economic uncertainty as a result of the sovereign debt crisis and deteriorating economic fundamentals in Europe. Such conditions may materially affect the value and performance of our properties, and may affect our ability to pay distributions, the availability or the terms of financing that we have or may seek to obtain, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due. Such challenging economic conditions may also impact the ability of certain of our tenants to enter into new leasing transactions or satisfy rental payments under existing leases. Specifically, financial distress in the U.S. and Europe may have adverse consequences, including:
• | decreased demand for our properties due to significant job losses that have occurred and may occur in the future, resulting in lower occupancy levels, which decreased demand will result in decreased revenues and which could diminish the value of our portfolio, which depends, in part, upon the cash flow generated by our properties; |
• | an increase in the number of bankruptcies or insolvency proceedings of our tenants and lease guarantors, which could delay or preclude our efforts to collect rent and any past due balances under the relevant leases; |
• | widening credit spreads for major sources of capital as investors demand higher risk premiums, resulting in lenders increasing the cost for debt financing; |
• | reduction in the amount of capital that is available to finance real estate, which, in turn, could lead to a decline in real estate values generally, slow real estate transaction activity, a reduction the loan-to-value ratio upon which lenders are willing to lend, and difficulty refinancing our debt; |
• | a decrease in the value of certain of our properties below the amounts we pay for them, which may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and |
• | reduction in the value and liquidity of our short-term investments as a result of the dislocation of the markets for our short-term investments and increased volatility in market rates for such investments or other factors. |
Further, in light of current economic uncertainty, we cannot provide assurance that we will be able to pay or increase the level of our distributions. If economic conditions deteriorate, our board of directors may reduce our distributions in order to conserve cash.
Net leases may not result in fair market lease rates over time, which could negatively impact our income and reduce the amount of funds available to make distributions to our stockholders.
We expect a large portion of our rental income to come from net leases, which generally provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to freely sublease the property, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Furthermore, net leases typically have longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in net leases.
Our real estate investments may include special use single tenant properties that may be difficult to sell or re-lease upon tenant defaults or early lease terminations, which could adversely affect the value of our common stock.
We focus our investments on commercial and retail properties, including special use single tenant properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. With these properties, if the current lease is terminated or not renewed or, in the case of a mortgage loan, if we take such property in foreclosure, we may be required to renovate the property or to make rent concessions in order to lease the property to another tenant or sell the property. In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant or borrower due to the special purpose for which the property may have been designed. These and other limitations may affect our ability to sell or re-lease properties and adversely affect returns to our stockholders.
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Changes in lease accounting standards may make the leasing of our properties less attractive to our potential tenants.
The Financial Accounting Standards Board has proposed accounting rules that would require companies to capitalize all leases on their balance sheets by recognizing a lessee’s rights and obligations. If such a proposal is adopted, many companies that account for certain leases on an “off balance sheet” basis would be required to account for such leases “on balance sheet.” This change would remove many of the differences in the way companies account for owned property and leased property, and could have a material effect on various aspects of our tenants’ businesses, including their credit quality and the factors they consider in deciding whether to own or lease properties. If the proposal is adopted, it could cause companies that lease properties to prefer shorter lease terms, in an effort to reduce the leasing liability required to be recorded on their balance sheets. The proposal could also make lease renewal options less attractive, as, under certain circumstances, the rule would require a tenant to assume that a renewal right will be exercised and accrue a liability relating to the longer lease term.
Risks Associated with Debt Financing and Investments
We may incur mortgage indebtedness and other borrowings, which may increase our business risks.
We generally acquire real properties by using either existing financing or borrowing new funds. In addition, we typically incur mortgage debt and may pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. In addition, we may borrow if we need additional funds to satisfy the REIT tax qualification requirement that we generally distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) to our stockholders, determined without regard to the deduction for dividends paid and excluding net capital gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
Our Advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to investors. There is no limitation on the amount we may borrow against any single improved property. Under our charter, our borrowings may not exceed 300% of our total “net assets” (as defined in our charter) 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 our intention to limit our borrowings to not more than 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 excess borrowing is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for such excess borrowing. This limitation, however, will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that 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 our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. We expect that during the period of this offering we seek independent director approval of borrowings in excess of these limitations since we will then be in the process of raising our equity capital to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have invested most of our capital.
If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of our common stock. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected which could result in our losing our REIT status and would result in a decrease in the value of an investment in our shares.
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The current state of debt markets could have a material adverse impact on our earnings and financial condition.
The domestic and international commercial real estate debt markets are currently experiencing volatility as a result of certain factors including the tightening of underwriting standards by lenders and credit rating agencies. This is resulting in lenders increasing the cost for debt financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns and potentially reducing future cash flow available for distribution. If these disruptions in the debt markets persist, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance indebtedness which is maturing.
In addition, the state of the debt markets could have an impact on the overall amount of capital investing in real estate which may result in price or value decreases of real estate assets. Although this may benefit us for future acquisitions, it could negatively impact the current value of our existing assets.
High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with providing us financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace our Advisor. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
We have and expect that we will continue to incur indebtedness in the future. To the extent that we incur variable rate debt, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
We may invest in collateralized mortgage-backed securities, which may increase our exposure to credit and interest rate risk.
We may invest in CMBS, which may increase our exposure to credit and interest rate risk. We have not adopted, and do not expect to adopt, any formal policies or procedures designed to manage risks associated with our investments in CMBS. In this context, credit risk is the risk that borrowers will default on the mortgages underlying the CMBS. Interest rate risk occurs as prevailing market interest rates change relative to the current yield on the CMBS. For example, when interest rates fall, borrowers are more likely to prepay their existing mortgages to take advantage of the lower cost of financing. As prepayments occur, principal is returned to the holders of the CMBS sooner than expected, thereby lowering the effective yield on the investment. On the other hand, when interest rates rise, borrowers are more likely to maintain their existing mortgages. As a result, prepayments decrease, thereby extending the average maturity of the mortgages underlying the CMBS. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to pay distributions to you will be adversely affected.
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We may invest in B Notes, which are subject to additional risks.
We may invest in B Notes, which are typically secured by a first mortgage on a single large commercial property or group of related properties and subordinated to an A Note secured by the same first mortgage on the same collateral. If a borrower defaults on a B Note, A Note holders would be paid first and there may not be sufficient funds remaining to repay us and other B Note holders. B Notes can vary in their structural characteristics and risks because each transaction is privately negotiated. For example, the rights of holders of B Notes to control the process following a borrower default may be limited in certain investments. We cannot predict the terms of each B Note investment. Moreover, because B Notes are typically secured by a single property or group of related properties, such investments may not be as diversified as investments secured by a pool of properties and therefore may be subject to increased risks.
Any real estate debt securities that we originate or purchase are subject to the risks of delinquency and foreclosure.
We may originate and purchase real estate debt securities, which are subject to risks of delinquency and foreclosure and risks of loss. Typically, we will not have recourse to the personal assets of our borrowers. The ability of a borrower to repay a real estate debt security secured by an income-producing property depends primarily upon the successful operation of the property, rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the real estate debt security may be impaired. A property’s net operating income can be affected by, among other things:
• | increased costs, added costs imposed by franchisors for improvements or operating changes required, from time to time, under the franchise agreements; |
• | property management decisions; |
• | property location and condition; |
• | competition from comparable types of properties; |
• | changes in specific industry segments; |
• | declines in regional or local real estate values, or occupancy rates; and |
• | increases in interest rates, real estate tax rates and other operating expenses. |
We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the real estate debt security, which could have a material adverse effect on our cash flow from operations and limit amounts available for distribution to our stockholders. In the event of the bankruptcy of a real estate debt security borrower, the real estate debt security to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the real estate debt security will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a real estate debt security can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed real estate debt security. We also may be forced to foreclose on certain properties, be unable to sell these properties and be forced to incur substantial expenses to improve operations at the property.
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U.S. Federal Income Tax Risks
Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock.
We qualified to be taxed as a REIT commencing with our taxable year ended December 31, 2013 and intend to operate in a manner that would allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification, if our board of directors determines that not qualifying as a REIT is in the best interests of our stockholders, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. We have structured and intend to continue structuring our activities in a manner designed to satisfy all the requirements for qualification as a REIT. However, the REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion of our counsel, including tax counsel, as to our eligibility to qualify or remain qualified as a REIT is not binding on the Internal Revenue Service ("IRS") and is not a guarantee that we will qualify, or continue to qualify, as a REIT. Accordingly, we cannot be certain that we will be successful in operating so we can qualify or remain qualified as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all the requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
If we fail to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even if we qualify as a REIT, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to our stockholders.
Even if we qualify and maintain our status as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable cause and not willful neglect) we would be subject to tax on the income that does not meet the income test requirements. We also may decide to retain net capital gain we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of our operating partnership or at the level of the other companies through which we indirectly own our assets, such as our taxable REIT subsidiaries, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to our stockholders.
To qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
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Certain of our business activities are potentially subject to the prohibited transaction tax.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity, including our operating partnership, but generally excluding taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary (but such taxable REIT subsidiary will incur corporate rate income taxes with respect to any income or gain recognized by it), (2) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary, will be treated as a prohibited transaction or (3) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements, have been held for at least two years. Despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our operating partnership, but generally excluding taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Our taxable REIT subsidiaries are subject to corporate-level taxes and our dealings with our taxable REIT subsidiaries may be subject to 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 25% of the gross value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. Accordingly, we may use taxable REIT subsidiaries generally to hold properties for sale in the ordinary course of a trade or business or to hold assets or conduct activities that we cannot conduct directly as a REIT. A taxable REIT subsidiary will be subject to applicable U.S. federal, state, local and foreign income tax on its taxable income. In addition, the rules, which are applicable to us as a REIT, also impose a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis.
We may be required to defer repatriation of cash from foreign jurisdictions in order to qualify as a REIT.
Investments in foreign real property may be subject to foreign currency gains and losses. Certain foreign currency gains will generally be excluded from income for purposes of determining our satisfaction of one or both of the REIT gross income tests; however, under certain circumstances such gains will be treated as non-qualifying income. To reduce the risk of foreign currency gains adversely affecting our REIT qualification, we may be required to defer the repatriation of cash from foreign jurisdictions or to employ other structures that could affect the timing, character or amount of income we receive from our foreign investments. No assurance can be given that we will be able to manage our foreign currency gains in a manner that enables us to qualify as a REIT or to avoid U.S. federal and other taxes on our income as a result of foreign currency gains.
If our operating partnership failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT.
If the IRS were to successfully challenge the status of our operating partnership as a partnership or disregarded entity for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the operating partnership could make to us. This also would result in our failing to qualify as a REIT, and becoming subject to a corporate level tax on our income. This substantially would reduce our cash available to pay distributions to our stockholders. In addition, if any of the partnerships or limited liability companies through which our operating partnership owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
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Our investments in certain debt instruments may cause us to recognize income for U.S. federal income tax purposes even though no cash payments have been received on the debt instruments, and certain modifications of such debt by us could cause the modified debt to not qualify as a good REIT asset, thereby jeopardizing our REIT qualification.
Our taxable income may substantially exceed our net income as determined based on GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may acquire assets, including debt securities requiring us to accrue original issue discount ("OID"), or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets. In addition, if a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our stockholders.
As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to (a) sell assets in adverse market conditions, (b) borrow on unfavorable terms, (c) distribute amounts that would otherwise be used for future acquisitions or used to repay debt, or (d) make a taxable distribution of our shares of common stock as part of a distribution in which stockholders may elect to receive shares of common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
Moreover, we may acquire distressed debt investments that require subsequent modification by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under the applicable Treasury Regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt taxable exchange with the borrower. This deemed reissuance may prevent the modified debt from qualifying as a good REIT asset if the underlying security has declined in value and would cause us to recognize income to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt.
The failure of a mezzanine loan to qualify as a real estate asset would adversely affect our ability to qualify as a REIT.
In general, in order for a loan to be treated as a qualifying real estate asset producing qualifying income for purposes of the REIT asset and income tests, the loan must be secured by real property. We may acquire mezzanine loans that are not directly secured by real property but instead secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan that is not secured by real estate would, if it meets each of the requirements contained in the Revenue Procedure, be treated by the IRS as a qualifying real estate asset. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law and in many cases it may not be possible for us to meet all the requirements of the safe harbor. We cannot provide assurance that any mezzanine loan in which we invest would be treated as a qualifying asset producing qualifying income for REIT qualification purposes. If any such loan fails either the REIT income or asset tests, we may be disqualified as a REIT.
We may choose to make distributions in our own stock, in which case our stockholders may be required to pay U.S. federal income taxes in excess of the cash dividends our stockholders receive.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may make distributions that are payable in cash and/or shares of our common stock (which could account for up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock.
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Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.
The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income, which may reduce the anticipated return from an investment in us.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. However, a portion of our distributions may (1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us as qualified dividend income generally to the extent they are attributable to dividends we receive from our taxable REIT subsidiaries, or (3) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock.
Our stockholders may have tax liability on distributions that they elect to reinvest in common stock, but they would not receive the cash from such distributions to pay such tax liability.
If our stockholders participate in our distribution reinvestment plan, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the value of the shares of common stock received.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock. Tax rates could be changed in future legislation.
If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be “preferential dividends.” A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. Currently, there is uncertainty as to the IRS’s position regarding whether certain arrangements that REITs have with their stockholders could give rise to the inadvertent payment of a preferential dividend (e.g., the pricing methodology for stock purchased under a distribution reinvestment plan inadvertently causing a greater than 5% discount on the price of such stock purchased). There is no de minimis exception with respect to preferential dividends. Therefore, if the IRS were to take the position that we inadvertently paid a preferential dividend, we may be deemed either to (a) have distributed less than 100% of our REIT taxable income and be subject to tax on the undistributed portion, or (b) have distributed less than 90% of our REIT taxable income and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure.
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Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary. This could increase the cost of our hedging activities because our taxable REIT subsidiaries would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a taxable REIT subsidiary generally will not provide any tax benefit, except for being carried forward against future taxable income of such taxable REIT subsidiary.
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets), and no more than 25% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. While we intend to elect and qualify to be taxed as a REIT, we may not elect to be treated as a REIT or may terminate our REIT election if we determine that qualifying as a REIT is no longer in our best interests. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the market price of our common stock.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common stock.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and there can be no assurance that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Investors are urged to consult with an independent tax advisor with respect to the impact of recent legislation on any investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. Investors also should note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
41
The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help insure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by our board of directors, for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8% in value of the aggregate of our outstanding shares of stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.
Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), capital gain distributions attributable to sales or exchanges of “U.S. real property interests" ("USRPIs"), generally will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a U.S. trade or business. However, a capital gain dividend will not be treated as effectively connected income if (a) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States and (b) the non-U.S. stockholder does not own more than 5% of the class of our stock at any time during the one-year period ending on the date the distribution is received. We do not anticipate that our shares will be “regularly traded” on an established securities market for the foreseeable future, and therefore, this exception is not expected to apply.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI under FIRPTA. Our common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe, but there can be no assurance, that we will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our common stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 5% or less of our common stock at any time during the five-year period ending on the date of the sale. However, it is not anticipated that our common stock will be “regularly traded” on an established market. Investors are encouraged to consult an independent tax advisor to determine the tax consequences applicable if they are non-U.S. stockholders.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (a) we are a “pension-held REIT,” (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock, or (c) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
42
Item 1B. Unresolved Staff Comments.
None.
43
Item 2. Properties.
We acquire and operate commercial properties. All such properties may be acquired and operated by us alone or jointly with another party. Our portfolio of real estate properties was comprised of the following properties as of December 31, 2014:
Portfolio | Acquisition Date | Country | Number of Properties | Square Feet | Remaining Lease Term (1) | Base Purchase Price (2) (In thousands) | |||||||||
McDonald's | Oct. 2012 | UK | 1 | 9,094 | 9.2 | $ | 2,566 | ||||||||
Wickes Building Supplies I | May 2013 | UK | 1 | 29,679 | 9.8 | 6,058 | |||||||||
Everything Everywhere | Jun. 2013 | UK | 1 | 64,832 | 12.5 | 12,365 | |||||||||
Thames Water | Jul. 2013 | UK | 1 | 78,650 | 7.7 | 18,233 | |||||||||
Wickes Building Supplies II | Jul. 2013 | UK | 1 | 28,758 | 12.0 | 5,054 | |||||||||
PPD Global Labs | Aug. 2013 | US | 1 | 76,820 | 9.9 | 9,283 | |||||||||
Northern Rock | Sep. 2013 | UK | 2 | 86,290 | 8.7 | 16,322 | |||||||||
Kulicke & Soffa | Sep. 2013 | US | 1 | 88,000 | 8.8 | 13,415 | |||||||||
Wickes Building Supplies III | Nov. 2013 | UK | 1 | 28,465 | 13.9 | 6,067 | |||||||||
Con-way Freight | Nov. 2013 | US | 7 | 105,090 | 8.9 | 12,266 | |||||||||
Wolverine | Dec. 2013 | US | 1 | 468,635 | 8.1 | 17,201 | |||||||||
Western Digital | Dec. 2013 | US | 1 | 286,330 | 5.9 | 28,574 | |||||||||
Encanto | Dec. 2013 | Puerto Rico | 18 | 65,262 | 10.5 | 37,556 | |||||||||
Rheinmetall | Jan. 2014 | Germany | 1 | 320,102 | 9.0 | 28,924 | |||||||||
GE Aviation | Jan. 2014 | US | 1 | 369,000 | 11.0 | 38,857 | |||||||||
Provident Financial | Feb. 2014 | UK | 1 | 117,003 | 10.9 | 41,812 | |||||||||
Crown Crest | Feb. 2014 | UK | 1 | 805,530 | 24.1 | 63,587 | |||||||||
Trane | Feb. 2014 | US | 1 | 25,000 | 8.9 | 3,072 | |||||||||
Aviva | Mar. 2014 | UK | 1 | 131,614 | 14.5 | 52,517 | |||||||||
DFS Trading | Mar. 2014 | UK | 5 | 240,230 | 15.2 | 34,050 | |||||||||
GSA I | Mar. 2014 | US | 1 | 135,373 | 7.6 | 43,250 | |||||||||
National Oilwell Varco | Mar. 2014 | US | 1 | 24,450 | 8.6 | 4,888 | |||||||||
Talk Talk | Apr. 2014 | UK | 1 | 48,415 | 10.2 | 14,274 | |||||||||
OBI DIY | Apr. 2014 | Germany | 1 | 143,633 | 8.9 | 13,216 | |||||||||
GSA II | Apr. 2014 | US | 2 | 24,957 | 8.2 | 9,525 | |||||||||
DFS Trading | Apr. 2014 | UK | 2 | 39,331 | 15.2 | 6,275 | |||||||||
GSA III | Apr. 2014 | US | 2 | 28,364 | 10.5 | 9,700 | |||||||||
GSA IV | May 2014 | US | 1 | 33,000 | 10.6 | 14,828 | |||||||||
Indiana Department of Revenue | May 2014 | US | 1 | 98,542 | 8.0 | 11,654 | |||||||||
National Oilwell Varco | May 2014 | US | 1 | 7,500 | 14.4 | 2,360 | |||||||||
Nissan | May 2014 | US | 1 | 462,155 | 8.8 | 25,838 | |||||||||
GSA V | Jun. 2014 | US | 1 | 26,533 | 8.3 | 11,556 | |||||||||
Lippert Components | Jun. 2014 | US | 1 | 539,137 | 11.7 | 14,776 | |||||||||
Select Energy Services I | Jun. 2014 | US | 3 | 135,877 | 12.0 | 24,112 | |||||||||
Bell Supply Co I | Jun. 2014 | US | 6 | 79,829 | 14.0 | 12,225 | |||||||||
Axon Energy Products | Jun. 2014 | US | 3 | 213,634 | 12.1 | 20,709 | |||||||||
Lhoist | Jun. 2014 | US | 1 | 22,500 | 8.0 | 3,264 | |||||||||
GE Oil & Gas | Jun. 2014 | US | 2 | 69,846 | 8.7 | 10,956 | |||||||||
Select Energy Services II | Jun. 2014 | US | 4 | 143,417 | 11.9 | 20,789 | |||||||||
Bell Supply Co II | Jun. 2014 | US | 2 | 19,136 | 14.0 | 3,407 | |||||||||
Superior Energy Services | Jun. 2014 | US | 2 | 42,470 | 9.5 | 2,455 | |||||||||
Amcor Packaging | Jun. 2014 | UK | 7 | 294,580 | 9.9 | 13,290 | |||||||||
GSA VI | Jun. 2014 | US | 1 | 6,921 | 9.3 | 1,450 | |||||||||
Nimble Storage | Jun. 2014 | US | 1 | 164,608 | 6.8 | 52,500 | |||||||||
FedEx -3-Pack | Jul. 2014 | US | 3 | 338,862 | 7.7 | 46,100 | |||||||||
Sandoz, Inc. | Jul. 2014 | US | 1 | 154,101 | 11.6 | 63,582 | |||||||||
Wyndham | Jul. 2014 | US | 1 | 31,881 | 10.3 | 5,200 | |||||||||
44
Properties (continued)
Portfolio | Acquisition Date | Country | Number of Properties | Square Feet | Remaining Lease Term (1) | Base Purchase Price (2) (In thousands) | |||||||||
Valassis | Jul. 2014 | US | 1 | 100,597 | 8.3 | $ | 13,614 | ||||||||
GSA VII | Jul. 2014 | US | 1 | 25,603 | 9.9 | 12,000 | |||||||||
AT&T Services | Jul. 2014 | US | 1 | 401,516 | 11.6 | 61,000 | |||||||||
PNC - 2-Pack | Jul. 2014 | US | 2 | 210,256 | 14.6 | 17,412 | |||||||||
Fujitisu | Jul. 2014 | UK | 3 | 162,888 | 10.2 | 70,651 | |||||||||
Continental Tire | Jul. 2014 | US | 1 | 90,994 | 7.6 | 18,500 | |||||||||
Achmea | Jul. 2014 | Netherlands | 2 | 190,252 | 9.0 | 38,790 | |||||||||
BP Oil | Aug. 2014 | UK | 1 | 2,650 | 10.8 | 4,951 | |||||||||
Malthurst | Aug. 2014 | UK | 2 | 3,784 | 10.9 | 5,914 | |||||||||
HBOS | Aug. 2014 | UK | 3 | 36,071 | 10.6 | 18,109 | |||||||||
Thermo Fisher | Aug. 2014 | US | 1 | 114,700 | 9.7 | 14,000 | |||||||||
Black & Decker | Aug. 2014 | US | 1 | 71,259 | 7.1 | 10,350 | |||||||||
Capgemini | Aug. 2014 | UK | 1 | 90,475 | 8.3 | 24,947 | |||||||||
Merck & Co. | Aug. 2014 | US | 1 | 146,366 | 10.7 | 53,325 | |||||||||
Family Dollar - 65-Pack | Aug. 2014 | US | 65 | 541,472 | 14.7 | 77,360 | |||||||||
GSA VIII | Aug. 2014 | US | 1 | 23,969 | 9.6 | 8,319 | |||||||||
Garden Ridge | Sep. 2014 | US | 4 | 564,910 | 14.7 | 40,936 | |||||||||
Waste Management | Sep. 2014 | US | 1 | 84,119 | 8.0 | 4,650 | |||||||||
Intier Automotive Interiors | Sep. 2014 | UK | 1 | 152,711 | 9.4 | 15,301 | |||||||||
HP Enterprise Services | Sep. 2014 | UK | 1 | 99,444 | 11.2 | 30,951 | |||||||||
Shaw Aero Devices, Inc. | Sep. 2014 | US | 1 | 130,581 | 7.8 | 27,000 | |||||||||
FedEx Freight | Sep. 2014 | US | 1 | 11,501 | 9.3 | 2,250 | |||||||||
Hotel Winston | Sep. 2014 | Netherlands | 1 | 24,283 | 14.7 | 17,292 | |||||||||
Dollar General - 39-Pack | Sep. 2014 | US | 39 | 369,644 | 13.3 | 52,004 | |||||||||
FedEx III | Sep. 2014 | US | 2 | 221,260 | 9.6 | 36,490 | |||||||||
Mallinkrodt Pharmaceuticals | Sep. 2014 | US | 1 | 89,900 | 9.7 | 22,800 | |||||||||
Kuka | Sep. 2014 | US | 1 | 200,000 | 9.5 | 14,850 | |||||||||
CHE Trinity | Sep. 2014 | US | 2 | 373,593 | 7.6 | 51,000 | |||||||||
FedEx IV | Sep. 2014 | US | 2 | 255,037 | 8.1 | 21,780 | |||||||||
GE Aviation | Sep. 2014 | US | 1 | 102,000 | 8.0 | 14,178 | |||||||||
DNV GL | Oct. 2014 | US | 1 | 82,000 | 10.2 | 7,850 | |||||||||
Bradford & Bingley | Oct. 2014 | UK | 1 | 120,618 | 14.8 | 24,482 | |||||||||
Rexam | Oct. 2014 | Germany | 1 | 175,615 | 10.2 | 14,725 | |||||||||
FedEx | Oct. 2014 | US | 1 | 76,035 | 9.5 | 9,532 | |||||||||
CJ Energy | Oct. 2014 | US | 1 | 96,803 | 11.3 | 17,925 | |||||||||
Family Dollar II | Oct. 2014 | US | 34 | 282,730 | 14.8 | 49,000 | |||||||||
Panasonic | Oct. 2014 | US | 1 | 48,497 | 13.6 | 10,375 | |||||||||
Onguard | Oct. 2014 | US | 1 | 120,000 | 9.0 | 10,800 | |||||||||
Metro Tonic | Oct. 2014 | Germany | 1 | 636,066 | 10.8 | 67,511 | |||||||||
Axon Energy Products | Oct. 2014 | US | 1 | 26,400 | 9.8 | 3,620 | |||||||||
Tokmanni | Oct. 2014 | Finland | 1 | 800,834 | 18.7 | 72,964 | |||||||||
Fife Council | Nov. 2014 | UK | 1 | 37,331 | 9.1 | 6,519 | |||||||||
Family Dollar III | Nov. 2014 | US | 2 | 16,442 | 14.7 | 2,727 | |||||||||
GSA IX | Nov. 2014 | US | 1 | 28,300 | 7.3 | 10,385 | |||||||||
KPN BV | Nov. 2014 | Netherlands | 1 | 133,053 | 12.0 | 27,351 | |||||||||
RWE AG | Nov. 2014 | Germany | 3 | 594,415 | 9.9 | 154,492 | |||||||||
Follett School | Nov. 2014 | US | 1 | 486,868 | 10.0 | 23,900 | |||||||||
Quest Diagnostics | Dec. 2014 | US | 1 | 223,894 | 9.7 | 96,000 | |||||||||
Family Dollar IV | Dec. 2014 | US | 1 | 8,030 | 14.7 | 1,779 | |||||||||
45
Properties (continued)
Portfolio | Acquisition Date | Country | Number of Properties | Square Feet | Remaining Lease Term (1) | Base Purchase Price (2) (In thousands) | |||||||||
Diebold | Dec. 2014 | US | 1 | 158,330 | 7.0 | $ | 11,500 | ||||||||
Dollar General | Dec. 2014 | US | 1 | 12,406 | 13.2 | 2,050 | |||||||||
Weatherford Intl | Dec. 2014 | US | 1 | 19,855 | 10.8 | 3,190 | |||||||||
AM Castle | Dec. 2014 | US | 1 | 127,600 | 9.8 | 9,270 | |||||||||
FedEx | Dec. 2014 | US | 1 | 27,771 | 9.7 | 9,300 | |||||||||
Constellium Auto | Dec. 2014 | US | 1 | 320,680 | 14.9 | 20,625 | |||||||||
Total | 307 | 16,305,844 | 11.6 | $ | 2,378,554 | ||||||||||
_____________________________________________________________________
(1) Remaining lease term in years as of December 31, 2014.
(2) Contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase, where applicable.
The following table details distribution of our portfolio by country as of December 31, 2014:
Country | Acquisition Date | Number of Properties | Square Feet | Percentage of Properties by Square Feet | Remaining Lease Term (1) | Base Purchase Price (2) (In thousands) | |||||||||
Finland | Nov. 2014 | 1 | 800,834 | 4.9% | 18.7 | $ | 72,964 | ||||||||
Germany | Jan. 2014 - Nov. 2014 | 7 | 1,869,831 | 11.5% | 10.0 | 278,868 | |||||||||
Netherlands | Jul. 2014 - Nov. 2014 | 4 | 347,588 | 2.1% | 10.6 | 83,433 | |||||||||
United Kingdom | Oct. 2012 - Nov. 2014 | 40 | 2,708,443 | 16.6% | 15.2 | 494,295 | |||||||||
United States | Aug. 2013 - Dec. 2014 | 237 | 10,513,886 | 64.5% | 10.5 | 1,411,438 | |||||||||
Puerto Rico | Dec. 2013 | 18 | 65,262 | 0.4% | 10.5 | 37,556 | |||||||||
Total | 307 | 16,305,844 | 100.0% | 11.6 | $ | 2,378,554 | |||||||||
____________________________________________________________________
(1) Remaining lease term in years as of December 31, 2014. If the portfolio has multiple properties with varying lease expirations, remaining lease term is calculated on a weighted-average basis.
(2) Contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase, where applicable.
