Global Net Lease, Inc. - Quarter Report: 2014 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________
Commission file number: 333-177563
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) | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant 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). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer x | (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of October 31, 2014, the registrant had 176,823,193 shares of common stock outstanding.
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
1
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
September 30, 2014 | December 31, 2013 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Real estate investments, at cost: | |||||||
Land | $ | 249,496 | $ | 44,647 | |||
Buildings, fixtures and improvements | 1,015,742 | 104,362 | |||||
Acquired intangible lease assets | 429,620 | 47,899 | |||||
Total real estate investments, at cost | 1,694,858 | 196,908 | |||||
Less accumulated depreciation and amortization | (30,344 | ) | (2,307 | ) | |||
Total real estate investments, net | 1,664,514 | 194,601 | |||||
Cash and cash equivalents | 263,948 | 11,500 | |||||
Restricted cash | 7,192 | 737 | |||||
Derivatives, at fair value | 4,056 | 734 | |||||
Receivable for sale of common stock | 2 | 1,766 | |||||
Prepaid expenses and other assets | 15,504 | 3,454 | |||||
Deferred costs, net | 10,246 | 2,135 | |||||
Total assets | $ | 1,965,462 | $ | 214,927 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Mortgage notes payable | $ | 172,483 | $ | 76,904 | |||
Mortgage premium, net | 1,290 | 1,663 | |||||
Credit facility | 299,747 | — | |||||
Below-market lease liability, net | 8,743 | 5,854 | |||||
Derivatives, at fair value | 3,520 | 2,565 | |||||
Accounts payable and accrued expenses | 9,623 | 2,519 | |||||
Deferred rent | 18,105 | 1,862 | |||||
Distributions payable | 10,268 | 840 | |||||
Total liabilities | 523,779 | 92,207 | |||||
Stockholders' equity: | |||||||
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding at September 30, 2014 and December 31, 2013 | — | — | |||||
Common stock, $0.01 par value, 300,000,000 shares authorized, 176,205,356 and 15,665,827 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively | 1,762 | 157 | |||||
Additional paid-in capital | 1,558,509 | 133,592 | |||||
Accumulated other comprehensive (loss) income | (448 | ) | 319 | ||||
Accumulated deficit | (118,140 | ) | (11,348 | ) | |||
Total stockholders' equity | 1,441,683 | 122,720 | |||||
Total liabilities and stockholders' equity | $ | 1,965,462 | $ | 214,927 | |||
The accompanying notes are an integral part of these statements.
2
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for share and per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenue: | ||||||||||||||||
Rental income | $ | 25,400 | $ | 1,221 | $ | 45,938 | $ | 1,463 | ||||||||
Operating expense reimbursements | 502 | 11 | 1,139 | 14 | ||||||||||||
Total revenues | 25,902 | 1,232 | 47,077 | 1,477 | ||||||||||||
Expenses: | ||||||||||||||||
Property operating | 1,428 | 14 | 2,447 | 14 | ||||||||||||
Operating fees to affiliate | 219 | 18 | 421 | 23 | ||||||||||||
Acquisition and transaction related | 29,124 | 3,256 | 53,883 | 4,576 | ||||||||||||
General and administrative | 742 | 19 | 3,253 | 34 | ||||||||||||
Depreciation and amortization | 15,126 | 684 | 27,120 | 838 | ||||||||||||
Total expenses | 46,639 | 3,991 | 87,124 | 5,485 | ||||||||||||
Operating loss | (20,737 | ) | (2,759 | ) | (40,047 | ) | (4,008 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (4,081 | ) | (348 | ) | (8,385 | ) | (413 | ) | ||||||||
(Losses) gains on foreign currency | (737 | ) | 17 | (756 | ) | 35 | ||||||||||
Gains on derivative instruments | 849 | — | 599 | — | ||||||||||||
Other income | 148 | — | 203 | — | ||||||||||||
Total other expense | (3,821 | ) | (331 | ) | (8,339 | ) | (378 | ) | ||||||||
Net loss | $ | (24,558 | ) | $ | (3,090 | ) | $ | (48,386 | ) | $ | (4,386 | ) | ||||
Other comprehensive loss: | ||||||||||||||||
Cumulative translation adjustment | (7,269 | ) | 1,648 | (2,535 | ) | 1,400 | ||||||||||
Designated derivatives, fair value adjustments | 6,639 | (1,952 | ) | 1,768 | (1,502 | ) | ||||||||||
Comprehensive loss | $ | (25,188 | ) | $ | (3,394 | ) | $ | (49,153 | ) | $ | (4,488 | ) | ||||
Basic and diluted weighted average shares outstanding | 175,401,867 | 7,023,704 | 108,779,593 | 3,430,215 | ||||||||||||
Basic and diluted net loss per share | $ | (0.14 | ) | $ | (0.44 | ) | $ | (0.44 | ) | $ | (1.28 | ) | ||||
The accompanying notes are an integral part of these statements.
3
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2014
(In thousands, except for share data)
(Unaudited)
Common Stock | ||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | |||||||||||||||||
Balance, December 31, 2013 | 15,665,827 | $ | 157 | $ | 133,592 | $ | 319 | $ | (11,348 | ) | $ | 122,720 | ||||||||||
Issuance of common stock | 157,682,695 | 1,576 | 1,565,989 | — | — | 1,567,565 | ||||||||||||||||
Common stock offering costs, commissions and dealer manager fees | (168,207 | ) | — | — | (168,207 | ) | ||||||||||||||||
Common stock repurchases | (28,493 | ) | — | (277 | ) | — | — | (277 | ) | |||||||||||||
Common stock issued through distribution reinvestment plan | 2,875,271 | 29 | 27,314 | — | — | 27,343 | ||||||||||||||||
Share-based compensation | 10,056 | — | 98 | — | — | 98 | ||||||||||||||||
Distributions declared | — | — | — | — | (58,406 | ) | (58,406 | ) | ||||||||||||||
Net loss | — | — | — | — | (48,386 | ) | (48,386 | ) | ||||||||||||||
Other comprehensive loss | — | — | — | (767 | ) | — | (767 | ) | ||||||||||||||
Balance, September 30, 2014 | 176,205,356 | $ | 1,762 | $ | 1,558,509 | $ | (448 | ) | $ | (118,140 | ) | $ | 1,441,683 | |||||||||
The accompanying notes are an integral part of this statement.
4
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (48,386 | ) | $ | (4,386 | ) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||
Depreciation | 15,636 | 331 | |||||
Amortization of intangibles | 11,484 | 507 | |||||
Amortization of deferred financing costs | 2,032 | 105 | |||||
Amortization of mortgage premium | (373 | ) | — | ||||
Accretion of below-market lease liability and amortization of above-market lease assets, net | 806 | 21 | |||||
Share-based compensation | 98 | 16 | |||||
Net realized and unrealized mark-to-market transactions | (599 | ) | — | ||||
Changes in assets and liabilities: | |||||||
Prepaid expenses and other assets | (3,511 | ) | (737 | ) | |||
Accounts payable and accrued expenses | 6,922 | 861 | |||||
Deferred rent | 16,243 | 883 | |||||
Net cash provided by (used in) operating activities | 352 | (2,399 | ) | ||||
Cash flows from investing activities: | |||||||
Investment in real estate and other assets | (1,399,619 | ) | (53,114 | ) | |||
Deposits for real estate acquisitions | (8,998 | ) | (500 | ) | |||
Net cash used in investing activities | (1,408,617 | ) | (53,614 | ) | |||
Cash flows from financing activities: | |||||||
Borrowings under credit facility | 328,862 | — | |||||
Repayments on credit facility | (19,570 | ) | — | ||||
Proceeds from notes payable | 12,505 | — | |||||
Payments on notes payable | (12,505 | ) | — | ||||
Payments on mortgage notes payable | (505 | ) | — | ||||
Proceeds from issuance of common stock | 1,569,328 | 83,028 | |||||
Payments of offering costs | (167,626 | ) | (10,859 | ) | |||
Payments of deferred financing costs | (10,143 | ) | (1,837 | ) | |||
Distributions paid | (21,635 | ) | (830 | ) | |||
Advances from affiliates, net | 459 | (595 | ) | ||||
Restricted cash | (6,455 | ) | — | ||||
Net cash provided by financing activities | 1,672,715 | 68,907 | |||||
Net change in cash and cash equivalents | 264,450 | 12,894 | |||||
Effect of exchange rate changes on cash | (12,002 | ) | 1,427 | ||||
Cash and cash equivalents, beginning of period | 11,500 | 262 | |||||
Cash and cash equivalents, end of period | $ | 263,948 | $ | 14,583 | |||
Supplemental Disclosures: | |||||||
Cash paid for interest | $ | 5,031 | $ | 99 | |||
Cash paid for income taxes | 277 | — | |||||
Non-Cash Financing Activities: | |||||||
Mortgage note payable used to acquire investments in real estate | $ | 96,620 | $ | 30,416 | |||
Common stock issued through distribution reinvestment plan | 27,343 | 546 | |||||
The accompanying notes are an integral part of these statements.
