Necessity Retail REIT, Inc. - Annual Report: 2018 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | ||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2018
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _________ to __________
Commission file number: 001-38597
American Finance Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 90-0929989 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
405 Park Ave., 3rd Floor, New York, New York | 10022 | |
(Address of principal executive offices) | (Zip Code) | |
(212) 415-6500 | ||
(Registrant’s telephone number, including area code) | ||
Securities registered pursuant to section 12(b) of the Act: | ||
Title of each class | Name of each exchange on which registered | |
Class A Common Stock, $0.01 par value | The Nasdaq Global Select Market | |
Securities registered pursuant to section 12(g) of the Act: None | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer x | Smaller reporting company o | |
Emerging growth company o | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There is no established public market for the registrant’s shares of common stock.
As of February 28, 2019, the registrant had 106,075,311 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be delivered to stockholders in connection with the registrant’s 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.
AMERICAN FINANCE TRUST, INC.
FORM 10-K
Year Ended December 31, 2018
Page | ||
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Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Finance Trust, Inc. (“we” “our” or “us”), American Finance Advisors, LLC (“our Advisor”) and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
• | All of our executive officers are also officers, managers, employees or holders of a direct or indirect controlling interest in the Advisor or other entities under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, “AR Global”). As a result, our executive officers, the Advisor and its affiliates face conflicts of interest, including significant conflicts created by the Advisor’s compensation arrangements with us and other investment programs advised by affiliates of AR Global and conflicts in allocating time among these entities and us, which could negatively impact our operating results. |
• | The trading price of our Class A common stock may fluctuate significantly. |
• | Lincoln Retail REIT Services, LLC (“Lincoln”) and its affiliates, which provide services to the Advisor in connection with our retail portfolio, faces conflicts of interest in allocating its employees’ time between providing real estate-related services to the Advisor and other programs and activities in which they are presently involved or may be involved in the future. |
• | The performance of our retail portfolio is linked to the market for retail space generally and factors that may impact our retail tenants, such as the increasing use of the Internet by retailers and consumers. |
• | Our rental revenue is dependent upon the success and economic viability of our tenants. |
• | We may be unable to enter into and consummate property acquisitions on advantageous terms or our property acquisitions may not perform as we expect. |
• | We have not generated, and in the future may not generate, operating cash flows sufficient to fund all of the dividends we pay our stockholders, and, as such, we may be forced to fund dividends from other sources, including borrowings, which may not be available on favorable terms, or at all. |
• | We may be unable to pay or maintain cash dividends at the current rate or increase dividends over time. |
• | We are obligated to pay fees, which may be substantial, to the Advisor and its affiliates. |
• | Our operating results are affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we are subject to risks associated with any dislocation or liquidity disruptions that may exist or occur in global financial markets, including the credit markets of the United States of America. |
• | We may fail to 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 our operations and would reduce the value of an investment in our common stock and our cash available for dividends. |
In addition, we describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors” (Part I, Item 1A of this Annual Report on Form 10-K), “Quantitative and Qualitative Disclosures about Market Risk” (Part II, Item 7A), and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” (Part II, Item 7).
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PART I
Item 1. Business.
Overview
We are a diversified REIT focused on acquiring and managing a diversified portfolio of primarily service-oriented and traditional retail and distribution related commercial real estate properties in the U.S. We own a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants and, as a result of the Merger (as defined below), a portfolio of multi-tenant retail properties consisting primarily of power centers and lifestyle centers. We intend to focus our future acquisitions primarily on net leased retail properties. As of December 31, 2018, we owned 626 properties, comprised of 19.1 million rentable square feet, which were 94.7% leased, including 593 of net leased commercial properties (554 which are retail properties) and 33 retail properties which were acquired in the Merger.
We are a Maryland corporation, incorporated on January 22, 2013, that elected to be taxed as a REIT beginning with the taxable year ended December 31, 2013. Substantially all of our business is conducted through American Finance Operating Partnership, L.P. (the “OP”), a Delaware limited partnership, and its wholly-owned subsidiaries.
On July 19, 2018 (the “Listing Date”), we listed shares of our common stock, which had been renamed “Class A common stock” in connection with a series of corporate actions effected earlier in July 2018, on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “AFIN” (the “Listing”).
To effect the Listing, and to address the potential for selling pressure that may have existed at the outset of listing, we listed only shares of our Class A common stock, which represented approximately 50% of our outstanding shares of common stock, on Nasdaq on the Listing Date. Our two other classes of outstanding stock at the time of the Listing were Class B-1 common stock, which comprised approximately 25% of our outstanding shares of common stock at that time, and Class B-2 common stock, which comprised approximately 25% of our outstanding shares of common stock at that time. As of December 31, 2018, we had 106.2 million shares of common stock outstanding, comprised of approximately 80.0 million shares of Class A common stock and approximately 26.2 million shares of Class B-2 common stock. In accordance with their terms, all shares of Class B-1 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on October 10, 2018 and all shares of Class B-2 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on January 9, 2019. For additional information, see Note 9 — Common Stock and Note 16 — Subsequent Events to our consolidated financial statements included in this Annual Report on Form 10-K.
We have no employees. We have retained the Advisor to manage our affairs on a day-to-day basis. American Finance Properties, LLC (the “Property Manager”) serves as our property manager. The Advisor and the Property Manager are under common control with AR Global, and these related parties of ours receive compensation, fees and expense reimbursements for services related to managing our business. Lincoln and its affiliates provide services to the Advisor in connection with our multi-tenant retail properties that are not net leased. The Advisor has informed us that the Advisor has agreed to pass through to Lincoln a portion of the fees and other expense reimbursements otherwise payable to the Advisor or its affiliates by us for services rendered by Lincoln. We are not a party to any contract with, and have no obligation to, Lincoln.
American Realty Capital — Retail Centers of America, Inc. Merger
On February 16, 2017, we completed the Merger, representing (a) the merger of American Realty Capital — Retail Centers of America, Inc. (“RCA”) with and into one of our wholly owned subsidiaries and (b) the merger of American Realty Capital Retail Operating Partnership, L.P. (the “RCA OP”) with and into the OP, with the OP as the surviving entity (together, the “Merger”). RCA was sponsored and advised by affiliates of the Advisor. We issued 38.2 million shares of our common stock and paid $94.5 million in cash as consideration to complete the Merger. For additional information on the Merger, see Note 2 — Merger Transaction to our consolidated financial statements included in this Annual Report on Form 10-K.