46
The following table details the industry distribution of our portfolio as of December 31, 2014:
Industry | Number of Properties | Square Feet | Square Feet as a Percentage of the Total Portfolio | Annualized Rental Income (1) | Annualized Rental Income as a Percentage of the Total Portfolio | ||||||||||
(In thousands) | |||||||||||||||
Aerospace | 3 | 601,581 | 3.7 | % | $ | 5,777 | 3.0 | % | |||||||
Auto Manufacturing | 2 | 1,001,292 | 6.1 | % | 2,729 | 1.4 | % | ||||||||
Automation | 1 | 200,000 | 1.2 | % | 1,092 | 0.6 | % | ||||||||
Automotive Parts Manufacturing | 1 | 152,711 | 0.9 | % | 1,201 | 0.6 | % | ||||||||
Automotive Parts Supplier | 2 | 411,096 | 2.5 | % | 3,617 | 1.9 | % | ||||||||
Biotechnology | 1 | 114,700 | 0.7 | % | 1,014 | 0.5 | % | ||||||||
Consulting | 1 | 82,000 | 0.5 | % | 602 | 0.3 | % | ||||||||
Consumer Goods | 3 | 271,874 | 1.7 | % | 2,133 | 1.1 | % | ||||||||
Contract Research | 1 | 80,420 | 0.5 | % | 908 | 0.5 | % | ||||||||
Discount Retail | 143 | 2,031,558 | 12.5 | % | 18,891 | 10.0 | % | ||||||||
Education | 1 | 486,868 | 3.0 | % | 1,935 | 1.0 | % | ||||||||
Electronics | 1 | 48,497 | 0.3 | % | 686 | 0.4 | % | ||||||||
Energy | 28 | 901,717 | 5.5 | % | 11,204 | 5.9 | % | ||||||||
Financial Services | 11 | 1,650,429 | 10.1 | % | 21,564 | 11.4 | % | ||||||||
Foot Apparel | 2 | 588,635 | 3.6 | % | 2,141 | 1.1 | % | ||||||||
Freight | 17 | 1,035,556 | 6.4 | % | 9,917 | 5.2 | % | ||||||||
Government | 11 | 333,020 | 2.0 | % | 11,572 | 6.1 | % | ||||||||
Government Services | 2 | 135,873 | 0.8 | % | 1,444 | 0.8 | % | ||||||||
Healthcare | 3 | 593,633 | 3.6 | % | 12,920 | 6.8 | % | ||||||||
Home Decor | 4 | 564,910 | 3.5 | % | 3,256 | 1.7 | % | ||||||||
Home Maintenance | 4 | 230,535 | 1.4 | % | 2,631 | 1.4 | % | ||||||||
Hospitality | 2 | 56,164 | 0.3 | % | 1,844 | 1.0 | % | ||||||||
Marketing | 1 | 100,597 | 0.6 | % | 1,194 | 0.6 | % | ||||||||
Metal Processing | 2 | 448,280 | 2.7 | % | 2,862 | 1.5 | % | ||||||||
Packaging Goods | 7 | 294,580 | 1.8 | % | 1,357 | 0.7 | % | ||||||||
Petroleum Services | 3 | 6,434 | — | % | 821 | 0.4 | % | ||||||||
Pharmaceuticals | 3 | 390,367 | 2.4 | % | 9,734 | 5.1 | % | ||||||||
Restaurant - Quick Service | 19 | 74,356 | 0.5 | % | 3,429 | 1.8 | % | ||||||||
Retail Banking | 3 | 36,071 | 0.2 | % | 1,328 | 0.7 | % | ||||||||
Retail Food Distribution | 1 | 805,530 | 4.9 | % | 6,180 | 3.3 | % | ||||||||
Specialty Retail | 7 | 279,561 | 1.7 | % | 3,557 | 1.9 | % | ||||||||
Technology | 8 | 891,745 | 5.5 | % | 16,842 | 8.9 | % | ||||||||
Telecommunications | 4 | 647,816 | 4.0 | % | 9,141 | 4.8 | % | ||||||||
Utilities | 4 | 673,065 | 4.1 | % | 13,571 | 7.2 | % | ||||||||
Waste Management | 1 | 84,373 | 0.5 | % | 358 | 0.2 | % | ||||||||
Total | 307 | 16,305,844 | 100 | % | $ | 189,452 | 100 | % | |||||||
________________________________
(1) | Annualized rental income converted from local currency into USD as of December 31, 2014 for the in-place lease in the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable. |
47
The following table details the geographic distribution, by U.S. state or country, of our portfolio as of December 31, 2014:
Country | State | Number of Properties | Square Feet | Square Feet as a Percentage of the Total Portfolio | Annualized Rental Income (1) | Annualized Rental Income as a Percentage of the Total Portfolio | ||||||||||
(In thousands) | ||||||||||||||||
Finland | 1 | 800,834 | 4.7 | % | $ | 6,261 | 3.3 | % | ||||||||
Germany | 7 | 1,869,831 | 11.5 | % | 20,727 | 10.9 | % | |||||||||
Netherlands | 4 | 347,588 | 2.1 | % | 7,072 | 3.7 | % | |||||||||
Puerto Rico | 18 | 65,262 | 0.4 | % | 3,212 | 1.7 | % | |||||||||
United Kingdom | 40 | 2,708,443 | 16.6 | % | 41,476 | 22.0 | % | |||||||||
United States: | ||||||||||||||||
Alabama | 9 | 73,554 | 0.5 | % | 791 | 0.4 | % | |||||||||
Arizona | 3 | 158,876 | 1.0 | % | 982 | 0.5 | % | |||||||||
Arkansas | 1 | 8,320 | 0.1 | % | 89 | |||||||||||
California | 3 | 674,832 | 4.1 | % | 12,890 | 6.8 | % | |||||||||
Colorado | 1 | 26,533 | 0.2 | % | 1,088 | 0.6 | % | |||||||||
Delaware | 1 | 9,967 | 0.1 | % | 359 | 0.2 | % | |||||||||
Florida | 15 | 243,596 | 1.5 | % | 3,420 | 1.8 | % | |||||||||
Georgia | 5 | 41,320 | 0.3 | % | 449 | 0.2 | % | |||||||||
Idaho | 2 | 16,267 | 0.1 | % | 201 | 0.1 | % | |||||||||
Illinois | 3 | 509,939 | 3.1 | % | 2,152 | 1.1 | % | |||||||||
Indiana | 3 | 646,329 | 4.0 | % | 1,991 | 1.1 | % | |||||||||
Iowa | 2 | 32,399 | 0.2 | % | 296 | 0.2 | % | |||||||||
Kansas | 6 | 178,807 | 1.1 | % | 1,275 | 0.7 | % | |||||||||
Kentucky | 7 | 517,420 | 3.2 | % | 3,687 | 1.9 | % | |||||||||
Louisiana | 7 | 136,850 | 0.8 | % | 1,260 | 0.7 | % | |||||||||
Maine | 2 | 49,572 | 0.3 | % | 1,871 | 1.0 | % | |||||||||
Maryland | 1 | 120,000 | 0.7 | % | 785 | 0.4 | % | |||||||||
Massachusetts | 2 | 127,456 | 0.8 | % | 1,772 | 0.9 | % | |||||||||
Michigan | 12 | 2,000,300 | 12.3 | % | 16,704 | 8.8 | % | |||||||||
Minnesota | 3 | 58,661 | 0.4 | % | 1,601 | 0.8 | % | |||||||||
Mississippi | 10 | 80,968 | 0.5 | % | 800 | 0.4 | % | |||||||||
Missouri | 4 | 138,536 | 0.9 | % | 2,582 | 1.4 | % | |||||||||
Nebraska | 6 | 57,572 | 0.4 | % | 564 | 0.3 | % | |||||||||
New Jersey | 3 | 348,964 | 2.1 | % | 8,450 | 4.5 | % | |||||||||
New Mexico | 5 | 46,405 | 0.3 | % | 556 | 0.3 | % | |||||||||
New York | 2 | 221,260 | 1.4 | % | 2,398 | 1.3 | % | |||||||||
North Carolina | 7 | 242,575 | 1.4 | % | 1,467 | 0.8 | % | |||||||||
North Dakota | 3 | 47,330 | 0.3 | % | 884 | 0.5 | % | |||||||||
Ohio | 12 | 508,375 | 3.1 | % | 4,229 | 2.2 | % | |||||||||
Oklahoma | 16 | 159,008 | 1.0 | % | 1,617 | 0.9 | % | |||||||||
Pennsylvania | 11 | 376,368 | 2.3 | % | 3,900 | 2.1 | % | |||||||||
South Carolina | 13 | 189,081 | 1.2 | % | 2,353 | 1.2 | % | |||||||||
South Dakota | 1 | 28,300 | 0.2 | % | 946 | 0.5 | % | |||||||||
Tennessee | 10 | 662,312 | 4.0 | % | 6,520 | 3.4 | % | |||||||||
Texas | 44 | 1,759,932 | 10.8 | % | 19,608 | 10.4 | % | |||||||||
Utah | 1 | 7,948 | — | % | 91 | — | % | |||||||||
Virginia | 1 | 7,954 | — | % | 76 | — | % | |||||||||
Total | 307 | 16,305,844 | 100 | % | $ | 189,452 | 100 | % | ||||||||
________________________________
(1) | Annualized rental income converted from local currency into USD as of December 31, 2014 for the in-place lease in the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable. |
48
Future Minimum Lease Payments
The following table presents future minimum base rent payments, on a cash basis, due to us over the next ten years and thereafter at the properties we owned as of December 31, 2014:
(In thousands) | Future Minimum Base Rent Payments (1) | |||
2015 | $ | 175,154 | ||
2016 | 179,154 | |||
2017 | 182,643 | |||
2018 | 185,137 | |||
2019 | 187,586 | |||
2020 | 189,854 | |||
2021 | 187,953 | |||
2022 | 178,180 | |||
2023 | 155,401 | |||
2024 | 132,311 | |||
Thereafter | 376,735 | |||
Total | $ | 2,130,108 | ||
________________________________
(1) | Based on the exchange rate as of December 31, 2014. |
Future Lease Expirations
The following is a summary of lease expirations for the next ten years at the properties we own as of December 31, 2014:
Year of Expiration | Number of Leases Expiring | Annualized Rental Income (1) | Annualized Rental Income as a Percentage of the Total Portfolio | Leased Rentable Square Feet | Percent of Portfolio Rentable Square Feet Expiring | ||||||||||
(In thousands) | |||||||||||||||
2015 | — | $ | — | — | % | — | — | % | |||||||
2016 | — | — | — | % | — | — | % | ||||||||
2017 | — | — | — | % | — | — | % | ||||||||
2018 | — | — | — | % | — | — | % | ||||||||
2019 | — | — | — | % | — | — | % | ||||||||
2020 | 2 | 3,482 | 1.8 | % | 386,015 | 2.4 | % | ||||||||
2021 | 2 | 5,003 | 2.6 | % | 322,938 | 2.0 | % | ||||||||
2022 | 16 | 22,013 | 11.6 | % | 1,552,953 | 9.5 | % | ||||||||
2023 | 26 | 21,176 | 10.5 | % | 2,352,720 | 14.4 | % | ||||||||
2024 | 33 | 38,010 | 20.6 | % | 3,173,767 | 19.5 | % | ||||||||
Total | 79 | $ | 89,684 | 47.1 | % | 7,788,393 | 47.8 | % | |||||||
________________________________
(1) | Annualized rental income converted from local currency into USD as of December 31, 2014 for the in-place lease in the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable. |
Tenant Concentration
As of December 31, 2014, we did not have any tenants whose rentable square footage or annualized rental income represented greater than 10% of total portfolio rentable square footage or annualized rental income.
49
Significant Portfolio Properties
The rentable square feet or annual straight-line rental income of the RWE AG and Government Services Administration ("GSA") (I - IX) properties, each represents 5% or more of our total portfolio's rentable square feet or annual straight-line rental income. The tenant concentration of these properties is summarized below.
RWE AG
RWE AG, located in Essen, Germany, are three freestanding, single-tenant modern office buildings, comprised of 594,415 total rentable square feet and are 100% leased to RWE AG. As of December 31, 2014, the tenant has 9.9 years remaining on its lease which expires in November 2024. The lease has annualized rental income on a straight-line basis of $11.9 million and contains two five-year renewal options.
GSA (I - IX)
The GSA portfolio is located in nine different states throughout U.S. with a total of eleven properties. The buildings are freestanding, single-tenant office buildings, comprised of 333,020 total rentable square feet and is 100% leased to different U.S. government agencies. As of December 31, 2014, the tenants have an average of 9.1 years remaining on their leases which expire between April 2022 and July 2028. The leases have annualized rental income on a straight-line basis of $11.6 million and contain one five-year, two five-year and 20 five-year renewal options for GSA II, GSA VI and GSA VII tenants, respectively. The other GSA tenants have no renewal options.
Property Financings
The following table presents certain debt information about the properties we owned as of December 31, 2014 and 2013:
Outstanding Loan Amount(1) | ||||||||||||||||||
Country | Portfolio | Encumbered Properties | December 31, 2014 | December 31, 2013 | Effective Interest Rate | Interest Rate | Maturity | |||||||||||
(In thousands) | (In thousands) | |||||||||||||||||
Germany: | ||||||||||||||||||
Rheinmetall | 1 | $ | 12,884 | $ | — | 2.5% | (2) | Fixed | Jan. 2019 | |||||||||
OBI DIY | 1 | 5,470 | — | 2.4% | Fixed | Jan. 2019 | ||||||||||||
RWE AG | 3 | 75,969 | — | 1.6% | Fixed | Oct. 2019 | ||||||||||||
Rexam | 1 | 6,394 | — | 1.9% | Fixed | Oct. 2019 | ||||||||||||
Metro Tonic | 1 | 32,211 | — | 1.7% | Fixed | Dec. 2019 | ||||||||||||
United Kingdom: | ||||||||||||||||||
McDonald's | 1 | 1,180 | 1,253 | 4.1% | (2) | Fixed | Oct. 2017 | |||||||||||
Wickes Building Supplies I | 1 | 3,024 | 3,209 | 3.7% | (2) | Fixed | May 2018 | |||||||||||
Everything Everywhere | 1 | 6,213 | 6,596 | 4.0% | (2) | Fixed | Jun. 2018 | |||||||||||
Thames Water | 1 | 9,319 | 9,894 | 4.1% | (2) | Fixed | Jul. 2018 | |||||||||||
Wickes Building Supplies II | 1 | 2,563 | 2,721 | 4.2% | (2) | Fixed | Jul. 2018 | |||||||||||
Northern Rock | 2 | 8,155 | 8,657 | 4.4% | (2) | Fixed | Sep. 2018 | |||||||||||
Wickes Building Supplies III | 1 | 2,951 | 3,133 | 4.3% | (2) | Fixed | Nov. 2018 | |||||||||||
Provident Financial | 1 | 19,804 | — | 4.1% | (2) | Fixed | Feb. 2019 | |||||||||||
Crown Crest | 1 | 29,901 | — | 4.2% | (2) | Fixed | Feb. 2019 | |||||||||||
Aviva | 1 | 24,387 | — | 3.8% | (2) | Fixed | Mar. 2019 | |||||||||||
United States: | Western Digital | 1 | 18,269 | 18,541 | 3.7% | Fixed | Jul. 2021 | |||||||||||
Puerto Rico: | Encanto Restaurants | 18 | 22,492 | 22,900 | 3.0% | Fixed | Jun. 2017 | |||||||||||
Total | 37 | $ | 281,186 | $ | 76,904 | 3.7% | ||||||||||||
____________________
(1) | Based on the ending exchange rate at December 31, 2014 and 2013, as applicable. |
(2) Fixed as a result of entering into a swap agreement.
Item 3. Legal Proceedings.
We are not a party to any material pending legal proceedings.
50
Item 4. Mine Safety Disclosure.
Not applicable.
51
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our shares are not listed on a national securities exchange and there is no established trading market for our shares of common stock although our board has announced that it intends to file an application to list our common stock on a national securities exchange. There is no assurance that the shares will, in fact, be listed. Unless and until the shares are listed, even if a stockholder is able to find a buyer for his or her shares, the stockholder may not sell his or her shares unless the buyer meets applicable suitability and minimum purchase standards and the sale does not violate state securities laws. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock by a single investor, unless exempted by our board of directors, which may inhibit large investors from desiring to purchase shares from stockholders.
In order for FINRA members and their associated persons to participate in our offering and sale of shares of common stock pursuant to our offering, we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to stockholders a per share estimated value of the shares, the method by which it was developed and the date of the data used to develop the estimated value. In addition, we prepare annual statements of estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of the Employee Retirement Income Security Act of 1974 in the preparation of their reports relating to an investment in our shares.
Holders
As of March 13, 2015, we had 179.7 million shares outstanding held by 33,865 stockholders.
Distributions
We qualified to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2013. As a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders annually. The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable and annual distribution requirements needed to qualify and maintain our status as a REIT under the Code. For tax purposes, of the amounts distributed during the year ended December 31, 2014, 70.4%, or $0.50 per share per annum, and 29.6%, or $0.21 per share per annum, represented a return of capital and ordinary dividends, respectively. During the year ended December 31, 2013, 51.7%, or $0.37 per share per annum, and 48.3%, or $0.34 per share per annum, represented a return of capital and ordinary dividends, respectively.
On October 5, 2012, our board of directors authorized and we declared, a distribution, which is calculated based on stockholders of record each day during the applicable period at a rate of $0.00194520548 per day equivalent to a per annum yield of 7.10% based on a price of $10.00 per share of common stock. The distributions began to accrue on November 28, 2012, 30 days following our initial property acquisition. The distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. 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 first distribution payment was made on December 1, 2012, relating to the period from November 28, 2012 (30 days after the date of the first property acquisition) through November 30, 2012. The following table reflects distributions declared and paid in cash and through the DRIP to common stockholders during the years ended December 31, 2014 and 2013:
(In thousands) | Distributions Paid in Cash (1) | Distributions Reinvested through DRIP (1) | Total Distributions Paid (1) | Distributions Declared (1) | ||||||||||||
Q1 2014 | $ | 2,028 | $ | 1,937 | $ | 3,965 | $ | 6,730 | ||||||||
Q2 2014 | 6,524 | 8,286 | 14,810 | 20,231 | ||||||||||||
Q3 2014 | 13,083 | 17,120 | 30,203 | 31,443 | ||||||||||||
Q4 2014 | 13,780 | 17,543 | 31,323 | 31,760 | ||||||||||||
Total | $ | 35,415 | $ | 44,886 | $ | 80,301 | $ | 90,164 | ||||||||
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(In thousands) | Distributions Paid in Cash (1) | Distributions Reinvested through DRIP (1) | Total Distributions Paid (1) | Distributions Declared (1) | ||||||||||||
Q1 2013 | $ | 46 | $ | 3 | $ | 49 | $ | 78 | ||||||||
Q2 2013 | 187 | 102 | 289 | 498 | ||||||||||||
Q3 2013 | 594 | 441 | 1,035 | 1,264 | ||||||||||||
Q4 2013 | 935 | 774 | 1,709 | 2,065 | ||||||||||||
Total | $ | 1,762 | $ | 1,320 | $ | 3,082 | $ | 3,905 | ||||||||
_______________________________
(1) Distributions amounts for the periods indicated above exclude distributions related to unvested restricted stock and Class B units. Distributions related to unvested restricted stock were $12,000 and $7,000 for the years ended December 31, 2014 and 2013, respectively. Distributions related to Class B units were $178,000 and $4,000 for the years ended December 31, 2014 and 2013, respectively.
We, our board of directors and our Advisor share a similar philosophy with respect to paying our distribution. The distribution should principally be derived from cash flows generated from real estate operations. In order to improve our operating cash flows and our ability to pay dividends from operating cash flows, our related party Advisor may waive certain fees including asset management and property management fees. As of January 1, 2013, the Advisor eliminated the payment of asset management fees in the form of cash, shares or restricted stock grants and instead expects to issue Class B units. Prior to this change, during the year ended December 31, 2013, the Advisor waived asset management fees of approximately $25,000. During the years ended December 31, 2014 and 2013, we incurred approximately $1,316,000 and $50,000, respectively, in property management fees from the Property Manager. The Advisor may elect to waive a portion of property management fees, and will determine if a portion or all of such fees will be waived in subsequent periods on a quarter-to-quarter basis. During the year ended December 31, 2014, the Property Manager elected to waive approximately $690,000 of property management fees. The fees that are waived are not deferrals and accordingly, will not be paid by us. Because the Advisor may waive certain fees that we may owe, cash flow from operations that would have been paid to the Advisor will be available to pay distributions to our stockholders. In certain instances, to improve our working capital, the Advisor may elect to absorb a portion of our costs that would otherwise have been paid by us. During the year ended December 31, 2014, there were no property and general administrative expenses absorbed by our Advisor. During the year ended December 31, 2013, the Advisor elected to absorb $1.3 million of our general and administrative costs.
During the year ended December 31, 2014, cash used to pay our distributions was generated from proceeds from common stock and common stock issued under the DRIP. As additional capital is raised and we continue to build our portfolio of investments, we expect that we will use funds received from operating activities to pay a greater proportion of our distributions and will be able to reduce and in the future eliminate the use of funds from the sale of common stock to pay distributions. As the cash flows from operations become more significant our Advisor may discontinue its practice of forgiving fees and providing contributions and may charge the full fee owed to it in accordance with our agreements with the Advisor. Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
53
Share-Based Compensation
We have a stock option plan (the “Plan”) which authorizes the grant of nonqualified stock options to our independent directors, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan.
Notwithstanding any other provisions of our Plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize our status as a REIT under the Code. The following table sets forth information regarding securities authorized for issuance under our stock option plan as of December 31, 2014:
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Right | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) | |||||||
(a) | (b) | (c) | ||||||||
Equity Compensation Plans approved by security holders | — | $ | — | — | ||||||
Equity Compensation Plans not approved by security holders | — | — | 500,000 | |||||||
Total | — | $ | — | 500,000 | ||||||
Restricted Share Plan
We have an employee and director incentive restricted share plan (the “RSP”) that provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further action by our 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% per annum. The RSP provides us with the ability to grant awards of restricted shares to our directors, officers and employees (if we ever have employees), employees of the Advisor and its affiliates, employees of entities that provide services to us, directors of the Advisor or of entities that provide services to us, certain consultants to us and the Advisor and its affiliates or to entities that provide services to us. The fair market value of any shares of restricted stock granted under our RSP, together with the total amount of acquisition fees, acquisition expense reimbursements, asset management fees, financing coordination fees, disposition fees and subordinated distributions by the operating partnership payable to the Advisor (or its assignees), may not exceed (a) 6% of all properties' aggregate gross contract purchase price, (b) as determined annually, the greater, in the aggregate, of 2% of average invested assets and 25% 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, (c) disposition fees, if any, of up to 3% of the contract sales price of all properties that we sell and (d) 15% of remaining net sales proceeds after return of capital contributions plus payment to investors of a 6% cumulative, pre-tax, non-compounded return on the capital contributed by investors. Additionally, the total number of shares of common stock granted under the RSP may not exceed 5% of our authorized common shares pursuant to the IPO and in any event will not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive common shares from us under terms that provide for vesting over a specified period of time. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient’s employment or other relationship with us. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in common shares shall be subject to the same restrictions as the underlying restricted shares. As of December 31, 2014, there were 14,400 unvested restricted shares issued pursuant to the RSP.
Unregistered Sales of Equity Securities
We did not sell any equity securities that were not registered under the Securities Act during the years ended December 31, 2014, 2013 and 2012. During the period from July 13, 2011 (date of inception) to December 31, 2011, we sold 22,222 shares of our common stock to our Special Limited Partner under Rule 506 of Regulation D of the Securities Act of 1933 at a price of $9.00 per share for aggregate gross proceeds of $0.2 million, which was used to fund third party offering costs.
54
Use of Proceeds from Sales of Registered Securities
On April 20, 2012, we commenced our IPO on a "reasonable best efforts" basis. On August 23, 2012, we filed a new prospectus offering up to 150.0 million shares of common stock, pursuant to the Registration Statement on Form S-11 (File No. 333-177563) filed with the SEC under the Securities Act of 1933, as amended. The Registration Statement also covers up to 25.0 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. The Company's IPO closed on June 30, 2014. As of December 31, 2014, we have issued 177.9 million shares of our common stock, and received $1,766.4 million of offering proceeds from the sale of common stock, including shares issued under the DRIP. As of December 31, 2014, the aggregate value of all the common stock outstanding was $1.8 billion based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP).
The following table reflects the offering costs associated with the issuance of common stock:
Year Ended December 31, | ||||||||||||
(In thousands) | 2014 | 2013 | 2012 | |||||||||
Selling commissions and dealer manager fees | $ | 148,372 | $ | 14,024 | $ | 3 | ||||||
Other offering costs | 19,321 | 3,900 | 1,988 | |||||||||
Total offering costs | $ | 167,693 | $ | 17,924 | $ | 1,991 | ||||||
The Dealer Manager was permitted to reallow the selling commissions and a portion of the dealer manager fees to participating broker-dealers. The following table details the selling commissions incurred and reallowed related to the sale of shares of common stock:
Year Ended December 31, | ||||||||||||
(In thousands) | 2014 | 2013 | 2012 | |||||||||
Total commissions paid to the Dealer Manager | $ | 148,372 | $ | 14,024 | $ | 3 | ||||||
Less: | ||||||||||||
Commissions to participating brokers | (101,421 | ) | (8,733 | ) | (2 | ) | ||||||
Reallowance to participating broker dealers | (15,275 | ) | (1,181 | ) | — | |||||||
Net to the Dealer Manager | $ | 31,676 | $ | 4,110 | $ | 1 | ||||||
As of December 31, 2014, cumulative offering costs included $18.2 million paid to the Advisor and the Dealer Manager to reimburse offering costs incurred. As of December 31, 2014, we have incurred $188.2 million of total cumulative offering costs in connection with the issuance and distribution of our registered securities. The Advisor has elected to cap cumulative offering costs incurred by us, net of unpaid amounts, to 11.5% of gross common stock proceeds during the IPO. Cumulative offering costs, net of unpaid amounts, were less than the 11.5% threshold as of December 31, 2014. Cumulative offering proceeds from the sale of common stock and DRIP exceeded cumulative offering costs by $1,578.5 million at December 31, 2014.
We have used and expect to continue to use substantially all of the net proceeds from our IPO to primarily acquire a diversified portfolio of income producing real estate properties, focusing primarily on acquiring freestanding, single-tenant bank branches, convenience stores, office, industrial and retail properties net leased to investment grade and other creditworthy tenants. We may also originate or acquire first mortgage loans secured by real estate. As of December 31, 2014, we have used the net proceeds from our IPO and debt financing to purchase 307 properties with an aggregate base purchase price of $2,378.6 million.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our common stock is currently not listed on a national securities exchange. Our board has determined that it is in the best interests of our stockholders to proceed to file an application to list our shares of common stock on a national securities exchange. In order to provide stockholders with the benefit of some interim liquidity, our board of directors has adopted a Share Repurchase Program (the “SRP”) that enables our stockholders to sell their shares back to us after you have held them for at least one year, subject to the significant conditions and limitations. Our Sponsor, Advisor, directors and affiliates are prohibited from receiving a fee on any share repurchases.
Pursuant to the terms of our SRP, we intend to make repurchases, if requested, at least once quarterly. Subject to the limitations described in our prospectus, we also will repurchase shares upon the request of the estate, heir or beneficiary, as applicable, of a deceased stockholder. During any quarter, we will not repurchase in excess of 1.25% of weighted average number of shares of common stock outstanding during the previous calendar quarter, or approximately 5.0% of the weighted average number of shares of common stock outstanding on December 31st of the previous calendar year during any 12-month period. In addition, funds available for our SRP may not be sufficient to accommodate all requests.
55
Unless the shares of our common stock are being repurchased in connection with a stockholder’s death, the purchase price for shares repurchased under our SRP will be as set forth below.
Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in the SRP. We will repurchase shares on the first business day of each quarter (and in all events on a date other than a dividend payment date). The price per share that we will pay to repurchase shares of our common stock will be as follows:
• | the lower of $9.25 or 92.5% of the price paid to acquire the shares, for stockholders who have continuously held their shares for at least one year; |
• | the lower of $9.50 and 95.0% of the price paid to acquire the shares for stockholders who have continuously held their |
shares for at least two years;
• | the lower of $9.75 and 97.5% of the price paid to acquire the shares for stockholders who have continuously held their |
shares for at least three years; and
• | the lower of $10.00 and 100.0% of the price paid to acquire the shares for stockholders who have continuously held their shares for at least four years (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). |
Upon the death or disability of a stockholder, upon request, we will waive the one-year holding requirement. Shares repurchased in connection with the death or disability of a stockholder will be repurchased at a purchase price equal to the price actually paid for the shares during the offering, In addition, we may waive the holding period in the event of a stockholder's bankruptcy or other exigent circumstance.
Since our inception through December 31, 2013, no shares of common stock had been repurchased or requested to be repurchased. During the year ended December 31, 2014, we acquired 99,969 shares at a weighted average price per share of $9.91.