5
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 the 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 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 September 30, 2014, the Company had 176.2 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 $1.7 billion including DRIP. As of September 30, 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).
Until the filing of the Company's second Quarterly Report on Form 10-Q with the SEC (or Annual Report on Form 10-K should such filing constitute the second quarterly financial filing) following the Company's acquisition of at least $1.2 billion in total investment portfolio assets, the per share purchase price in the IPO will be up to $10.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP will initially be equal to $9.50 per share, which is equal to 95% of the initial offering price in the IPO. Thereafter, the per share purchase price will vary quarterly and will be equal to the Company's net asset value ("NAV") per share plus applicable commissions and fees in the case of the primary offering; and the per share purchase price in the DRIP will be equal to the NAV per share.
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 September 30, 2014, the Company owned 246 properties consisting of 11.6 million rentable square feet, which were 100.0% leased, with an average remaining lease term of 11.3 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.
6
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
The Company has no direct employees. American Realty Capital Global Advisors, LLC (the "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 many of which have, or may, 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 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 investment strategy in Europe. Such fees are deducted from fees paid to the Advisor.
On September 12, 2014, Mr. Scott J. Bowman and Mr. Edward M. Weil, Jr. resigned as members of the board of directors of the Company, effective as of that same date. Neither Mr. Bowman nor Mr. Weil resigned pursuant to any disagreement with the Company. Mr. Bowman was subsequently appointed as chief executive officer of the Company.
Note 2 — Summary of Significant Accounting Policies
The accompanying consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended September 30, 2014 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2013, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 7, 2014. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2014 other than the updates described below.
Recently Issued Accounting Pronouncements
In April 2014, the FASB amended the requirements for reporting discontinued operations. Under the revised guidance, in addition to other disclosure requirements, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale, disposed of by sale or other than by sale. The Company has adopted the provisions of this guidance effective January 1, 2014, and has applied the provisions prospectively. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
7
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 nine months ended September 30, 2014:
Number of Properties | Base Purchase Price(1) | |||||
(In thousands) | ||||||
As of December 31, 2013 | 37 | $ | 184,890 | |||
Nine Months ended September 30, 2014 | 209 | 1,510,606 | ||||
Portfolio as of September 30, 2014 | 246 | $ | 1,695,496 | |||
________________________________________________
(1) | Contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase. |
The following table presents the allocation of the assets acquired during the nine months ended September 30, 2014 and 2013.
Nine Months Ended | ||||||||
(Dollar amounts in thousands) | September 30, 2014 | September 30, 2013 | ||||||
Real estate investments, at cost: | ||||||||
Land | $ | 205,129 | $ | 18,071 | ||||
Buildings, fixtures and improvements | 912,355 | 37,516 | ||||||
Total tangible assets | 1,117,484 | 55,587 | ||||||
Intangibles acquired: | ||||||||
In-place leases | 350,626 | 30,624 | ||||||
Above market lease asset | 31,584 | 1,223 | ||||||
Below market lease liability | (3,455 | ) | (3,904 | ) | ||||
Total assets acquired, net | 1,496,239 | 83,530 | ||||||
Mortgage notes payable used to acquire real estate investments | (96,620 | ) | (30,416 | ) | ||||
Cash paid for acquired real estate investments | $ | 1,399,619 | $ | 53,114 | ||||
Number of properties purchased | 209 | 8 | ||||||
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 nine months ended September 30, 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 $53.9 million and $4.6 million from the nine months ended September 30, 2014 and September 30, 2013, respectively.
Nine Months Ended September 30, | ||||||||
(In thousands) | 2014 | 2013 | ||||||
Pro forma revenues | $ | 105,826 | $ | 93,558 | ||||
Pro forma net income | $ | 11,546 | $ | 3,458 | ||||
8
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
The following presents future minimum base rental cash payments due to the Company during the next five years and thereafter as of September 30, 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 | |||
October 1, 2014 - December 31, 2014 | $ | 33,372 | ||
2015 | 134,389 | |||
2016 | 135,870 | |||
2017 | 137,090 | |||
2018 | 138,592 | |||
Thereafter | 1,121,831 | |||
$ | 1,701,144 | |||
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 September 30, 2014 and September 30, 2013.
September 30, | ||||
Tenant | 2014 | 2013 | ||
Thames Water Utilities Limited | * | 24.2% | ||
Northern Rock (Asset Management) PLC | * | 18.2% | ||
Kulicke and Soffa Industries, Inc. | * | 17.0% | ||
Everything Everywhere Limited | * | 14.8% | ||
Wickes Building Supplies Limited | * | 11.7% | ||
PPD Global Central Labs, LLC | * | 11.3% | ||
_______________________________________________________________________
* 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.
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 September 30, 2014 and September 30, 2013.
September 30, | ||||
Country or State (if domestic) | 2014 | 2013 | ||
United Kingdom | 29.8% | 71.7% | ||
United States: Texas | 12.1% | * | ||
United States: Michigan | 10.3% | * | ||
United States: Pennsylvania | * | 17.0% | ||
United States: Kentucky | * | 11.3% | ||
_______________________________________________________________________
* 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.
9
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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. On March 26, 2014, the Company amended the credit agreement to increase aggregate borrowings under the facility to $100.0 million. On June 24, 2014, the Company further amended the credit agreement to increase aggregate borrowings under the facility to $330.0 million. On July 31, 2014, the Company further amended the credit facility agreement to increase aggregate borrowings to $415.0 million. 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 corporate leverage, 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% and (c) the Adjusted LIBOR for a month 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 September 30, 2014, the Company was in compliance with the financial covenants under the credit agreement.
As of September 30, 2014, total outstanding advances under the credit facility were $299.7 million. 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 September 30, 2014 and December 31, 2013, was $115.3 million and $31.1 million, respectively.
10
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
Note 5 — Mortgage Notes Payable
Mortgage notes payable as of September 30, 2014 and December 31, 2013 consisted of the following:
Encumbered Properties | Outstanding Loan Amount | Effective Interest Rate | Interest Rate | |||||||||||||
Portfolio | September 30, 2014 | December 31, 2013 | Maturity | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
McDonald's | 1 | $ | 1,234 | (1) | $ | 1,253 | 4.1% | (2) | Fixed | Oct. 2017 | ||||||
Wickes Building Supplies I | 1 | 3,161 | (1) | 3,209 | 3.7% | (2) | Fixed | May 2018 | ||||||||
Everything Everywhere | 1 | 6,496 | (1) | 6,596 | 4.0% | (2) | Fixed | Jun. 2018 | ||||||||
Thames Water | 1 | 9,744 | (1) | 9,894 | 4.1% | (2) | Fixed | Jul. 2018 | ||||||||
Wickes Building Supplies II | 1 | 2,680 | (1) | 2,721 | 4.2% | (2) | Fixed | Jul. 2018 | ||||||||
Northern Rock | 2 | 8,526 | (1) | 8,657 | 4.4% | (2) | Fixed | Sep. 2018 | ||||||||
Wickes Building Supplies III | 1 | 3,086 | (1) | 3,133 | 4.3% | (2) | Fixed | Nov. 2018 | ||||||||
Western Digital | 1 | 18,339 | 18,541 | 5.3% | Fixed | Jul. 2021 | ||||||||||
Encanto | 18 | 22,597 | 22,900 | 6.3% | Fixed | Jun. 2017 | ||||||||||
Rheinmetall | 1 | 13,447 | — | 2.6% | (2) | Fixed | Jan. 2019 | |||||||||
Provident Financial | 1 | 20,706 | — | 4.1% | (2) | Fixed | Feb. 2019 | |||||||||
Crown Crest Group Limited | 1 | 31,261 | — | 4.2% | (2) | Fixed | Feb. 2019 | |||||||||
Aviva Life & Pensions UK Ltd. | 1 | 25,497 | — | 3.8% | (2) | Fixed | Mar. 2019 | |||||||||
OBI DIY | 1 | 5,709 | — | 2.4% | Fixed | Jan. 2019 | ||||||||||
Total | 32 | $ | 172,483 | $ | 76,904 | 4.3% | ||||||||||
___________________________________________________________
(1) Movement in principal balances are related to changes in exchange rates.