Investment Objectives
We seek to preserve and protect capital, provide attractive and stable cash dividends and increase the value of our assets in order to generate capital appreciation by using the following strategies:
• | Retail Focused Portfolio, Including Single-Tenant Net Leased Properties — Acquiring freestanding single-tenant properties net leased to investment grade and other creditworthy tenants, which are expected to primarily consist of service-oriented and traditional retail and distribution properties; however, we will not forgo opportunities to invest in other types of real estate investments that meet our overall investment objectives; |
• | Long-Term Leases — With respect to net leased properties, enter into long-term leases with minimum, non-cancelable lease terms of ten or more years; |
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• | Low Leverage — Finance our portfolio opportunistically (taking advantage of opportunities as they arise) at a target leverage level of not more than 45% loan-to-value. Loan to value ratio is a lending risk assessment ratio that is examined before approving a mortgage and is calculated by dividing the mortgage amount by the appraised value of the property; and |
• | Diversified Portfolio — Assemble, manage and optimize a well-diversified portfolio based on geography, tenant diversity, lease expirations, and other factors. |
In addition, we may, at our discretion, originate and acquire commercial real estate debt investments, or invest in commercial real estate securities.
Acquisition and Investment Policies
Real Estate Investment Focus
We own a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants and, as a result of the Merger, a portfolio of retail properties consisting primarily of power centers and lifestyle centers.
Our investment objectives are (a) to provide current income for investors through the payment of cash dividends and (b) to preserve and return investors’ capital and to maximize risk-adjusted returns. We do not expect to make investments outside of the United States.
There is no limitation on the number, size or type of properties that we may acquire. The number and mix of properties depend upon real estate market conditions and other circumstances existing at the time of acquisition of properties.
Investing in Real Property
We consider relevant real estate and financial factors when evaluating prospective investments in real property, including the location of the property, the leases and other agreements affecting it, the creditworthiness of its major tenants, its income-producing capacity, its physical condition, its prospects for appreciation, its prospects for liquidity, tax considerations and other factors. Our Advisor has substantial discretion with respect to the selection of specific investments, subject to board approval and any guidelines established by our board of directors.
The following table lists the tenants (including, for this purpose, all affiliates of such tenants) from which we derive annualized rental income on a straight-line basis constituting 5.0% or more of our consolidated annualized rental income on a straight-line basis for all portfolio properties as of December 31, 2018:
Tenant | December 31, 2018 | |
SunTrust | 8.7% | |
Sanofi US | 7.0% | |
AmeriCold | 5.2% | |
Acquisition Structure
To date, we have acquired fee interests (a “fee interest” is the absolute, legal possession and ownership of land, property, or rights) and leasehold interests (a “leasehold interest” is a right to enjoy the exclusive possession and use of an asset or property for a stated definite period as created by a written lease) in properties. We anticipate continuing to do so if we acquire properties in the future, although other methods of acquiring a property may be utilized if we deem it to be advantageous. For example, we may acquire properties through a joint venture or the acquisition of substantially all of the interests of an entity which in turn owns the real property.
International Investments
We do not intend to invest in real estate outside of the United States or the Commonwealth of Puerto Rico or make other real estate investments related to assets located outside of the United States.
Development and Construction of Properties
We do not intend to acquire undeveloped land, develop new properties, or substantially redevelop existing properties.
Joint Ventures
We may enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. Some of the potential reasons to enter into a joint venture would be to acquire assets we could not otherwise acquire, to reduce our capital commitment to a particular asset, or to benefit from certain expertise that a partner might have.
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Our general policy is to invest in joint ventures only when we will have a right of first refusal to purchase the co-venturer’s interest in the joint venture if the co-venturer elects to sell such interest. If the co-venturer elects to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the property held by the joint venture. If any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specifically allocated based upon the respective proportion of funds invested by each co-venturer in each such property.
Financing Strategies and Policies
We have and expect to continue to use debt financing, when necessary, for acquisitions, property improvements, tenant improvements, leasing commissions and other working capital needs. The form of our indebtedness for future financings will vary and could be long-term or short-term, secured or unsecured, or fixed-rate or floating rate. We will not enter into interest rate swaps or caps, or similar hedging transactions or derivative arrangements for speculative purposes but may do so in order to manage or mitigate our interest rate risks on variable rate debt. We expect to be able to secure various forms of fixed- and floating-rate debt financing, including financing secured by individual properties in our portfolio and corporate-level bank financing.
We will not borrow from our Advisor or its affiliates unless a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties.
We may reevaluate and change our financing policies without a stockholder vote. Factors that we would consider when reevaluating or changing our debt policy include: then-current economic conditions, the relative cost and availability of debt and equity capital, our expected investment opportunities, the ability of our investments to generate sufficient cash flow to cover debt service requirements and other similar factors.
Tax Status
We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2013. We believe that, commencing with such taxable year, we have been organized and operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT. In order to continue to qualify for taxation 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 generally accepted accounting principles (“GAAP”)), determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties, and federal income and excise taxes on our undistributed income.
Competition
The net leased property and retail real estate markets are highly competitive. We compete for tenants in all of our markets with other owners and operators of retail real estate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and to locate tenants and purchasers for our properties. These competitors include Global Net Lease, Inc. (“GNL”), a REIT sponsored by an affiliate of AR Global, with an investment strategy similar to our investment strategy, other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There are also other REITs with asset acquisition objectives similar to ours and others may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, we seek financing through similar channels as our competitors. Therefore, we compete for financing in a market where funds for real estate investment may decrease.
Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It also may result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.
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Regulations
Our investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our investments.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future. We hire third parties to conduct Phase I environmental reviews of the real property that we intend to purchase.
Employees
As of December 31, 2018, we had no employees. The employees of the Advisor and its affiliates perform a full range of real estate services for us, including acquisitions, property management, accounting, legal, asset management, and investor relations services.
We are dependent on these companies for services that are essential to us, including asset acquisition decisions, property management and other general administrative responsibilities. In the event that any of these companies were unable to provide these services to us, we would be required to provide such services ourselves or obtain such services from other sources.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the SEC. You may read and copy any materials we file with the SEC at the SEC’s Internet address located at www.sec.gov. The website contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC may be obtained at www.americanfinancetrust.com. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Form 10-K.
Item 1A. Risk Factors.
Set forth below are the risk factors that we believe are material to our investors. The occurrence of any of the risks discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results of operations, ability to pay dividends and the value of an investment in our common stock.
Risks Related to Our Properties and Operations
We may be unable to enter into and consummate property acquisitions on advantageous terms or our property acquisitions may not perform as we expect.