56
Item 6. Selected Financial Data
The following is selected financial data as of December 31, 2014, 2013, 2012 and 2011 and for the years ended December 31, 2014, 2013, 2012 and for the period ended July 13, 2011 (date of inception) to December 31, 2011:
December 31, | ||||||||||||||||
Balance sheet data (In thousands) | 2014 | 2013 | 2012 | 2011 | ||||||||||||
Total real estate investments, at cost | $ | 2,340,039 | $ | 196,908 | $ | 2,585 | $ | — | ||||||||
Total assets | 2,428,797 | 214,927 | 2,933 | 559 | ||||||||||||
Mortgage notes payable | 281,186 | 76,904 | 1,228 | — | ||||||||||||
Credit facility | 659,268 | — | — | — | ||||||||||||
Total liabilities | 1,012,128 | 92,207 | 3,729 | 375 | ||||||||||||
Total stockholders' equity (deficit) | $ | 1,416,669 | $ | 122,720 | $ | (796 | ) | $ | 184 | |||||||
Operating data (In thousands, except share and per share data) | Year Ended December 31, | Period from July 13, 2011 (date of inception) to December 31, 2011 | ||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||
Total revenues | $ | 93,383 | $ | 3,951 | $ | 30 | $ | — | ||||||||
Operating expenses: | ||||||||||||||||
Property operating | 7,947 | 42 | — | — | ||||||||||||
Operating fees to affiliates | 797 | 50 | 1 | — | ||||||||||||
Acquisition and transaction related | 83,498 | 7,745 | 228 | — | ||||||||||||
General and administrative | 4,314 | 58 | 183 | 16 | ||||||||||||
Depreciation and amortization | 40,387 | 2,112 | 21 | — | ||||||||||||
Income tax benefit | (1,431 | ) | — | — | — | |||||||||||
Total expenses | 135,512 | 10,007 | 433 | 16 | ||||||||||||
Operating loss | (42,129 | ) | (6,056 | ) | (403 | ) | (16 | ) | ||||||||
Other Income (Expense): | ||||||||||||||||
Interest expense | (14,852 | ) | (969 | ) | (10 | ) | — | |||||||||
Income from investments | 14 | — | 14 | — | ||||||||||||
Unrealized gain (loss) on foreign currency | (186 | ) | 35 | — | — | |||||||||||
Gains (losses) on derivative instruments | 1,881 | — | — | — | ||||||||||||
Gain (loss) on hedging instruments deemed ineffective | 1,387 | — | — | — | ||||||||||||
Other income | 291 | 1 | — | — | ||||||||||||
Net loss | $ | (53,594 | ) | $ | (6,989 | ) | $ | (399 | ) | $ | (16 | ) | ||||
Other data: | ||||||||||||||||
Cash flows used in operations | $ | (9,693 | ) | $ | (3,647 | ) | $ | (418 | ) | $ | — | |||||
Cash flows used in investing activities | (1,517,175 | ) | (111,500 | ) | (1,357 | ) | — | |||||||||
Cash flows provided by financing activities | 1,582,907 | 124,209 | 2,027 | — | ||||||||||||
Per share data: | ||||||||||||||||
Weighted-average number of common shares outstanding, basic and diluted | 126,079,369 | 5,453,404 | 64,252 | 22,222 | ||||||||||||
Dividends declared per common share | $ | 0.71 | $ | 0.71 | $ | 0.71 | — | |||||||||
Net loss per common share - basic and diluted | $ | (0.43 | ) | $ | (1.28 | ) | $ | (6.43 | ) | NM | ||||||
___________________
NM - not meaningful
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" elsewhere in this report for a description of these risks and uncertainties.
Overview
We were incorporated on July 13, 2011, as a Maryland corporation that qualified to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2013. On April 20, 2012, we commenced our IPO on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11, as amended from time to time (File No. 333-177563) (the "Registration Statement") filed with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended. The Registration Statement also covered up to an additional 25.0 million shares of common stock pursuant to a distribution reinvestment plan (the "DRIP") under which our common stockholders could elect to have their distributions reinvested in additional shares of our common stock. On March 19, 2014, our board of directors approved the extension of our IPO to April 20, 2015, provided that the offering will be terminated if all 150.0 million shares of our common stock are sold before such date. On June 13, 2014, we announced the reallocation 23.8 million shares which represented all remaining unsold shares available pursuant to the DRIP. On June 17, 2014, we registered an additional 25.0 million shares to be issued under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-196829).
Our IPO closed on June 30, 2014. As of December 31, 2014, we had 177.9 million shares of stock outstanding, including unvested restricted shares and had received total gross proceeds from the IPO of $1.8 billion, including shares issued under the DRIP. As of December 31, 2014, the aggregate value of all the common stock outstanding was $1.8 billion based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP).
We were formed to primarily acquire a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. Our primary geographic target will be the United States, although up to 40% of our portfolio may consist of properties purchased in Europe with a potential additional 10% allocation of properties elsewhere internationally. All such properties may be acquired and operated by us alone or jointly with another party. We may also originate or acquire first mortgage loans secured by real estate. We purchased our first property and commenced active operations in October 2012. As of December 31, 2014, we owned 307 properties consisting of 16.3 million rentable square feet, which were 100% leased, with a weighted average remaining lease term of 11.6 years. 255 of these properties are located in the United States and Puerto Rico, with an average remaining lease term of 10.5 years, 40 of these properties are located in the United Kingdom, with an average remaining lease term of 15.2 years and 12 of these properties are located in continental Europe, with an average remaining lease term of 12.4 years.
Substantially all of our business is conducted through the American Realty Capital Global 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"). American Realty Capital Global Special Limited Partner, LLC (the "Special Limited Partner"), an entity controlled by AR Capital Global Holdings, LLC (the "Sponsor"), contributed $200 to the OP in exchange for 22 OP units, which represents a nominal percentage of the aggregate OP ownership. A holder of OP units has 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, in accordance with 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 have no employees. Our Advisor has been retained to manage our affairs on a day-to-day basis. The properties are managed and leased by American Realty Capital Global Properties, LLC (the "Property Manager"). The Dealer Manager serves as the dealer manager of the IPO. The Advisor, Property Manager and Dealer Manager are affiliates of the Sponsor and Special Limited Partner. These related parties have received or will receive compensation and fees for services related to the IPO and for the investment and management of our assets. These entities receive or will receive fees during the offering, acquisition, operational and liquidation stages. The Advisor and Property Manager have entered into a service provider agreement with a third party, Moor Park Capital Partners LLP (the "Service Provider"), pursuant to which the Service Provider provides, subject to the Advisor's and Property Manager's oversight, certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence, and arranging debt financing and equity investment syndicates, solely with respect to our properties in Europe. Pursuant to the service provider agreements, 50% of the fees payable by us to the Advisor and a percentage of the fees paid to the Property Manager are assigned to the Service Provider, solely with respect to our foreign investments in Europe. Such fees are deducted from fees paid to the Advisor.
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Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our 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 and critical accounting policies include:
Offering and Related Costs
Offering and related costs include all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the Dealer Manager fees) include costs that may be paid by the Advisor, the Dealer Manager or their affiliates on our behalf. 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. We are obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor is obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the Dealer Manager fee) incurred by us in our offering exceed 1.5% of gross offering proceeds in the IPO. As a result, these costs are only our liability to the extent aggregate selling commissions, the dealer manager fee and other organization and offering costs do not exceed 11.5% of the gross proceeds determined at the end of the IPO.
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. We defer the revenue related to lease payments received from tenants in advance of their due dates.
As of December 31, 2014 and 2013, the Company included cumulative straight line rents receivable in Prepaid expenses and other assets in the balance sheet of $8.7 million and $0.2 million, respectively. The Company’s rental revenue included impacts of unbilled rental revenue of $8.5 million and $0.2 million respectively, to adjust contractual rent to straight line rent.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations.
As of December 31, 2014, some of our leases for properties in U.S and foreign countries contain upward adjustments to fair market value every five years or contain capped indexed escalation provisions, but there can be no assurance that future leases on properties in foreign countries will contain such provisions or that such provisions will protect us from all potential adverse effects of inflation.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, the Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
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The Company is required to make subjective assessments as to the useful lives of the Company's properties for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company's investments in real estate. These assessments have a direct impact on the Company's net income because if the Company were to shorten the expected useful lives of the Company's investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
The Company is required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as “held for sale” on the consolidated balance sheet.
The Company evaluates the lease accounting for each new property acquired with existing or new lease and reviews for any capital lease criterias. A lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. This situation is generally considered to be met if, among other things, the non-cancelable lease term is more than 75% of the useful life of the asset or if the present value of the minimum lease payments equals 90% or more of the leased property’s fair value at lease inception.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Purchase Price Allocation
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company's analysis of comparable properties in the Company's portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from 12 to 18 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on the Company's evaluation of the specific characteristics of each tenant’s lease and the Company's overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors.
The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
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In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company's pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Derivative Instruments
We may use derivative financial instruments to hedge all or a portion of the currency and the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed 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 is recognized immediately in gains (losses) on derivative instruments in the consolidated statement of operations. If the derivative is designated and qualifies for hedge accounting treatment the change in the estimated fair value of the derivative is recorded in other 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.
Recently Issued Accounting Pronouncements
Adopted:
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-04, Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date - a consensus of the FASB Emerging Issues Task Force. The guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (ASC 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The Update removes all incremental financial reporting requirements from GAAP for development stage entities, including the removal of Topic 915 from the FASB Accounting Standards Codification. In addition, the Update adds an example disclosure in Risks and Uncertainties (Topic 275) to illustrate one way that an entity that has not begun planned principal operations could provide information about the risks and uncertainties related to the company’s current activities. The Update also removes an exception provided to development stage entities in Consolidations (Topic 810) for determining whether an entity is a variable interest entity-which may change the consolidation analysis, consolidation decision, and disclosure requirements for a company that has an interest in a company in the development stage. Except for the amendments to ASC 810, the ASU is effective for public business entities for reporting periods (including interim periods) beginning after December 15, 2014. The amendments to ASC 810 are effective for annual periods beginning after December 15, 2015, for public business entities. Early adoption of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. The Company has adopted the provisions of this guidance effective January 1, 2014, and has applied the provisions prospectively. The adoption of this guidance has not had a material impact on the Company's consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties about an Entities Ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The assessment is required for each annual and interim reporting period. Management’s
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assessment should evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. Substantial doubt is deemed to exist when it is probable that the company will be unable to meet its obligations within one year from the financial statement issuance date. If conditions or events give rise to substantial doubt about the entity's ability to continue as a going concern, the guidance requires management to disclose information that enables users of the financial statements to understand the conditions or events that raised the substantial doubt, management's evaluation of the significance of the conditions or events that led to the doubt, the entity’s ability to continue as a going concern and management’s plans that are intended to mitigate or that have mitigated the conditions or events that raised substantial doubt about the entity's ability to continue as a going concern. The guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. The Company has elected to adopt the provisions of this guidance effective December 31, 2014, as early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Pending Adoption:
In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers, which revises guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. We have not yet selected a transition method and is currently evaluating the impact of the new guidance.
In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates from U.S. GAAP the concept of an extraordinary item. As a result, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the reporting and disclosure requirements for an event that is unusual in nature or that occurs infrequently. the ASU is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted if the guidance is applied as of the beginning of the annual period of adoption. The Company is currently evaluating the impact of the new guidance.
In February 2015, the FASB issued ASU 2015-02 Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The new guidance applies to entities in all industries and provides a new scope exception to registered money market funds and similar unregistered money market funds. It makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the variable interest entity (VIE) guidance. The standard does not add or remove any of the characteristics that determine if an entity is a VIE. However, when decision-making over the entity’s most significant activities has been outsourced, the standard changes how a reporting entity assesses if the equity holders at risk lack decision making rights. Previously, the reporting entity would be required to determine if there is a single equity holder that is able to remove the outsourced decision maker that has a variable interest. The new standard requires that the reporting entity first consider the rights of all of the equity holders at risk. If the equity holders have certain rights that are deemed to give them the power to direct the entity’s most significant activities, then the entity does not have this VIE characteristic. The new standard also introduces a separate analysis specific to limited partnerships and similar entities for assessing if the equity holders at risk lack decision making rights. Limited partnerships and similar entities will be VIEs unless the limited partners hold substantive kick-out rights or participating rights. In order for such rights to be substantive, they must be exercisable by a simple majority vote (or less) of all of the partners (exclusive of the general partner and its related parties). A right to liquidate an entity is viewed as akin to a kick-out right. The guidance for limited partnerships under the voting model has been eliminated in conjunction with the introduction of this separate analysis, including the rebuttable presumption that a general partner unilaterally controls a limited partnership and should therefore consolidate it. A limited partner with a controlling financial interest obtained through substantive kick out rights would consolidate a limited partnership. The standard eliminates certain of the criteria that must be met for an outsourced decision maker or service provider’s fee arrangement to not be a variable interest. Under current guidance, a reporting entity first assesses whether it meets power and economics tests based solely on its own variable interests in the entity to determine if it is the primary beneficiary required to consolidate the VIE. Under the new standard, a reporting entity that meets the power test will also include indirect interests held through related parties on a proportionate basis to determine whether it meets the economics test and is the primary beneficiary on a standalone basis. The standard is effective for annual periods beginning after December 15, 2015. Early adoption is allowed, including in any interim period. The Company is currently evaluating the impact of the new guidance.
In April 2014, the FASB issued guidance related to the reporting of discontinued operation and disclosures of disposals of components of an entity. This guidance defines a discontinued operation as a component or group of components disposed or classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and final result; the guidance states that a strategic shift could include a disposal of a major geographical area of operations, a major line of business, a major equity method investment or other major parts of an entity. The guidance also provides for additional disclosure
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requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations. The guidance will be effective for annual and interim periods beginning on or after December 15, 2014. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. All entities may early adopt the guidance for new disposals (or new classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company is currently evaluating the impact of the new guidance.
Results of Operations
Comparison of the Year Ended December 31, 2014 to the Year Ended December 31, 2013
We purchased 270 properties in 2014 compared to our portfolio of 37 properties as of December 31, 2013. The results of operations for the year ended December 31, 2014 therefore reflect significant increases in most categories.
Rental Income
Rental income was $88.2 million for the year ended December 31, 2014, compared to $3.9 million for the year ended December 31, 2013. The increase in rental income was driven by our acquisition of 270 properties since December 31, 2013 for an aggregate purchase price of $2,378.6 million, as of the respective acquisition dates. In addition, we had a full year of rental income on 37 properties acquired through December 31, 2013.
Operating Expense Reimbursements
Operating expense reimbursements were $5.2 million for the year ended December 31, 2014, compared to $51,000 for the year ended December 31, 2013. Pursuant to some of our lease agreements, tenants are required to reimburse us for property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. The operating expense reimbursement primarily reflects insurance expense incurred by us and subsequently reimbursed by the tenant. Operating expense reimbursements increased due to our acquisition of 270 properties since December 31, 2013, compared to our portfolio of 37 properties as of December 31, 2013. In addition, we had a full year of operating expense reimbursements on these properties acquired through December 31, 2013.
Property Operating Expense
Property operating expenses were $7.9 million for the year ended December 31, 2014, compared to $42,000 for the year ended 2013. Operating expenses increased as a result of our acquisition of 270 properties during the year ended December 31, 2014, compared to our portfolio of 37 properties as of December 31, 2013.
These costs primarily relate to the costs associated with maintaining insurance on our properties, which is incurred by us and is reimbursable by the tenants.
Operating Fees to Affiliates
Our Advisor is entitled to asset management fees in connection with providing asset management services. Effective January 1, 2013, the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor was eliminated. Instead we will issue (if approved by the board of directors) to the Advisor Class B Units, which will be forfeited unless certain conditions are met. During the year ended December 31, 2014 the board of directors approved the issuance of 682,351 Class B Units to the Advisor at a price of $9.00 per unit.
Our Service Provider and Property Manager are entitled to fees for the management of our properties. Property management fees are calculated as a percentage of gross revenues. During the years ended December 31, 2014 and 2013, property management fees were $1.3 million and $50,000, respectively. The Property Manager elected to waive $0.7 million and $25,000 of the property management fees for the years ended December 31, 2014 and 2013, respectively.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $83.5 million were incurred for the year ended December 31, 2014 related to our acquisition of 270 properties during the year. Acquisition and transaction related expenses of $7.7 million were incurred related to the 36 properties purchased during the year ended December 31, 2013.
General and Administrative Expenses
General and administrative expenses were $4.3 million for the year ended December 31, 2014, compared to $58,000 for the year ended December 31, 2013. The increase in general and administrative expenses during the year, was primarily driven by higher costs to maintain our larger real estate portfolio, such as higher professional fees, including strategic advisory fees from our Dealer Manager, taxes on foreign operations, board compensation and insurance costs.
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Depreciation and Amortization Expense
Depreciation and amortization expense was $40.4 million for the year ended December 31, 2014, compared to $2.1 million for the year ended December 31, 2013. The increase in depreciation and amortization expense is related to our acquisition of 270 properties during the year ended December 31, 2014. In addition, we had a full year of depreciation and amortization on 37 properties owned as of December 31, 2013.
The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and then depreciated or amortized over the estimated useful life.
Income Tax (Benefit) Expense
We recognize current income tax expense for state taxes and local income taxes incurred, if any, in foreign jurisdictions in which we invest. In addition, we perform an analysis of potential deferred tax or future tax benefit as a result of timing differences in taxes across jurisdictions. Our current income tax (benefit) expense fluctuates from period to period based primarily on the timing of those taxes. In 2014 we recognized a future income tax benefit of $(1.4) million as a result of our review of tax positions.
Interest Expense
Interest expense was $14.9 million for the year ended December 31, 2014, compared to $1.0 million for the year ended December 31, 2013. The increase in interest expense is related to the increase in mortgage notes payable outstanding as a result of our increased rate of property acquisitions during 2014, along with an increase in the amortization of deferred financing costs associated with these borrowings. Interest expense also increased as a result of amounts drawn under our revolving credit facility.
In July 2013, we entered into a credit agreement which allows for total borrowings of up to $50.0 million. We have, at various times, amended the facility to increase the aggregate borrowings available and, on October 16, 2014, further amended the credit facility agreement to increase aggregate borrowings to $680.0 million. $659.3 million was outstanding under the facility as of December 31, 2014. We did not utilize the facility during 2013.
We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on our refinancing needs and our acquisition activity.
Gains (Losses) on Foreign Currency
We had foreign currency exchange losses of $0.2 million for the year ended December 31, 2014, compared to exchange gains of $35,000 for the year ended December 31, 2013. Exchange gains and losses on foreign currency reflect the effect of changes in foreign currency exchange rates, primarily between the time deposits related to when acquisitions were made and the time the related transactions were consummated.
Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012
We purchased our first property and commenced our real estate operations in October 2012, and as such our results of operations for the year ended December 31, 2013 as compared to the year ended December 31, 2012 reflect significant increases in most categories.
Rental Income
Rental income was $3.9 million for the year ended December 31, 2013, compared to $30,000 for the year ended December 31, 2012. The increase in rental income was driven by our acquisition of 36 properties since December 31, 2012 for an aggregate purchase price of $182.3 million, as of the respective acquisition dates, as well as revenue for a full year from the one property held as of December 31, 2012.
Operating Expense Reimbursements
Operating expense reimbursements were $51,000 for the year ended December 31, 2013. We had no operating expense reimbursements for the year ended December 31, 2012. Operating expense reimbursements in 2013 related to our acquisition of 37 properties. Pursuant to some of our lease agreements, tenants are required to reimburse us for property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. The operating expense reimbursement primarily reflects insurance expense incurred by us and reimbursed by the tenant.
Property Operating Expense
Property operating expenses were $42,000 for the year ended December 31, 2013. We had no property operating expenses for the year ended December 31, 2012. Property operating expenses related to our acquisition of 37 properties through December 31, 2013. These costs primarily relate to the costs associated with maintaining insurance on our properties, which is incurred by us and is reimbursable by the tenants.
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Operating Fees to Affiliate
We do not pay our Advisor asset management fees in cash. Instead we issue to the Advisor (if approved by the board of directors) Class B Units, which will be forfeited unless certain conditions are met. During the year ended December 31, 2013, the board of directors approved the issuance of 23,392 Class B Units to the Advisor. Prior to this change, during the year ended December 31, 2012 approximately $3,000 of asset management fees were waived.
Our Property Manager is entitled to fees for the management of our properties. Property management fees are calculated as a percentage of gross revenues. During the years ended December 31, 2013 and 2012, property management fees were $50,000 and $1,000, respectively. The Property Manager elected to waive a portion of the property management fees for the years ended December 31, 2013 and 2012. Had these fees not been waived, we would have incurred additional property management fees of $25,000 and $1,000 for the years ended December 31, 2013 and 2012, respectively.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $7.7 million for the year ended December 31, 2013 related to our acquisition of 36 properties since December 31, 2012 for an aggregate purchase price of $182.3 million, as of the respective acquisition dates. Acquisition and transaction related expense of $0.2 million related to the one property we purchased during the year ended December 31, 2012.
General and Administrative Expenses
General and administrative expenses decreased by $0.1 million to $58,000 for the year ended December 31, 2013. The decrease was supported by an increased absorption of general and administrative expenses by the Advisor of $1.2 million for the year ended December 31, 2013, compared to $85,000 for the year ended December 31, 2012. This decrease was partially offset by a $1.1 million increase in 2013 general and administrative expenses from higher costs to maintain our larger real estate portfolio, including higher professional fees, strategic advisory fees from our Dealer Manager, taxes on foreign operations, board compensation and insurance costs.
Depreciation and Amortization Expense
Depreciation and amortization expense was $2.1 million for the year ended December 31, 2013, compared to $21,000 for the year ended December 31, 2012. The increase in depreciation and amortization expense related to our acquisition of 36 properties in 2013 for an aggregate purchase price of $182.3 million and a full year of depreciation for the one property held as of December 31, 2012. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful life.
Interest Expense
Interest expense was $1.0 million for the year ended December 31, 2013, compared to $10,000 for the year ended December 31, 2012. Interest expense related to mortgage notes payable increased by $0.8 million as a result of a higher level of notes during the year ended December 31, 2013. A comparable increase in amortization of deferred financing costs also occurred in 2013.
Gain (loss) on Foreign Currency
Gains on foreign currency were $35,000 for the year ended December 31, 2013. We had no gain or loss on foreign currency for the year ended December 31, 2012. Gains on foreign currency reflect the effect of changes in foreign currency exchange rates, primarily between the time deposits related to acquisitions were made and the time the related transactions were consummated.
Cash Flows for the Year Ended December 31, 2014
During the year ended December 31, 2014, net cash used in operating activities was $9.7 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash used in operating activities during the year ended December 31, 2014 reflects a net loss, after adjustments for non-cash items, of $13.1 million (net loss of $53.6 million adjusted for non-cash items including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, net realized and unrealized mark-to-market transactions of $3.3 million and share based compensation of $0.1 million). Operating cash flow during the year ended December 31, 2014 includes $83.5 million of acquisition and transaction related costs reflected in our net loss and an increase in prepaid expenses and other assets of $20.6 million primarily related to prepaid professional fees due for strategic advisory services from our Dealer Manager and receivables due from our Advisor related to absorbed costs. These cash outflows were partially offset by an increase in deferred rent of $10.4 million and increased accounts payable and accrued expenses of $15.7 million primarily related to accrued interest payable and local taxes.
Net cash used in investing activities during the year ended December 31, 2014 of $1,517.2 million primarily related to our acquisition of 270 properties which were partially funded with borrowings under our credit facility. Net cash used in investing activities also includes a deposit of $0.8 million on a potential future acquisition.
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Net cash provided by financing activities of $1,582.9 million during the year ended ended December 31, 2014 related to proceeds, net of receivables, from the issuance of common stock of $1,569.1 million and net borrowings under our credit facility of $240.0 million, partly offset by payments related to offering costs of $168.3 million, payments of deferred financing costs of $16.9 million, distributions to stockholders of $35.4 million and restricted cash increases of $5.4 million.
Cash Flows for the Year Ended December 31, 2013
During the year ended December 31, 2013, net cash used in operating activities was $3.6 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows used in operating activities during the year ended December 31, 2013 included $7.7 million of acquisition and transaction related costs. Cash outflows included a net loss adjusted for non-cash items of $4.6 million (net loss of $7.0 million adjusted for non-cash items including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs and share based compensation of $24,000), an increase in prepaid expenses of $1.8 million primarily related to prepaid professional fees due to strategic advisory services from our Dealer Manager and receivables due from our Advisor related to absorbed costs. These cash outflows were partially offset by an increase in accounts payable and accrued expenses of $1.9 million primarily related to accrued interest payable, local taxes and a roof repair credit received from a seller at acquisition as well as an increase in deferred rent of $0.9 million.
Net cash used in investing activities during the year ended December 31, 2013 of $111.5 million primarily related to our acquisition of 36 properties, which were partially funded with mortgage notes payable. Net cash used in investing activities also includes a deposit of $1.5 million on a potential future acquisition.
Net cash provided by financing activities of $124.2 million during the year ended December 31, 2013 related to proceeds, net of receivables, from the issuance of common stock of $148.9 million, partially offset by payments related to offering costs of $18.8 million, payments of deferred financing costs of $2.3 million, distributions to stockholders of $1.8 million, net advances from affiliates of $1.0 million and restricted cash increases of $0.7 million.
Cash Flows for the Year Ended December 31, 2012
During the year ended December 31, 2012, net cash used in operating activities was $0.4 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the year ended December 31, 2012 included $0.2 million of acquisition and transaction costs. Cash outflows primarily included a net loss of $0.4 million.
Net cash used in investing activities of $1.4 million during the year ended December 31, 2012 related to the acquisition of one property in October 2012 for a purchase price of $2.6 million, which was financed at acquisition with a $1.2 million mortgage note payable.
Net cash provided by financing activities of $2.0 million during the year ended December 31, 2012 related to proceeds from the issuance of common stock of $2.0 million and $0.8 million from affiliates primarily to fund third party offering costs. These inflows were partially offset by payments related to offering costs of $0.7 million, deferred financing costs of $41,000 and distributions of $1,000.
Liquidity and Capital Resources
Our IPO closed on June 30, 2014. We purchased our first property and commenced our real estate operations in October 2012. As of December 31, 2014, we owned 307 properties with an aggregate base purchase price of $2,378.6 million based on exchange rates as of the respective acquisition dates. As of December 31, 2014, we had 177.9 million shares of common stock outstanding, including unvested restricted shares from total gross proceeds of $1,766.4 million, including shares issued under the DRIP.
As of December 31, 2014, we had cash of $64.7 million. Our principal demands for cash will be for acquisition costs, including the purchase price of any properties, loans and securities we acquire, improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations, operating expenses and the payment of distributions to our stockholders.
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Generally, we will fund a portion of the purchase price of our acquisitions from the net proceeds of our offering. We intend to acquire our assets with cash and mortgage or other debt, but we also may acquire assets free and clear of permanent mortgage or other indebtedness by paying the entire purchase price for the asset in cash or in units of limited partnership interest in our operating partnership. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from additional public or private offerings, proceeds from the sale of properties and undistributed funds from operations. On July 25, 2013, we entered into a credit agreement, which allows for total borrowings of up to $50.0 million. The credit facility contains an “accordion feature” to allow us, under certain circumstances, to increase the aggregate borrowings under the credit facility to up to $750.0 million through additional commitments and in the sole and absolute discretion of the lender. We had, at various times, amended the facility to increase the aggregate borrowings available and, on October 16, 2014, we further amended the credit facility agreement to increase aggregate borrowings to $680.0 million. The initial maturity date of the credit facility is July 25, 2016. The credit facility also contains two one-year extension options, subject to certain conditions.
We expect to use 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 in our charter) 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 our IPO and once we have invested substantially all the proceeds of our IPO), 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 our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. As of December 31, 2014, we had advances under our credit facility of $659.3 million and secured mortgage notes payable of $281.2 million with a weighted average interest rate per annum of 3.7% and a weighted average remaining debt term of 4.9 years. Our debt leverage ratio was 39.5% (total debt as a percentage of total real estate investments on the date of acquisition) as of December 31, 2014.
We intend to maintain the following percentage of the overall value of our portfolio in liquid assets that can be liquidated more readily than properties: 5% of our NAV in excess of $1 billion. However, our stockholders should not expect that we will maintain liquid assets at or above these levels. To the extent that we maintain borrowing capacity under a line of credit, such available amount will be included in calculating our liquid assets. The Advisor will consider various factors in determining the amount of liquid assets we should maintain, including but not limited to our receipt of proceeds from sales of additional shares, our cash flow from operations, available borrowing capacity under a line of credit, if any, our receipt of proceeds from any asset sale, and the use of cash to fund repurchases. The board of directors will review the amount and sources of liquid assets on a quarterly basis.
Our board of directors has adopted a share repurchase plan that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we have sufficient funds available to fund such purchase. Since our inception through December 31, 2013, no shares of common stock have been repurchased or requested to be repurchased. During 2014, we acquired 99,969 shares at a weighted average price per share of $9.91.
Acquisitions
Our Advisor evaluates potential acquisitions of real estate and real estate related assets and engages in negotiations with sellers and borrowers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence and negotiation of final binding agreements. During this period, we may decide to temporarily invest any unused proceeds from common stock offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
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"), an industry trade group, has promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.
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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 writedowns, 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.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, because impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.
Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, 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 occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and modified funds from operations ("MFFO"), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. We are using the proceeds raised in our offering to, among other things, acquire properties. We intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national stock exchange, a merger or sale or another similar transaction) within three to five years of the completion of the offering. Thus, unless we raise, or recycle, a significant amount of capital after we complete our offering, we will not be continuing to purchase assets at the same rate as during our offering. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association ("IPA"), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to purchase a significant amount of new assets after we complete our offering. 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 properties 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 acquiring our properties and once our portfolio is seasoned. 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 IPO has been completed and our portfolio has been stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.
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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 ("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; mark-to-market adjustments included in net income; 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 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, 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.
Our MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to non-controlling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income during the period in which the asset is acquired. These expenses are paid in cash by us, and therefore such funds will not be available to invest in other assets, pay operating expenses or fund distributions. MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to our investors.
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 a limited and defined acquisition period. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties. 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, 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.
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. Accordingly, 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 GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure while an offering is ongoing and where the price of a share of common stock is a stated value. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods.
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-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.