(2) Fixed as a result of an interest rate swap agreement.
The following table summarizes the scheduled aggregate principal payments on the mortgage notes payable subsequent to September 30, 2014 and thereafter:
(In thousands) | Future Principal Payments | |||
October 1, 2014 — December 31, 2014 | $ | 175 | ||
2015 | 721 | |||
2016 | 758 | |||
2017 | 23,152 | |||
2018 | 34,028 | |||
Thereafter | 113,649 | |||
$ | 172,483 | |||
Some of the Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of September 30, 2014 and December 31, 2013, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
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.
11
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 September 30, 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.
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 September 30, 2014 and December 31, 2013, aggregated at the fair value hierarchy level within which those instruments fall.
(In thousands) | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||||||
September 30, 2014 | ||||||||||||||||
Foreign currency swaps, net | $ | — | $ | 1,213 | $ | — | $ | 1,213 | ||||||||
Foreign currency forwards, net | $ | — | $ | 676 | $ | — | $ | 676 | ||||||||
Interest rate swaps, net | $ | — | $ | (1,353 | ) | $ | — | $ | (1,353 | ) | ||||||
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 September 30, 2014.
12
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 | September 30, 2014 | September 30, 2014 | December 31, 2013 | December 31, 2013 | |||||||||||||
Mortgage notes payable | 3 | $ | 173,773 | $ | 174,918 | $ | 78,567 | $ | 77,698 | |||||||||
__________________________________________________________
(1) Carrying value includes $172.5 million mortgage notes payable and $1.3 million mortgage premiums, net as of September 30, 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.
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 nine months ended September 30, 2014 and year ended December 31, 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 $2.4 million will be reclassified from other comprehensive income as an increase to interest expense.
13
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
As of September 30, 2014 and December 31, 2013, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
September 30, 2014 | December 31, 2013 | |||||||||||
Derivatives | Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | ||||||||
(In thousands) | (In thousands) | |||||||||||
Interest rate swaps | 21 | $ | 425,585 | 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 of September 30, 2014 and December 31, 2013, the Company had the following outstanding cross currency swaps that were used to hedge its net investments in foreign operations:
September 30, 2014 | December 31, 2013 | |||||||||||
Derivatives | Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | ||||||||
(In thousands) | (In thousands) | |||||||||||
Foreign currency swaps (1) | 12 | $ | 132,391 | 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.
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 $0.6 million was recognized for the nine months ended September 30, 2014. The company did not have any derivatives that were not designated in 2013.
As of September 30, 2014 and December 31, 2013, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.
September 30, 2014 | December 31, 2013 | |||||||||||
Derivatives | Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | ||||||||
(In thousands) | (In thousands) | |||||||||||
EUR-USD forwards | 16 | $ | 4,944 | — | $ | — | ||||||
GBP-USD forwards | 71 | $ | 13,354 | — | $ | — | ||||||
14
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 September 30, 2014 and December 31, 2013:
(In thousands) | Balance Sheet Location | September 30, 2014 | December 31, 2013 | |||||||
Derivatives designated as hedging instruments: | ||||||||||
Interest rate swaps | Derivative assets, at fair value | $ | 355 | $ | 734 | |||||
Foreign currency swaps | Derivative assets, at fair value | $ | 2,996 | $ | — | |||||
GBP-USD Forwards | Derivative assets, at fair value | $ | 460 | $ | — | |||||
EUR-USD Forwards | Derivative assets, at fair value | $ | 245 | $ | — | |||||
Interest rate swaps | Derivative liabilities, at fair value | $ | (1,708 | ) | $ | — | ||||
Foreign currency swaps | Derivative liabilities, at fair value | $ | (1,783 | ) | $ | (2,565 | ) | |||
GBP-USD Forwards | Derivative liabilities, at fair value | $ | (29 | ) | $ | — | ||||
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2014 and 2013.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||
Amount of gain (loss) recognized in accumulated other comprehensive income from derivatives (effective portion) | $ | 5,735 | (1,993 | ) | $ | (84 | ) | (1,553 | ) | |||||
Amount of loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion) | $ | (595 | ) | (41 | ) | $ | (1,197 | ) | (51 | ) | ||||
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 September 30, 2014 and December 31, 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 | |||||||||||||||||||||
September 30, 2014 | $ | 4,056 | $ | (3,520 | ) | $ | — | $ | 536 | $ | — | $ | — | $ | 536 | |||||||||||||
December 31, 2013 | $ | 734 | $ | (2,565 | ) | $ | — | $ | (1,831 | ) | $ | — | $ | — | $ | (1,831 | ) | |||||||||||
15
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 September 30, 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 $3.9 million. As of September 30, 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 had 176.2 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 $1.7 billion and $154.2 million as of September 30, 2014 and December 31, 2013, 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 has a Share Repurchase Program that enables stockholders to sell their shares to the Company. As of September 30, 2014, no shares of common stock had been repurchased under the Share Repurchase Program.
Note 9 — Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. There are no material legal proceedings pending or known to be contemplated against the Company.
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 September 30, 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 September 30, 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 September 30, 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.
16
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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).
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:
Payable as of | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | December 31, | |||||||||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||
Total commissions and fees to Dealer Manager | $ | 1,821 | $ | 3,186 | $ | 148,377 | $ | 7,807 | $ | — | $ | 176 | ||||||||||||
The Advisor and its affiliates are paid compensation and receive reimbursement for services relating to the IPO. Effective March 1, 2013, the Company began utilizing transfer agent services provided by an affiliate of the Dealer Manager. 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:
Payable as of | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | December 31, | |||||||||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||
Fees and expense reimbursements to the Advisor and Dealer Manager | $ | 5,889 | $ | 488 | $ | 17,635 | $ | 998 | $ | 552 | $ | 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. As of September 30, 2014, offering and related costs, excluding commissions and dealer manager fees, exceeded 1.5% of gross proceeds received from the IPO by $43,000.
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 September 30, 2014, cumulative offering costs were $188.7 million. Cumulative offering costs net of unpaid amounts, were less than the 15% threshold as of September 30, 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 insourced expenses incurred in the process of acquiring properties, which are fixed 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.
17
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 will be deducted from fees payable to the Advisor, pursuant to the service provider agreement.
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 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.
18
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 September 30, 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. During the nine months ended September 30, 2014, the board of directors approved the issuance of 317,064 Class B Units to the Advisor and the Service Provider in connection with this agreement. No class B units were issued during the nine months ended September 30, 2013.
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.
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.
19
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
The following table reflects related party fees incurred, forgiven and contractually due as of and for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | ||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | September 30, | December 31, | |||||||||||||||||||||||||||||||||||
(In thousands) | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | 2014 | 2013 | ||||||||||||||||||||||||||||||
One-time fees and reimbursements: | ||||||||||||||||||||||||||||||||||||||||
Acquisition fees and related cost reimbursements | $ | 13,734 | $ | — | $ | 958 | $ | — | $ | 22,889 | $ | — | $ | 1,253 | $ | — | $ | 2 | $ | — | ||||||||||||||||||||
Financing coordination fees | 637 | — | 524 | — | 3,484 | — | 593 | — | — | — | ||||||||||||||||||||||||||||||
Ongoing fees: | ||||||||||||||||||||||||||||||||||||||||
Property management and leasing fees | 167 | 152 | 18 | 5 | 354 | 355 | 23 | 6 | 41 | 1 | ||||||||||||||||||||||||||||||
Strategic advisory fees | 346 | — | 107 | — | 561 | — | 251 | — | — | — | ||||||||||||||||||||||||||||||
Distributions on Class B Units | 50 | — | 1 | — | 77 | — | 1 | — | — | — | ||||||||||||||||||||||||||||||
Total related party operational fees and reimbursements | $ | 14,934 | $ | 152 | $ | 1,608 | $ | 5 | $ | 27,365 | $ | 355 | $ | 2,121 | $ | 6 | $ | 43 | $ | 1 | ||||||||||||||||||||
(1) Effective January 1, 2013, the Company issues (subject to approval by the board of directors) to the Advisor 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 three and nine months ended September 30, 2014 and 2013.