Our goal is to grow through acquiring additional properties, and pursuing this investment objective exposes us to numerous risks, including:
• | competition from other real estate investors with significant capital, including both publicly traded REITs and institutional investment funds; |
• | we may acquire properties that are not accretive; |
• | we may not successfully manage and lease the properties we acquire to meet our expectations or market conditions may result in future vacancies and lower-than expected rental rates; |
• | we may be unable to obtain debt financing or raise equity required to fund acquisitions on favorable terms, or at all; |
• | we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties; |
• | agreements for the acquisition of properties are typically subject to customary conditions to closing that may or may not be completed, and we may spend significant time and money on potential acquisitions that we do not consummate; |
• | the process of acquiring or pursuing the acquisition of a new property may divert the attention of our management team from our existing operations; and |
• | we may acquire properties without recourse, or with only limited recourse, for liabilities, whether known or unknown. |
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We rely upon our Advisor and the real estate professionals affiliated with our Advisor to identify suitable investments, and there can be no assurance that our Advisor will be successful in obtaining suitable further investments on financially attractive terms or that our objectives will be achieved. If our Advisor is unable to timely locate suitable investments, we may be unable or limited in our ability to pay dividends, and we may not be able to meet our investment objectives.
The trading price of our Class A common stock may fluctuate significantly.
The trading price of our Class A common stock may be volatile and subject to significant price and volume fluctuations in response to market and other factors, and is impacted by a number of factors, many of which are outside our control. Among the factors that could affect the trading price of our Class A common stock are:
• | our financial condition and performance; |
• | the financial condition of our tenants, including the extent of tenant bankruptcies or defaults; |
• | actual or anticipated quarterly fluctuations in our operating results and financial condition; |
• | the amount and frequency of our payment of dividends; |
• | additional sales of equity securities, including Class A common stock, or the perception that additional sales may occur; |
• | the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities, and fixed income debt securities; |
• | our reputation and the reputation of AR Global and its affiliates or other entities advised by AR Global and its affiliates; |
• | uncertainty and volatility in the equity and credit markets; |
• | fluctuations in interest rates and exchange rates; |
• | changes in revenue or earnings estimates, if any, or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs; |
• | failure to meet analyst revenue or earnings estimates; |
• | strategic actions by us or our competitors, such as acquisitions or restructurings; |
• | the extent of investment in our Class A common stock by institutional investors; |
• | the extent of short-selling of our Class A common stock; |
• | general financial and economic market conditions and, in particular, developments related to market conditions for REITs and other real estate related companies; |
• | failure to maintain our REIT status; |
• | changes in tax laws; |
• | domestic and international economic factors unrelated to our performance; and |
• | all other risk factors addressed elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2018. |
We depend on our Advisor and Property Manager to provide us with executive officers, key personnel and all services required for us to conduct our operations and our operating performance may be impacted by any adverse changes in the financial health or reputation of our Advisor.
We have no employees. Personnel and services that we require are provided to us under contracts with our Advisor and its affiliate, our Property Manager. We depend on our Advisor and our Property Manager to manage our operations and to acquire and manage our portfolio of real estate assets.
Thus, our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our Advisor, including Edward M. Weil, Jr., our chairman and chief executive officer, and Katie P. Kurtz, our chief financial officer. Neither our Advisor nor its affiliates have an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain employed by our Advisor or its affiliates and available to continue to perform services for us. If any of our key personnel were to cease their affiliation with our Advisor, our operating results, business and prospects could suffer. Further, we do not maintain key person life insurance on any person. We believe that our success depends, in large part, upon the ability of our Advisor to hire, retain or contract for services of highly skilled managerial, operational and marketing personnel. Competition for skilled personnel is intense, and there can be no assurance that our Advisor will be successful in attracting and retaining skilled personnel. If our Advisor loses or is unable to obtain the services of key personnel, our Advisor’s ability to manage our business and implement our investment strategies could be delayed or hindered, and the value of an investment in shares of our stock may decline.
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On March 8, 2017, the creditor trust established in connection with the bankruptcy of RCS Capital Corp. (“RCAP”), which prior to its bankruptcy filing was under common control with our Advisor, filed suit against AR Global, our Advisor, advisors of other entities sponsored by AR Global, and AR Global’s principals (including Mr. Weil). The suit alleges, among other things, certain breaches of duties to RCAP. We are neither a party to the suit, nor are there allegations related to the services our Advisor provides to us. On May 26, 2017, the defendants moved to dismiss. On November 30, 2017, the court issued an opinion partially granting the defendant’s motion. On December 7, 2017, the creditor trust moved for limited reargument of the court's partial dismissal of its breach of fiduciary duty claim, and on January 10, 2018, the defendants filed a supplemental motion to dismiss certain claims. On April 5, 2018, the court issued an opinion denying the creditor trust's motion for reconsideration while partially granting the defendants' supplemental motion to dismiss. On November 5, 2018, the defendants moved for leave to amend their answers and for partial summary judgment on certain of the claims at issue in the case. The creditor trust opposed the motion, and it was argued before the court on February 6, 2019. The court has not yet ruled on the motion. On January 18, 2019, the defendants requested that the scheduling order governing the case be modified to bifurcate liability and damages issues for discovery purposes and trial. That request is also pending. Our Advisor has informed us that it believes the suit is without merit and intends to defend against it vigorously.
Any adverse changes in the financial condition or financial health of, or our relationship with, our Advisor, including any change resulting from an adverse outcome in any litigation, could hinder its ability to successfully manage our operations and our portfolio of investments. Additionally, changes in ownership or management practices, the occurrence of adverse events affecting our Advisor or its affiliates or other companies advised by our Advisor or its affiliates could create adverse publicity and adversely affect us and our relationship with lenders, tenants or counterparties.
In addition, our Advisor has engaged Lincoln as an independent service provider to provide real estate-related services to our Advisor with respect to our multi-tenant retail properties. Subject to the oversight of our Advisor, Lincoln performs asset management, property management and leasing services with respect to those properties. Our Advisor has informed us that our Advisor has agreed to pass through to Lincoln a portion of the fees and expense reimbursements otherwise payable to our Advisor or its affiliates by us for services rendered by Lincoln. While we have no direct obligation to Lincoln, we do depend on Lincoln to provide us, indirectly through our Advisor, with services, and, therefore, any adverse changes in the financial condition or financial health of Lincoln, or in our Advisor’s relationship with Lincoln, could adversely affect us. In addition, Lincoln and its affiliates face conflicts of interest in allocating its employees’ time between providing real estate-related services to our Advisor and other programs and activities in which they are presently involved or may be involved in the future.
There is no assurance that we will be able to continue paying dividends on our Class A common stock at the current rate, increase dividends over time, or pay dividends at all.
We currently pay dividends at an annual rate equal to $1.10 per share. This rate is lower than the rate at which we paid dividends in the past. There is no assurance that we will continue to pay dividends at the current level or at all for various reasons, including the following:
• | rents from properties may not increase, and future asset acquisitions may not increase our cash available for paying dividends; |
• | we may not generate sufficient cash from operations to fund our other capital needs; |
• | decisions on whether, when and in which amounts to pay any future dividends will remain at all times entirely at the discretion of our board of directors, which reserves the right to change our dividend policy at any time and for any reason; |
• | we may desire to retain cash to maintain or improve our credit rating; and |
• | the amount of dividends or other distributions that our subsidiaries may pay to us may be subject to restrictions imposed by state law, restrictions that may be imposed by state regulators and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries may incur. |
Failure to meet the market's expectations with regard to future earnings and dividends likely would adversely affect the market price of our Class A common stock.