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The table below reflects the items deducted or added to net loss in our calculation of FFO and MFFO for the periods indicated:
Three Months Ended | Year Ended | |||||||||||||||||||
(In thousands) | March 31, 2014 | June 30, 2014 | September 30, 2014 | December 31, 2014 | December 31, 2014 | |||||||||||||||
Net loss (in accordance with GAAP) | $ | (16,349 | ) | $ | (7,479 | ) | $ | (24,558 | ) | $ | (5,208 | ) | $ | (53,594 | ) | |||||
Depreciation and amortization(1) | 4,354 | 7,640 | 15,126 | 13,267 | 40,387 | |||||||||||||||
FFO | (11,995 | ) | 161 | (9,432 | ) | 8,059 | (13,207 | ) | ||||||||||||
Acquisition fees and expenses (2) | 16,516 | 8,244 | 29,124 | 29,614 | 83,498 | |||||||||||||||
Amortization of above or below market leases and liabilities (3) | 66 | 348 | 393 | (775 | ) | 32 | ||||||||||||||
Mark-to-market adjustments | 79 | 171 | (849 | ) | (1,282 | ) | (1,881 | ) | ||||||||||||
Straight-line rent (4) | (592 | ) | (906 | ) | (1,670 | ) | (5,517 | ) | (8,685 | ) | ||||||||||
Amortization of mortgage premiums | (124 | ) | (124 | ) | (125 | ) | (125 | ) | (498 | ) | ||||||||||
Losses (gains) on foreign currency, net (5) | (6 | ) | 26 | 737 | (571 | ) | 186 | |||||||||||||
MFFO | $ | 3,944 | $ | 7,920 | $ | 18,178 | $ | 29,403 | $ | 59,445 | ||||||||||
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(1) During 2014, we identified certain measurement adjustments that impacted the provisional accounting of our real estate investment purchase price allocations. As a result, depreciation and amortization period amounts have been adjusted to properly reflect such measurements.
(2) | In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management's analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our Advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. |
(3) Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(4) Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management's analysis of operating performance. During the fourth quarter of 2014, we have made a cumulative adjustment due to change in accounting policy for free rent credits with $2.0 million, $(1.3) million, $(0.4) million and $(0.2) million impact for the quarters ending December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014, respectively.
(5) Represents components of net loss primarily resulting from the changes in exchange rates related to the time deposits on acquisitions are made and the related acquisition is consummated. We have excluded these changes in value from our evaluation of our operating performance and MFFO because such adjustments may not be reflective of our ongoing performance.
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Distributions
On October 5, 2012, our board of directors authorized, and we declared, a distribution, which is calculated based on stockholders of record each day during the applicable period at a rate of $0.00194520548 per day, based on a price of $10.00 per share of common stock. Our distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to qualify and maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured. There is no assurance that we will continue to declare distributions at this rate.
The distributions began to accrue on November 28, 2012, 30 days following our initial property acquisition. The first distribution was paid in December 2012. During the year ended December 31, 2014, distributions paid to common stockholders totaled $80.3 million. During the year ended December 31, 2014, cash used to pay our distributions was generated from proceeds of issuance of common stock and common stock issued under the DRIP.
The following table shows the sources for the payment of distributions to common stockholders for the periods indicated:
Three Months Ended | Year Ended | ||||||||||||||||||||||||||||||||||
March 31, 2014 | June 30, 2014 | September 30, 2014 | December 31, 2014 | December 31, 2014 | |||||||||||||||||||||||||||||||
(In thousands) | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | ||||||||||||||||||||||||||||||
Distributions: | |||||||||||||||||||||||||||||||||||
Distributions paid in cash | $ | 2,028 | $ | 6,524 | $ | 13,083 | $ | 13,780 | $ | 35,415 | |||||||||||||||||||||||||
Distributions reinvested | 1,937 | 8,286 | 17,120 | 17,543 | 44,886 | ||||||||||||||||||||||||||||||
Distributions on unvested restricted stock | 3 | 3 | 2 | 4 | 12 | ||||||||||||||||||||||||||||||
Total distributions | $ | 3,968 | $ | 14,813 | $ | 30,205 | $ | 31,327 | $ | 80,313 | |||||||||||||||||||||||||
Source of distribution coverage: | |||||||||||||||||||||||||||||||||||
Cash flows provided by operations | $ | — | — | % | $ | 6,527 | 44.1 | % | $ | (6,416 | ) | (21.2 | )% | $ | (45 | ) | (0.1 | )% | $ | 66 | 0.1 | % | |||||||||||||
Proceeds from issuance of common stock | 2,031 | 51.2 | % | — | — | % | 19,501 | 64.6 | % | 13,829 | 44.1 | % | 35,361 | 44.0 | % | ||||||||||||||||||||
Common stock issued under the DRIP / offering proceeds | 1,937 | 48.8 | % | 8,286 | 55.9 | % | 17,120 | 56.7 | % | 17,543 | 56.0 | % | 44,886 | 55.9 | % | ||||||||||||||||||||
Total sources of distribution coverage | $ | 3,968 | 100.0 | % | $ | 14,813 | 100.0 | % | $ | 30,205 | 100.1 | % | $ | 31,327 | 100.0 | % | $ | 80,313 | 100.0 | % | |||||||||||||||
Cash flows provided by (used in) operations (GAAP basis) (1) | $ | (18,542 | ) | $ | 15,310 | $ | (6,416 | ) | $ | (45 | ) | $ | (9,693 | ) | |||||||||||||||||||||
Net loss (in accordance with GAAP) | $ | (16,349 | ) | $ | (7,479 | ) | $ | (24,558 | ) | $ | (5,208 | ) | $ | (53,594 | ) | ||||||||||||||||||||
_______________________________
(1) Cash flows used in operations for the year ended December 31, 2014 reflects acquisition and transaction related expenses of $83.5 million.
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The following table compares cumulative distributions paid to cumulative net loss (in accordance with GAAP) for the period from July 13, 2011 (date of inception) through December 31, 2014:
July 13, 2011 (date of inception) to December 31, 2014 | ||||
(In thousands) | ||||
Distributions paid: | ||||
Common stockholders in cash | $ | 37,178 | ||
Common stockholders pursuant to DRIP / offering proceeds | 46,206 | |||
Unvested restricted stockholders in cash | 18 | |||
Total distributions paid | $ | 83,402 | ||
Reconciliation of net loss: | ||||
Revenues | $ | 97,364 | ||
Acquisition and transaction-related expenses | (91,471 | ) | ||
Depreciation and amortization | (42,520 | ) | ||
Other operating expenses | (13,408 | ) | ||
Income tax benefit | 1,431 | |||
Other non-operating expense | (12,408 | ) | ||
Net loss (in accordance with GAAP) (1) | $ | (61,012 | ) | |
_______________________________
(1) Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions.
Dilution
Our net tangible book value per share is based on balance sheet amounts and is calculated as (1) total book value of our assets less the net value of intangible assets of $462.8 million at December 31, 2014, (2) minus total liabilities less the net value of intangible liabilities, if applicable, (3) divided by the total number of shares of common and preferred stock outstanding as of December 31, 2014. This calculation assumes that the value of real estate, and real estate related assets and liabilities diminish predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated value per share. It is not intended to reflect the value of our assets upon an orderly liquidation. Our net tangible book value reflects dilution in the value of our common and preferred stock from the offer price as a result of (i) operating losses, which reflect, among other things, accumulated depreciation and amortization of real estate investments, (ii) the funding of distributions from sources other than our cash flow from operations, and (iii) fees paid in connection with our IPO, including commissions, dealer manager fees and other offering costs. As of December 31, 2014, our net tangible book value per share was $5.48. The offering price of shares under our primary offering (ignoring purchase price discounts for certain categories of purchasers) was $10.00 per share and $9.50 per common share under our DRIP.
Loan Obligations
The payment terms of our loan obligations require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. Our loan agreements stipulate that we comply with specific reporting covenants. As of December 31, 2014, we were in compliance with the debt covenants under our loan agreements.
Our Advisor may, with approval from our independent board of directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third-parties on a case-by-case basis as acquisition opportunities present themselves simultaneous with our capital raising efforts. We view the use of short-term borrowings as an efficient and accretive means of acquiring real estate in advance of raising equity capital. Accordingly, we can take advantage of buying opportunities as we expand our fund raising activities. As additional equity capital is obtained, these short-term borrowings will be repaid.
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Foreign Currency Translation
Our reporting currency is the U.S. dollar. The functional currency of the our foreign operations is the applicable local currency for each foreign subsidiary. Assets and liabilities of foreign subsidiaries (including intercompany balances for which settlement is not anticipated in the foreseeable future) are translated at the spot rate in effect at the applicable reporting date. The amounts reported in the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive earnings (loss) in the consolidated statements of equity.
Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2014:
2015 | Years Ended December 31, | |||||||||||||||||||
(In thousands) | Total | 2016 — 2017 | 2018 — 2019 | Thereafter | ||||||||||||||||
Principal on mortgage notes payable | $ | 281,186 | $ | 721 | $ | 23,857 | $ | 239,936 | $ | 16,672 | ||||||||||
Interest on mortgage notes payable | 39,108 | 8,976 | 17,552 | 11,198 | 1,382 | |||||||||||||||
Principal on credit facility (a) | 659,268 | — | 659,268 | — | — | |||||||||||||||
Interest on credit facility (a) | 20,122 | 12,840 | 7,282 | — | — | |||||||||||||||
Ground lease rental payments due | 2,270 | 20 | 40 | 42 | 2,168 | |||||||||||||||
Total (b) | $ | 1,001,954 | $ | 22,557 | $ | 707,999 | $ | 251,176 | $ | 20,222 | ||||||||||
_________________________
(a) Amounts in the table above that relate to our foreign operations are based on the exchange rate of the local currencies at December 31, 2014, which consisted primarily of the euro and British pounds. At December 31, 2014, we had no material capital lease obligations for which we were the lessee, either individually or in the aggregate.
(b) Derivative payments are not included in this table due to the uncertainty of the timing and amounts of payments. Additionally, as derivatives can be settled at any point in time, they are generally not considered long-term in nature.
Credit Facility
On July 25, 2013, the Company, through the OP, entered into a credit agreement relating to a credit facility that provides for aggregate revolving loan borrowings of up to $50.0 million (subject to borrowing base availability). The credit facility contains an “accordion feature” to allow the Company, under certain circumstances, to increase the aggregate borrowings under the credit facility up to $750.0 million through additional commitments. We had, at various times, amended the facility to increase the aggregate borrowings available and, on October 16, 2014, we further amended the credit facility agreement to increase aggregate borrowings to $680.0 million. We had $659.3 million outstanding under the facility as of December 31, 2014. We did not utilize the facility during 2013.
As of December 31, 2014, total outstanding advances under the credit facility were $659.3 million. This includes advances of £169.8 million and €128.0 million. These draws were used to fund individual investments in the respective local currency and were designated as net investment hedges. There were no outstanding advances under the credit facility as of December 31, 2013. The unused borrowing capacity, based on the value of the borrowing base properties as of December 31, 2014 and December 31, 2013, was $20.7 million and $31.1 million, respectively.
We have no off-balance sheet arrangements as of December 31, 2014 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Election as a REIT
We qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2013. Commencing with such taxable year, we were organized and operate in such a manner as to qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. In order to qualify and continue to qualify for taxation as a REIT, we must, among other things, distribute annually at least 90% of our REIT taxable income. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain federal, state, local and foreign taxes on our income and assets, including alternative minimum taxes, taxes on any undistributed income and state, local or foreign income, franchise, property and transfer taxes. Any of these taxes decrease our earnings and our available cash.
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In addition, our international assets and operations, including those designated as direct or indirect qualified REIT subsidiaries or other disregarded entities of a REIT, continue to be subject to taxation in the foreign jurisdictions where those assets are held or those operations are conducted.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
We have entered into agreements with affiliates of our Sponsor, whereby we have paid or may in the future pay certain fees or reimbursements to our Advisor or its affiliates and entities under common ownership with our Advisor in connection with items such as acquisition and financing activities, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 10 — Related Party Transactions to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the various related party transactions, agreements and fees.
In addition, the limited partnership agreement of the OP was amended as of December 31, 2013 to allow the special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to our Advisor, a limited partner of the OP. In connection with this special allocation, our Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP. Our Advisor is directly or indirectly controlled by certain officers and directors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or rates. Our interest rate risk management objectives with respect to our long-term debt will be to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. Our currency risk management objectives with respect to our long-term debt and our investment outside the United States will be to limit the impact of exchange changes on earnings and cash flows, and to lower our overall borrowing cost. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps and collars in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We may also be exposed to foreign currency fluctuations as a result of any investments in foreign operations in Europe and elsewhere internationally.
As of December 31, 2014, our debt included fixed-rate secured mortgage financing, with a carrying value of $282.4 million, a fair value of $281.0 million and a weighted average interest rate per annum of 3.7%. Changes in market interest rates on our fixed-rate debt impact the fair value of the notes, but it has no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 2014 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $1.8 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $2.3 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and, assuming no other changes in our capital structure. As the information presented above includes only those exposures that existed as of December 31, 2014, it does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report of Form 10-K
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
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Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.
Internal Control Over Financial Reporting
Management's Annual Reporting on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act.
In connection with the preparation of our Annual Report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making that assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework (2013).
Based on its assessment, our management concluded that, as of December 31, 2014, our internal control over financial reporting was effective.
The rules of the SEC do not require, and this annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
During the fiscal year ended December 31, 2014, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. A copy of our code of ethics may be obtained, free of charge, by sending a written request to our executive office – 405 Park Avenue – 14th Floor, New York, NY 10022, attention Chief Financial Officer.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 2015 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 2015 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 2015 annual meeting of stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 2015 annual meeting of stockholders.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statement Schedules
See the Index to Consolidated Financial Statements at page F-1 of this report.
The following financial statement schedule is included herein at page F-35 of this report:
Schedule III – Real Estate and Accumulated Depreciation
(b) Exhibits
EXHIBITS INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2014 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | |
3.1* | Articles of Amendment and Restatement for American Realty Capital Global Trust, Inc. | |
3.2 * | Bylaws of American Realty Capital Global Trust, Inc. | |
4.1 (7) | Amended and Restated Agreement of Limited Partnership of American Realty Capital Global Operating Partnership, L.P., dated July 2, 2013 | |
4.2 (9) | First Amendment to Amended and Restated Agreement of Limited Partnership of American Realty Capital Global Operating Partnership, L.P. | |
10.1(7) | Third Amended and Restated Advisory Agreement, dated July 15, 2013, by and among American Realty Capital Global Trust, Inc., American Realty Capital Global Operating Partnership, L.P. and American Realty Capital Global Advisors, LLC | |
10.2(4) | Property Management and Leasing Agreement, among American Realty Capital Global Trust, Inc., American Realty Capital Global Operating Partnership, L.P. and American Realty Capital Global Properties, LLC | |
10.3 (4) | Company’s Restricted Share Plan | |
10.4 (4) | Company’s Stock Option Plan | |
10.5 (3) | Valuation Services Agreement, dated August 13, 2012, between American Realty Capital Global Trust, Inc. and Duff & Phelps, LLC | |
10.6 (5) | Agreement for the Sale and Purchase of Wickes Store, dated April 12, 2013, between Aviva Investors Pensions Limited and ARC WKBPLUK001, LLC | |
10.7 (5) | Facility Letter, dated May 3, 2013, by and between ARC WKBPLUK001, LLC and Santander UK plc | |
10.8 (6) | Asset Sale Contract, dated as of May 22, 2013, by and among Mapeley Acquisition Co (5) Limited, Jemma McAndrew and Richard Stanley and ARC EEMTRUK001, LLC | |
10.9 (6) | Facility Letter, dated June 7, 2013, by and between ARC EEMTRUK001, LLC and SantanderUK plc | |
10.10 (6) | Agreement for Sale of 1, 2 and 3 Walnut Court, Kembrey Park, Swindon SN2 8BW | |
10.11 (6) | Facility Letter, dated July 19, 2013, by and between ARC TWSWDUK001, LLC and Santander UK plc | |
10.12 (6) | Agreement for the Sale of Land Lying to the North West of Reginald Mitchell Way, Tunstall, dated July 23, 2013, by and among (1) St James Place UK PLC and ARC WKSOTUK001, LLC | |
10.13 (6) | Facility Letter, dated July 22, 2013, by and between ARC WKSOTUK001, LLC and Santander UK plc | |
10.14 (6) | Credit Agreement, dated as of July 25, 2013, by and among American Realty Capital Global Partnership, L.P., JPMorgan Chase Bank, N.A., and the lenders and agents party thereto. | |
10.15 (7) | Agreement for Purchase and Sale of Real Property, dated as of August 19, 2013, by and between AR Capital, LLC and Alliance HSP Fort Washington Office I Limited Partnership | |
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Exhibit No. | Description | |
10.16 (7) | Agreement for Purchase and Sale of Real Property, dated as of August 24, 2013, by and between AR Capital, LLC and Stein Family, LLC | |
10.17 (7) | Agreement related to the sale and leasback of Solar House, dated 4th September, 2013, by Northern Rock (Asset Management) PLC and ARC NRSLDUK001, LLC | |
10.18 (7) | First Amendment to Agreement for Purchase and Sale of Real Property dated as of September 10, 2013, by and between Alliance AR Capital, LLC and Alliance HSP Fort Washington Office I Limited Partnership | |
10.19 (7) | Facility Letter, dated September 4, 2013, by and between ARC NRSLDUK001, LLC and Santander UK plc | |
10.20 (8) | Purchase and Sale Agreement by and among ARC PADRBPA001, LLC and AR Capital, LLC and the sellers described on schedules thereto, dated as of July 24, 2013 | |
10.21 (9) | Agreement for Purchase and Sale of Real Property, dated September 3, 2013, by and between AR Capital, LLC and Towers Partners, L.L.C. | |
10.22 (9) | Amendment to Agreement for Purchase and Sale of Real Property, by and between AR Capital, LLC and Towers Partners, LLC | |
10.23 (9) | Agreement to Assign Agreements of Sale, dated November 12, 2013, by and between Setzer Properties XCW, LLC and AR Capital, LLC | |
10.24 (9) | Agreement for Purchase and Sale of Real Property, dated December 3, 2013, by and between AR Capital, LLC and 3W Development II, L.L.C. | |
10.25 (10) | Sale and purchase agreement, dated November 19, 2013, between Axiom Asset 1 GmbH & Co. KG and ARC RMNUSBER01, LLC | |
10.26 (10) | Agreement for lease, dated December 24, 2013, between Coolatinney Developments Limited and ARC PFBFDUK001, LLC | |
10.27 (10) | Sale and purchase agreement, dated December 31, 2013, among Crown Crest Property Developments Limited, ARC CCLTRUK001, LLC, Crown Crest (Leicester) Plc and Crown Crest Group Limited and Poundstretcher Limited | |
10.28 (10) | Sale and purchase agreement, dated January 21, 2014, between Holaw (472) Limited and ARC ALSFDUK001, LLC | |
10.29 (10) | Loan Agreement, dated February 5, 2014, between ARC RMNUSGER01 LLC and Deutsche Pfandbriefbank AG | |
10.30 (10) | Facility Letter, dated January 30, 2014, between Santander UK Plc and ARC PFBDUK001, LLC | |
10.31 (10) | Facility Letter, dated February 13, 2014, between Santander UK Plc and ARC CCLTRUK001, LLC | |
10.32 (10) | Facility Agreement, dated March 7, 2014, among ARC ALSFDUK001, LLC, Royal Bank of Scotland International Limited and the other parties named therein | |
10.33 (10) | Omnibus Amendment to Loan Documents, dated as of March 26, 2014, among American Realty Capital Global Partnership, L.P., JPMorgan Chase Bank, N.A., and the lenders and agents party thereto. | |
10.34 (11) | Agreement for Purchase and Sale of Real Property, dated April 29, 2014, between AR Capital, LLC and Mesa Real Estate Partners, L.P. | |
10.35 (11) | Third Amendment to Credit Agreement, dated as of June 24, 2014, among American Realty Capital Global Operating Partnership, the Company, ARC Global Holdco, LLC, JPMorgan Chase Bank, N.A. and the other parties named thereto | |
10.36 * | Indemnification Agreement between the Company and each of Scott J. Bowman, Peter M. Budko, Patrick J. Goulding, William M. Kahane, Nicholas Radesca, Edward G. Rendell, Nicholas S. Schorsch, Abby M. Wenzel, Andrew Winer, Edward M. Weil, Jr., American Realty Capital Global Advisors, LLC, AR Capital, LLC and RCS Capital Corporation, dated as of December 31, 2014 | |
10.37 * | Indemnification Agreement between the Company and P. Sue Perrotty, dated as of March 30, 2015 | |
14 (4) | Code of Ethics | |
21 * | List of Subsidiaries | |
16.1 (12) | Letter from Grant Thornton LLP to the Securities and Exchange Commission dated January 20, 2015. | |
23.1* | Consent of PricewaterhouseCoopers LLP | |
23.2* | Consent of Grant Thornton LLP | |
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 | |
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Exhibit No. | Description | |
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 | |
101.1 * | XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital Global Trust, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive 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. | |
_______________________
* Filed herewith
(1) | Filed as an exhibit to Post-Effective Amendment No. 2 to our Registration Statement on Form S-11 filed with the SEC on October 15, 2012, and incorporated by reference herein. |
(2) | Filed as an exhibit to our Registration Statement on Form S-11 filed with the SEC on October 27, 2011, and incorporated by reference herein. |
(3) | Filed as an exhibit to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 1 to our Registration Statement on Form S-11 filed with the SEC on August 14, 2012, and incorporated by reference herein. |
(4) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 11, 2013, and incorporated by reference herein. |
(5) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 10, 2013, and incorporated by reference herein. |
(6) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC on August 13, 2013, and incorporated by reference herein. |
(7) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 filed with the SEC on November 13, 2013, and incorporated by reference herein. |
(8) | Filed as an exhibit to our Current Report on Form 8-K/A filed with the SEC on January 3, 2014 and incorporated by reference herein. |
(9) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 7, 2014, and incorporated by reference herein. |
(10) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 30, 2014 filed with the SEC on May 15, 2014, and incorporated by reference herein. |
(11) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 11, 2014, and incorporated by reference herein. |
(12) | Filed as an exhibit to our Current Report on form 8-K filed with the SEC on January 20, 2015, and incorporated by reference herein. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 2nd day of April, 2015.
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC. | ||
By: | /s/ Scott J. Bowman | |
Scott J. Bowman | ||
CHIEF EXECUTIVE OFFICER | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Capacity | Date | ||
/s/ P. Sue Perrotty | Non-Executive Chair of The Board of Directors | April 2, 2015 | ||
P. Sue Perrotty | ||||
/s/ William M. Kahane | Director | April 2, 2015 | ||
William M. Kahane | ||||
/s/ Scott J. Bowman | Chief Executive Officer (Principal Executive Officer) | April 2, 2015 | ||
Scott J. Bowman | ||||
/s/ Andrew Winer | President and Chief Investment Officer | April 2, 2015 | ||
Andrew Winer | ||||
/s/ Patrick J. Goulding | Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) | April 2, 2015 | ||
Patrick J. Goulding | ||||
/s/ Edward G. Rendell | Independent Director | April 2, 2015 | ||
Edward G. Rendell | ||||
/s/ Abby M. Wenzel | Independent Director | April 2, 2015 | ||
Abby M. Wenzel | ||||
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AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Financial Statement Schedule: | |
Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes thereto, or because the conditions requiring their filing do not exist.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of American Realty Capital Global Trust, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of American Realty Capital Global Trust, Inc. (the "Company") and its subsidiaries at December 31, 2014, and the results of their operations and their cash flows for the year ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
April 2, 2015
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
American Realty Capital Global Trust, Inc.
We have audited the accompanying consolidated balance sheets of American Realty Capital Global Trust, Inc. (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity and cash flows for each of the two years ended December 31, 2013 and 2012. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Realty Capital Global Trust, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the two years ended December 31, 2013 and 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 7, 2014
F-3
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, | |||||||
2014 | 2013 | ||||||
ASSETS | |||||||
Real estate investments, at cost: | |||||||
Land | $ | 326,696 | $ | 44,647 | |||
Buildings, fixtures and improvements | 1,519,558 | 104,362 | |||||
Construction in progress | 9,706 | — | |||||
Acquired intangible lease assets | 484,079 | 47,899 | |||||
Total real estate investments, at cost | 2,340,039 | 196,908 | |||||
Less accumulated depreciation and amortization | (42,568 | ) | (2,307 | ) | |||
Total real estate investments, net | 2,297,471 | 194,601 | |||||
Cash and cash equivalents | 64,684 | 11,500 | |||||
Restricted cash | 6,104 | 737 | |||||
Derivatives, at fair value | 13,638 | 734 | |||||
Investment securities, at fair value | 490 | — | |||||
Receivable for sale of common stock | — | 1,766 | |||||
Prepaid expenses and other assets | 24,873 | 3,454 | |||||
Due from affiliates | 500 | — | |||||
Deferred tax asset | 2,102 | — | |||||
Goodwill and other intangible assets | 3,665 | — | |||||
Deferred costs, net | 15,270 | 2,135 | |||||
Total assets | $ | 2,428,797 | $ | 214,927 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Mortgage notes payable | $ | 281,186 | $ | 76,904 | |||
Mortgage premium, net | 1,165 | 1,663 | |||||
Credit facility | 659,268 | — | |||||
Below-market lease liability, net | 21,676 | 5,854 | |||||
Derivatives, at fair value | 6,115 | 2,565 | |||||
Due to affiliates | 400 | — | |||||
Accounts payable and accrued expenses | 19,357 | 2,519 | |||||
Deferred rent | 12,252 | 1,862 | |||||
Distributions payable | 10,709 | 840 | |||||
Total liabilities | 1,012,128 | 92,207 | |||||
Commitments and contingencies (Note 9) | — | — | |||||
Stockholders' equity: | |||||||
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding at December 31, 2014 and December 31, 2013 | — | — | |||||
Common stock, $0.01 par value, 300,000,000 shares authorized, 177,933,175 and 15,665,827 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | 1,782 | 157 | |||||
Additional paid-in capital | 1,575,592 | 133,592 | |||||
Accumulated other comprehensive income (loss) | (5,589 | ) | 319 | ||||
Accumulated deficit | (155,116 | ) | (11,348 | ) | |||
Total stockholders' equity | 1,416,669 | 122,720 | |||||
Total liabilities and stockholders' equity | $ | 2,428,797 | $ | 214,927 | |||
F-4
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Revenue: | ||||||||||||
Rental income | $ | 88,158 | $ | 3,900 | $ | 30 | ||||||
Operating expense reimbursements | 5,225 | 51 | — | |||||||||
Total revenues | 93,383 | 3,951 | 30 | |||||||||
Expenses: | ||||||||||||
Property operating | 7,947 | 42 | — | |||||||||
Operating fees to affiliate | 797 | 50 | 1 | |||||||||
Acquisition and transaction related | 83,498 | 7,745 | 228 | |||||||||
General and administrative | 4,314 | 58 | 183 | |||||||||
Depreciation and amortization | 40,387 | 2,112 | 21 | |||||||||
Income tax benefit | (1,431 | ) | — | — | ||||||||
Total expenses | 135,512 | 10,007 | 433 | |||||||||
Operating loss | (42,129 | ) | (6,056 | ) | (403 | ) | ||||||
Other income (expense): | ||||||||||||
Interest expense | (14,852 | ) | (969 | ) | (10 | ) | ||||||
Income from investments | 14 | — | — | |||||||||
Gain (loss) on foreign currency | (186 | ) | 35 | — | ||||||||
Gain on derivative instruments | 1,881 | — | — | |||||||||
Gain (loss) on hedging instruments deemed ineffective | 1,387 | — | — | |||||||||
Other income | 291 | 1 | — | |||||||||
Total other expense | (11,465 | ) | (933 | ) | (10 | ) | ||||||
Net loss | $ | (53,594 | ) | $ | (6,989 | ) | $ | (413 | ) | |||
Other comprehensive income (loss): | ||||||||||||
Change in cumulative translation adjustment | (11,990 | ) | 2,140 | 10 | ||||||||
Designated derivatives, fair value adjustments | 6,082 | (1,778 | ) | (53 | ) | |||||||
Comprehensive loss | $ | (59,502 | ) | $ | (6,627 | ) | $ | (456 | ) | |||
Basic and diluted weighted average shares outstanding | 126,079,369 | 5,453,404 | 64,252 | |||||||||
Basic and diluted net loss per share | $ | (0.43 | ) | $ | (1.28 | ) | $ | (6.43 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Common Stock | ||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | |||||||||||||||||
Balance, December 31, 2011 | 22,222 | — | 200 | — | (16 | ) | 184 | |||||||||||||||
Issuance of common stock | 225,278 | 3 | 2,028 | — | — | 2,031 | ||||||||||||||||
Common stock offering costs, commissions and dealer manager fees | — | — | (2,550 | ) | — | — | (2,550 | ) | ||||||||||||||
Share-based compensation | 9,000 | — | 11 | — | — | 11 | ||||||||||||||||
Distributions declared | — | — | — | — | (16 | ) | (16 | ) | ||||||||||||||
Net loss | — | — | — | — | (413 | ) | (413 | ) | ||||||||||||||
Other comprehensive loss | — | — | — | (43 | ) | — | (43 | ) | ||||||||||||||
Balance, December 31, 2012 | 256,500 | 3 | (311 | ) | (43 | ) | (445 | ) | (796 | ) | ||||||||||||
Issuance of common stock | 15,261,350 | 153 | 150,484 | — | — | 150,637 | ||||||||||||||||
Common stock offering costs, commissions and dealer manager fees | — | — | (17,924 | ) | — | — | (17,924 | ) | ||||||||||||||
Common stock issued through distribution reinvestment plan | 138,977 | 1 | 1,319 | — | — | 1,320 | ||||||||||||||||
Share-based compensation | 9,000 | — | 24 | — | — | 24 | ||||||||||||||||
Distributions declared | — | — | — | — | (3,914 | ) | (3,914 | ) | ||||||||||||||
Net loss | — | — | — | — | (6,989 | ) | (6,989 | ) | ||||||||||||||
Other comprehensive income | — | — | — | 362 | — | 362 | ||||||||||||||||
Balance, December 31, 2013 | 15,665,827 | $ | 157 | $ | 133,592 | $ | 319 | $ | (11,348 | ) | $ | 122,720 | ||||||||||
Issuance of common stock | 157,635,481 | 1,579 | 1,565,738 | — | — | 1,567,317 | ||||||||||||||||
Common stock offering costs, commissions and dealer manager fees | — | — | (167,693 | ) | — | — | (167,693 | ) | ||||||||||||||
Common stock issued through distribution reinvestment plan | 4,721,780 | 47 | 44,839 | — | — | 44,886 | ||||||||||||||||
Common stock repurchases | (99,969 | ) | (1 | ) | (990 | ) | — | — | (991 | ) | ||||||||||||
Share-based compensation | 10,056 | — | 10 | — | — | 10 | ||||||||||||||||
Amortization of restricted shares | — | — | 96 | — | — | 96 | ||||||||||||||||
Distributions declared | — | — | — | — | (90,174 | ) | (90,174 | ) | ||||||||||||||
Net loss | — | — | — | — | (53,594 | ) | (53,594 | ) | ||||||||||||||
Cumulative translation adjustment | — | — | — | (11,990 | ) | — | (11,990 | ) | ||||||||||||||
Other comprehensive income | — | — | — | 6,082 | — | 6,082 | ||||||||||||||||
Balance, December 31, 2014 | 177,933,175 | $ | 1,782 | $ | 1,575,592 | $ | (5,589 | ) | $ | (155,116 | ) | $ | 1,416,669 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (53,594 | ) | $ | (6,989 | ) | $ | (413 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||||||
Depreciation | 20,856 | 837 | 12 | ||||||||
Amortization of intangibles | 19,531 | 1,275 | 9 | ||||||||
Amortization of deferred financing costs | 3,753 | 250 | 1 | ||||||||
Amortization of mortgage premium | (498 | ) | (1 | ) | — | ||||||
Accretion of below-market lease liability | (1,085 | ) | (29 | ) | — | ||||||
Amortization of above-market lease assets | 1,085 | — | 9 | ||||||||
Amortization of above-market ground lease assets | 32 | — | — | ||||||||
Share-based compensation | 106 | 24 | 11 | ||||||||
Net realized and unrealized mark-to-market transactions | (3,272 | ) | — | — | |||||||
Changes in assets and liabilities: | |||||||||||
Prepaid expenses and other assets | (20,644 | ) | (1,819 | ) | (76 | ) | |||||
Deferred tax asset | (2,102 | ) | — | — | |||||||
Due from affiliates | — | — | — | ||||||||
Accounts payable and accrued expenses | 15,749 | 1,888 | 29 | ||||||||
Deferred rent | 10,390 | 917 | — | ||||||||
Net cash used in operating activities | (9,693 | ) | (3,647 | ) | (418 | ) | |||||
Cash flows from investing activities: | |||||||||||
Investment in real estate and other assets | (1,507,072 | ) | (110,026 | ) | (1,357 | ) | |||||
Deposits for real estate acquisitions | (775 | ) | (1,474 | ) | — | ||||||
Capital expenditures | (8,838 | ) | — | — | |||||||
Purchase of investment securities | (490 | ) | — | — | |||||||
Net cash used in investing activities | (1,517,175 | ) | (111,500 | ) | (1,357 | ) | |||||
Cash flows from financing activities: | |||||||||||
Borrowings under credit facility | 258,500 | — | — | ||||||||
Repayments on credit facility | (18,500 | ) | — | — | |||||||
Proceeds from notes payable | 12,505 | — | — | ||||||||
Payments on notes payable | (12,505 | ) | — | — | |||||||
Payments on mortgage notes payable | (135 | ) | — | — | |||||||
Proceeds from issuance of common stock | 1,569,082 | 148,871 | 2,031 | ||||||||
Payments of offering costs | (168,270 | ) | (18,770 | ) | (748 | ) | |||||
Payments of deferred financing costs | (16,888 | ) | (2,345 | ) | (41 | ) | |||||
Distributions paid | (35,415 | ) | (1,769 | ) | (1 | ) | |||||
Advances from affiliates, net | (100 | ) | (1,041 | ) | 786 | ||||||
Restricted cash | (5,367 | ) | (737 | ) | — | ||||||
Net cash provided by financing activities | 1,582,907 | 124,209 | 2,027 | ||||||||
Net change in cash and cash equivalents | 56,039 | 9,062 | 252 | ||||||||
Effect of exchange rate changes on cash | (2,855 | ) | 2,176 | 10 | |||||||
Cash and cash equivalents, beginning of period | 11,500 | 262 | — | ||||||||
Cash and cash equivalents, end of period | $ | 64,684 | $ | 11,500 | $ | 262 | |||||
F-8
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Supplemental Disclosures | |||||||||||
Cash paid for interest | $ | 6,540 | $ | 218 | $ | — | |||||
Non-Cash Investing and Financing Activities: | |||||||||||
Mortgage notes payable assumed or used to acquire investments in real estate | $ | 217,791 | $ | 75,651 | $ | 1,228 | |||||
Premium on mortgage note payable | — | 1,664 | — | ||||||||
Borrowings under line of credit to acquire real estate | 446,558 | — | — | ||||||||
Common stock issued through distribution reimbursement plan | 44,886 | 1,320 | — | ||||||||
Reclassification of deferred offering costs | — | — | 559 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-9
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Note 1 — Organization
American Realty Capital Global Trust, Inc. (the "Company"), incorporated on July 13, 2011, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2013.