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 three and nine months ended September 30, 2014 and 2013.
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.
20
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
The following table details property operating and general and administrative expenses absorbed by the Advisor during the three and nine months ended September 30, 2014 and 2013:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | |||||||||||
Property operating expenses absorbed | $ | — | $ | — | $ | — | $ | 4 | |||||||
General and administrative expenses absorbed | — | 357 | — | 833 | |||||||||||
Total expenses absorbed (1) | $ | — | $ | 357 | $ | — | $ | 837 | |||||||
___________________________________________________________________
(1) The Company had no receivable from the Advisor as of September 30, 2014 related to absorbed costs and had $0.5 million receivable as of December 31, 2013.
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 have been incurred during the three and nine months ended September 30, 2014 and 2013.
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 have been incurred during the three and nine months ended September 30, 2014 and 2013.
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 three and nine months ended September 30, 2014 and 2013. 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 three and nine months ended September 30, 2014 and 2013.
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, 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.
21
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 will be $9.00, until the termination of the IPO, based on NAV, and thereafter 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 September 30, 2014 and December 31, 2013, 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 the Company's 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), shall 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 the Company sells 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 shall not exceed 5.0% of the Company's authorized shares of common stock 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 shares of common stock from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares.
The following table reflects restricted share award activity for the nine months ended September 30, 2014:
Number of Restricted Shares | Weighted-Average Issue Price | |||||
Unvested, December 31, 2013 | 16,200 | $ | 9.00 | |||
Granted | 9,000 | 9.00 | ||||
Vested | (10,800 | ) | 9.00 | |||
Unvested, September 30, 2014 | 14,400 | $ | 9.00 | |||
22
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
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 $88,000 and $8,000 during the nine months ended September 30, 2014 and 2013, respectively, and is recorded as general and administrative expense in the accompanying statements of operations.
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 nine months ended September 30, 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 nine months ended September 30, 2013.
Note 13 — Net Loss Per Share
The following is a summary of the basic and diluted net loss per share computation for the three and nine months ended September 30, 2014 and 2013:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net loss (in thousands) | $ | (24,558 | ) | $ | (3,090 | ) | $ | (48,386 | ) | $ | (4,386 | ) | ||||
Basic and diluted weighted average shares outstanding | 175,401,867 | 7,023,704 | 108,779,593 | 3,430,215 | ||||||||||||
Basic and diluted net loss per share | $ | (0.14 | ) | $ | (0.44 | ) | $ | (0.44 | ) | $ | (1.28 | ) | ||||
The Company had the following common share equivalents as of September 30, 2014 and 2013, which were excluded from the calculation of diluted loss per share attributable to stockholders as the effect would have been antidilutive:
September 30, | ||||||
2014 | 2013 | |||||
Unvested restricted stock | 14,400 | 16,200 | ||||
OP Units | 22 | 22 | ||||
Class B units | 340,456 | 5,218 | ||||
Total common share equivalents | 354,878 | 21,440 | ||||
Note 14 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements, except for the following transactions:
Sales of Common Stock
As of October 31, 2014, the Company had 176.8 million shares of common stock outstanding, including unvested restricted shares and shares issued under the DRIP. Total gross proceeds, net of repurchases, from these issuances were $1.8 billion, including proceeds from shares issued under the DRIP. As of October 31, 2014, the aggregate value of all share issuances was $1.7 billion based on a per share value of $10.00 (or $9.50 per share for shares issued under the DRIP).
Total capital raised to date, including shares issued under the DRIP, is as follows:
Source of Capital (in thousands) | Inception to September 30, 2014 | October 1, 2014 to October 31, 2014 | Total | |||||||||
Common stock | $ | 1,749,096 | $ | 17,320 | $ | 1,766,416 | ||||||
23
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
Acquisitions
The following table presents certain information about the properties that the Company acquired from October 1, 2014 to October 31, 2014:
__________________________________________________
Number of Properties | Rentable Square Feet | Base Purchase Price (1) | ||||||||
(In thousands) | ||||||||||
Total portfolio, September 30, 2014 | 246 | 11,641,731 | $ | 1,695,496 | ||||||
Acquisitions | 44 | 2,471,887 | 289,123 | |||||||
Total portfolio, October 31, 2014 | 290 | 14,113,618 | $ | 1,984,619 | ||||||
(1) Contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase.
Revolving Credit Facility
On July 25, 2013, the Company entered into a credit facility agreement which allows for total borrowings of up to $50.0 million. The credit facility agreement 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. On October 16, 2014, the Company subsequently amended the credit facility agreement to increase aggregate borrowings to $680.0 million.
Management Updates
On October 22, 2014, Mr. Nicholas S. Schorsch resigned from his role as chief executive officer of the Company, effective as of that same date. Mr. Schorsch did not resign pursuant to any disagreement with the Company. Simultaneously with Mr. Schorsch’s resignation from his role as chief executive officer of the Company, the Company’s board of directors appointed Mr. Schorsch to serve as executive chairman of the board.Simultaneously with Mr. Schorsch’s resignation from his role as chief executive officer of the Company, the Company’s board of directors appointed Mr. Scott J. Bowman to serve as the Company’s chief executive officer, effective as of that same date.
On October 22, 2014, in light of his recent appointment as chief executive officer of RCS Capital Corporation, Edward M. Weil, Jr. resigned from his role as president, chief operating officer, treasurer and secretary of the Company, effective as of that same date. Mr. Weil did not resign pursuant to any disagreement with the Company. Simultaneously with Mr. Weil’s resignation, the Company’s board of directors appointed Mr. Andrew Winer, currently the chief investment officer of the Company, to serve as president of the Company and Mr. William M. Kahane to serve as the Company’s chief operating officer, treasurer and secretary. Mr. Winer will also continue to serve in his capacity as chief investment officer of the Company.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of American Realty Capital Global Trust, Inc. and the notes thereto. As used herein, the terms "Company," "we," "our" and "us" refer to American Realty Capital Global Trust, Inc., a Maryland corporation, including, as required by context, to American Realty Capital Global Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and to its subsidiaries. The Company is externally managed by American Realty Capital Global Advisors, LLC (our "Advisor"), a Delaware limited liability company.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements including statements regarding the intent, belief or current expectations of the Company 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, but not all, of the risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements:
• | We have a limited operating history. This inexperience makes our future performance difficult to predict. |
• | All of our executive officers are also officers, managers and/or holders of a direct or indirect controlling interest in our Advisor, our dealer manager, Realty Capital Securities, LLC (the "Dealer Manager") and other American Realty Capital affiliated entities. As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other 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. |
• | Commencing with the filing of our second quarterly financial filing pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), following our acquisition of at least $1.2 billion in total portfolio assets, the purchase price and repurchase price for our shares will be based on our net asset value ("NAV") rather than a public trading market. Our published NAV may not accurately reflect the value of our assets. No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid. |
• | If we and our Advisor are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay distributions. |
• | Our initial public offering of common stock (the "IPO"), which commenced on April 20, 2012, is a blind pool offering and you may not have the opportunity to evaluate our investments before you make your purchase of our common stock, thus making your investment more speculative. |
• | We may be unable to pay or maintain cash distributions or increase distributions over time. |
• | We are obligated to pay fees that may be substantial to our Advisor and its affiliates. |
• | We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. |
• | Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders. |
• | Our organizational documents permit us to pay distributions from unlimited amounts of any source. Until substantially all the proceeds from our IPO 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. |
• | 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 your investment. |
25
• | We have not and may not in the future generate cash flows sufficient to pay our distributions to stockholders, as such we may be forced to incur additional debt, borrow at higher rates or depend on our Advisor to waive reimbursement of certain expenses and fees to fund our operations. |
• | We are subject to risks associated with the significant dislocations and liquidity disruptions that may occur in the credit markets of the United States of America and Europe. |
• | 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, and thus subject to regulation under the Investment Company Act of 1940, as amended. |
26
Overview
We were incorporated on July 13, 2011, as a Maryland corporation that elected and qualified to be taxed as a REIT for U.S. federal income tax purposes beginning with the 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 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 September 30, 2014, we had 176.2 million shares of stock outstanding, including unvested restricted shares and had received total gross proceeds from the IPO of $1.7 billion, including shares issued under the DRIP. Until the filing of our second quarterly financial filing with the SEC, pursuant to the Exchange Act, following our acquisition of at least $1.2 billion in total investment portfolio assets (the "NAV pricing date"), the per share purchase price in the IPO will be up to $10.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP will be initially equal to $9.50 per share, which is 95% of the initial offering price in the IPO. Thereafter, the per share purchase price will vary quarterly and will be equal to the NAV per share plus applicable commissions and fees, and the per share purchase price of the DRIP will be equal to the NAV per share.