We have not generated, and in the future may not generate, operating cash flows sufficient to fund all of the dividends we pay to our stockholders, and, as such, we may be forced to fund dividends from other sources, including borrowings, which may not be available on favorable terms, or at all.
Our cash flows provided by operations were $95.0 million for the year ended December 31, 2018. During the year ended December 31, 2018, we paid dividends of $128.1 million, of which 74.2% was funded from cash flows from operations, 11.2% was funded from proceeds from issuances of common stock under our distribution reinvestment plan (the “DRIP”) with the remainder funded from available cash on hand, which consists of proceeds from sale of real estate investments and proceeds from borrowings. We amended and restated the DRIP in connection with the Listing, and we refer in this Annual Report on Form 10-K, as the context requires, to the DRIP effective prior to the Listing as the “Pre-Listing DRIP” and to the DRIP effective following the Listing as the “Post-Listing DRIP.” If we do not generate sufficient cash flows from our operations
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in the future we may have to reduce the amount of dividends we pay or continue to fund dividends from other sources, such as from borrowings or the sale of properties, loans or securities. We may continue to fund dividends with the proceeds from available cash on hand, which consists of proceeds from sale of real estate investments and proceeds from financings. We have in the past used proceeds from the Pre-Listing DRIP and may use proceeds from our Post-Listing DRIP to fund dividends in the future. A decrease in the level of stockholder participation in our DRIP could have an adverse impact on our ability to do so. Funding dividends from borrowings could restrict the amount we can borrow for property acquisitions and investments. Funding dividends with the sale of assets, or using the proceeds from issuance of our Class A common stock or other equity securities to fund dividends rather than invest in assets, may affect our ability to generate cash flows. Funding dividends from the sale of additional securities could also result in a dilution of our stockholders’ investments.
Our business and operations could suffer if our Advisor or any other party that provides us with services essential to our operations experiences system failures or cyber incidents or a deficiency in cybersecurity.
The internal information technology networks and related systems of our Advisor and other parties that provide us with services essential to our operations are vulnerable to damage from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by these disruptions.
As reliance on technology has increased, so have the risks posed to those systems. Our Advisor and other parties that provide us with services essential to our operations must continuously monitor and develop their networks and information technology to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses, and social engineering, such as phishing. We are continuously working, including with the aid of third party service providers, to install new, and to upgrade our existing, network and information technology systems, to create processes for risk assessment, testing, prioritization, remediation, risk acceptance, and reporting, and to provide awareness training around phishing, malware and other cyber risks to ensure that our Advisor, other parties that provide us with services essential to our operations and we are protected against cyber risks and security breaches. However, these upgrades, processes, new technology and training may not be sufficient to protect us from all risks. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques and technologies used in attempted attacks and intrusions evolve and generally are not recognized until launched against a target. In some cases attempted attacks and intrusions are designed not to be detected and, in fact, may not be detected.
The remediation costs and lost revenues experienced by a subject of an intentional cyberattack or other event which results in unauthorized third party access to systems to disrupt operations, corrupt data or steal confidential information may be significant and significant resources may be required to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches. Additionally, any failure to adequately protect against unauthorized or unlawful processing of personal data, or to take appropriate action in cases of infringement may result in significant penalties under privacy law.
Furthermore, a security breach or other significant disruption involving the information technology networks and related systems of our Advisor or any other party that provides us with services essential to our operations could:
• | result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines; |
• | affect our ability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT; |
• | result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information (including information about tenants), which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes; |
• | result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space; |
• | require significant management attention and resources to remedy any damages that result; |
• | subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or |
• | adversely impact our reputation among our tenants and investors generally. |
Although our Advisor and other parties that provide us with services essential to our operations intend to continue to implement industry-standard security measures, there can be no assurance that those measures will be sufficient, and any material adverse effect experienced by our Advisor and other parties that provide us with services essential to our operations could, in turn, have an adverse impact on us.
We may in the future acquire or originate commercial real estate debt or invest in commercial real estate-related securities, which would expose us to additional risks.
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As of the date of this Annual Report on Form 10-K, we have not invested in any first mortgage debt loans, mezzanine
loans, preferred equity or securitized loans, commercial mortgage-backed securities ("CMBS"), preferred equity and other
higher-yielding structured debt and equity investments. In the future, however, we may choose to acquire or originate commercial real estate debt or invest in commercial real estate-related securities issued by real estate market participants, which would expose us not only to the risks and uncertainties we are currently exposed to through our direct investments in real estate but also to additional risks and uncertainties attendant to investing in and holding these types of investments, such as:
• | risk of defaults by borrowers in paying debt service on outstanding indebtedness and to other impairments of our loans and investments; |
• | increased competition from entities engaged in mortgage lending and, or investing in our target assets; |
• | deterioration in the performance of properties securing our investments may cause deterioration in the performance of our investments and, potentially, principal losses to us; |
• | fluctuations in interest rates and credit spreads could reduce our ability to generate income on our loans and other investments; |
• | difficulty in redeploying the proceeds from repayments of our existing loans and investments; |
• | the illiquidity of certain of these investments; |
• | lack of control over certain of our loans and investments; |
• | the potential need to foreclose on certain of the loans we originate or acquire, which could result in losses additional risks, including the risks of the securitization process, posed by investments in CMBS and other similar structured finance investments, as well as those we structure, sponsor or arrange; use of leverage may create a mismatch with the duration and interest rate of the investments that we financing; and |
• | the need to structure, select and more closely monitor our investments such that we continue to maintain our qualification as a REIT and our exemption from registration under the Investment Company Act of 1940, as amended. |
Risks Related to Conflicts of Interest
Our Advisor faces conflicts of interest relating to the purchase and leasing of properties, and these conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
We rely on our Advisor and the executive officers and other key real estate professionals at our Advisor to identify suitable investment opportunities for us. Several of the other key real estate professionals at our Advisor are also the key real estate professionals at AR Global and other entities advised by affiliates of AR Global. Many investment opportunities that are suitable for us may also be suitable for other entities advised by affiliates of AR Global. For example, GNL seeks, like us, to invest in sale-leaseback transactions involving single tenant net-leased commercial properties, in the U.S and we are party to an investment opportunity allocation agreement with GNL pursuant to which each opportunity to acquire one or more domestic office or industrial properties will be presented first to GNL, and each opportunity to acquire one or more domestic retail or distribution properties will be presented first to us. There can be no assurance the executive officers and real estate professionals at our Advisor will not direct attractive investment opportunities to GNL, which has contractual priority over us with respect to domestic office or industrial properties, or other entities advised by affiliates of AR Global.