On April 20, 2012, the Company commenced its initial public offering ("IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, 0.01 par value per share, at a price of 10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-177563), as amended from time to time (the "Registration Statement") filed with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended. The Registration Statement also covered up to an additional 25.0 million shares of common stock issuable pursuant to a distribution reinvestment plan (the "DRIP") under which the Company's common stockholders could elect to have their distributions reinvested in additional shares of the Company's common stock. On June 13, 2014, as permitted, the Company announced the reallocation of 23.8 million shares, which represented all remaining unsold shares available pursuant to the DRIP. Concurrent with such reallocation, on June 17, 2014, the Company registered an additional 25.0 million shares to be issued under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-196829) with total 50.0 million shares available under the DRIP.
The Company's IPO closed on June 30, 2014. As of December 31, 2014, the Company had 177.9 million shares of stock outstanding, including unvested restricted shares and shares issued under the DRIP and had received total gross proceeds from the IPO of $1.8 billion including DRIP.
The Company was formed to primarily acquire a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. The Company may also originate or acquire first mortgage loans secured by real estate. The Company's primary geographic target is the United States, although up to 40% of its portfolio may consist of properties purchased in Europe with an additional 10% allocation to properties purchased elsewhere internationally. All such properties may be acquired and operated by the Company alone or jointly with another party. As of December 31, 2014, the Company had 61% of investments in U.S. and 39% in Europe and owned 307 properties consisting of 16.3 million rentable square feet, which were 100.0% leased, with an average remaining lease term of 11.6 years.
Substantially all of the Company's business is conducted through American Realty Capital Global Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP ("OP units"). American Realty Capital Global Special Limited Partner, LLC (the "Special Limited Partner"), an entity controlled by AR Capital Global Holdings, LLC (the "Sponsor"), contributed $200 to the OP in exchange for 22 OP units, which represents a nominal percentage of the aggregate OP ownership. A holder of OP units has 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, in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited 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 has no direct employees. The Company has retained American Realty Capital Global Advisors, LLC (the "Advisor") to manage our affairs on a day-to-day basis. The properties are managed and leased by American Realty Capital Global Properties, LLC (the "Property Manager"). Realty Capital Securities, LLC (the "Dealer Manager") serves as the dealer manager of the IPO. The Advisor, Property Manager and Dealer Manager are affiliates of the Sponsor and Special Limited Partner. These related parties have received or will receive compensation and fees for services related to the IPO and for the investment and management of our assets. These entities receive fees during the offering, acquisition, operational and liquidation stages. The Advisor has entered into a service provider agreement with Moor Park Capital Partners LLP (the "Service Provider"). The Service Provider is not affiliated with the Company, the Advisor or the Sponsor. Pursuant to the service provider agreement, the Service Provider provides, subject to the Advisor's oversight, certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence, and arranging debt financing and equity investment syndicates, solely with respect to investments in Europe. Pursuant to the service provider agreement, 50.0% of the fees payable by the Company to the Advisor and a percentage of the fees paid to the Property Manager are paid or assigned to the Service Provider, solely with respect to the Company's foreign investment strategy in Europe. Such fees are deducted from fees paid to the Advisor.
F-10
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Note 2 — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company 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. As of December 31, 2014, the Company does not have any investments in variable interest entities.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, real estate taxes and derivative financial instruments and hedging activities, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, the Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates.
The Company is required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as “held for sale” on the consolidated balance sheet.
The Company evaluates the lease accounting for each new property acquired with existing or new lease and reviews for any capital lease criteria. A lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. This situation is generally considered to be met if, among other things, the non-cancelable lease term is more than 75% of the useful life of the asset or if the present value of the minimum lease payments equals 90% or more of the leased property’s fair value at lease inception.
Depreciation and Amortization
The Company is required to make subjective assessments as to the useful lives of the components of Company’s real estate investments for purposes of determining the amount of depreciation to record on an annual basis. These assessments have a direct impact on the Company’s net income because if the Company were to shorten the expected useful lives of the Company’s real estate investments, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
F-11
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Purchase Price Allocation
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company's analysis of comparable properties in the Company's portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from 12 to 18 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on the Company's evaluation of the specific characteristics of each tenant’s lease and the Company's overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors.
The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company's pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
F-12
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Intangible assets and acquired lease liabilities consist of following:
December 31, | ||||||||
(In thousands) | 2014 | 2013 | ||||||
Intangible assets: | ||||||||
In-place lease, net of accumulated amortization of $20,131 and $1,325 at December 31, 2014 and 2013, respectively | $ | 435,684 | $ | 44,202 | ||||
Above-market lease, net of accumulated amortization of $1,086 and $113 at December 31, 2014 and 2013, respectively | 26,329 | 2,259 | ||||||
Below-market ground lease, net of accumulated amortization of $32 at December 31, 2014 | 817 | — | ||||||
Total intangible lease assets, net | $ | 462,830 | $ | 46,461 | ||||
Intangible liabilities: | ||||||||
Below-market leases, net of accumulated accretion of $1,211 and $129 at December 31, 2014 and 2013, respectively | $ | 21,676 | $ | 5,854 | ||||
Total intangible lease liabilities, net | $ | 21,676 | $ | 5,854 | ||||
The following table provides the weighted-average amortization and accretion periods as of December 31, 2014 for intangible assets and liabilities and the projected amortization expense and adjustments to revenues for the next five years:
(In thousands) | Amortization Years | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||
In-place leases (amortization expense) | 11.6 | $ | 41,646 | $ | 41,646 | $ | 41,646 | $ | 41,646 | $ | 41,646 | |||||||||||
Above-market lease assets (rental revenue) | 11.6 | (2,539 | ) | (2,539 | ) | (2,539 | ) | (2,539 | ) | (2,539 | ) | |||||||||||
Below-market ground lease assets (amortization expense) | 90.3 | 30 | 28 | 26 | 25 | 23 | ||||||||||||||||
Below-market lease liabilities (rental revenue) | 14.2 | 1,884 | 1,884 | 1,884 | 1,884 | 1,884 | ||||||||||||||||
Total to be included in rental income | $ | (655 | ) | $ | (655 | ) | $ | (655 | ) | $ | (655 | ) | $ | (655 | ) | |||||||
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
F-13
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Cash and Cash Equivalents
Cash and cash equivalents includes cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less. The Company deposits cash with high quality financial institutions. Deposits in the United States and other countries where we have deposits are guaranteed by the Federal Deposit Insurance Company ("FDIC") in the United States, Financial Services Compensation Scheme ("FSCS") in the United Kingdom, Duchy Deposit Guarantee Scheme ("DDGS") in Luxembourg and by similar agencies in the other countries, up to insurance limits. The Company had deposits in the United States, the United Kingdom, Luxembourg, Germany, Finland and the Netherlands totaling $64.7 million at December 31, 2014, of which $37.8 million, $13.5 million and $7.1 million were in excess of amounts insured by the FDIC, FSCS and European equivalent deposit insurance companies including DDGS, respectively. At December 31, 2013, the Company had deposits in the United States and the United Kingdom totaling $11.5 million, $10.2 million of which were in excess of the amount insured by the FDIC or FSCS. Although the Company bears risk to amounts in excess of those insured, it does not anticipate any losses as a result.
Restricted Cash
Restricted cash primarily consists of debt service and real estate tax reserves. The Company had restricted cash of $6.1 million as of December 31, 2014. The Company had 0.7 million restricted cash as of December 31, 2013.
Deferred Costs, Net
Deferred costs, net consists of deferred financing costs. Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining commitments for financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Share Repurchase Program
The Company’s board of directors has adopted a Share Repurchase Program (“SRP”) that enables stockholders to sell their shares to the Company. Under the SRP, stockholders may request that the Company repurchase all or any portion, subject to certain minimum amounts described below, of their shares on any business day, if such repurchase does not impair the Company's capital or operations.
Only those stockholders who purchased their shares from the Company or received their shares from the Company (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP.
The number of shares repurchased may not exceed 5.0% of the weighted average number of shares of common stock outstanding at the end of the previous calendar year and the price per share for repurchases of shares of common stock will be as follows: after one year from the purchase date — the lower of $9.25 or 92.5% of the amount actually paid for each share; after two years from the purchase date — the lower of $9.50 and 95.0% of the amount actually paid for each share; after three years from the purchase date — the lower of $9.75 and 97.5% of the amount actually paid for each share; after four years from the purchase date — the lower of $10.00 and 100.0% of the amount actually paid for each share (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the Company's common stock).
Subject to limited exceptions, stockholders who request the repurchase of 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 2.0%.
When a stockholder requests a repurchase and the repurchase is approved, the Company reclassifies such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP have the status of authorized but unissued shares.
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 IPO. 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 accompanying consolidated balance sheets in the period distributions are declared. During the year ended December 31, 2014, the Company issued 4.7 million shares of common stock with a value of $44.9 million and a par value per share of $0.01, under the DRIP. During the year ended December 31, 2013, the Company issued 0.1 million shares of common stock with a value of $1.3 million and a par value of $0.01. There were no shares issued under the DRIP during the period from July 13, 2011 (date of inception) to December 31, 2012.
F-14
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Derivative Instruments
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company's cash receipts and payments in the Company's functional currency, the U.S. dollar. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed 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 is recognized immediately in gains (losses) on derivative instruments in the consolidated statement of operations and comprehensive loss. If the derivative is designated and qualifies for hedge accounting treatment the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of the Company's leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purposes of this calculation.
As of December 31, 2014 and 2013, the Company included cumulative straight line rents receivable in Prepaid expenses and other assets in the balance sheet of $8.7 million and $0.2 million, respectively. The Company’s rental revenue included impacts of unbilled rental revenue of $8.5 million and $0.2 million respectively, to adjust contractual rent to straight line rent.
The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company records an increase in the Company's allowance for uncollectible accounts or records a direct write-off of the receivable in the Company's consolidated statements of operations.
As of December 31, 2014, all of Company's leases for properties in U.S and foreign countries contain upward adjustments to fair market value every five years or contain capped indexed escalation provisions, but there can be no assurance that future leases on properties in foreign countries will contain such provisions or that such provisions will protect us from all potential adverse effects of inflation.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
F-15
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Offering and Related Costs
Offering and related costs include all expenses incurred in connection with the Company’s IPO. 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 included in stockholders’ equity at December 31, 2014 totaled $188.2 million, and include all expenses incurred by the Company in connection with its IPO 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 organization and offering costs paid by them on behalf of the Company, provided that the Advisor is obligated to reimburse the Company to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by the Company in its offering exceed 1.5% 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 organization and offering costs do not exceed 11.5% of the gross proceeds determined at the end of offering. Such amounts under 11.5% are still a liability for the Company, however the Advisor has the obligation to reimburse such amounts.
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 is included in general and administrative expenses and is recognized over the vesting period or when the requirements for exercise of the award have been met.
Income Taxes
The Company elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), beginning with the taxable year ended December 31, 2013. Commencing with such taxable year, we were organized and operate in such a manner as to qualify for taxation as a REIT under the Code. The Company intends to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that it will operate in a manner so as to qualify or remain qualified as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax to the extent it distributes at least 90% of its REIT taxable income to its stockholders. REIT's are subject to a number of other organizational and operational requirements. The Company may be subject to certain federal, state, local and foreign taxes on our income and assets, including alternative minimum taxes, taxes on any undistributed income and state, local or foreign income, franchise, property and transfer taxes. Any of these taxes decrease Company's earnings and available cash.
In addition, Company's international assets and operations, including those designated as direct or indirect qualified REIT subsidiaries or other disregarded entities of a REIT, continue to be subject to taxation in the foreign jurisdictions where those assets are held or those operations are conducted.
During the period from July 13, 2011 (date of inception) to December 31, 2012, the Company elected to be taxed as a corporation, pursuant to which income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts and income tax basis of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards, using expected tax rates in effect for each taxing jurisdiction in which the Company operates for the year in which those temporary differences are expected to be recovered or settled. The Company recognizes the financial statement effects of a tax position when it is more-likely-than-not, based on technical merits, that the position will be sustained upon examination. Because, the Company intends to elect and qualify to be taxed as a REIT commencing with the taxable year ended December 31, 2013, it did not anticipate that any applicable deferred tax assets or liabilities will be realized.
During 2014, our current income tax expense was immaterial and charged to income tax benefit. We recognize current income tax expense for state and local income taxes and taxes incurred in our foreign jurisdictions. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income. During 2014, we recognized a deferred tax benefit of $1.4 million. Deferred income tax benefit (expense) is generally a function of the period’s temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets from state and local taxes in the United States or in foreign jurisdictions.
F-16
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Foreign Currency Translation
The Company's reporting currency is the U.S. dollar. The functional currency of the Company's foreign operations is the applicable local currency for each foreign subsidiary. Assets and liabilities of foreign subsidiaries (including intercompany balances for which settlement is not anticipated in the foreseeable future) are translated at the spot rate in effect at the applicable reporting date. The amounts reported in the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive income (loss) in the consolidated statements of equity.
Per Share Data
The Company calculates basic income per share by dividing net income for the period by weighted-average shares of its common stock outstanding for a respective period. Diluted income per share takes into account the effect of dilutive instruments, such as stock options and unvested restricted stock, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.
Reportable Segments
The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate generate rental revenue and other income through the leasing of properties, which comprise 100% of total consolidated revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level.
Revisions to historical cash flow statements
During the year ended December 31, 2014, the Company identified certain historical errors in the preparation of its statement of cash flows. Specifically, the company had been (i) reflecting rent credits in connection with purchased real estate as deferred rent at closing which was then reflected as a cash inflow from operations rather than as part of the purchase price in investing activity and (ii) reflecting certain advances on its credit line (for which it did not take constructive receipt) used to acquire investments in real estate as cash inflows from financing activities and cash outflows from investing activities rather than as non-cash investing and financing activities. These items were correctly presented in the statement of cash flow for the year ended December 31, 2014 and the statement of cash flow for the year ended December 31, 2013 has been revised (as below). We concluded that the errors noted above were significant but not material to our cash flows for any historical periods presented. However, we determined that it is useful for the reader of the financial statements to view these adjustments in the period in which they originated and, as such, we will revise our future presentations of the cash flow statements when the periods are refiled in 2015 for comparative purposes. The effects of these revisions are summarized below:
Year ended December 31, 2013 | As originally reported | Revisions | As revised | |||||||||||||
Item 1 | Item 2 | |||||||||||||||
Net Cash provided by (used in) Operating Activities | $ | (2,702 | ) | $ | (945 | ) | $ | — | $ | (3,647 | ) | |||||
Net Cash provided by (used in) Investing Activities | $ | (112,445 | ) | $ | 945 | $ | — | $ | (111,500 | ) | ||||||
Net Cash provided by (used in) Financing Activities | $ | 124,209 | $ | — | $ | — | $ | 124,209 | ||||||||
Additional non-cash financing activities: | ||||||||||||||||
Line of credit draws used directly to acquire investments in real estate | $ | — | $ | — | $ | — | $ | — | ||||||||
Three months ended March 31, 2014 | As originally reported | Revisions | As revised | |||||||||||||
Item 1 | Item 2 | |||||||||||||||
Net Cash provided by (used in) Operating Activities | $ | (16,893 | ) | $ | (1,649 | ) | $ | — | $ | (18,542 | ) | |||||
Net Cash provided by (used in) Investing Activities | $ | (219,996 | ) | $ | 1,649 | $ | 36,265 | $ | (182,082 | ) | ||||||
Net Cash provided by (used in) Financing Activities | $ | 504,818 | $ | — | $ | (36,265 | ) | $ | 468,553 | |||||||
Additional non-cash financing activities: | ||||||||||||||||
Line of credit draws used directly to acquire investments in real estate | $ | — | $ | — | $ | 36,265 | $ | 36,265 | ||||||||
F-17
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Six months ended June 30, 2014 | As originally reported | Revisions | As revised | |||||||||||||
Item 1 | Item 2 | |||||||||||||||
Net Cash provided by (used in) Operating Activities | $ | (769 | ) | $ | (2,463 | ) | $ | — | $ | (3,232 | ) | |||||
Net Cash provided by (used in) Investing Activities | $ | (519,568 | ) | $ | 2,463 | $ | 71,528 | $ | (445,577 | ) | ||||||
Net Cash provided by (used in) Financing Activities | $ | 1,441,661 | $ | — | $ | (71,528 | ) | $ | 1,370,133 | |||||||
Additional non-cash financing activities: | ||||||||||||||||
Line of credit draws used directly to acquire investments in real estate | $ | — | $ | — | $ | 71,528 | $ | 71,528 | ||||||||
Nine months ended September 30, 2014 | As originally reported | Revisions | As revised | |||||||||||||
Item 1 | Item 2 | |||||||||||||||
Net Cash provided by (used in) Operating Activities | $ | 352 | $ | (10,000 | ) | $ | — | $ | (9,648 | ) | ||||||
Net Cash provided by (used in) Investing Activities | $ | (1,408,617 | ) | $ | 10,000 | $ | 309,096 | $ | (1,089,521 | ) | ||||||
Net Cash provided by (used in) Financing Activities | $ | 1,672,715 | $ | — | $ | (309,096 | ) | $ | 1,363,619 | |||||||
Additional non-cash financing activities: | ||||||||||||||||
Line of credit draws used directly to acquire investments in real estate | $ | — | $ | — | $ | 309,096 | $ | 309,096 | ||||||||
Recently Issued Accounting Pronouncements
Adopted:
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-04, Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date - a consensus of the FASB Emerging Issues Task Force. The guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (ASC 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The Update removes all incremental financial reporting requirements from GAAP for development stage entities, including the removal of Topic 915 from the FASB Accounting Standards Codification. In addition, the Update adds an example disclosure in Risks and Uncertainties (Topic 275) to illustrate one way that an entity that has not begun planned principal operations could provide information about the risks and uncertainties related to the company’s current activities. The Update also removes an exception provided to development stage entities in Consolidations (Topic 810) for determining whether an entity is a variable interest entity-which may change the consolidation analysis, consolidation decision, and disclosure requirements for a company that has an interest in a company in the development stage. Except for the amendments to ASC 810, the ASU is effective for public business entities for reporting periods (including interim periods) beginning after December 15, 2014. The amendments to ASC 810 are effective for annual periods beginning after December 15, 2015, for public business entities. Early adoption of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. The Company has adopted the provisions of this guidance effective January 1, 2014, and has applied the provisions prospectively. The adoption of this guidance has not had a material impact on the Company's consolidated financial position, results of operations or cash flows.
F-18
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties about an Entities Ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The assessment is required for each annual and interim reporting period. Management’s assessment should evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. Substantial doubt is deemed to exist when it is probable that the company will be unable to meet its obligations within one year from the financial statement issuance date. If conditions or events give rise to substantial doubt about the entity's ability to continue as a going concern, the guidance requires management to disclose information that enables users of the financial statements to understand the conditions or events that raised the substantial doubt, management's evaluation of the significance of the conditions or events that led to the doubt, the entity’s ability to continue as a going concern and management’s plans that are intended to mitigate or that have mitigated the conditions or events that raised substantial doubt about the entity's ability to continue as a going concern. The guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. The Company has elected to adopt the provisions of this guidance effective December 31, 2014, as early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Pending Adoption:
In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers, which revises guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. We have not yet selected a transition method and is currently evaluating the impact of the new guidance.
In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates from U.S. GAAP the concept of an extraordinary item. As a result, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the reporting and disclosure requirements for an event that is unusual in nature or that occurs infrequently. the ASU is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted if the guidance is applied as of the beginning of the annual period of adoption. The Company is currently evaluating the impact of the new guidance.
In February 2015, the FASB issued ASU 2015-02 Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The new guidance applies to entities in all industries and provides a new scope exception to registered money market funds and similar unregistered money market funds. It makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the variable interest entity (VIE) guidance. The standard does not add or remove any of the characteristics that determine if an entity is a VIE. However, when decision-making over the entity’s most significant activities has been outsourced, the standard changes how a reporting entity assesses if the equity holders at risk lack decision making rights. Previously, the reporting entity would be required to determine if there is a single equity holder that is able to remove the outsourced decision maker that has a variable interest. The new standard requires that the reporting entity first consider the rights of all of the equity holders at risk. If the equity holders have certain rights that are deemed to give them the power to direct the entity’s most significant activities, then the entity does not have this VIE characteristic. The new standard also introduces a separate analysis specific to limited partnerships and similar entities for assessing if the equity holders at risk lack decision making rights. Limited partnerships and similar entities will be VIEs unless the limited partners hold substantive kick-out rights or participating rights. In order for such rights to be substantive, they must be exercisable by a simple majority vote (or less) of all of the partners (exclusive of the general partner and its related parties). A right to liquidate an entity is viewed as akin to a kick-out right. The guidance for limited partnerships under the voting model has been eliminated in conjunction with the introduction of this separate analysis, including the rebuttable presumption that a general partner unilaterally controls a limited partnership and should therefore consolidate it. A limited partner with a controlling financial interest obtained through substantive kick out rights would consolidate a limited partnership. The standard eliminates certain of the criteria that must be met for an outsourced decision maker or service provider’s fee arrangement to not be a variable interest. Under current guidance, a reporting entity first assesses whether it meets power and economics tests based solely on its own variable interests in the entity to determine if it is the primary beneficiary required to consolidate the VIE. Under the new standard, a reporting entity that meets the power test will also include indirect interests held through related parties on a proportionate basis to determine whether it meets the economics test and is the primary beneficiary on a standalone basis. The standard is effective for annual periods beginning after December 15, 2015. Early adoption is allowed, including in any interim period. The Company is currently evaluating the impact of the new guidance.
F-19
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
In April 2014, the FASB issued guidance related to the reporting of discontinued operation and disclosures of disposals of components of an entity. This guidance defines a discontinued operation as a component or group of components disposed or classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and final result; the guidance states that a strategic shift could include a disposal of a major geographical area of operations, a major line of business, a major equity method investment or other major parts of an entity. The guidance also provides for additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations. The guidance will be effective for annual and interim periods beginning on or after December 15, 2014. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. All entities may early adopt the guidance for new disposals (or new classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company is currently evaluating the impact of the new guidance.
Note 3 — Real Estate Investments
The following table reflects the number and related base purchase prices of properties acquired as of December 31, 2013 and during the year ended December 31, 2014:
Number of Properties | Base Purchase Price(1) | |||||
(In thousands) | ||||||
As of December 31, 2013 | 37 | $ | 184,960 | |||
Twelve Months ended December 31, 2014 | 270 | 2,193,594 | ||||
Portfolio as of December 31, 2014 | 307 | $ | 2,378,554 | |||
________________________________________________
(1) | Contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase, where applicable. |
The following table presents the allocation of the assets acquired during the years ended December 31, 2014, 2013 and 2012 based on contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase.
Year Ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2014 | 2013 | 2012 | |||||||||
Real estate investments, at cost: | ||||||||||||
Land | $ | 288,376 | $ | 44,118 | $ | 519 | ||||||
Buildings, fixtures and improvements | 1,450,862 | 103,127 | 1,210 | |||||||||
Total tangible assets | 1,739,238 | 147,245 | 1,729 | |||||||||
Intangibles acquired: | ||||||||||||
In-place leases | 418,419 | 44,865 | 647 | |||||||||
Above market lease asset | 26,711 | 2,159 | 209 | |||||||||
Below market lease liability | (17,513 | ) | (5,983 | ) | — | |||||||
Below market ground lease liability | 901 | — | — | |||||||||
Goodwill | 3,665 | — | — | |||||||||
Total assets acquired, net | 2,171,421 | 188,286 | 2,585 | |||||||||
Mortgage notes payable used to acquire real estate investments | (217,791 | ) | (75,651 | ) | (1,228 | ) | ||||||
Credit facility borrowings used to acquire real estate investments | (446,558 | ) | — | — | ||||||||
Other liabilities assumed | — | (1,664 | ) | — | ||||||||
Cash paid for acquired real estate investments | $ | 1,507,072 | $ | 110,971 | $ | 1,357 | ||||||
Number of properties purchased | 270 | 36 | 1 | |||||||||
F-20
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
The allocations in the table above of land, buildings, fixtures and improvements, and in-place lease intangibles have been provisionally assigned to each class of asset, pending receipt of information being prepared by a third-party specialist.