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 September 30, 2014, we owned 246 properties consisting of 11.6 million rentable square feet, which were 100% leased, with a weighted average remaining lease term of 11.3.
Substantially all of our business is conducted through the OP. 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 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 investment strategy in Europe. Such fees are deducted from fees paid to the Advisor.
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:
27
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.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 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.
We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis. We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations at fair value for all periods presented to the extent the disposal of a component represents a strategic shift that has or will have a major effect on our operations and financial results. Properties that are intended to be sold are to be designated as "held for sale" on the balance sheet.
Long-lived assets are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted or when they are designated as held for sale. Valuation of real estate is considered a "critical accounting estimate" because the evaluation of impairment and the determination of fair values involve a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate. Additionally, decisions regarding when a property should be classified as held for sale are also highly subjective and require significant management judgment.
Events or changes in circumstances that could cause an evaluation for impairment include the following:
• | a significant decrease in the market price of a long-lived asset; |
• | a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; |
• | a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; |
• | an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; and |
• | a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset. |
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We review our portfolio on an ongoing basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income.
Purchase Price Allocation
We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third-parties or on our analysis of comparable properties in our 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.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by us in our analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 12 months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease. The capitalized below-market lease values are amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, we initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
The aggregate value of intangible assets related to customer relationships is measured based on our evaluation of the specific characteristics of each tenant's lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases, which ranges from seven to 25 years. 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, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Derivative Instruments
We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.
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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.
Recently Issued Accounting Pronouncements
In April 2014, the FASB amended the requirements for reporting discontinued operations. Under the revised guidance, in addition to other disclosure requirements, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale, disposed of by sale or other than by sale. We have adopted the provisions of this guidance effective January 1, 2014, and have applied the provisions prospectively. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
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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 September 30, 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 | 9.5 | $ | 2,566 | ||||||||
Wickes Building Supplies I | May 2013 | UK | 1 | 29,679 | 10.0 | 6,058 | |||||||||
Everything Everywhere | Jun. 2013 | UK | 1 | 64,832 | 12.8 | 12,365 | |||||||||
Thames Water | Jul. 2013 | UK | 1 | 78,650 | 7.9 | 18,233 | |||||||||
Wickes Building Supplies II | Jul. 2013 | UK | 1 | 28,758 | 12.2 | 5,054 | |||||||||
PPD Global Labs | Aug. 2013 | US | 1 | 73,220 | 10.3 | 9,283 | |||||||||
Northern Rock | Sep. 2013 | UK | 2 | 86,290 | 8.9 | 16,322 | |||||||||
Kulicke & Soffa | Sep. 2013 | US | 1 | 88,000 | 9.0 | 13,415 | |||||||||
Wickes Building Supplies III | Nov. 2013 | UK | 1 | 28,465 | 14.2 | 6,067 | |||||||||
Con-way Freight | Nov. 2013 | US | 7 | 105,090 | 9.2 | 12,196 | |||||||||
Wolverine | Dec. 2013 | US | 1 | 468,635 | 8.3 | 17,201 | |||||||||
Western Digital | Dec. 2013 | US | 1 | 286,330 | 6.2 | 28,574 | |||||||||
Encanto | Dec. 2013 | Puerto Rico | 18 | 65,262 | 10.8 | 37,556 | |||||||||
GE Aviation | Jan. 2014 | US | 1 | 369,000 | 11.3 | 38,857 | |||||||||
Rheinmetall | Feb. 2014 | Germany | 1 | 320,102 | 9.3 | 28,924 | |||||||||
Provident Financial | Feb. 2014 | UK | 1 | 117,003 | 11.1 | 41,812 | |||||||||
Crown Crest Group Limited | Feb. 2014 | UK | 1 | 805,530 | 24.4 | 63,587 | |||||||||
Trane | Feb. 2014 | US | 1 | 25,000 | 9.2 | 3,072 | |||||||||
Aviva Life & Pensions UK Ltd. | Mar. 2014 | UK | 1 | 131,614 | 14.7 | 52,517 | |||||||||
DFS Trading | Mar. 2014 | UK | 5 | 240,230 | 15.5 | 34,049 | |||||||||
GSA - IRS | Mar. 2014 | US | 1 | 135,373 | 7.9 | 43,250 | |||||||||
National Oilwell Varco | Mar. 2014 | US | 1 | 24,450 | 8.8 | 4,888 | |||||||||
Talk Talk | April 2014 | UK | 1 | 48,415 | 10.5 | 14,274 | |||||||||
OBI DIY | April 2014 | Germany | 1 | 143,633 | 9.3 | 13,216 | |||||||||
GSA II | April 2014 | US | 2 | 24,957 | 8.4 | 9,525 | |||||||||
DFS Trading | April 2014 | UK | 2 | 39,331 | 15.5 | 6,275 | |||||||||
GSA III | April 2014 | US | 2 | 28,364 | 8.2 | 9,697 | |||||||||
GSA IV | May 2014 | US | 1 | 33,000 | 10.8 | 14,828 | |||||||||
Indiana Department of Revenue | May 2014 | US | 1 | 98,542 | 8.3 | 11,654 | |||||||||
National Oilwell Varco | May 2014 | US | 1 | 7,500 | 14.7 | 2,360 | |||||||||
Nissan | May 2014 | US | 1 | 462,155 | 9.0 | 25,838 | |||||||||
GSA V | June 2014 | US | 1 | 26,533 | 8.5 | 11,556 | |||||||||
Lippert Components | June 2014 | US | 1 | 539,137 | 11.9 | 14,776 | |||||||||
Select Energy Services I | June 2014 | US | 3 | 135,877 | 12.2 | 24,112 | |||||||||
Bell Supply Co I | June 2014 | US | 6 | 79,829 | 14.3 | 12,225 | |||||||||
Axon Energy Products | June 2014 | US | 3 | 213,634 | 11.9 | 20,709 | |||||||||
Lhoist | June 2014 | US | 1 | 22,500 | 8.3 | 3,264 | |||||||||
GE Oil & Gas | June 2014 | US | 2 | 69,846 | 9.0 | 10,956 | |||||||||
Select Energy Services II | June 2014 | US | 4 | 143,417 | 12.2 | 20,789 | |||||||||
Bell Supply Co II | June 2014 | US | 2 | 19,136 | 14.3 | 3,407 | |||||||||
Superior Energy Services | June 2014 | US | 2 | 42,470 | 9.6 | 2,455 | |||||||||
Amcor Packaging | June 2014 | UK | 7 | 294,580 | 10.2 | 13,290 | |||||||||
GSA VI | June 2014 | US | 1 | 6,921 | 9.5 | 1,450 | |||||||||
Nimble Storage | June 2014 | US | 1 | 164,608 | 7.1 | 52,125 | |||||||||
FedEx -3-Pack | July 2014 | US | 3 | 338,862 | 7.7 | 46,100 | |||||||||
Sandoz, Inc. | July 2014 | US | 1 | 154,101 | 11.8 | 52,005 | |||||||||
Wyndham | July 2014 | US | 1 | 31,881 | 10.6 | 5,200 | |||||||||
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Properties (continued)
Portfolio | Acquisition Date | Country | Number of Properties | Square Feet | Remaining Lease Term (1) | Base Purchase Price (2) (In thousands) | |||||||||
Valassis | July 2014 | US | 1 | 100,597 | 8.6 | 13,614 | |||||||||
GSA VII | July 2014 | US | 1 | 25,603 | 10.1 | 11,997 | |||||||||
AT&T Services | July 2014 | US | 1 | 401,516 | 11.8 | 61,000 | |||||||||
PNC - 2-Pack | July 2014 | US | 2 | 210,256 | 14.8 | 17,412 | |||||||||
Fujitisu | July 2014 | UK | 3 | 162,888 | 10.5 | 67,668 | |||||||||
Continental Tire | July 2014 | US | 1 | 90,994 | 7.8 | 18,500 | |||||||||
Achmea | July 2014 | The Netherlands | 2 | 190,252 | 9.3 | 38,790 | |||||||||
BP Oil | August 2014 | UK | 1 | 2,650 | 11.1 | 4,879 | |||||||||
Malthurst | August 2014 | UK | 2 | 3,784 | 11.1 | 5,827 | |||||||||
HBOS | August 2014 | UK | 3 | 36,071 | 10.8 | 18,109 | |||||||||
Thermo Fisher | August 2014 | US | 1 | 114,700 | 4.4 | 14,000 | |||||||||
Black & Decker | August 2014 | US | 1 | 71,259 | 7.3 | 10,350 | |||||||||
Capgemini | August 2014 | UK | 1 | 90,475 | 8.6 | 24,947 | |||||||||
Merck & Co. | August 2014 | US | 1 | 146,366 | 10.9 | 53,325 | |||||||||
Family Dollar - 65-Pack | August 2014 | US | 65 | 541,472 | 14.9 | 77,360 | |||||||||