We and other entities advised by affiliates of AR Global also rely on these real estate professionals to supervise the property management and leasing of properties. These executive officers and key real estate professionals, as well as AR Global, are not prohibited from engaging, directly or indirectly, in any business or from possessing interests in other businesses and ventures, including businesses and ventures involved in the acquisition, development, ownership, leasing or sale of real estate investments.
Our Advisor faces conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to the other venture partners at our expense and adversely affect the return on our stockholders’ investments.
We may enter into joint ventures with other entities advised by affiliates of AR Global for the acquisition, development or improvement of properties. Our Advisor may have conflicts of interest in determining which entity advised by affiliates of AR Global enters into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Due to the role of our Advisor and its affiliates, agreements and transactions between the co-venturers with respect to any joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In
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addition, we may assume liabilities related to the joint venture that exceeds the percentage of our investment in the joint venture.
Our Advisor, AR Global and their officers and employees and certain of our executive officers and other key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
Our Advisor, AR Global and their officers and employees and certain of our executive officers and other key personnel and their respective affiliates are key personnel, general partners and sponsors of other entities, including entities advised by affiliates of AR Global, having investment objectives and legal and financial obligations similar to ours and may have other business interests as well. Because these entities and individuals have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. If this occurs, the returns on our investments may suffer.
All of our executive officers, some of our directors and the key real estate and other professionals assembled by our Advisor and our Property Manager face conflicts of interest related to their positions or interests in affiliates of AR Global, which could hinder our ability to implement our business strategy.
All of our executive officers, some of our directors and the key real estate and other professionals assembled by our Advisor and Property Manager are also executive officers, directors, managers, key professionals or holders of a direct or indirect controlling interests in our Advisor and our Property Manager or other entities under common control with AR Global. As a result, they have loyalties to each of these entities, which loyalties could conflict with the fiduciary duties they owe to us and could result in action or inaction detrimental to our business. Conflicts with our business and interests are most likely to arise from (a) allocation of new investments and management time and services between us and the other entities, (b) our purchase of properties from, or sale of properties to, affiliated entities, (c) development of our properties by affiliates, (d) investments with affiliates of our Advisor, (e) compensation to our Advisor and (f) our relationship with our Advisor and our Property Manager. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to pay dividends to our stockholders and to maintain or increase the value of our assets.
If we internalize our management functions, we would be required to pay a substantial internalization fee and would not have the right to retain our executive officers or other personnel of our Advisor who currently manage our day-to-day operations.
We may engage in an internalization transaction and become self-managed in the future. If we internalize our management functions, under the terms of our advisory agreement with our Advisor we would be required to pay a substantial internalization fee to our Advisor. We also would not have any right to retain our executive officers or other personnel of our Advisor who currently manage our day to day operations. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. These deficiencies could cause us to incur additional costs, and our management’s attention could be diverted from most effectively managing our investments, which could result in litigation and resulting associated costs in connection with the internalization transaction.
We may be unable to terminate our advisory agreement, even for poor performance by our Advisor.
We have limited rights to terminate our Advisor. Our advisory agreement with our Advisor does not expire until April 29, 2035, is automatically extended for successive 20-year terms, and may only be terminated under limited circumstances. The limited termination rights of our advisory agreement will make it difficult for us to renegotiate the terms of our advisory agreement or replace our Advisor even if the terms of our advisory agreement are no longer consistent with the terms generally available to externally-managed REITs for similar services.
Our Advisor faces conflicts of interest relating to the structure of the compensation it may receive.
Under the advisory agreement, the Advisor is entitled to substantial minimum compensation regardless of performance as well as incentive compensation, and under a multi-year outperformance award agreement entered into at the Listing (the “2018 OPP”), the Advisor is entitled to earn units of limited partnership designated as “LTIP Units” (“LTIP Units”). Furthermore, our OP is a party to a listing note agreement with an affiliate of our Advisor pursuant to which this affiliate is entitled to receive an amount based on the market price of Class A common stock during a 30-day trading period, commencing on July 8, 2019 (see Note 11—Related Party Transactions and Arrangements and Note 13—Share-Based Compensation to our consolidated financial statements included in this Annual Report on Form 10-K). These arrangements, coupled with the fact that the Advisor does not maintain significant equity interest in us, may result in the Advisor taking actions or recommending investments that are riskier or more speculative than an advisor with a more significant investment in us might take or recommend.
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Risks Related to Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% in value of the aggregate of our outstanding shares of our capital stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our capital stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our Class A common stock.
Our charter permits our board of directors to authorize the issuance of stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 350,000,000 shares of stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock into other classes or series and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our Class A common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our Class A common stock.
We have a classified board, which may discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our board of directors is divided into three classes of directors. At each annual meeting, directors of one class are elected to serve until the annual meeting of stockholders held in the third year following the year of their election and until their successors are duly elected and qualify. The classification of our board of directors may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might result in a premium price for our stockholders.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
• | any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or |
• | an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation. |
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
• | 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
• | two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. |
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder
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becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving our Advisor or any affiliate of our Advisor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any affiliate of our Advisor. As a result, our Advisor and any affiliate of our Advisor may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our stockholders.
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, is the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of any duty owed by any of our directors or officer or other employees to us or our stockholders, (c) any action asserting a claim against us or any of our directors or officers or other employees arising pursuant to any provision of Maryland law, our charter or our bylaws, or (d) any action asserting a claim against us or any of our directors or officers or other employees that is governed by the internal affairs doctrine for certain types of actions and proceedings that may be initiated by our stockholders with respect to us, our directors, our officers or our employees. This choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving these matters in other jurisdictions.
Maryland law limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors, which may discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
The Maryland Control Share Acquisition Act provides that holders of “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by the stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A “control share acquisition” means the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
Our board of directors may change our investment policies without stockholder approval, which could alter the nature of our stockholders’ investments.
Our board of directors may change our investment policies over time. The methods of implementing our investment policies also may vary, as new real estate development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of our stockholders’ investments could change without their consent.
If we conduct equity offerings or issue additional shares in the future, the value of your investments may be adversely affected.