The following table presents unaudited pro forma information as if the acquisitions during the year ended December 31, 2014, had been consummated on January 1, 2013. Additionally, the unaudited pro forma net income attributable to stockholders was adjusted to exclude acquisition and transaction related expense of $83.5 million from the year ended December 31, 2014 to the year ended December 31, 2013.
Year Ended December 31, | ||||||||||||
(In thousands) | 2014 | 2013 | 2012 | |||||||||
Pro forma revenues | $ | 203,769 | $ | 202,419 | $ | 16,685 | ||||||
Pro forma net income | $ | 54,887 | $ | (55,524 | ) | $ | (6,817 | ) | ||||
Pro forma earnings per share | 0.44 | (10.18 | ) | (106.10 | ) | |||||||
The following presents future minimum base rental cash payments due to the Company during the next five years and thereafter as of December 31, 2014. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indices among other items.
(In thousands) | Future Minimum Base Rent Payments | |||
2015 | $ | 175,154 | ||
2016 | 179,154 | |||
2017 | 182,643 | |||
2018 | 185,137 | |||
2019 | 187,586 | |||
Thereafter | 1,220,434 | |||
$ | 2,130,108 | |||
The following table lists the tenants whose annualized rental income on a straight-line basis represented greater than 10% of total annualized rental income for all properties on a straight-line basis as of December 31, 2014, 2013 and 2012.
December 31, | ||||||
Tenant | 2014 | 2013 | 2012 | |||
Encanto Restaurants, Inc. | * | 19.4% | —% | |||
Western Digital Corporation | * | 14.6% | —% | |||
Thames Water Utilities Limited | * | 11.7% | —% | |||
McDonald's Property Company Limited | * | * | 100% | |||
_______________________________________________________________________
* Tenant's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.
The termination, delinquency or non-renewal of leases by any of the above tenants may have a material adverse effect on revenues.
F-21
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
The following table lists the countries and states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented greater than 10% of consolidated annualized rental income on a straight-line basis as of December 31, 2014, 2013 and 2012.
December 31, | ||||||
Country | 2014 | 2013 | 2012 | |||
United Kingdom | 22.0% | 38.4% | 100% | |||
Puerto Rico | * | 19.4% | * | |||
Germany | 10.9% | * | * | |||
United States: | ||||||
California | * | 14.6% | * | |||
Texas | 10.4% | * | * | |||
_______________________________________________________________________
* Geography's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.
Note 4 — Revolving Credit Facility
On July 25, 2013, the Company, through the OP, entered into a credit agreement relating to a credit facility that provides for aggregate revolving loan borrowings of up to $50.0 million (subject to borrowing base availability). The credit facility contains an “accordion feature” to allow the Company, under certain circumstances, to increase the aggregate borrowings under the credit facility to up to $750.0 million through additional commitments. We had, at various times, amended the facility to increase the aggregate borrowings available and, on October 16, 2014, we further amended the credit facility agreement to increase aggregate borrowings to $680.0 million. We had $659.3 million outstanding under the facility as of December 31, 2014. We did not utilize the facility during 2013.
Availability of borrowings is based on a pool of eligible unencumbered real estate assets. The initial maturity date of the facility is July 25, 2016 with two one-year extension options, subject to certain conditions.
The Company has the option, based upon its consolidated leverage ratio, to have draws under the facility priced at either the Alternate Base Rate (as described below) plus 0.60% to 1.20% or at adjusted LIBOR plus 1.60% to 2.20%. The Alternate Base Rate is defined in the credit facility agreement as a rate per annum equal to the greatest of (a) the fluctuating annual rate of interest announced from time to time by the lender as its “prime rate” in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.5% of 1% and (c) the Adjusted LIBOR for a one month interest period on such day plus 1%. Adjusted LIBOR refers to LIBOR multiplied by the statutory reserve rate, as determined by the Federal Reserve System of the United States. The credit agreement requires the Company to pay an unused fee per annum of 0.25% if the unused balance of the credit facility exceeds or is equal to 50% of the available facility or a fee per annum of 0.15% if the unused balance of the credit facility is less than 50% of the available facility.
The credit agreement provides for quarterly interest payments for each Alternate Base Rate loan and periodic payments for each adjusted LIBOR loan, based upon the applicable LIBOR loan period, with all principal outstanding being due on the maturity date in July 2016. The credit agreement also contains two one-year extension options, subject to certain conditions. The credit facility may be prepaid at any time, in whole or in part, without premium or penalty, subject to prior notice to the lender. In the event of a default, the lender has the right to terminate their obligations under the credit agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans.
The credit agreement requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of December 31, 2014, the Company was in compliance with the financial covenants under the credit agreement.
As of December 31, 2014, total outstanding advances under the credit facility were $659.3 million. This includes advances of £169.8 million and €128.0 million. These draws were used to fund individual investments in the respective local currency and were designated as net investment hedges.
There were no outstanding advances under the credit facility as of December 31, 2013. The currently drawable unused borrowing capacity, based on the value of the borrowing base properties as of December 31, 2014 and December 31, 2013, was $20.7 million and $31.1 million, respectively.
F-22
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Note 5 — Mortgage Note Payable
Mortgage notes payable as of December 31, 2014 and December 31, 2013 consisted of the following:
Encumbered Properties | Outstanding Loan Amount | Effective Interest Rate | Interest Rate | ||||||||||||||
Country | Portfolio | December 31, 2014 | December 31, 2013 | Maturity | |||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||
Germany: | |||||||||||||||||
Rheinmetall | 1 | $ | 12,884 | $ | — | 2.5% | Fixed | Jan. 2019 | |||||||||
OBI DIY | 1 | 5,470 | — | 2.4% | Fixed | Jan. 2019 | |||||||||||
RWE AG | 3 | 75,969 | — | 1.6% | Fixed | Oct. 2019 | |||||||||||
Rexam | 1 | 6,394 | — | 1.9% | Fixed | Oct. 2019 | |||||||||||
Metro Tonic | 1 | 32,211 | — | 1.7% | Fixed | Dec. 2019 | |||||||||||
United Kingdom: | |||||||||||||||||
McDonald's | 1 | 1,180 | (1) | 1,253 | 4.1% | (2) | Fixed | Oct. 2017 | |||||||||
Wickes Building Supplies I | 1 | 3,024 | (1) | 3,209 | 3.7% | (2) | Fixed | May 2018 | |||||||||
Everything Everywhere | 1 | 6,213 | (1) | 6,596 | 4.0% | (2) | Fixed | Jun. 2018 | |||||||||
Thames Water | 1 | 9,319 | (1) | 9,894 | 4.1% | (2) | Fixed | Jul. 2018 | |||||||||
Wickes Building Supplies II | 1 | 2,563 | (1) | 2,721 | 4.2% | (2) | Fixed | Jul. 2018 | |||||||||
Northern Rock | 2 | 8,155 | (1) | 8,657 | 4.4% | (2) | Fixed | Sep. 2018 | |||||||||
Wickes Building Supplies III | 1 | 2,951 | (1) | 3,133 | 4.3% | (2) | Fixed | Nov. 2018 | |||||||||
Provident Financial | 1 | 19,804 | — | 4.1% | (2) | Fixed | Feb. 2019 | ||||||||||
Crown Crest | 1 | 29,901 | — | 4.2% | (2) | Fixed | Feb. 2019 | ||||||||||
Aviva | 1 | 24,387 | — | 3.8% | (2) | Fixed | Mar. 2019 | ||||||||||
United States: | Western Digital | 1 | 18,269 | 18,541 | 3.7% | Fixed | Jul. 2021 | ||||||||||
Puerto Rico: | Encanto Restaurants | 18 | 22,492 | 22,900 | 3.0% | Fixed | Jun. 2017 | ||||||||||
Total | 37 | $ | 281,186 | $ | 76,904 | 3.7% | |||||||||||
___________________________________________________________
(1) Movement in principal balances are related to changes in exchange rates.
(2) Fixed as a result of an interest rate swap agreement.
The total carrying value of unencumbered assets as of December 31, 2014 is $1.7 billion.
The following table summarizes the scheduled aggregate principal payments on the mortgage notes payable subsequent to December 31, 2014 and thereafter:
(In thousands) | Future Principal Payments | |||
2015 | $ | 721 | ||
2016 | 758 | |||
2017 | 23,099 | |||
2018 | 32,562 | |||
2019 | 207,374 | |||
Thereafter | 16,672 | |||
$ | 281,186 | |||
Some of the Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of December 31, 2014 and December 31, 2013, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
F-23
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Note 6 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter, however, the Company expects that changes in classifications between levels will be rare.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of December 31, 2014, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties.
As of December 31, 2014 and 2013, the Company had investments in a real estate income fund, that is traded in active market and therefore classified this investments as level 1 in the fair value hierarchy, with an aggregate fair value of $0.5 million and $0.0 million as of December 31, 2014 and 2013, respectively. The real estate income fund is managed by an affiliate of the Sponsor (see Note 10 — Related Party Transactions). These investments are considered available-for-sale securities and therefore increases or decreases in the fair value of these investments are recorded in accumulated other comprehensive income (loss) as a component of equity on the consolidated balance sheets unless the securities are considered to be other than temporarily impaired at which time the losses would be reclassified to expense.
The following table details the unrealized gains and losses on investment securities as of December 31, 2014 and 2013:
(In thousands) | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
December 31, 2014 | $ | 514 | $ | — | $ | (24 | ) | $ | 490 | ||||||||
December 31, 2013 | $ | — | $ | — | $ | — | — | $ | — | ||||||||
Unrealized losses are considered temporary and therefore no impairment was recorded during the years ended December 31, 2014 and 2013.
F-24
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
The following table presents information about the Company's assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of December 31, 2014 and December 31, 2013, aggregated at the fair value hierarchy level within which those instruments fall.
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
December 31, 2014 | ||||||||||||||||
Foreign currency swaps, net | $ | — | $ | 11,289 | $ | — | $ | 11,289 | ||||||||
Foreign currency forwards, net | $ | — | $ | 1,884 | $ | — | $ | 1,884 | ||||||||
Investment securities | $ | 490 | $ | — | $ | — | $ | 490 | ||||||||
Interest rate swaps, net | $ | — | $ | (5,650 | ) | $ | — | $ | (5,650 | ) | ||||||
December 31, 2013 | ||||||||||||||||
Foreign currency swap | $ | — | $ | (2,565 | ) | $ | — | $ | (2,565 | ) | ||||||
Interest rate swap | $ | — | $ | 734 | $ | — | $ | 734 | ||||||||
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended December 31, 2014.
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate value. The fair value of short-term financial instruments such as cash and cash equivalents, due from affiliates, accounts payable and distributions payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below.
Carrying Amount(1) | Fair Value | Carrying Amount(2) | Fair Value | |||||||||||||||
(In thousands) | Level | December 31, 2014 | December 31, 2014 | December 31, 2013 | December 31, 2013 | |||||||||||||
Mortgage notes payable | 3 | $ | 282,351 | $ | 280,967 | $ | 78,567 | $ | 77,698 | |||||||||
Credit facility | 3 | $ | 659,268 | $ | 669,824 | $ | — | $ | — | |||||||||
__________________________________________________________
(1) Carrying value includes $281.2 million mortgage notes payable and $1.2 million mortgage premiums, net as of December 31, 2014.
(2) Carrying value includes $76.9 million mortgage notes payable and $1.7 million mortgage premiums, net as of December 31, 2013.
The fair value of the mortgage notes payable is estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements.
Note 7 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company's cash receipts and payments in the Company's functional currency, the U.S. dollar. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency.
The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships.
F-25
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Cash Flow Hedges of Interest Rate Risk
The Company's objectives in using interest rate derivatives are to manage its exposure to interest rate movements and add stability to interest expense. To accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction impacts earnings. During 2014, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the years ended December 31, 2014 and 2013, the Company recorded no hedge ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next 12 months, the Company estimates that an additional $3.3 million will be reclassified from other comprehensive income as an increase to interest expense.
As of December 31, 2014 and 2013, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
December 31, 2014 | December 31, 2013 | |||||||||||
Derivatives | Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | ||||||||
(In thousands) | (In thousands) | |||||||||||
Interest Rate Swap (GBP) | 20 | $ | 371,225 | 7 | $ | 35,465 | ||||||
Interest Rate Swap (EUR) | 10 | $ | 282,999 | — | $ | — | ||||||
Total | 30 | $ | 654,224 | 7 | $ | 35,465 | ||||||
Net Investment Hedges
The Company is exposed to fluctuations in foreign exchange rates on property investments it holds in foreign countries which pay rental income, property related expenses and hold debt instruments in foreign currencies. The Company uses foreign currency derivatives including cross currency swaps to hedge its exposure to changes in foreign exchange rates on certain of its foreign investments. Cross currency swaps involve fixing the applicable exchange rate for delivery of a specified amount of foreign currency on specified dates.
For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in accumulated other comprehensive income (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income into earnings when the hedged net investment is either sold or substantially liquidated.
As disclosed in Note 4, the Company used advances under the Operating Partnership’s (a USD functional currency entity) credit facility to fund individual investments in Europe. As permitted under ASC 815-20-25, the Company designated the foreign currency liability resulting from these advances as a net investment hedges on each investment. As such, the effects of changes in exchange rates on the effective portion are recoded in the cumulative translation adjustment component of other comprehensive income.
F-26
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
As of December 31, 2014 and 2013, the Company had the following outstanding cross currency swaps that were used to hedge its net investments in foreign operations:
December 31, 2014 | December 31, 2013 | ||||||||||||
Derivatives | Number of Instrument (2) | Notional Amount (2) | Number of Instruments (1) | Notional Amount (1) | |||||||||
(In thousands) | (In thousands) | ||||||||||||
Foreign currency swaps (GBP-USD) | 5 | $ | 107,623 | 7 | $ | 35,597 | |||||||
Foreign currency swaps (EUR-USD) | 10 | 134,285 | — | — | — | ||||||||
Total | 15 | $ | 241,908 | 7 | $ | 35,597 | |||||||
____________________________________
(1) Payments and obligations pursuant to these foreign currency swap agreements are guaranteed by AR Capital, LLC, the entity which wholly owns the Sponsor as of December 31, 2013.
(2) Payments and obligations pursuant to these foreign currency swap agreements are guaranteed by the Company, ARC Global Holdco, LLC and OP as of December 31, 2014.
Non-Designated Hedges
The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. The Company uses foreign currency derivatives including currency forward agreements to manage its exposure to fluctuations in GBP-USD and EUR-USD exchange rate. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and a gain of approximately $1.9 million was recognized for the year ended December 31, 2014. The company did not have any derivatives that were not designated in 2013.
As of December 31, 2014 and December 31, 2013, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.
December 31, 2014 | December 31, 2013 | |||||||||||
Derivatives | Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | ||||||||
(In thousands) | (In thousands) | |||||||||||
EUR-USD forwards | 31 | $ | 12,699 | — | $ | — | ||||||
GBP-USD forwards | 80 | $ | 13,664 | — | $ | — | ||||||
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Balance Sheet as of December 31, 2014 and December 31, 2013:
(In thousands) | Balance Sheet Location | December 31, 2014 | December 31, 2013 | |||||||
Derivatives designated as hedging instruments: | ||||||||||
Interest rate swaps | Derivative assets, at fair value | $ | 18 | $ | 734 | |||||
Foreign currency swaps | Derivative assets, at fair value | $ | 11,736 | $ | — | |||||
Interest rate swaps | Derivative liabilities, at fair value | $ | (5,668 | ) | $ | — | ||||
Foreign currency swaps | Derivative liabilities, at fair value | $ | (447 | ) | $ | (2,565 | ) | |||
Derivatives not designated as hedging instruments: | ||||||||||
GBP-USD Forwards | Derivative assets, at fair value | $ | 1,148 | $ | — | |||||
EUR-USD Forwards | Derivative assets, at fair value | $ | 736 | $ | — | |||||
F-27
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the years ended December 31, 2014, 2013 and 2012.
Year Ended December 31, | |||||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||||
Amount of gain (loss) recognized in accumulated other comprehensive income from derivatives (effective portion) | $ | 5,670 | (1,901 | ) | $ | (55 | ) | ||||
Amount of loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion) | $ | (2,087 | ) | (123 | ) | $ | (2 | ) | |||
Amount of gain (loss) recognized in income on derivative instruments (ineffective portion and amount excluded from effectiveness testing) | $ | — | — | $ | — | ||||||
Tabular Disclosure Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of December 31, 2014 and 2013. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying consolidated balance sheets.
Gross Amounts Not Offset on the Balance Sheet | ||||||||||||||||||||||||||||
Derivatives (In thousands) | 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 | |||||||||||||||||||||
December 31, 2014 | $ | 13,638 | $ | (6,115 | ) | $ | — | $ | 7,523 | $ | — | $ | — | $ | 7,523 | |||||||||||||
December 31, 2013 | $ | 734 | $ | (2,565 | ) | $ | — | $ | (1,831 | ) | $ | — | $ | — | $ | (1,831 | ) | |||||||||||
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
As of December 31, 2014, the fair value of derivatives in net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $6.1 million. As of December 31, 2014, the Company had not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value.
Note 8 — Common Stock
The Company's IPO closed on June 30, 2014. The Company had 177.9 million and 15.7 million shares of common stock outstanding, including unvested restricted shares and shares issued under the DRIP, and had received total proceeds of $1.8 billion and $154.2 million as of December 31, 2014 and December 31, 2013, respectively.
F-28
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
We qualified to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2013. As a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders annually. The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable and annual distribution requirements needed to qualify and maintain our status as a REIT under the Code. For tax purposes, of the amounts distributed during the year ended December 31, 2014, 70.4%, or $0.50 per share per annum, and 29.6%, or $0.21 per share per annum, represented a return of capital and ordinary dividends, respectively. During the year ended December 31, 2013, 51.7%, or $0.37 per share per annum, and 48.3%, or $0.34 per share per annum, represented a return of capital and ordinary dividends, respectively.
On October 5, 2012, the Company's board of directors authorized and the Company declared a distribution which is payable to stockholders of record each day during the applicable period at a rate equal to $0.00194520548 per day equivalent to a per annum yield of 7.10% based on $10.00 price per share of common stock. The distributions began to accrue on November 28, 2012, which was 30 days following the Company's initial property acquisition. The distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. 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 Company’s board of directors has adopted an SRP that enables stockholders to sell their shares to the Company. Under the SRP, stockholders may request that the Company repurchase all or any portion, subject to certain minimum amounts, of their shares on any business day, if such repurchase does not impair the Company's capital or operations. Since our inception through December 31, 2013, no shares of common stock have been repurchased or requested to be repurchased. During 2014, the Company repurchased 99,969 shares at a weighted average price per share of $9.91.
Note 9 — Commitments and Contingencies
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. As of December 31, 2014, the Company had not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
Note 10 — Related Party Transactions
As of December 31, 2014 and December 31, 2013, the Sponsor, the Special Limited Partner and a subsidiary of the Service Provider owned 244,444 shares of the Company's outstanding common stock. The Advisor and its affiliates may incur costs and fees on behalf of the Company. As of December 31, 2014, the Company had no amounts owed to or receivable from affiliated entities. As of December 31, 2013, the Company had $0.5 million receivable from affiliated entities, primarily related to funding the payment of third party professional fees and offering costs, net of general and administrative expenses absorbed by the Advisor.
Fees Paid in Connection with the IPO
The Dealer Manager is paid fees and compensation in connection with the sale of the Company's common stock. The Dealer Manager is paid selling commissions of up to 7.0% of the per share purchase price of offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Dealer Manager is paid 3.0% of the per share purchase price from the sale of the Company's shares, before reallowance to participating broker-dealers, as a dealer manager fee. The Dealer Manager may re-allow its dealer manager fee to participating broker-dealers. A 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 dealers, with 2.5% thereof paid at the time of the sale and 1.0% paid on each anniversary date of the closing of the sale to the fifth anniversary date of the closing of the sale. If this option is elected, the Dealer Manager's fee will be reduced to 2.5% of the applicable gross proceeds (not including selling commissions and dealer manager fees).
F-29
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
The following table details total selling commissions and dealer manager fees incurred from and payable to the Dealer Manager related to the sale of common stock as of and for the periods presented:
Year Ended December 31, | Payable as of December 31, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Total commissions and fees to Dealer Manager | $ | 148,372 | $ | 14,024 | $ | 13 | $ | 176 | ||||||||
The Advisor and its affiliates are paid compensation and receive reimbursement for services relating to the IPO, including transfer agent services provided by an affiliate of the Dealer Manager. Effective March 1, 2013, the Company began utilizing transfer agent services provided by an affiliate of the Dealer Manager. Our transfer agent is a related party of our Sponsor. All offering costs incurred by the Company or by the Advisor and its affiliated entities on behalf of the Company are charged to additional paid-in capital on the accompanying consolidated balance sheets. The following table details fees and offering cost reimbursements incurred and payable to the Advisor and Dealer Manager related to the sale of common stock as of and for the periods presented:
Year Ended December 31, | Payable as of December 31, | |||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Fees and expense reimbursements to the Advisor and Dealer Manager | $ | 16,920 | $ | 2,615 | $ | 61 | $ | 293 | ||||||||
The Company is responsible for paying offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 1.5% of gross proceeds received from its ongoing offering of common stock, measured at the end of the offering. Offering costs in excess of the 1.5% cap as of the end of the offering are the Advisor's responsibility. During 2014, the Advisor reimbursed the Company $0.5 million of offering costs. As a result offering and related costs, excluding commissions and dealer manager fees, did not exceed 1.5% of gross proceeds received from the IPO as of December 31, 2014.
After the escrow break, the Advisor elected to cap cumulative offering costs incurred by the Company, net of unpaid amounts, to 15% of gross common stock proceeds during the offering period. As of December 31, 2014, cumulative offering costs were $188.2 million. Cumulative offering costs net of unpaid amounts, were less than the 15% threshold as of December 31, 2014.
Fees Paid in Connection With the Operations of the Company
The Advisor is paid an acquisition fee of 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment. Solely with respect to investment activities in Europe, the Service Provider is paid 50% of the acquisition fees and the Advisor is paid the remaining 50%, as set forth in the service provider agreement. The Advisor is also reimbursed for in-sourced expenses incurred in the process of acquiring properties, which are capped initially at 0.5% of the contract purchase price and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company will pay third party acquisition expenses. Once the proceeds from the IPO have been fully invested, the total of all acquisition fees and acquisition expenses (including any financing coordination fee) may not exceed 4.5% of the aggregate contract purchase price of the Company's portfolio or 4.5% of the amount advanced for all loans or other investments.
If the Company's Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company pays the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations. Solely with respect to the Company's investment activities in Europe, the Service Provider is paid 50% of the financing coordination fees and the Advisor receives the remaining 50%, as set forth in the service provider agreement. Such fees are deducted from fees payable to the Advisor, pursuant to the service provider agreement.
F-30
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
In connection with providing strategic advisory services related to certain portfolio acquisitions, the Company has entered into arrangements in which the investment banking division of the Dealer Manager is paid a transaction fee of 0.25% of the Transaction Value for such portfolio acquisition transactions. Pursuant to such arrangements to date, the Transaction Value has been defined as: (i) the value of the consideration paid or to be paid for all the equity securities or assets in connection with the sale transaction or acquisition transaction (including consideration payable with respect to convertible or exchangeable securities and option, warrants or other exercisable securities and including dividends or distributions and equity security repurchases made in anticipation of or in connection with the sale transaction or acquisition transaction), or the implied value for all the equity securities or assets of the Company or acquisition target, as applicable, if a partial sale or purchase is undertaken, plus (ii) the aggregate value of any debt, capital lease and preferred equity security obligations (whether consolidated, off-balance sheet or otherwise) of the Company or acquisition target, as applicable, outstanding at the closing of the sale transaction or acquisition transaction), plus (iii) the amount of any fees, expenses and promote paid by the buyer(s) on behalf of the Company or the acquisition target, as applicable. Should the Dealer Manager provide strategic advisory services related to additional portfolio acquisition transactions, the Company will enter into new arrangements with the Dealer Manager on such terms as may be agreed upon between the two parties.
Prior to January 1, 2013, the Company paid the Advisor a monthly asset management fee equal to one-twelfth of 0.75% of the cost of investment portfolio assets (costs include the purchase price, acquisition expenses, capital expenditures and other customarily capitalized costs, but excluded acquisition fees). All or a portion of the asset management fee may have been waived or deferred at the sole discretion of the Company's board of directors (a) to the extent that FFO, as adjusted, during the six months ending on the last day of the calendar quarter immediately preceding the date that such asset management fee is payable, is less than the distributions declared with respect to such six month period or (b) for any other reason.
Effective January 1, 2013, the following were eliminated: (i) the reduction of the asset management fee to the extent, if any, that the Company's funds from operations, as adjusted, during the six months ending on the last calendar quarter immediately preceding the date the asset management fee was payable was less than the distributions declared with respect to such six month period and (ii) the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor. Instead, the Company issues (subject to periodic approval by the board of directors) to the Advisor performance-based restricted partnership units of the OP designated as "Class B units," which are intended to be profits interests and will vest, and no longer be subject to forfeiture, at such time as: (x) the value of the OP's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pre-tax, non-compounded annual return thereon (the "economic hurdle"); (y) any one of the following occurs: (1) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; (2) a listing; or (3) another liquidity event; and (z) the Advisor is still providing advisory services to the Company (the "performance condition"). Such Class B units will be forfeited immediately if: (a) the advisory agreement is terminated other than by an affirmative vote of a majority of the Company's independent directors without cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of the Company's independent directors without cause before the economic hurdle has been met.
The number of Class B units to be issued will be equal to: (i) the excess of (A) the product of (y) the cost of assets multiplied by (z) 0.1875% over (B) any amounts payable as an oversight fee (as described below) for such calendar quarter; divided by (ii) the value of one share of common stock as of the last day of such calendar quarter. When and if approved by the board of directors, the Class B units are expected to be issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. Pursuant to the service provider agreement 50.0% of the Class B units will be assigned to the Service Provider, solely with respect to the Company's foreign investment strategy in Europe. As of December 31, 2014, the Company did not consider achievement of the performance condition to be probable. The value of issued Class B units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. The Advisor will receive distributions on unvested Class B units equal to the distribution rate received on the Company's common stock. Such distributions on issued Class B units will be expensed in the consolidated statement of operations until the performance condition is considered probable to occur. The board of directors approved the issuance of 682,351 and 23,392 of Class B units to the Advisor and the Service Provider in connection with this agreement during the years ended December 31, 2014 and 2013, respectively.
If the Property Manager or an affiliate provides property management and leasing services for properties owned by the Company, the Company pays fees equal to: (i) with respect to stand-alone, single-tenant net leased properties which are not part of a shopping center, 2.0% of gross revenues from the properties managed and (ii) with respect to all other types of properties, 4.0% of gross revenues from the properties managed.
For services related to overseeing property management and leasing services provided by any person or entity that is not an affiliate of the Property Manager, the Company pays the Property Manager an oversight fee equal to 1.0% of gross revenues of the property managed.
F-31
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Solely with respect to the Company's investment activities in Europe, the Service Provider or other entity providing property management services with respect to such investments is paid: (i) with respect to single-tenant net leased properties which are not part of a shopping center, 1.75% of the gross revenues from such properties and (ii) with respect to all other types of properties, 3.5% of the gross revenues from such properties. The Property Manager is paid 0.25% of the gross revenues from European single-tenant net leased properties which are not part of a shopping center and 0.5% of the gross revenues from all other types of properties, reflecting a split of the oversight fee with the Service Provider or an affiliated entity providing European property management services. Such fees are deducted from fees payable to the Advisor, pursuant to the service provider agreement.
Effective March 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. Strategic advisory fees are amortized over approximately 18 months, the estimated remaining term of the IPO as of the date of the agreement, and are included in general and administrative expenses in the consolidated statement of operations and comprehensive loss.
The following table reflects related party fees incurred, forgiven and contractually due as of and for the periods presented:
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | Payable as of December 31, | |||||||||||||||||||||||||||||||||
(In thousands) | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||
One-time fees and reimbursements: | ||||||||||||||||||||||||||||||||||||
Acquisition fees and related cost reimbursements | $ | 32,915 | $ | — | $ | 2,447 | $ | — | $ | 41 | $ | — | $ | 2 | $ | — | $ | — | ||||||||||||||||||
Transaction fee | — | — | 165 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Financing coordination fees | 6,546 | — | 926 | — | 9 | — | — | — | — | |||||||||||||||||||||||||||
Ongoing fees: | ||||||||||||||||||||||||||||||||||||
Asset management fees (1) | — | — | — | — | — | 3 | — | — | — | |||||||||||||||||||||||||||
Property management and leasing fees | 1,316 | 690 | 50 | 25 | 1 | — | 52 | 1 | 1 | |||||||||||||||||||||||||||
Strategic advisory fees | 561 | — | 359 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Distributions on Class B Units | 178 | — | 4 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Total related party operational fees and reimbursements | $ | 41,516 | $ | 690 | $ | 3,951 | $ | 25 | $ | 51 | $ | 3 | $ | 54 | $ | 1 | $ | 1 | ||||||||||||||||||
(1) Effective January 1, 2013, the Company issues to the Advisor (subject to approval by the board of directors) restricted performance based Class B units for asset management services, which will be forfeited immediately if certain conditions occur.