GSA VIII | August 2014 | US | 1 | 23,969 | 9.9 | 8,319 | |||||||||
Garden Ridge | September 2014 | US | 4 | 564,910 | 15.0 | 40,936 | |||||||||
Waste Management | September 2014 | US | 1 | 84,119 | 8.3 | 4,650 | |||||||||
Intier Automotive Interiors | September 2014 | UK | 1 | 152,771 | 9.6 | 15,301 | |||||||||
HP Enterprise Services | September 2014 | UK | 1 | 99,444 | 11.5 | 30,951 | |||||||||
Shaw Aero Devices, Inc. | September 2014 | US | 1 | 130,581 | 8.0 | 27,000 | |||||||||
FedEx Freight | September 2014 | US | 1 | 11,501 | 9.5 | 2,250 | |||||||||
Hotel Winston | September 2014 | The Netherlands | 1 | 24,283 | 15.0 | 17,292 | |||||||||
Dollar General - 39-Pack | September 2014 | US | 39 | 369,644 | 13.5 | 51,998 | |||||||||
FedEx - 2-Pack I | September 2014 | US | 2 | 221,260 | 9.8 | 36,491 | |||||||||
Mallinkrodt Pharmaceuticals | September 2014 | US | 1 | 89,900 | 9.9 | 22,800 | |||||||||
Kuka | September 2014 | US | 1 | 200,000 | 9.8 | 14,850 | |||||||||
CHE Trinity | September 2014 | US | 2 | 373,593 | 8.3 | 51,000 | |||||||||
FedEx - 2-Pack II | September 2014 | US | 2 | 255,037 | 8.4 | 21,780 | |||||||||
GE Aviation | September 2014 | US | 1 | 102,000 | 8.3 | 14,168 | |||||||||
Portfolio, September 30, 2014 | 246 | 11,641,731 | 11.3 | $ | 1,695,496 | ||||||||||
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(1) | Remaining lease term in years as of September 30, 2014. |
(2) | Contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase, where applicable. |
Results of Operations
Comparison of Three Months Ended September 30, 2014 to Three Months Ended September 30, 2013
Rental Income
Rental income was $25.4 million and $1.2 million for the three months ended September 30, 2014 and 2013, respectively. Rental income growth was driven by our acquisition of 237 properties since September 30, 2013, for an aggregate base purchase price of $1,612.2 million, all of which are 100% leased.
Operating Expense Reimbursements
Operating expense reimbursements were $0.5 million for the three months ended September 30, 2014. Our lease agreements generally require tenants to pay all property operating expenses, in addition to base rent. Operating expense reimbursements primarily reflect insurance costs incurred by us and subsequently reimbursed by the tenant. Operating expense reimbursements were $11,000 for the three months ended September 30, 2013.
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Property Operating Expense
Property operating expense was $1.4 million for the three months ended September 30, 2014. These costs relate to insurance on our properties, which are generally reimbursable by the tenants. Property operating expense was $14,000 for the three months ended September 30, 2013.
Operating Fees to Affiliate
Our Advisor is entitled to asset management fees for the provision of asset management services, which are paid in the form of Class B Units, and are subject to forfeiture unless certain conditions are met. During the nine months ended September 30, 2014, the board of directors approved the issuance of 317,064 Class B Units to the Advisor at a price of $9.00 per unit. During the three months ended September 30, 2013, the board of directors approved the issuance of 4,646 Class B Units to the Advisor.
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 three months ended September 30, 2014, the Service Provider earned property management fees of $167,000. The Property Manager elected to waive its property management fees of $152,000 for the three months ended September 30, 2014. If the Property Manager had not elected to waive these fees, we would have incurred property management fees of $0.3 million for the three months ended September 30, 2014. During the three months ended September 30, 2013, we incurred $18,000 in fees related to services for the management of our properties. The Property Manager elected to waive its portion of the property management fees for the three months ended September 30, 2013. Had these fees not been waived, we would have incurred property management fees of $23,000 for the three months ended September 30, 2013.
Acquisition and Transaction Related Costs
Acquisition and transaction related costs for the three months ended September 30, 2014 of $29.1 million related to the purchase of 150 properties with an aggregate base purchase price of $900.9 million. Acquisition and transaction related costs for the three months ended September 30, 2013 of $3.3 million related to the purchase of six properties with an aggregate base purchase price of $62.3 million.
General and Administrative Expense
General and administrative expense of $742,000 for the three months ended September 30, 2014, primarily included board member compensation, directors and officers' liability insurance, and professional fees including audit and taxation services. General and administrative expense for the three months ended September 30, 2013 was $19,000.
Depreciation and Amortization
Depreciation and amortization expense of $15.1 million for the three months ended September 30, 2014 related to our acquisition of 246 properties since inception with an aggregate base purchase price of $1,695.5 million, as of the respective acquisition dates. The majority of the portfolio has been acquired in 2014. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful lives. Depreciation and amortization expense for the three months ended September 30, 2013 was $0.7 million.
Interest Expense
Interest expense of $4.1 million for the three months ended September 30, 2014 related to mortgage notes payable which totaled $172.5 million with an effective interest rate of 4.3% and the outstanding balance on our line of credit which totaled $299.7 million at September 30, 2014. Interest expense for the three months ended September 30, 2013 was $0.3 million.
Gains (Losses) on Foreign Currency
The loss on foreign currency for the three months ended September 30, 2014 of $0.7 million reflects the effect of movements in foreign currency exchange rates. A gain on foreign currency of $17,000 was realized for the three months ended September 30, 2013.
Gains on Derivative Instruments
The gain on derivative instruments for the three months ended September 30, 2014 of $0.8 million reflects the impact of our derivative contracts used to hedge the foreign portion of our portfolio.
Cash Flows for the Nine Months Ended September 30, 2014
During the nine months ended September 30, 2014, net cash provided by operating activities was $0.4 million. The level of cash flows used in or provided by operating activities is driven by the volume of acquisition activity, related rental income received, and the amount of borrowings outstanding during the period and the timing of interest payments on those borrowings. Cash flows used in operating activities during the nine months ended September 30, 2014 also included $53.9 million of acquisition and transaction related costs.
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Net cash used in investing activities during the nine months ended September 30, 2014 was $1,408.6 million, primarily related to our acquisition of 209 properties with an aggregate base purchase price of 1,510.6 million, and partially funded with $309.3 million in net borrowings under the credit facility.
Net cash provided by financing activities of $1.7 billion during the nine months ended September 30, 2014 related to proceeds, net of receivables, from the issuance of common stock of $1,569.3 million and borrowings under credit facility of $328.9 million, partially offset by offering cost payments of $167.6 million and repayments on credit facility of $19.6 million Other payments included deferred financing costs of $10.1 million, distributions to stockholders of $21.6 million and net advances from affiliates of $0.5 million.
Cash Flows for the Nine Months Ended September 30, 2013
During the nine months ended September 30, 2013, net cash used in operating activities was $2.4 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 payments. Cash flows used in operating activities during the nine months ended September 30, 2013 included $4.6 million of acquisition and transaction related costs. Cash outflows included a net loss adjusted for non-cash items of $3.4 million (net loss of $4.4 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 $1.0 million) and an increase in prepaid expenses of $0.7 million primarily related to prepaid professional fees. These cash outflows were partially offset by an increase in accounts payable and accrued expenses of $0.9 million related to professional fees and interest payable and an increase in deferred rent of $0.9 million.