Our stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently authorizes us to issue 350,000,000 shares of stock, of which 300,000,000 shares are classified as Class A common stock and 50,000,000 are classified as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors, without stockholder approval, may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of any class or series of stock, or may classify or reclassify any unissued shares without the necessity of obtaining stockholder approval. Stockholders will suffer dilution of their equity investment in us, if we: (a) sell additional shares or securities that are convertible into shares of our Class A common stock in public or private offerings in the future, including those issued pursuant to our DRIP; (b) issue restricted share awards to our directors; (c) issue shares of our Class A common stock, or units of limited partnership designated as “Class A Units” (“Class A Units”) which may be exchanged for shares of our Class A common stock, to our Advisor or its successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory agreement; (d) issue shares of Class A common stock in connection with our Advisor earning LTIP Units pursuant to the 2018 OPP; or (e) issue shares of our Class A common stock to sellers of
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properties acquired by us in connection with an exchange of limited partnership interests of the OP, stockholders will likely experience dilution of their equity investment in us. In addition, the partnership agreement for the OP contains provisions that would allow, under certain circumstances, other entities, including other entities advised by affiliates of AR Global, to merge into or cause the exchange or conversion of their interest for interests of the OP. Because the limited partnership interests of the OP may, in the discretion of our board of directors, be exchanged for shares of our Class A common stock, any merger, exchange or conversion between the OP and another entity ultimately could result in the issuance of a substantial number of shares of our Class A common stock, thereby diluting the percentage ownership interest of other stockholders.
Moreover, any preferred stock, convertible, exercisable or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our Class A common stock and may result in dilution to owners of our Class A common stock or limit our ability to pay dividends to the holders of our Class A common stock. Holders of our Class A common stock are not entitled to preemptive rights or other protections against dilution. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.
Payment of fees to our Advisor and its affiliates reduces cash available for investment and dividends to our stockholders.
Our Advisor and its affiliates perform services for us in connection with the selection and acquisition of our investments, the management of our properties, and the administration of our investments. They are paid substantial fees for these services, which reduces the amount of cash available for investment in properties or dividends to stockholders.
We depend on our OP and its subsidiaries for cash flow and are effectively structurally subordinated in right of payment to the obligations of our OP and its subsidiaries, which could adversely affect our ability to pay dividends to our stockholders.
Our only significant asset is our interest in our OP. We conduct, and intend to continue conducting, all of our business operations through our OP. Accordingly, our only source of cash to pay our obligations is distributions from our OP and its subsidiaries of their net earnings and cash flows. We cannot assure our stockholders that our OP or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to pay dividends to our stockholders from cash flows from operations. Each of our OP’s subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from these entities. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our OP and its subsidiaries will be able to satisfy the claims of our stockholders only after all of our and our OPs and its subsidiaries liabilities and obligations have been paid in full.
We indemnify our officers, directors, the Advisor and its affiliates against claims or liability they may become subject to due to their service to us, and our rights and the rights of our stockholders to recover claims against our officers, directors, the Advisor and its affiliates are limited.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for monetary damages and permits us to indemnify our directors and officers from liability and advance certain expenses to them in connection with claims or liability they may become subject to due to their service to us, and we are not restricted from indemnifying our Advisor or its affiliates on a similar basis. We have entered into indemnification agreements to this effect with our directors and officers, certain former directors and officers, our Advisor and AR Global. We and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce the recovery of our stockholders and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor and its affiliates in some cases. Subject to conditions and exceptions, we also indemnify our Advisor and its affiliates from losses arising in the performance of their duties under the advisory agreement and have agreed to advance certain expenses to them in connection with claims or liability they may become subject to due to their service to us.
General Risks Related to Investments in Real Estate
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Our operating results are affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
• | changes in general, economic or local conditions; |
• | changes in supply of or demand for similar or competing properties in an area; |
• | changes in interest rates and availability of mortgage financing on favorable terms, or at all; |
• | changes in tax, real estate, environmental and zoning laws; and |
• | the possibility that one or more of our tenants will be unable to pay their rental obligations. |
These and other risks may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
A major tenant, including a tenant with leases in multiple locations, may fail to make rental payments to us, because of a deterioration of its financial condition or otherwise, or may choose not to renew its lease.
Our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our tenants. While we evaluate the creditworthiness of our tenants by reviewing available financial and other pertinent information, there can be no assurance that any tenant will be able to make timely rental payments or avoid defaulting under its lease. At any time, our tenants may experience an adverse change in their business. If any of our tenants’ businesses experience significant adverse changes, they may decline to extend or renew leases upon expiration, fail to make rental payments when due, close a number of stores, exercise early termination rights (to the extent such rights are available to the tenant) or declare bankruptcy. If a tenant defaults, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.
If any of the foregoing were to occur, it could result in the termination of the tenant’s leases and the loss of rental income attributable to the terminated leases. If a lease is terminated or defaulted on, we may be unable to find a new tenant to re-lease the vacated space at attractive rents or at all, which would have a material adverse effect on our results of operations and our financial condition. Furthermore, the consequences to us would be exacerbated if one of our tenants with leases in multiple locations were to terminate or default on their leases. The occurrence of any of the situations described above would have a material adverse effect on our results of operations and our financial condition.
We rely significantly on three major tenants (including, for this purpose, all affiliates of such tenants) and therefore, are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants.
As of December 31, 2018, the following major tenants (including, for this purpose, their affiliates) accounted for 5.0% or more of our consolidated annualized rental income on a straight-line basis:
Tenant | December 31, 2018 | |
SunTrust | 8.7% | |
Sanofi US | 7.0% | |
AmeriCold | 5.2% | |
Therefore, a default or lease termination by any of these tenants could have a material adverse effect on our results of operations and our financial condition. In addition, the value of our investment is historically driven by the credit quality of the underlying tenant, and an adverse change in either the tenant’s financial condition or a decline in the credit rating of such tenant may result in a decline in the value of our investments.
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We are subject to tenant geographic concentrations that make us more susceptible to adverse events with respect to certain geographic areas.
As of December 31, 2018, properties concentrated in the following states accounted for annualized rental income on a straight-line basis equal to 5.0% or more of our consolidated annualized rental income on a straight-line basis:
State | December 31, 2018 | |
Georgia | 8.4% | |
Florida | 7.9% | |
New Jersey | 7.6% | |
Alabama | 7.4% | |
North Carolina | 6.8% | |
Ohio | 6.6% | |
South Carolina | 5.3% | |
As of December 31, 2018, our tenants operated in 42 states and the District of Columbia. Any adverse situation that disproportionately affects the states listed above may have a magnified adverse effect on our portfolio. Real estate markets are subject to economic downturns, as they have been in the past, and we cannot predict how economic conditions will impact this market in both the short and long term.
Declines in the economy or a decline in the real estate market in these states could hurt our financial performance and the value of our properties. Factors that may negatively affect economic conditions in these states include:
• | business layoffs or downsizing; |
• | industry slowdowns; |
• | relocations of businesses; |
• | changing demographics; |
• | increased telecommuting and use of alternative work places; |
• | infrastructure quality; |
• | any oversupply of, or reduced demand for, real estate; |
• | concessions or reduced rental rates under new leases for properties where tenants defaulted; and |
• | increased insurance premiums. |
If a tenant or lease guarantor declares bankruptcy or becomes insolvent, we may be unable to collect balances due under relevant leases.