The Company reimburses 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 (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Additionally, the Company reimburses 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 does not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or real estate commissions. No reimbursement was incurred from the Advisor for providing services during the years ended December 31, 2014, 2013 and 2012.
The Company pays the Advisor an annual subordinated performance fee calculated on the basis of the Company's total return to stockholders, payable annually in arrears, such that for any year in which the Company's total return on stockholders' capital exceeds 6.0% per annum, the Advisor is entitled to 15.0% of the excess total return but not to exceed 10.0% of the aggregate total return for such year (which will take into account distributions and realized appreciation). This fee is payable only upon the sale of assets, distributions or other events which results in the Company's return on stockholders' capital exceeding 6.0% per annum. Solely with respect to the Company's investment activities in Europe, the Service Provider will be paid 50.0% of the annual subordinated performance fee payable in respect of such investments, and the Advisor or its affiliates will receive the remaining 50%, as set forth in the service provider agreement. No such amounts had been incurred during the years ended December 31, 2014, 2013 and 2012.
F-32
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may waive certain fees including asset management and property management 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 certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs or property operating expenses. These absorbed costs are presented net in the accompanying consolidated statements of operations and comprehensive loss.
The following table details property operating and general and administrative expenses absorbed by the Advisor during the three years ended December 31, 2014, 2013, and 2012:
Year Ended December 31, | ||||||||||||
(In thousands) | 2014 | 2013 | 2012 | |||||||||
Property operating expenses absorbed | $ | 178 | $ | 4 | $ | — | ||||||
General and administrative expenses absorbed | — | 1,292 | 85 | |||||||||
Total expenses absorbed (1) | $ | 178 | $ | 1,296 | $ | 85 | ||||||
___________________________________________________________________
(1) The Company had $0.5 million receivable from the Advisor as of December 31, 2014 related to absorbed costs and had $0.5 million and $0.1 million receivable as of December 31, 2013 and 2012, respectively.
Fees Paid in Connection with the Liquidation or Listing of the Company's Real Estate Assets
The Company pays a brokerage commission to the Advisor or its affiliates on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and 50% of the total brokerage commission paid if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such amounts had been incurred during the years ended December 31, 2014, 2013 and 2012.
If a liquidity event occurs and the Company is not simultaneously listed on an exchange, the Company will pay a subordinated participation in the net sales 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 an annual 6.0% cumulative, pre-tax non-compounded return on the capital contributed by investors. The Company cannot assure that it will provide this 6.0% return but the Advisor will not be entitled to the subordinated participation in net sale proceeds unless the Company's investors have received a 6.0% cumulative non-compounded return on their capital contributions plus the return of capital. No such amounts had been incurred during the years ended December 31, 2014, 2013 and 2012.
The Company will distribute a subordinated incentive listing distribution of 15.0%, payable in the form of a promissory note, of the amount by which the market value of all issued and outstanding shares of the Company's common stock 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. The Company cannot assure that it will provide this 6.0% return but the Advisor will not be entitled to the subordinated incentive listing fee unless investors have received a 6.0% cumulative, pre-tax non-compounded return on their capital contributions plus return of capital. No such distributions have been paid during the years ended December 31, 2014, 2013 and 2012. Neither the Advisor nor any of its affiliates can receive both the subordination participation in the net proceeds and the subordinated listing distribution.
Solely with respect to the Company's properties in Europe, the Service Provider has the right to receive up to 50% of subordinated participation in the net sales proceeds of the sale of real estate assets and 50% of subordinated incentive listing distribution relating to such properties. No such fees have been incurred during the years ended December 31, 2014, 2013 and 2012.
Upon termination or non-renewal of the advisory agreement, the Advisor will receive distributions from the OP payable in the form of a promissory note. 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.
Note 11 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services,
F-33
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company's common stock available for issue, transfer agency services, as well as other administrative responsibilities for the Company including accounting services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies 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
Stock Option Plan
The Company has a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to the Company's independent directors, officers, advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan during the IPO is the exercise price for stock options granted to the independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. As of December 31, 2014, 2013 and 2012, no stock options were issued under the Plan.
Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further action by the Company's board of directors or the stockholders, on the date of 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% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The fair market value of any shares of restricted stock granted under our restricted share plan, together with the total amount of acquisition fees, acquisition expense reimbursements, asset management fees, financing coordination fees, disposition fees and subordinated distributions by the operating partnership payable to the Advisor (or its assignees), may not exceed (a) 6% of all properties' aggregate gross contract purchase price, (b) as determined annually, the greater, in the aggregate, of 2% of average invested assets and 25% 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, (c) disposition fees, if any, of up to 3% of the contract sales price of all properties that we sell and (d) 15% of remaining net sales proceeds after return of capital contributions plus payment to investors of a 6% cumulative, pre-tax, non-compounded return on the capital contributed by investors. Additionally, the total number of shares of common stock granted under the RSP may not exceed 5.0% of the Company's outstanding shares of common stock and in any event will not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. 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 shares of common stock shall be subject to the same restrictions as the underlying restricted shares.
F-34
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
The following table reflects restricted share award activity for the years ended December 31, 2014, 2013 and 2012.
Number of Restricted Shares | Weighted-Average Issue Price | |||||
Unvested, December 31, 2011 | — | $ | — | |||
Granted | 9,000 | 9.00 | ||||
Vested | — | — | ||||
Unvested, December 31, 2012 | 9,000 | 9.00 | ||||
Granted | 9,000 | 9.00 | ||||
Vested | (1,800 | ) | 9.00 | |||
Unvested, December 31, 2013 | 16,200 | 9.00 | ||||
Granted | 9,000 | 9.00 | ||||
Vested | (10,800 | ) | 9.00 | |||
Forfeitures | — | — | ||||
Unvested, December 31, 2014 | 14,400 | $ | 9.00 | |||
The fair value of the restricted shares is being expensed over the vesting period of five years. Compensation expense related to restricted stock was approximately $96,000, $24,000 and $11,000 during the years ended December 31, 2014, 2013 and 2012, respectively, and is recorded as general and administrative expense in the accompanying statements of operations. As of December 31, 2014, the Company had $0.1 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company’s RSP. That cost is expected to be recognized over a weighted average period of 2.5 years.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at each director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. There were 1,056 shares of common stock issued in lieu of cash during the year ended December 31, 2014 which resulted in additional share based compensation of $10,000. There were no such shares of common stock issued in lieu of cash during the years ended December 31, 2013 and 2012.
Note 13 — Net Loss Per Share
The following is a summary of the basic and diluted net loss per share computation for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Net loss (in thousands) | $ | (53,594 | ) | $ | (6,989 | ) | $ | (413 | ) | |||
Basic and diluted weighted average shares outstanding | 126,079,369 | 5,453,404 | 64,252 | |||||||||
Basic and diluted net loss per share | $ | (0.43 | ) | $ | (1.28 | ) | $ | (6.43 | ) | |||
The Company had the following common share equivalents as of December 31, 2014, 2013 and 2012, which were excluded from the calculation of diluted loss per share attributable to stockholders as the effect would have been antidilutive:
December 31, | |||||||||
2014 | 2013 | 2012 | |||||||
Unvested restricted stock | 14,400 | 16,200 | 9,000 | ||||||
OP Units | 22 | 22 | 22 | ||||||
Class B units | 705,743 | 23,392 | — | ||||||
Total common share equivalents | 720,165 | 39,614 | 9,022 | ||||||
F-35
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Note 14 – Quarterly Results (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for years ended December 31, 2014 and 2013:
For the quarter ended | ||||||||||||||||
2014 | March 31, | June 30, | September 30, | December 31, | ||||||||||||
Rental revenue | $ | 7,315 | $ | 13,223 | $ | 25,400 | $ | 42,220 | ||||||||
Net loss | $ | (16,349 | ) | $ | (7,479 | ) | $ | (24,558 | ) | $ | (5,208 | ) | ||||
Weighted average shares outstanding | 37,602,790 | 111,819,848 | 175,401,867 | 177,414,574 | ||||||||||||
Basic and diluted net loss per share | $ | (0.43 | ) | $ | (0.07 | ) | $ | (0.14 | ) | $ | (0.03 | ) | ||||
For the quarter ended | ||||||||||||||||
2013 | March 31, | June 30, | September 30, | December 31, | ||||||||||||
Rental revenue | $ | 45 | $ | 200 | $ | 1,232 | $ | 2,474 | ||||||||
Net loss | $ | (2 | ) | $ | (1,294 | ) | $ | (3,090 | ) | $ | (2,603 | ) | ||||
Weighted average shares outstanding | 439,097 | 2,755,487 | 7,023,704 | 11,456,997 | ||||||||||||
Basic and diluted net loss per share | $ | — | $ | (0.47 | ) | $ | (0.44 | ) | $ | (0.23 | ) | |||||
Note 15 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K, and determined that there have not been any events that have occurred that would require adjustments to, or disclosures in, the consolidated financial statements, except for the following disclosures:
Acquisitions
The following table presents certain information about the properties that the Company acquired from January 1, 2015 to April 2, 2015:
Number of Properties | Rentable Square Feet | Base Purchase Price(1) | |||||||||
(in thousands) | |||||||||||
Total portfolio, December 31, 2014 | 307 | — | 16,305,844 | $ | 2,378,554 | ||||||
Acquisitions | 2 | 136,874 | 38,655 | ||||||||
Total portfolio, April 2, 2015 | 309 | 16,442,718 | $ | 2,417,209 | |||||||
______________________
(1) Contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase, where applicable.
Intention to List Common Stock on New York Stock Exchange
On March 9, 2015, the Company announced that that it intends to file an application to list its common stock on the New York Stock Exchange (“NYSE”) under the symbol “GNL,” and, subject to NYSE approval, anticipates that its common stock will begin trading on the NYSE during the second quarter of 2015. Concurrent with the listing, the Company intends to change its name to “Global Net Lease, Inc.”
The Company’s Board of Directors determined, in consultation with its financial advisors, Barclays and RCS Capital, a division of Realty Capital Securities, LLC, that it is in the Company’s best interest to move forward with the listing application. This decision is the result of a process begun in December 2014 by the Board of Directors to evaluate possible strategic alternatives designed to maximize long-term stockholder value.
F-36
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | |||||||||||||||||||||||||||||||||
Property | City | U.S. State or Country | Acquisition Date | Encumbrances at December 31, 2014 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount at December 31, 2014(1)(2) | Accumulated Depreciation (3)(4) | ||||||||||||||||||||||||
McDonalds Corporation | Carlisle | UK | Oct. 2012 | $ | 1,181 | $ | 499 | $ | 1,163 | $ | — | $ | — | $ | 1,662 | $ | 145 | |||||||||||||||||
Wickes | Blackpool | UK | May. 2013 | 3,023 | 2,097 | 2,252 | — | — | 4,349 | 180 | ||||||||||||||||||||||||
Everything Everywhere | Merthyr Tydfil | UK | Jun. 2013 | 6,213 | 4,272 | 2,718 | — | — | 6,990 | 208 | ||||||||||||||||||||||||
Thames Water | Swindon | UK | Jul. 2013 | 9,320 | 4,272 | 5,048 | — | — | 9,320 | 345 | ||||||||||||||||||||||||
Wickes | Tunstall | UK | Jul. 2013 | 2,563 | 1,087 | 2,485 | — | — | 3,572 | 169 | ||||||||||||||||||||||||
PPD Global Labs | Highland Heights | KY | Aug. 2013 | — | 2,001 | 6,002 | — | — | 8,003 | 433 | ||||||||||||||||||||||||
Northern Rock | Sunderland | UK | Sep. 2013 | 8,155 | 1,553 | 5,437 | — | — | 6,990 | 350 | ||||||||||||||||||||||||
Kulicke & Soffa | Fort Washington | PA | Sep. 2013 | — | 2,272 | 12,874 | — | — | 15,146 | 828 | ||||||||||||||||||||||||
Wickes | Clifton | UK | Nov. 2013 | 2,951 | 1,553 | 2,175 | — | — | 3,728 | 122 | ||||||||||||||||||||||||
Con-Way Freight, Inc. | Aurora | NE | Nov. 2013 | — | 295 | 1,670 | — | — | 1,965 | 110 | ||||||||||||||||||||||||
Con-Way Freight, Inc. | Grand Rapids | MI | Nov. 2013 | — | 945 | 1,417 | — | — | 2,362 | 94 | ||||||||||||||||||||||||
Con-Way Freight, Inc. | Riverton | IL | Nov. 2013 | — | 344 | 804 | — | — | 1,148 | 53 | ||||||||||||||||||||||||
Con-Way Freight, Inc. | Salina | KS | Nov. 2013 | — | 461 | 1,843 | — | — | 2,304 | 122 | ||||||||||||||||||||||||
Con-Way Freight, Inc. | Uhrichsville | OH | Nov. 2013 | — | 380 | 886 | — | — | 1,266 | 59 | ||||||||||||||||||||||||
Con-Way Freight, Inc. | Vincennes | IN | Nov. 2013 | — | 220 | 712 | — | — | 932 | 44 | ||||||||||||||||||||||||
Con-Way Freight, Inc. | Waite Park | MN | Nov. 2013 | — | 366 | 681 | — | — | 1,047 | 45 | ||||||||||||||||||||||||
Wolverine | Howard City | MI | Dec. 2013 | — | 719 | 13,667 | — | — | 14,386 | 834 | ||||||||||||||||||||||||
Western Digital | San Jose | CA | Dec. 2013 | 18,269 | 9,021 | 16,729 | — | — | 25,750 | 808 | ||||||||||||||||||||||||
Encanto Restaurants | Baymon | PR | Dec. 2013 | 1,829 | 1,150 | 1,724 | — | — | 2,874 | 96 | ||||||||||||||||||||||||
Encanto Restaurants | Caguas | PR | Dec. 2013 | 1,591 | — | 2,481 | — | — | 2,481 | 138 | ||||||||||||||||||||||||
Encanto Restaurants | Carolina | PR | Dec. 2013 | 875 | 615 | 751 | — | — | 1,366 | 42 | ||||||||||||||||||||||||
Encanto Restaurants | Carolina | PR | Dec. 2013 | 2,943 | 1,840 | 2,761 | — | — | 4,601 | 153 | ||||||||||||||||||||||||
Encanto Restaurants | Guayama | PR | Dec. 2013 | 954 | 673 | 822 | — | — | 1,495 | 46 | ||||||||||||||||||||||||
Encanto Restaurants | Mayaguez | PR | Dec. 2013 | 875 | 410 | 957 | — | — | 1,367 | 53 | ||||||||||||||||||||||||
Encanto Restaurants | Ponce | PR | Dec. 2013 | 1,392 | 655 | 1,528 | — | — | 2,183 | 85 | ||||||||||||||||||||||||
Encanto Restaurants | Ponce | PR | Dec. 2013 | 1,273 | 600 | 1,399 | — | — | 1,999 | 80 | ||||||||||||||||||||||||
Encanto Restaurants | Puerto Neuvo | PR | Dec. 2013 | 517 | — | 782 | — | — | 782 | 43 | ||||||||||||||||||||||||
Encanto Restaurants | Quebrada Arena | PR | Dec. 2013 | 1,535 | 843 | 1,566 | — | — | 2,409 | 87 | ||||||||||||||||||||||||
Encanto Restaurants | Rio Piedras | PR | Dec. 2013 | 1,750 | 963 | 1,788 | — | — | 2,751 | 99 | ||||||||||||||||||||||||
Encanto Restaurants | Rio Piedras | PR | Dec. 2013 | 1,074 | 505 | 1,179 | — | — | 1,684 | 65 | ||||||||||||||||||||||||
Encanto Restaurants | San German | PR | Dec. 2013 | 716 | 391 | 726 | — | — | 1,117 | 42 | ||||||||||||||||||||||||
Encanto Restaurants | San Juan | PR | Dec. 2013 | 994 | 389 | 1,168 | — | — | 1,557 | 65 | ||||||||||||||||||||||||
Encanto Restaurants | San Juan | PR | Dec. 2013 | 1,750 | 1,235 | 1,509 | — | — | 2,744 | 84 | ||||||||||||||||||||||||
Encanto Restaurants | San Juan | PR | Dec. 2013 | 493 | 153 | 612 | — | — | 765 | 34 | ||||||||||||||||||||||||
F-37
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | |||||||||||||||||||||||||||||||||
Property | City | U.S. State or Country | Acquisition Date | Encumbrances at December 31, 2014 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount at December 31, 2014(1)(2) | Accumulated Depreciation (3)(4) | ||||||||||||||||||||||||
Encanto Restaurants | Toa Baja | PR | Dec. 2013 | 437 | 68 | 616 | — | — | 684 | 35 | ||||||||||||||||||||||||
Encanto Restaurants | Vega Baja | PR | Dec. 2013 | 1,495 | 822 | 1,527 | — | — | 2,349 | 85 | ||||||||||||||||||||||||
Rheinmetall | Neuss | Germany | Jan. 2014 | 12,884 | 6,250 | 17,547 | — | — | 23,797 | 476 | ||||||||||||||||||||||||
GE Aviation | Grand Rapids | MI | Jan. 2014 | — | 3,174 | 27,076 | — | — | 30,250 | 721 | ||||||||||||||||||||||||
Provident Financial | Bradford | UK | Feb. 2014 | 19,805 | 1,567 | 29,067 | — | — | 30,634 | 679 | ||||||||||||||||||||||||
Crown Crest | Leicester | UK | Feb. 2014 | 29,901 | 8,927 | 36,863 | — | — | 45,790 | 981 | ||||||||||||||||||||||||
Trane | Davenport | IA | Feb. 2014 | — | 291 | 1,968 | — | — | 2,259 | 54 | ||||||||||||||||||||||||
Aviva | Sheffield | UK | Mar. 2014 | 24,387 | 3,375 | 38,242 | — | — | 41,617 | 839 | ||||||||||||||||||||||||
DFS Trading | Brigg | UK | Mar. 2014 | — | 1,577 | 4,471 | — | — | 6,048 | 101 | ||||||||||||||||||||||||
DFS Trading | Carcroft | UK | Mar. 2014 | — | 360 | 2,583 | — | — | 2,943 | 61 | ||||||||||||||||||||||||
DFS Trading | Carcroft | UK | Mar. 2014 | — | 1,325 | 5,249 | — | — | 6,574 | 109 | ||||||||||||||||||||||||
DFS Trading | Darley Dale | UK | Mar. 2014 | — | 1,551 | 3,981 | — | — | 5,532 | 91 | ||||||||||||||||||||||||
DFS Trading | Somercotes | UK | Mar. 2014 | — | 911 | 3,254 | — | — | 4,165 | 88 | ||||||||||||||||||||||||
Government Services Administration | Fanklin | TN | Mar. 2014 | — | 4,160 | 30,083 | — | — | 34,243 | 600 | ||||||||||||||||||||||||
National Oilwell Varco | Williston | ND | Mar. 2014 | — | 211 | 3,513 | — | — | 3,724 | 95 | ||||||||||||||||||||||||
Talk Talk | Manchester | UK | Apr. 2014 | — | 911 | 10,831 | — | — | 11,742 | 225 | ||||||||||||||||||||||||
Government Services Administration | Dover | DE | Apr. 2014 | — | 1,097 | 1,715 | — | — | 2,812 | 34 | ||||||||||||||||||||||||
Government Services Administration | Germantown | PA | Apr. 2014 | — | 1,097 | 3,573 | — | — | 4,670 | 64 | ||||||||||||||||||||||||
OBI DIY | Mayen | Germany | Apr. 2014 | 5,470 | 1,362 | 8,129 | — | — | 9,491 | 165 | ||||||||||||||||||||||||
DFS Trading | South Yorkshire | UK | Apr. 2014 | — | — | 1,624 | — | — | 1,624 | 44 | ||||||||||||||||||||||||
DFS Trading | Yorkshire | UK | Apr. 2014 | — | — | 2,116 | — | — | 2,116 | 38 | ||||||||||||||||||||||||
Government Services Administration | Dallas | TX | Apr. 2014 | — | 484 | 2,934 | — | — | 3,418 | 52 | ||||||||||||||||||||||||
Government Services Administration | Mission | TX | Apr. 2014 | — | 618 | 3,145 | — | — | 3,763 | 59 | ||||||||||||||||||||||||
Government Services Administration | International Falls | MN | May. 2014 | — | 350 | 11,182 | — | — | 11,532 | 204 | ||||||||||||||||||||||||
Indiana Department of Revenue | Indianapolis | IN | May. 2014 | — | 891 | 7,677 | — | — | 8,568 | 145 | ||||||||||||||||||||||||
National Oilwell Varco | Pleasanton | TX | May. 2014 | — | 202 | 1,643 | — | — | 1,845 | 37 | ||||||||||||||||||||||||
Nissan | Murfreesboro | TN | May. 2014 | — | 966 | 19,573 | — | — | 20,539 | 299 | ||||||||||||||||||||||||
Government Services Administration | Lakewood | CO | Jun. 2014 | — | 1,220 | 7,928 | — | — | 9,148 | 122 | ||||||||||||||||||||||||
Lippert Components | South Bend | IN | Jun. 2014 | — | 3,195 | 6,883 | — | — | 10,078 | 108 | ||||||||||||||||||||||||
Axon Energy Products | Conroe | TX | Jun. 2014 | — | 826 | 6,132 | — | — | 6,958 | 91 | ||||||||||||||||||||||||
Axon Energy Products | Houston | TX | Jun. 2014 | — | 416 | 5,186 | — | — | 5,602 | 83 | ||||||||||||||||||||||||
F-38
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | |||||||||||||||||||||||||||||||||
Property | City | U.S. State or Country | Acquisition Date | Encumbrances at December 31, 2014 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount at December 31, 2014(1)(2) | Accumulated Depreciation (3)(4) | ||||||||||||||||||||||||
Axon Energy Products | Houston | TX | Jun. 2014 | — | 294 | 2,310 | — | — | 2,604 | 38 | ||||||||||||||||||||||||
Bell Supply Co | Carrizo Springs | TX | Jun. 2014 | — | 260 | 1,445 | — | — | 1,705 | 28 | ||||||||||||||||||||||||
Bell Supply Co | Cleburne | TX | Jun. 2014 | — | 301 | 323 | — | — | 624 | 7 | ||||||||||||||||||||||||
Bell Supply Co | Frierson | LA | Jun. 2014 | — | 260 | 1,054 | — | — | 1,314 | 28 | ||||||||||||||||||||||||
Bell Supply Co | Gainesville | TX | Jun. 2014 | — | 131 | 1,420 | — | — | 1,551 | 23 | ||||||||||||||||||||||||
Bell Supply Co | Killdeer | ND | Jun. 2014 | — | 307 | 1,250 | — | — | 1,557 | 23 | ||||||||||||||||||||||||
Bell Supply Co | Williston | ND | Jun. 2014 | — | 162 | 2,323 | — | — | 2,485 | 39 | ||||||||||||||||||||||||
GE Oil & Gas | Canton | OH | Jun. 2014 | — | 437 | 3,039 | — | — | 3,476 | 50 | ||||||||||||||||||||||||
GE Oil & Gas | Odessa | TX | Jun. 2014 | — | 1,611 | 3,322 | — | — | 4,933 | 99 | ||||||||||||||||||||||||
Lhoist | Irving | TX | Jun. 2014 | — | 173 | 2,154 | — | — | 2,327 | 42 | ||||||||||||||||||||||||
Select Energy Services | DeBerry | TX | Jun. 2014 | — | 533 | 7,551 | — | — | 8,084 | 192 | ||||||||||||||||||||||||
Select Energy Services | Gainesville | TX | Jun. 2014 | — | 519 | 7,482 | — | — | 8,001 | 113 | ||||||||||||||||||||||||
Select Energy Services | Victoria | TX | Jun. 2014 | — | 354 | 1,698 | — | — | 2,052 | 34 | ||||||||||||||||||||||||
Bell Supply Co | Jacksboro | TX | Jun. 2014 | — | 51 | 657 | — | — | 708 | 15 | ||||||||||||||||||||||||
Bell Supply Co | Kenedy | TX | Jun. 2014 | — | 190 | 1,669 | — | — | 1,859 | 30 | ||||||||||||||||||||||||
Select Energy Services | Alice | TX | Jun. 2014 | — | 518 | 1,331 | — | — | 1,849 | 21 | ||||||||||||||||||||||||
Select Energy Services | Dilley | TX | Jun. 2014 | — | 429 | 1,777 | — | — | 2,206 | 32 | ||||||||||||||||||||||||
Select Energy Services | Kenedy | TX | Jun. 2014 | — | 815 | 8,355 | — | — | 9,170 | 131 | ||||||||||||||||||||||||
Select Energy Services | Laredo | TX | Jun. 2014 | — | 2,472 | 944 | — | — | 3,416 | 22 | ||||||||||||||||||||||||
Superior Energy Services | Gainesville | TX | Jun. 2014 | — | 322 | 480 | — | — | 802 | 7 | ||||||||||||||||||||||||
Superior Energy Services | Jacksboro | TX | Jun. 2014 | — | 408 | 312 | — | — | 720 | 6 | ||||||||||||||||||||||||
Amcor Packaging | Workington | UK | Jun. 2014 | — | 1,352 | 7,971 | — | — | 9,323 | 129 | ||||||||||||||||||||||||
Government Services Administration | Raton | NM | Jun. 2014 | — | 93 | 875 | — | — | 968 | 13 | ||||||||||||||||||||||||
Nimble Storage | San Jose | CA | Jun. 2014 | — | 30,227 | 10,708 | — | 28 | 40,963 | 142 | ||||||||||||||||||||||||
FedEx | Amarillo | TX | Jul. 2014 | — | 889 | 6,421 | — | — | 7,310 | 104 | ||||||||||||||||||||||||
FedEx | Chicopee | MA | Jul. 2014 | — | 1,030 | 7,022 | — | — | 8,052 | 119 | ||||||||||||||||||||||||
FedEx | San Antonio | TX | Jul. 2014 | — | 3,283 | 17,729 | — | — | 21,012 | 239 | ||||||||||||||||||||||||
Sandoz | Princeton | NJ | Jul. 2014 | — | 7,766 | 29,991 | — | 9,561 | 47,318 | 383 | ||||||||||||||||||||||||