Net cash used in investing activities during the nine months ended September 30, 2013 of $53.6 million, primarily related to our acquisition of eight properties with an aggregate base purchase price of $83.5 million, which were partially funded with mortgage notes payable of $30.4 million. Net cash used in investing activities also includes a deposit of $0.5 million on a potential future acquisition.
Net cash provided by financing activities of $68.9 million during the nine months ended September 30, 2013 related to proceeds, net of receivables, from the issuance of common stock of $83.0 million, partially offset by payments related to offering costs of $10.9 million, payments of deferred financing costs of $1.8 million, distributions to stockholders of $0.8 million and net advances from affiliates of $0.6 million.
Liquidity and Capital Resources
As of September 30, 2014, we had cash of $263.9 million primarily from the net proceeds of our offering. Principal future demands on cash will include the purchase of additional properties or other investments in accordance with our investment strategy, payment of related acquisition costs, improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations and distributions to our stockholders. Management expects that as our portfolio matures rental income from our properties will cover operating expenses and the payment of our monthly distribution.
Generally, we fund our acquisitions through a combination of cash with mortgage or other debt, but we also may acquire assets free and clear of permanent mortgage or other indebtedness. See Note 5 - Mortgage Notes Payable to our consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from public and private offerings, proceeds from the sale of properties and undistributed funds from operations.
At September 30, 2014 we have a revolving credit facility that currently permits us to borrow up to $415.0 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. See Note 4 - Revolving Credit Facility to our consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion of the terms and conditions of this facility.
As of September 30, 2014, total outstanding advances under the credit facility were $299.7 million. 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 September 30, 2014 and December 31, 2013, was $115.3 million and $31.1 million, respectively.
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.
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Our current intention is to limit aggregate borrowings to 45% of the aggregate fair market value of our assets (calculated after the close of our offering and once we have invested substantially all the proceeds of our offering), unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation does 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 September 30, 2014, we had secured mortgage notes payable of $172.5 million and outstanding advances under our credit facility of $299.7 million. Our secured debt leverage ratio was 27.9% (total secured debt as a percentage of total purchase price of real estate investments) as of September 30, 2014.
We intend to maintain 5% of our NAV in excess of $1 billion in liquid assets. 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 stockholders to sell shares back 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, no shares of common stock have been repurchased or requested to be repurchased.
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. Investors should be aware that 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 accounting principles generally accepted in the United States ("GAAP").
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment 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.
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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. Investors should note, however, that 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, investors are cautioned that due to the fact that 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. While other start up entities also may experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a relatively limited time frame of significant acquisition activity. We are using the proceeds raised in the offering to acquire properties, and intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale or another similar transaction) within three to five years of the completion of the offering which is scheduled to expire on April 20, 2015. 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 operate with a limited life and targeted exit strategy, as currently intended. 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 investing the proceeds from the IPO and acquiring properties. By providing MFFO, we believe it is 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 properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our IPO and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our IPO has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.
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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. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations.
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. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and 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 other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Therefore, 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 and may not ultimately be realized. 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 investors. Acquisition fees and expenses will not be reimbursed by our Advisor if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.
Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have defined acquisition periods and targeted exit strategies. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. 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. For example, acquisitions costs are funded from the proceeds of our IPO and other financing sources and not from operations. 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.
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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. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. The SEC, NAREIT or another regulatory body may at some future point in time decide to standardize the allowable adjustments across the non-listed REIT industry requiring possible adjustment to our calculation and characterization of FFO or MFFO.
The table below reflects the items deducted or added to net loss in our calculation of FFO and MFFO:
Three Months Ended | ||||
(In thousands) | September 30, 2014 | |||
Net loss (in accordance with GAAP) | $ | (24,558 | ) | |
Depreciation and amortization | 15,126 | |||
FFO | (9,432 | ) | ||
Acquisition fees and expenses (1) | 29,124 | |||
Amortization of above or below market lease assets and liabilities (2) | 393 | |||
Straight-line rent (3) | (1,670 | ) | ||
Gains on derivative instruments | (849 | ) | ||
Losses on foreign currency (4) | 737 | |||
Amortization of mortgage premium | (125 | ) | ||
MFFO | $ | 18,178 | ||
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(1) In evaluating investments in real estate, management differentiates the costs incurred to acquire the investment from the on-going operational revenue and costs of the investment. Such information would only be comparable for non-listed REITs that have completed their acquisition activity and have similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information for comparison of each type of real estate investment and is consistent with management's analysis and evaluation 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 are 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.
(2) Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment. Some 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 portfolio.
(3) Under GAAP, rental receipts are allocated to periods using various methodologies which may result in income recognition that is significantly different than underlying contract terms. Adjusting MFFO for these items provides useful supplemental information on the contractual cash flows and realized economic impact of lease terms and debt investments and aligns results with management's analysis and evaluation of operating performance.
(4) Represents components of net loss primarily resulting from changes in foreign exchange rates from the time acquisition deposits 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
The amount of distributions payable to our stockholders is determined by the board of directors and is dependent on a number of factors including funds available for distribution; our financial condition; capital expenditure requirements; requirements of Maryland law, as applicable; and annual distribution requirements needed to qualify and maintain our status as a REIT under the Internal Revenue Code of 1986 (the "Code").
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. Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspended 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.
Distributions accrued from November 28, 2012 with the first distribution paid in December 2012. During the nine months ended September 30, 2014, distributions paid to common stockholders were $49.0 million, inclusive of $27.3 million of distributions issued under the DRIP. During the nine months ended September 30, 2014, cash used to pay distributions was generated from cash flows from operations, the net proceeds of our IPO and common stock issued under the DRIP.
The following table shows the sources for the payment of distributions to common stockholders for the period indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
September 30, 2014 | June 30, 2014 | March 31, 2014 | September 30, 2014 | |||||||||||||||||||||||||
(In thousands) | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | ||||||||||||||||||||||||
Distributions: (1) | ||||||||||||||||||||||||||||
Distributions paid in cash | $ | 13,083 | $ | 6,524 | $ | 2,028 | $ | 21,635 | ||||||||||||||||||||
Distributions reinvested | 17,120 | 8,286 | 1,937 | 27,343 | ||||||||||||||||||||||||
Total distributions | $ | 30,203 | $ | 14,810 | $ | 3,965 | $ | 48,978 | ||||||||||||||||||||
Source of distribution coverage: | ||||||||||||||||||||||||||||
Cash flows provided by operations | $ | 1,169 | 3.9 | % | $ | 6,524 | 44.1 | % | $ | — | — | % | $ | 7,693 | 15.7 | % | ||||||||||||
Proceeds from issuance of common stock | 11,914 | 39.4 | % | — | — | % | 2,028 | 51.1 | % | 13,942 | 28.5 | % | ||||||||||||||||
Common stock issued under the DRIP / offering proceeds | 17,120 | 56.7 | % | 8,286 | 55.9 | % | 1,937 | 48.9 | % | 27,343 | 55.8 | % | ||||||||||||||||
Total sources of distribution coverage | $ | 30,203 | 100.0 | % | $ | 14,810 | 100.0 | % | $ | 3,965 | 100.0 | % | $ | 48,978 | 100.0 | % | ||||||||||||
Cash flows provided by (used in) operations (GAAP basis) | $ | 1,121 | $ | 16,124 | $ | (16,893 | ) | $ | 352 | |||||||||||||||||||
Net loss (in accordance with GAAP) | $ | (24,558 | ) | $ | (7,479 | ) | $ | (16,349 | ) | $ | (48,386 | ) | ||||||||||||||||
(1) Excludes distributions on Class B units
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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 September 30, 2014:
For the Period from July 13, 2011 (date of inception) to | ||||
(In thousands) | September 30, 2014 | |||
Distributions paid: | ||||
Common stockholders in cash | $ | 23,398 | ||
Common stockholders pursuant to DRIP / offering proceeds | 28,663 | |||
Total distributions paid | $ | 52,061 | ||
Reconciliation of net loss: | ||||
Revenues | $ | 51,058 | ||
Acquisition and transaction-related expenses | (61,857 | ) | ||
Depreciation and amortization | (29,253 | ) | ||
Other operating expenses | (6,471 | ) | ||
Other non-operating expense | (9,281 | ) | ||
Net loss (in accordance with GAAP) (1) | $ | (55,804 | ) | |
Cash flows used in operations | $ | (2,768 | ) | |
___________________________________________
(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.