Any of our tenants, or any guarantor of a tenant’s lease obligations, could become insolvent or be subject to a bankruptcy proceeding pursuant to Title 11 of the United States Code. A bankruptcy filing of our tenants or any guarantor of a tenant’s lease obligations would result in a stay of all efforts by us to collect pre-bankruptcy debts from these entities or their assets, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be required to be paid currently. If a lease is assumed by the tenant, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid as of the date of the bankruptcy filing (post-bankruptcy rent would be payable in full). This claim could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. A tenant or lease guarantor bankruptcy could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to our stockholders. In the event of a bankruptcy, we cannot assure our stockholders that the tenant or its trustee will assume our lease and that our cash flow and the amounts available for distributions to our stockholders will not be adversely affected.
If a sale-leaseback transaction is recharacterized in a tenant’s bankruptcy proceeding, our financial condition and ability to pay dividends to our stockholders could be adversely affected.
We have entered and may continue to enter into sale-leaseback transactions, whereby we purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be recharacterized as either a financing or a joint venture, and either type of recharacterization could adversely affect our business. If the sale-leaseback were recharacterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor. In that event, we would no longer have the right to
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sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If this plan were confirmed by the bankruptcy court, we would be bound by the new terms. If the sale-leaseback were recharacterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
We use commercially reasonable efforts to structure any sale-leaseback transaction we enter into so that the lease will be characterized as a “true lease” for tax purposes, thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. However, we cannot assure our stockholders that the Internal Revenue Service (the “IRS”) will not challenge this characterization. In the event that any sale-leaseback transaction is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to the property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification “asset tests” or “income tests” and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year.
Properties may have vacancies for a significant period of time.
A property may have vacancies either due to the continued default of tenants under their leases or the expiration of leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash to be distributed to stockholders. In addition, because market values of properties depend principally upon the value of their leases, the resale value of properties with prolonged vacancies could decline significantly.
We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property.
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all our invested capital in the property as well as the loss of rental income from that property.
We may be unable to secure funds for future tenant improvements or capital needs.
We will be required to expend substantial funds for tenant improvements and tenant refurbishments to retain existing tenants or attract new tenants. In addition, we are responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops at all of our properties. Accordingly, if we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from sources, such as cash flow from operations, borrowings, property sales or future equity offerings, to fund these capital requirements. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.
We may be unable to sell a property when we desire to do so.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. In addition, as a REIT, our ability to sell properties that have been held for less than two years is limited as any gain recognized on the sale or other disposition of such property could be subject to the 100% prohibited transaction tax, as discussed in more detail below.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
We have acquired or financed, and may continue to acquire or finance, properties with lock-out provisions which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions, such as the provisions contained in certain mortgage loans we have entered into, could materially restrict us from selling or otherwise disposing of or refinancing properties, including by requiring the payment of a yield maintenance premium in connection with the required prepayment of principal upon sale, disposition or refinance. Lock-out
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provisions may also prohibit us from pre-paying the outstanding indebtedness with respect to any properties. Lock-out provisions could also impair our ability to take other actions during the lock-out period that may otherwise be in the best interests of our stockholders, such as precluding us from participating in major transactions that would result in a disposition of our assets or a change in control.
Rising expenses could reduce cash flow.
The properties that we own or may acquire are subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. Properties may be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. Our multi-tenant retail properties are not leased on a triple-net basis, therefore we are required to pay certain operating expenses (although we are reimbursed for others). Renewals of leases or future leases for our net lease properties may not be negotiated on a triple-net basis or on a basis requiring the tenants to pay all or some of such expenses, in which event we may have to pay those costs. If we are unable to lease properties on a triple-net basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs.
We may suffer uninsured losses relating to real property or have to pay expensive premiums for insurance coverage.
Our general liability coverage, property insurance coverage and umbrella liability coverage on all our properties may not be adequate to insure against liability claims and provide for the costs of defense. Similarly, we may not have adequate coverage against the risk of direct physical damage or to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property. Moreover, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with such catastrophic events could sharply increase the premiums we pay for coverage against property and casualty claims.
This risk is particularly relevant with respect to potential acts of terrorism. The Terrorism Risk Insurance Act of 2002 (the “TRIA”), under which the U.S. federal government bears a significant portion of insured losses caused by terrorism, will expire on December 31, 2020, and there can be no assurance that Congress will act to renew or replace the TRIA following its expiration. In the event that the TRIA is not renewed or replaced, terrorism insurance may become difficult or impossible to obtain at reasonable costs or at all, which may result in adverse impacts and additional costs to us.
Changes in the cost or availability of insurance due to the non-renewal of the TRIA or for other reasons could expose us to uninsured casualty losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay greater amounts for insurance due to changes in cost and availability, this could result in lower dividends to stockholders.
Additionally, mortgage lenders insist in some cases that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Accordingly, to the extent terrorism risk insurance policies are not available at reasonable costs, if at all, our ability to finance or refinance our properties could be impaired. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses.
Terrorist attacks and other acts of violence, civilian unrest or war may affect the markets in which we operate our business and our profitability.
Our properties are located in major metropolitan areas as well as densely populated sub-markets that are susceptible to terrorist attack. Because many of our properties are open to the public, they are exposed to a number of incidents that may take place within their premises and that are beyond our control or ability to prevent, which may harm our consumers and visitors. If an act of terror, a mass shooting or other violence were to occur, we may lose tenants or be forced to close one or more of our properties for some time. If any of these incidents were to occur, the relevant property could face material damage to its image and could experience a reduction of business traffic due to lack of confidence in the premises’ security. In addition, we may be exposed to civil liability and be required to indemnify the victims, and our insurance premiums could rise, any of which could adversely affect us.
In addition, any kind of terrorist activity or violent criminal acts, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could have a negative effect on our business and the value of our properties. More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the worldwide financial markets and economy, including demand for properties and availability of financing. Increased economic volatility could adversely affect our tenants’ abilities to conduct their operations profitably or our ability to borrow money or issue capital stock at acceptable prices and have a material adverse effect on our financial condition, results of operations and ability to pay distributions to our stockholders.
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Real estate-related taxes may increase and, if these increases are not passed on to tenants, our cash available for dividends will be reduced.
Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. Generally, from time to time our property taxes increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. There is no assurance that leases will be negotiated on the same basis. Increases not passed through to tenants would increase our expenses and could reduce our cash available for dividends.
Covenants, conditions and restrictions may restrict our ability to operate a property, which may adversely affect our operating costs.