Wyndham | Branson | MO | Jul. 2014 | — | 881 | 3,307 | — | — | 4,188 | 47 | ||||||||||||||||||||||||
Valassis | Livonia | MI | Jul. 2014 | — | 1,735 | 8,119 | — | — | 9,854 | 106 | ||||||||||||||||||||||||
Government Services Administration | Fort Fairfield | ME | Jul. 2014 | — | 26 | 9,315 | — | — | 9,341 | 99 | ||||||||||||||||||||||||
AT&T Services, Inc. | San Antonio | TX | Jul. 2014 | — | 5,312 | 41,201 | — | — | 46,513 | 434 | ||||||||||||||||||||||||
PNC Bank | Erie | PA | Jul. 2014 | — | 242 | 6,195 | — | — | 6,437 | 67 | ||||||||||||||||||||||||
PNC Bank | Scranton | PA | Jul. 2014 | — | 1,324 | 3,004 | — | — | 4,328 | 33 | ||||||||||||||||||||||||
Achmea | Leusden | Netherlands | Jul. 2014 | — | 3,094 | 24,115 | — | — | 27,209 | 255 | ||||||||||||||||||||||||
F-39
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | ||||||||||||||||||||||||||
Property | City | U.S. State or Country | Acquisition Date | Encumbrances at December 31, 2014 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount at December 31, 2014(1)(2) | Accumulated Depreciation (3)(4) | |||||||||||||||||
Continental Tire | Fort Mill | SC | Jul. 2014 | — | 780 | 14,259 | — | — | 15,039 | 153 | |||||||||||||||||
Fujitsu Office Properties | Manchester | UK | Jul. 2014 | — | 4,386 | 47,482 | — | — | 51,868 | 517 | |||||||||||||||||
BP Oil | Wootton Bassett | UK | Aug. 2014 | — | 712 | 3,075 | — | — | 3,787 | 36 | |||||||||||||||||
HBOS | Derby | UK | Aug. 2014 | — | 714 | 7,192 | — | — | 7,906 | 86 | |||||||||||||||||
HBOS | St. Helens | UK | Aug. 2014 | — | 270 | 4,075 | — | — | 4,345 | 49 | |||||||||||||||||
HBOS | Warrington | UK | Aug. 2014 | — | 516 | 2,435 | — | — | 2,951 | 32 | |||||||||||||||||
Malthurst | Shiptonthorpe | UK | Aug. 2014 | — | 328 | 2,327 | — | — | 2,655 | 30 | |||||||||||||||||
Malthurst | Yorkshire | UK | Aug. 2014 | — | 581 | 1,523 | — | — | 2,104 | 25 | |||||||||||||||||
Stanley Black & Decker | Westerville | OH | Aug. 2014 | — | 958 | 6,933 | — | — | 7,891 | 77 | |||||||||||||||||
Thermo Fisher | Kalamazoo | MI | Aug. 2014 | — | 1,176 | 10,179 | — | — | 11,355 | 107 | |||||||||||||||||
Capgemini | Birmingham | UK | Aug. 2014 | — | 1,933 | 18,331 | — | — | 20,264 | 170 | |||||||||||||||||
Merck | Madison | NJ | Aug. 2014 | — | 10,290 | 32,530 | — | — | 42,820 | 277 | |||||||||||||||||
Family Dollar | Abbeville | AL | Aug. 2014 | — | 115 | 635 | — | — | 750 | 7 | |||||||||||||||||
Family Dollar | Aiken | SC | Aug. 2014 | — | 439 | 505 | — | — | 944 | 6 | |||||||||||||||||
Family Dollar | Alapaha | GA | Aug. 2014 | — | 200 | 492 | — | — | 692 | 6 | |||||||||||||||||
Family Dollar | Anniston | AL | Aug. 2014 | — | 176 | 618 | — | — | 794 | 7 | |||||||||||||||||
Family Dollar | Atlanta | GA | Aug. 2014 | — | 234 | 1,181 | — | — | 1,415 | 11 | |||||||||||||||||
Family Dollar | Bossier City | LA | Aug. 2014 | — | 291 | 520 | — | — | 811 | 5 | |||||||||||||||||
Family Dollar | Brandenburg | KY | Aug. 2014 | — | 178 | 748 | — | — | 926 | 8 | |||||||||||||||||
Family Dollar | Brownfield | TX | Aug. 2014 | — | 31 | 664 | — | — | 695 | 6 | |||||||||||||||||
Family Dollar | Brownsville | TX | Aug. 2014 | — | 83 | 803 | — | — | 886 | 8 | |||||||||||||||||
Family Dollar | Caledonia | MS | Aug. 2014 | — | 415 | 162 | — | — | 577 | 3 | |||||||||||||||||
Family Dollar | Camden | SC | Aug. 2014 | — | 187 | 608 | — | — | 795 | 7 | |||||||||||||||||
Family Dollar | Camp Wood | TX | Aug. 2014 | — | 96 | 593 | — | — | 689 | 6 | |||||||||||||||||
Family Dollar | Church Point | LA | Aug. 2014 | — | 247 | 563 | — | — | 810 | 6 | |||||||||||||||||
Family Dollar | Columbia | SC | Aug. 2014 | — | 363 | 487 | — | — | 850 | 6 | |||||||||||||||||
Family Dollar | Columbus | MS | Aug. 2014 | — | 305 | 85 | — | — | 390 | 1 | |||||||||||||||||
Family Dollar | Danville | VA | Aug. 2014 | — | 124 | 660 | — | — | 784 | 7 | |||||||||||||||||
Family Dollar | Detroit | MI | Aug. 2014 | — | 107 | 711 | — | — | 818 | 6 | |||||||||||||||||
Family Dollar | Diamond Head | MS | Aug. 2014 | — | 104 | 834 | — | — | 938 | 8 | |||||||||||||||||
Family Dollar | Eatonville | FL | Aug. 2014 | — | 332 | 584 | — | — | 916 | 8 | |||||||||||||||||
Family Dollar | Falfurrias | TX | Aug. 2014 | — | 52 | 745 | — | — | 797 | 6 | |||||||||||||||||
Family Dollar | Fayetteville | NC | Aug. 2014 | — | 99 | 438 | — | — | 537 | 4 | |||||||||||||||||
Family Dollar | Fort Davis | TX | Aug. 2014 | — | 114 | 698 | — | — | 812 | 8 | |||||||||||||||||
Family Dollar | Fort Madison | IA | Aug. 2014 | — | 188 | 226 | — | — | 414 | 3 | |||||||||||||||||
F-40
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | ||||||||||||||||||||||||||
Property | City | U.S. State or Country | Acquisition Date | Encumbrances at December 31, 2014 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount at December 31, 2014(1)(2) | Accumulated Depreciation (3)(4) | |||||||||||||||||
Family Dollar | Greenwood | SC | Aug. 2014 | — | 629 | 546 | — | — | 1,175 | 5 | |||||||||||||||||
Family Dollar | Grenada | MS | Aug. 2014 | — | 346 | 335 | — | — | 681 | 4 | |||||||||||||||||
Family Dollar | Griffin | GA | Aug. 2014 | — | 369 | 715 | — | — | 1,084 | 8 | |||||||||||||||||
Family Dollar | Hallsville | TX | Aug. 2014 | — | 96 | 225 | — | — | 321 | 2 | |||||||||||||||||
Family Dollar | Hardeeville | SC | Aug. 2014 | — | 83 | 663 | — | — | 746 | 7 | |||||||||||||||||
Family Dollar | Hastings | NE | Aug. 2014 | — | 260 | 515 | — | — | 775 | 5 | |||||||||||||||||
Family Dollar | Haw River | NC | Aug. 2014 | — | 310 | 554 | — | — | 864 | 7 | |||||||||||||||||
Family Dollar | Jacksonville | FL | Aug. 2014 | — | 369 | 544 | — | — | 913 | 6 | |||||||||||||||||
Family Dollar | Kansas City | MO | Aug. 2014 | — | 52 | 986 | — | — | 1,038 | 8 | |||||||||||||||||
Family Dollar | Knoxville | TN | Aug. 2014 | — | 82 | 714 | — | — | 796 | 7 | |||||||||||||||||
Family Dollar | La Feria | TX | Aug. 2014 | — | 124 | 956 | — | — | 1,080 | 9 | |||||||||||||||||
Family Dollar | Lancaster | SC | Aug. 2014 | — | 229 | 721 | — | — | 950 | 8 | |||||||||||||||||
Family Dollar | Lillian | AL | Aug. 2014 | — | 410 | 508 | — | — | 918 | 6 | |||||||||||||||||
Family Dollar | Louisville | KY | Aug. 2014 | — | 511 | 503 | — | — | 1,014 | 6 | |||||||||||||||||
Family Dollar | Louisville | MS | Aug. 2014 | — | 235 | 410 | — | — | 645 | 5 | |||||||||||||||||
Family Dollar | Madisonville | KY | Aug. 2014 | — | 389 | 576 | — | — | 965 | 6 | |||||||||||||||||
Family Dollar | Memphis | TN | Aug. 2014 | — | 356 | 507 | — | — | 863 | 6 | |||||||||||||||||
Family Dollar | Memphis | TN | Aug. 2014 | — | 79 | 342 | — | — | 421 | 4 | |||||||||||||||||
Family Dollar | Memphis | TN | Aug. 2014 | — | 158 | 301 | — | — | 459 | 4 | |||||||||||||||||
Family Dollar | Mendenhall | MS | Aug. 2014 | — | 61 | 720 | — | — | 781 | 7 | |||||||||||||||||
Family Dollar | Mobile | AL | Aug. 2014 | — | 258 | 682 | — | — | 940 | 7 | |||||||||||||||||
Family Dollar | Mohave Valley | AZ | Aug. 2014 | — | 284 | 575 | — | — | 859 | 7 | |||||||||||||||||
Family Dollar | N Platte | NE | Aug. 2014 | — | 117 | 255 | — | — | 372 | 2 | |||||||||||||||||
Family Dollar | Nampa | ID | Aug. 2014 | — | 133 | 1,126 | — | — | 1,259 | 11 | |||||||||||||||||
Family Dollar | Newberry | MI | Aug. 2014 | — | 172 | 1,562 | — | — | 1,734 | 15 | |||||||||||||||||
Family Dollar | North Charleston | SC | Aug. 2014 | — | 376 | 588 | — | — | 964 | 7 | |||||||||||||||||
Family Dollar | North Charleston | SC | Aug. 2014 | — | 458 | 593 | — | — | 1,051 | 7 | |||||||||||||||||
Family Dollar | Oklahoma City | OK | Aug. 2014 | — | 144 | 1,211 | — | — | 1,355 | 10 | |||||||||||||||||
Family Dollar | Orlando | FL | Aug. 2014 | — | 668 | 567 | — | — | 1,235 | 7 | |||||||||||||||||
Family Dollar | Orlando | FL | Aug. 2014 | — | 501 | 769 | — | — | 1,270 | 10 | |||||||||||||||||
Family Dollar | Paulden | AZ | Aug. 2014 | — | 468 | 306 | — | — | 774 | 5 | |||||||||||||||||
Family Dollar | Pensacola | FL | Aug. 2014 | — | 123 | 541 | — | — | 664 | 6 | |||||||||||||||||
Family Dollar | Poteet | TX | Aug. 2014 | — | 141 | 169 | — | — | 310 | 3 | |||||||||||||||||
Family Dollar | Rockford | IL | Aug. 2014 | — | 183 | 1,179 | — | — | 1,362 | 11 | |||||||||||||||||
Family Dollar | Roebuck | SC | Aug. 2014 | — | 306 | 508 | — | — | 814 | 7 | |||||||||||||||||
F-41
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | ||||||||||||||||||||||||||
Property | City | U.S. State or Country | Acquisition Date | Encumbrances at December 31, 2014 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount at December 31, 2014(1)(2) | Accumulated Depreciation (3)(4) | |||||||||||||||||
Family Dollar | San Angelo | TX | Aug. 2014 | — | 96 | 342 | — | — | 438 | 4 | |||||||||||||||||
Family Dollar | St Louis | MO | Aug. 2014 | — | 226 | 1,325 | — | — | 1,551 | 12 | |||||||||||||||||
Family Dollar | Tyler | TX | Aug. 2014 | — | 217 | 682 | — | — | 899 | 6 | |||||||||||||||||
Family Dollar | Union | MS | Aug. 2014 | — | 52 | 622 | — | — | 674 | 6 | |||||||||||||||||
Family Dollar | Williamston | SC | Aug. 2014 | — | 211 | 558 | — | — | 769 | 6 | |||||||||||||||||
Family Dollar | Winter Haven | FL | Aug. 2014 | — | 486 | 437 | — | — | 923 | 6 | |||||||||||||||||
Family Dollar | Winter Haven | FL | Aug. 2014 | — | 210 | 527 | — | — | 737 | 7 | |||||||||||||||||
Government Services Administration | Rangeley | ME | Aug. 2014 | — | 1,377 | 4,746 | — | 117 | 6,240 | 40 | |||||||||||||||||
Garden Ridge | Louisville | KY | Sep. 2014 | — | 3,994 | 4,865 | — | — | 8,859 | 43 | |||||||||||||||||
Garden Ridge | Lubbock | TX | Sep. 2014 | — | 1,574 | 5,950 | — | — | 7,524 | 59 | |||||||||||||||||
Garden Ridge | Mesa | AZ | Sep. 2014 | — | 2,727 | 4,867 | — | — | 7,594 | 47 | |||||||||||||||||
Garden Ridge | Raleigh | NC | Sep. 2014 | — | 2,362 | 4,267 | — | — | 6,629 | 42 | |||||||||||||||||
Hewlett-Packard | Newcastle | UK | Sep. 2014 | — | 1,335 | 22,237 | — | — | 23,572 | 147 | |||||||||||||||||
Intier Automotive | Redditch | UK | Sep. 2014 | — | 1,379 | 10,920 | — | — | 12,299 | 81 | |||||||||||||||||
Waste Management | Winston-Salem | NC | Sep. 2014 | — | 494 | 3,235 | — | — | 3,729 | 22 | |||||||||||||||||
FedEx | Winona | MN | Sep. 2014 | — | 83 | 1,785 | — | — | 1,868 | 14 | |||||||||||||||||
Winston Hotel | Amsterdam | Netherlands | Sep. 2014 | — | 8,534 | 4,512 | — | — | 13,046 | 28 | |||||||||||||||||
Dollar General | Allen | OK | Sep. 2014 | — | 99 | 793 | — | — | 892 | 6 | |||||||||||||||||
Dollar General | Allentown | PA | Sep. 2014 | — | 346 | 888 | — | — | 1,234 | 8 | |||||||||||||||||
Dollar General | Caledonia | OH | Sep. 2014 | — | 110 | 861 | — | — | 971 | 6 | |||||||||||||||||
Dollar General | Cherokee | KS | Sep. 2014 | — | 27 | 769 | — | — | 796 | 6 | |||||||||||||||||
Dollar General | Choctaw | OK | Sep. 2014 | — | 247 | 859 | — | — | 1,106 | 6 | |||||||||||||||||
Dollar General | Clearwater | KS | Sep. 2014 | — | 90 | 785 | — | — | 875 | 6 | |||||||||||||||||
Dollar General | Dexter | NM | Sep. 2014 | — | 329 | 585 | — | — | 914 | 4 | |||||||||||||||||
Dollar General | Elmore City | OK | Sep. 2014 | — | 21 | 742 | — | — | 763 | 5 | |||||||||||||||||
Dollar General | Erie | PA | Sep. 2014 | — | 410 | 682 | — | — | 1,092 | 5 | |||||||||||||||||
Dollar General | Eunice | NM | Sep. 2014 | — | 269 | 569 | — | — | 838 | 4 | |||||||||||||||||
Dollar General | Gore | OK | Sep. 2014 | — | 143 | 813 | — | — | 956 | 6 | |||||||||||||||||
Dollar General | Gratiot | OH | Sep. 2014 | — | 239 | 809 | — | — | 1,048 | 6 | |||||||||||||||||
Dollar General | Greensburg | PA | Sep. 2014 | — | 97 | 970 | — | — | 1,067 | 7 | |||||||||||||||||
Dollar General | Heavener | OK | Sep. 2014 | — | 99 | 998 | — | — | 1,097 | 7 | |||||||||||||||||
Dollar General | Kingston | OK | Sep. 2014 | — | 81 | 778 | — | — | 859 | 6 | |||||||||||||||||
Dollar General | Lordsburg | NM | Sep. 2014 | — | 212 | 719 | — | — | 931 | 5 | |||||||||||||||||
Dollar General | Lyons | KS | Sep. 2014 | — | 120 | 970 | — | — | 1,090 | 7 | |||||||||||||||||
Dollar General | Mansfield | LA | Sep. 2014 | — | 169 | 812 | — | — | 981 | 6 | |||||||||||||||||
F-42
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | |||||||||||||||||||||||||||||||||
Property | Citiy | U.S. State or Country | Acquisition Date | Encumbrances at December 31, 2014 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount at December 31, 2014(1)(2) | Accumulated Depreciation (3)(4) | ||||||||||||||||||||||||
Dollar General | McKean | PA | Sep. 2014 | — | 107 | 1,014 | — | — | 1,121 | 7 | ||||||||||||||||||||||||
Dollar General | Muskogee | OK | Sep. 2014 | — | 154 | 771 | — | — | 925 | 6 | ||||||||||||||||||||||||
Dollar General | Neligh | NE | Sep. 2014 | — | 83 | 1,045 | — | — | 1,128 | 7 | ||||||||||||||||||||||||
Dollar General | New Florence | PA | Sep. 2014 | — | 70 | 940 | — | — | 1,010 | 7 | ||||||||||||||||||||||||
Dollar General | New Paris | OH | Sep. 2014 | — | 411 | 488 | — | — | 899 | 5 | ||||||||||||||||||||||||
Dollar General | Norman | OK | Sep. 2014 | — | 40 | 913 | — | — | 953 | 7 | ||||||||||||||||||||||||
Dollar General | Painesville | OH | Sep. 2014 | — | 340 | 797 | — | — | 1,137 | 6 | ||||||||||||||||||||||||
Dollar General | Painesville | OH | Sep. 2014 | — | 300 | 715 | — | — | 1,015 | 5 | ||||||||||||||||||||||||
Dollar General | Peggs | OK | Sep. 2014 | — | 72 | 879 | — | — | 951 | 6 | ||||||||||||||||||||||||
Dollar General | Santa Rosa | NM | Sep. 2014 | — | 324 | 575 | — | — | 899 | 4 | ||||||||||||||||||||||||
Dollar General | Sapulpa | OK | Sep. 2014 | — | 143 | 745 | — | — | 888 | 5 | ||||||||||||||||||||||||
Dollar General | Schuyler | NE | Sep. 2014 | — | 144 | 905 | — | — | 1,049 | 6 | ||||||||||||||||||||||||
Dollar General | Spencerville | OH | Sep. 2014 | — | 213 | 928 | — | — | 1,141 | 6 | ||||||||||||||||||||||||
Dollar General | Tahlequah | OK | Sep. 2014 | — | 132 | 925 | — | — | 1,057 | 7 | ||||||||||||||||||||||||
Dollar General | Talihina | OK | Sep. 2014 | — | 163 | 1,023 | — | — | 1,186 | 7 | ||||||||||||||||||||||||
Dollar General | Townville | PA | Sep. 2014 | — | 78 | 882 | — | — | 960 | 7 | ||||||||||||||||||||||||
Dollar General | Uniontown | PA | Sep. 2014 | — | 165 | 1,107 | — | — | 1,272 | 8 | ||||||||||||||||||||||||
Dollar General | Valley Falls | KS | Sep. 2014 | — | 51 | 922 | — | — | 973 | 6 | ||||||||||||||||||||||||
Dollar General | Valliant | OK | Sep. 2014 | — | 183 | 1,004 | — | — | 1,187 | 7 | ||||||||||||||||||||||||
Dollar General | Wymore | NE | Sep. 2014 | — | 21 | 872 | — | — | 893 | 6 | ||||||||||||||||||||||||
Dollar General | Wynnewood | OK | Sep. 2014 | — | 188 | 1,057 | — | — | 1,245 | 8 | ||||||||||||||||||||||||
FedEx | Bohemia | NY | Sep. 2014 | — | 4,838 | 19,596 | — | — | 24,434 | 141 | ||||||||||||||||||||||||
FedEx | Watertown | NY | Sep. 2014 | — | 561 | 4,757 | — | — | 5,318 | 36 | ||||||||||||||||||||||||
Shaw Aero | Naples | FL | Sep. 2014 | — | 998 | 22,332 | — | — | 23,330 | 145 | ||||||||||||||||||||||||
Mallinckrodt | St. Louis | MO | Sep. 2014 | — | 1,499 | 16,828 | — | — | 18,327 | 111 | ||||||||||||||||||||||||
Kuka Warehouse | Sterling Heights | MI | Sep. 2014 | — | 1,227 | 10,790 | — | — | 12,017 | 71 | ||||||||||||||||||||||||
Trinity Health | Livonia | MI | Sep. 2014 | — | 8,953 | 28,141 | — | — | 37,094 | 212 | ||||||||||||||||||||||||
FedEx | Hebron | KY | Sep. 2014 | — | 1,106 | 7,750 | — | — | 8,856 | 54 | ||||||||||||||||||||||||
FedEx | Lexington | KY | Sep. 2014 | — | 1,118 | 7,961 | — | — | 9,079 | 55 | ||||||||||||||||||||||||
GE Aviation | Cincinnati | OH | Sep. 2014 | — | 1,393 | 10,490 | — | — | 11,883 | 69 | ||||||||||||||||||||||||
Bradford & Bingley | Bingley | UK | Oct. 2014 | — | 5,180 | 13,006 | — | — | 18,186 | 93 | ||||||||||||||||||||||||
DNV GL | Dublin | OH | Oct. 2014 | — | 2,509 | 3,140 | — | — | 5,649 | 22 | ||||||||||||||||||||||||
Rexam | Reckinghausen | Germany | Oct. 2014 | 6,394 | 857 | 12,064 | — | — | 12,921 | 53 | ||||||||||||||||||||||||
CJ Energy | Houston | TX | Oct. 2014 | — | 3,865 | 9,457 | — | — | 13,322 | 44 | ||||||||||||||||||||||||
FedEx | Lake Charles | LA | Oct. 2014 | — | 255 | 7,485 | — | — | 7,740 | 39 | ||||||||||||||||||||||||
F-43
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | |||||||||||||||||||||||||||||||||
Property | Citiy | U.S. State or Country | Acquisition Date | Encumbrances at December 31, 2014 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount at December 31, 2014(1)(2) | Accumulated Depreciation (3)(4) | ||||||||||||||||||||||||
Family Dollar | Big Sandy | TN | Oct. 2014 | — | 62 | 739 | — | — | 801 | 4 | ||||||||||||||||||||||||
Family Dollar | Boling | TX | Oct. 2014 | — | 80 | 781 | — | — | 861 | 4 | ||||||||||||||||||||||||
Family Dollar | Bonifay | FL | Oct. 2014 | — | 103 | 673 | — | — | 776 | 4 | ||||||||||||||||||||||||
Family Dollar | Brindidge | AL | Oct. 2014 | — | 89 | 749 | — | — | 838 | 5 | ||||||||||||||||||||||||
Family Dollar | Brownsville | TN | Oct. 2014 | — | 155 | 776 | — | — | 931 | 4 | ||||||||||||||||||||||||
Family Dollar | Buena Vista | GA | Oct. 2014 | — | 246 | 757 | — | — | 1,003 | 6 | ||||||||||||||||||||||||
Family Dollar | Calvert | TX | Oct. 2014 | — | 91 | 777 | — | — | 868 | 4 | ||||||||||||||||||||||||
Family Dollar | Chocowinty | NC | Oct. 2014 | — | 237 | 554 | — | — | 791 | 3 | ||||||||||||||||||||||||
Family Dollar | Clarksville | TN | Oct. 2014 | — | 370 | 1,025 | — | — | 1,395 | 6 | ||||||||||||||||||||||||
Family Dollar | Fort Mill | SC | Oct. 2014 | — | 556 | 757 | — | — | 1,313 | 4 | ||||||||||||||||||||||||
Family Dollar | Hillsboro | TX | Oct. 2014 | — | 287 | 634 | — | — | 921 | 3 | ||||||||||||||||||||||||
Family Dollar | Lake Charles | LA | Oct. 2014 | — | 295 | 737 | — | — | 1,032 | 4 | ||||||||||||||||||||||||
Family Dollar | Lakeland | FL | Oct. 2014 | — | 300 | 812 | — | — | 1,112 | 4 | ||||||||||||||||||||||||
Family Dollar | Lansing | MI | Oct. 2014 | — | 132 | 1,040 | — | — | 1,172 | 6 | ||||||||||||||||||||||||
Family Dollar | Laurens | SC | Oct. 2014 | — | 303 | 584 | — | — | 887 | 4 | ||||||||||||||||||||||||
Family Dollar | Marion | MS | Oct. 2014 | — | 183 | 747 | — | — | 930 | 4 | ||||||||||||||||||||||||
Family Dollar | Marsing | ID | Oct. 2014 | — | 188 | 786 | — | — | 974 | 5 | ||||||||||||||||||||||||
Family Dollar | Montgomery | AL | Oct. 2014 | — | 122 | 821 | — | — | 943 | 5 | ||||||||||||||||||||||||
Family Dollar | Montgomery | AL | Oct. 2014 | — | 411 | 646 | — | — | 1,057 | 5 | ||||||||||||||||||||||||
Family Dollar | Monticello | FL | Oct. 2014 | — | 230 | 695 | — | — | 925 | 4 | ||||||||||||||||||||||||
Family Dollar | Monticello | UT | Oct. 2014 | — | 96 | 894 | — | — | 990 | 6 | ||||||||||||||||||||||||
Family Dollar | North Little Rock | AR | Oct. 2014 | — | 424 | 649 | — | — | 1,073 | 4 | ||||||||||||||||||||||||
Family Dollar | Oakdale | LA | Oct. 2014 | — | 243 | 696 | — | — | 939 | 3 | ||||||||||||||||||||||||
Family Dollar | Orlando | FL | Oct. 2014 | — | 684 | 619 | — | — | 1,303 | 4 | ||||||||||||||||||||||||
Family Dollar | Port St. Lucie | FL | Oct. 2014 | — | 403 | 907 | — | — | 1,310 | 5 | ||||||||||||||||||||||||
Family Dollar | Prattville | AL | Oct. 2014 | — | 463 | 749 | — | — | 1,212 | 5 | ||||||||||||||||||||||||
Family Dollar | Prichard | AL | Oct. 2014 | — | 241 | 803 | — | — | 1,044 | 4 | ||||||||||||||||||||||||
Family Dollar | Quinlan | TX | Oct. 2014 | — | 74 | 774 | — | — | 848 | 4 | ||||||||||||||||||||||||
Family Dollar | Rigeland | MS | Oct. 2014 | — | 447 | 891 | — | — | 1,338 | 4 | ||||||||||||||||||||||||
Family Dollar | Rising Star | TX | Oct. 2014 | — | 63 | 674 | — | — | 737 | 3 | ||||||||||||||||||||||||
Family Dollar | Southaven | MS | Oct. 2014 | — | 409 | 1,080 | — | — | 1,489 | 6 | ||||||||||||||||||||||||
Family Dollar | Spout Springs | NC | Oct. 2014 | — | 474 | 676 | — | — | 1,150 | 4 | ||||||||||||||||||||||||
Family Dollar | St. Petersburg | FL | Oct. 2014 | — | 482 | 851 | — | — | 1,333 | 4 | ||||||||||||||||||||||||
Family Dollar | Swansboro | NC | Oct. 2014 | — | 337 | 826 | — | — | 1,163 | 6 | ||||||||||||||||||||||||
Panasonic | Hudson | NJ | Oct. 2014 | — | 1,312 | 7,075 | — | — | 8,387 | 31 | ||||||||||||||||||||||||
F-44
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | |||||||||||||||||||||||||||||||||
Property | Citiy | U.S. State or Country | Acquisition Date | Encumbrances at December 31, 2014 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount at December 31, 2014(1)(2) | Accumulated Depreciation (3)(4) | ||||||||||||||||||||||||
Onguard | Havre De Grace | MD | Oct. 2014 | — | 2,216 | 6,585 | — | — | 8,801 | 41 | ||||||||||||||||||||||||
Axon Energy Products | Houston | TX | Oct. 2014 | — | 297 | 2,432 | — | — | 2,729 | 11 | ||||||||||||||||||||||||
Metro Tonic | Halle Peissen | Germany | Oct. 2014 | 32,211 | 7,387 | 51,749 | — | — | 59,136 | 254 | ||||||||||||||||||||||||
Tokmanni | Matsala | Finland | Nov. 2014 | — | 1,914 | 57,932 | — | — | 59,846 | 268 | ||||||||||||||||||||||||
Fife Council | Dunfermline | UK | Nov. 2014 | — | 409 | 5,277 | — | — | 5,686 | 24 | ||||||||||||||||||||||||
Family Dollar | Doerun | GA | Nov. 2014 | — | 236 | 717 | — | — | 953 | 4 | ||||||||||||||||||||||||
Family Dollar | Old Hickory | TN | Nov. 2014 | — | 548 | 781 | — | — | 1,329 | 4 | ||||||||||||||||||||||||
Government Services Administration | Rapid City | SD | Nov. 2014 | — | 504 | 7,837 | — | — | 8,341 | 35 | ||||||||||||||||||||||||
KPN BV | Houten | Netherlands | Nov. 2014 | — | 1,714 | 20,965 | — | — | 22,679 | 89 | ||||||||||||||||||||||||
RWE AG | Essen | Germany | Nov. 2014 | 17,968 | 2,064 | 26,365 | — | — | 28,429 | 56 | ||||||||||||||||||||||||
RWE AG | Essen | Germany | Nov. 2014 | 31,769 | 13,054 | 45,890 | — | — | 58,944 | 96 | ||||||||||||||||||||||||
RWE AG | Essen | Germany | Nov. 2014 | 26,229 | 5,332 | 37,908 | — | — | 43,240 | 79 | ||||||||||||||||||||||||
Follett School | McHenry | IL | Dec. 2014 | — | 3,423 | 15,600 | — | — | 19,023 | 42 | ||||||||||||||||||||||||
Quest Diagnostics, Inc. | Santa Clarita | CA | Dec. 2014 | — | 10,714 | 69,018 | — | — | 79,732 | 146 | ||||||||||||||||||||||||
Family Dollar | Tampa | FL | Dec. 2014 | — | 466 | 820 | — | — | 1,286 | 2 | ||||||||||||||||||||||||
Diebold | North Canton | OH | Dec. 2014 | — | 575 | 8,906 | — | — | 9,481 | — | ||||||||||||||||||||||||
Dollar General | Chickasha | OK | Dec. 2014 | — | 248 | 1,293 | — | — | 1,541 | — | ||||||||||||||||||||||||
Weatherford International | Odessa | TX | Dec. 2014 | — | 665 | 1,795 | — | — | 2,460 | — | ||||||||||||||||||||||||
AM Castle | Wichita | KS | Dec. 2014 | — | 426 | 6,027 | — | — | 6,453 | — | ||||||||||||||||||||||||
FedEx | Billerica | MA | Dec. 2014 | — | 1,138 | 6,674 | — | — | 7,812 | — | ||||||||||||||||||||||||
Constellium Auto | Wayne | MI | Dec. 2014 | — | 1,180 | 13,781 | — | — | 14,961 | — | ||||||||||||||||||||||||
Total | $ | 281,186 | $ | 326,696 | $ | 1,519,558 | $ | — | $ | 9,706 | $ | 1,855,960 | $ | 21,319 | ||||||||||||||||||||
___________________________________
(1) | Acquired intangible lease assets allocated to individual properties in the amount of $484.1 million are not reflected in the table above. |
(2) | The tax basis of aggregate land, buildings and improvements as of December 31, 2014 is $2.4 billion. |
(3) | The accumulated depreciation column excludes approximately $21.3 million of amortization associated with acquired intangible lease assets. |
(4) | Each of the properties has a depreciable life of: 40 years for buildings, 15 years for improvements and five years for fixtures. |
F-45
American Realty Capital Global Trust, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(dollar amounts in thousands)
A summary of activity for real estate and accumulated depreciation for the years ended December 31, 2014, 2013 and 2012:
December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Real estate investments, at cost: | ||||||||||||
Balance at beginning of year | $ | 149,009 | $ | 1,729 | $ | — | ||||||
Additions-Acquisitions | 1,748,944 | 147,245 | 1,729 | |||||||||
Asset remeasurement | (675 | ) | — | — | ||||||||
Currency translation adjustment | (41,318 | ) | 35 | — | ||||||||
Balance at end of the year | $ | 1,855,960 | $ | 149,009 | $ | 1,729 | ||||||
Accumulated depreciation and amortization: | ||||||||||||
Balance at beginning of year | $ | 869 | $ | 12 | $ | — | ||||||
Depreciation expense | 20,856 | 837 | 12 | |||||||||
Currency translation adjustment | (406 | ) | 20 | — | ||||||||
Balance at end of the year | $ | 21,319 | $ | 869 | $ | 12 | ||||||
F-46