Loan Obligations
Our loan obligations require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. The loan agreements stipulate compliance with specific reporting covenants. As of September 30, 2014, we were in compliance with the debt covenants under our loan agreements.
Our Advisor, with approval from our independent board of directors, may 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.
Contractual Obligations
The following is a summary of our contractual obligations as of September 30, 2014:
October 1, 2014 — December 31, 2014 | Years Ended December 31, | |||||||||||||||||||
(In thousands) | Total | 2015 — 2016 | 2017 — 2018 | Thereafter | ||||||||||||||||
Principal Payments Due: | ||||||||||||||||||||
Mortgage notes payable (1) | $ | 172,483 | $ | 175 | $ | 1,479 | $ | 57,180 | $ | 113,649 | ||||||||||
Interest Payments Due: | ||||||||||||||||||||
Mortgage notes payable (2) | $ | 32,342 | $ | 1,878 | $ | 14,881 | $ | 12,260 | $ | 3,323 | ||||||||||
(1) As of September 30, 2014, the weighted average maturity date was January 16, 2019.
(2) As of September 30, 2014, the effective interest rate was 4.31%.
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Election as a REIT
We elected to be taxed as a REIT under Sections 856 through 860 of the Code, beginning with taxable year ended December 31, 2013. We believe that, 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 continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income(which does not equal net income as calculated in accordance with GAAP), determined without regards to the deduction for dividends paid and excluding net capital gain. REITs are also subject to a number of other organizational and operational requirements. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as federal income and excise taxes on our undistributed income.
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 control with our Advisor in connection with acquisition and financing activities, sales and maintenance of common stock under our offering, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 10 — Related Party Transactions to our financial statements included in this report for a discussion of the various related party transactions, agreements and fees.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of September 30, 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.
Item 3. 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. 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 September 30, 2014, our debt included fixed-rate secured mortgage financing, with a carrying value of $173.8 million and a fair value of $174.9 million. 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 September 30, 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 $1.9 million.
At September 30, 2014 our debt included a variable-rate revolving credit facility with a carrying and fair value of $299.7 million. Interest rate volatility associated with this variable-rate credit facility affects interest expense incurred and cash flow. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates at the beginning of the year with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate credit facility would increase or decrease our interest expense by $0.1 million annually.
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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 September 30, 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 4. Controls and Procedures.
In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that the disclosure controls and procedures are effective.
No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we are not a party to any material pending legal proceedings.
Item 1A. Risk Factors.
Our potential risks and uncertainties are presented in the section entitled "Risk Factors", contained in the Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes from these risk factors, except for the items described below.
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 your interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect your overall return.
Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our offering, reduce the funds available for the acquisition of properties and other real estate-related investments and may dilute your interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect your overall return.
Our cash flows provided by operations were $0.4 million for the nine months ended September 30, 2014. During the nine months ended September 30, 2014, we paid distributions of $49.0 million, of which $41.3 million, or 84.3%, was funded from proceeds from the issuance of common stock and proceeds from our IPO which were reinvested in common stock issued under the DRIP. The remaining $7.7 million, or 15.7%, was funded with cash flows from operations. During the nine months ended September 30, 2014 cash flow from operations included an increase in accounts payable and accrued expenses of $6.9 million, as reflected on the statement of cash flows. Accordingly, if these accounts payable and accrued expenses had been paid during the nine months ended September 30, 2014, there would have been $6.9 million less in cash flow from operations available to pay distributions. Using offering proceeds to pay distributions, especially if the distributions are not reinvested through our DRIP, reduces cash available for investment in assets and other purposes and reduces our per share stockholder equity. We may continue to use the net offering proceeds to fund distributions.
We may not generate sufficient cash flows from operations to pay distributions. 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 may 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.
Funding distributions from borrowings could 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 may affect our ability to generate cash flows. Funding distributions from the sale of additional securities could dilute your interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third party investors. 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 you upon a liquidity event, any or all of which may have an adverse effect on your investment.
Recent disclosures made by American Realty Capital Properties, Inc., or ARCP, an entity previously sponsored by the parent of our sponsor, regarding certain accounting errors may affect our ability to raise capital.
ARCP recently filed a Form 8-K announcing 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 as a result of certain accounting errors that were identified but intentionally not corrected, and other AFFO and financial statement errors that were intentionally made. These accounting errors resulted in the resignations of ARCP’s former chief financial officer and its former chief accounting officer. ARCP has initiated an investigation into these matters that is ongoing, no assurance can be made regarding the outcome of the investigation. ARCP’s former chief financial officer is one of the non-controlling owners of
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the parent of our sponsor. While ARCP’s former chief financial officer does not have a current role in the management of our sponsor’s or our business, he did serve as our chief financial officer from July 2011 to December 2013.
As a result of this announcement, a number of broker-dealer firms that had been participating in the distribution of offerings of public, non-listed REITs sponsored directly or indirectly by the parent of our sponsor have temporarily suspended their participation in the distribution of those offerings. Although we have completed our initial public offering, we may seek to raise additional capital in connection with the operation of our business. Similarly to other entities sponsored directly or indirectly by the parent of our sponsor, the recent announcement by ARCP, as well as any future announcements by ARCP, may have an adverse effect on our ability to access capital through, among other things, equity offerings or lending arrangements. If we are unable to access additional capital it may have a material adverse effect on our business including, among other things, our ability to achieve our investment objectives.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities.
We did not sell any equity securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), during the nine months ended September 30, 2014.
On April 20, 2012, we commenced our IPO on a "reasonable best efforts" basis of up to 150.0 million of common stock, pursuant to the Registration Statement filed with the SEC under the Securities Act. The Registration Statement also covers up to 25.0 million shares of common stock issuable pursuant the DRIP under which common stockholders may elect to have their distributions reinvested in additional shares of common stock. As of September 30, 2014, we have issued 176.2 million shares of our common stock, and received $1,749.1 million of offering proceeds from the sale of common stock, including shares issued under the DRIP.
The following table reflects the offering costs associated with the issuance of common stock:
For the Period from July 13, 2011 (date of inception) to | ||||
(In thousands) | September 30, 2014 | |||
Selling commissions and dealer manager fees | $ | 162,405 | ||
Other offering costs | 26,275 | |||
Total offering costs | $ | 188,680 | ||
The Dealer Manager may 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:
For the Period from July 13, 2011 (date of inception) to | ||||
(In thousands) | September 30, 2014 | |||
Total commissions paid to the Dealer Manager | $ | 162,405 | ||
Less: | ||||
Commissions to participating brokers | (110,159 | ) | ||
Reallowance to participating broker dealers | (16,453 | ) | ||
Net to the Dealer Manager | $ | 35,793 | ||
As of September 30, 2014, cumulative offering costs included $104.0 million of offering cost reimbursements incurred from the Advisor and Dealer Manager. As of September 30, 2014, we have incurred $188.7 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 15% of gross common stock proceeds during the offering period. Cumulative offering costs, net of unpaid amounts, were less than the 15% threshold as of September 30, 2014. Cumulative offering proceeds from the sale of common stock exceeded cumulative offering costs by $1,560.4 million at September 30, 2014.
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We expect 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 September 30, 2014, we have used debt financing of approximately $472.2 million and the net proceeds from our IPO to purchase 246 properties with an aggregate base purchase price of $1,695.5 million. We have used and may continue to use net proceeds from our IPO to fund a portion of our distributions. See Distributions in Management's Discussion and Analysis of Financial Condition for further discussion.
We did not repurchase any of our securities during the three months ended September 30, 2014.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN REALTY CAPITAL GLOBAL TRUST, INC. | ||
By: | /s/ Scott J. Bowman | |
Scott J. Bowman | ||
Chief Executive Officer (Principal Executive Officer) | ||
By: | /s/ Patrick J. Goulding | |
Patrick J. Goulding | ||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
Dated: November 13, 2014
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EXHIBITS INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | |
31.1 * | Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 * | Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 * | Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 * | XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital Global Trust, Inc.'s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 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. As provided in Rule 406T of Regulation S-T, this information in furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Exchange Act. | |
_________________________________________
* Filed herewith
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