Some of our properties may be contiguous to other parcels of real property, comprising part of the same commercial center. In connection with such properties, there are significant covenants, conditions and restrictions restricting the operation of such properties and any improvements on such properties, and related to granting easements on such properties. Moreover, the operation and management of the contiguous properties may impact such properties. Compliance with covenants, conditions and restrictions may adversely affect our operating costs and reduce the amount of cash that we have available to pay dividends.
Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.
We may acquire and develop properties upon which we will construct improvements. We will be subject to uncertainties associated with re-zoning for development, environmental concerns of governmental entities and/or community groups, and our builder’s ability to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance also may be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
We may invest in unimproved real property. For purposes of this paragraph, “unimproved real property” does not include properties acquired for the purpose of producing rental or other operating income, properties under development or construction, and properties under contract for development or in planning for development within one year. Returns from development of unimproved properties are also subject to risks associated with re-zoning the land for development and environmental concerns of governmental entities and/or community groups. If we invest in unimproved property other than property we intend to develop, our stockholders’ investments will be subject to the risks associated with investments in unimproved real property.
Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on our stockholders’ investments.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. Larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties and other investments, our profitability will be reduced and our stockholders may experience a lower return on their investments.
Our properties face competition for tenants.
Our properties face competition for tenants. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents we are able to charge. We could be adversely affected if additional competitive properties are built in locations competitive with our properties, causing increased competition for customer traffic and creditworthy tenants. This type of competition could also require us to make capital improvements to properties that we would not have otherwise made in order to retain tenants, and these expenditures could affect the amount of cash available for distributions.
We may incur significant costs to comply with governmental laws and regulations, including those relating to environmental matters.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater
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discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Environmental laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate them, may adversely affect our ability to sell, rent or pledge a property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance.
State and federal laws in this area are constantly evolving, and we monitor these laws and take commercially reasonable steps to protect ourselves from the impact of these laws, including obtaining environmental assessments of most properties that we acquire; however, we do not obtain an independent third-party environmental assessment for every property we acquire. In addition, any assessment that we do obtain may not reveal all environmental liabilities or reveal that a prior owner of a property created a material environmental condition unknown to us. We may incur significant costs to defend against claims of liability, comply with environmental regulatory requirements, remediate any contaminated property, or pay personal injury claims.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows and our ability to pay dividends to our stockholders.
If we decide to sell any of our properties, in some instances we may sell our properties by providing financing to purchasers. In these cases, we will bear the risk that the purchaser may default, which could negatively impact our cash dividends to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash dividends to our stockholders.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We may enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.
Costs associated with complying with the Americans with Disabilities Act may affect cash available for dividends.
Our properties are subject to the Americans with Disabilities Act of 1990 (“Disabilities Act”). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. However, we cannot assure our stockholders that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for Disabilities Act compliance may affect cash available for dividends and the amount of dividends to our stockholders.
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Market and economic challenges experienced by the U.S. and global economies may adversely impact aspects of our operating results and operating condition.
Our business may be affected by market and economic challenges experienced by the U.S. and global economies. These conditions may materially affect the commercial real estate industry, the businesses of our tenants and the value and performance of our properties, and may affect our ability to pay dividends, and the availability or the terms of financing that we have or may anticipate utilizing. Challenging economic conditions may also impact the ability of certain of our tenants to enter into new leasing transactions or satisfy rental payments under existing leases. Specifically, global market and economic challenges may have adverse consequences, including:
• | decreased demand for our properties due to significant job losses that occur or may occur in the future, resulting in lower rents and occupancy levels; |
• | an increase in the number of bankruptcies or insolvency proceedings of our tenants and lease guarantors, which could delay or preclude our efforts to collect rent and any past due balances under the relevant leases; |
• | widening credit spreads as investors demand higher risk premiums, resulting in lenders increasing the cost for debt financing; |
• | reduction in the amount of capital that is available to finance real estate, which, in turn, could lead to a decline in real estate values generally, slow real estate transaction activity, a reduction the loan-to-value ratio upon which lenders are willing to lend, and difficulty refinancing our debt; |
• | a decrease in the market value of our properties, which may limit our ability to obtain debt financing secured by our properties; |
• | a need for us to establish significant provisions for losses or impairments; and |
• | reduction in the value and liquidity of our short-term investments and increased volatility in market rates for such investments. |
Changes in the debt markets could have a material adverse impact on our earnings and financial condition.
The domestic and international commercial real estate debt markets are subject to changing levels of volatility, resulting in, from time to time, the tightening of underwriting standards by lenders and credit rating agencies. If our overall cost of borrowings increase, either due to increases in the index rates or due to increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns. If these disruptions in the debt markets persist, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted.
If we are unable to borrow monies on terms and conditions that we find acceptable, our ability to purchase properties may be limited, and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance maturing indebtedness.
Furthermore, the state of the debt markets could have an impact on the overall amount of capital investing in real estate, which may result in price or value decreases of real estate assets. This could negatively impact the value of our assets after the time we acquire them.
The credit profile of our tenants may create a higher risk of lease defaults and therefore lower revenues.
Based on annualized rental income on a straight-line basis as of December 31, 2018, 22.8% of our single-tenant portfolio and 53.1% of our anchor tenants in our multi-tenant portfolio are not evaluated or ranked by credit rating agencies, or are ranked below "investment grade," which includes both actual investment grade ratings of the tenant and “implied investment grade,” which includes ratings of the tenant’s parent (regardless of whether or not the parent has guaranteed the tenant’s obligation under the lease) or lease guarantor. Implied Investment Grade ratings are also determined using a proprietary Moody’s analytical tool, which compares the risk metrics of the non-rated company to those of a company with an actual rating. Of our “investment grade” tenants for our single-tenant portfolio, 48.0% have actual investment grade ratings and 29.2% have “implied investment grade” ratings. Of our “investment grade” tenants for our anchor tenants in the multi-tenant portfolio, 32.3% have actual investment grade ratings and 14.6% have “implied investment grade” ratings.
Our long-term leases with certain of these tenants may therefore pose a higher risk of default than would long-term leases with tenants who have investment grade ratings.
Net leases may not result in fair market lease rates over time.
The majority of our rental income is generated by net leases, which generally provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to freely sublease the property, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Furthermore, net leases typically have longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years. As a result, our income and the amount of cash available to pay dividends to our stockholders could be lower than they would otherwise be if we did not engage in net leases.
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Recent changes in U.S. accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants, which could reduce overall demand for our properties.
Under authoritative accounting guidance for leases through December 31, 2018, a lease was classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. Under capital lease accounting for a tenant, both the leased asset and liability are reflected on their balance sheet. If the lease did not meet any of the criteria for a capital lease, the lease was considered an operating lease by the tenant, and the obligation did not appear on the tenant’s balance sheet, rather, the contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus, entering into an operating lease could have appeared to enhance a tenant’s balance sheet in comparison to direct ownership. The new standards, which were effective as of January 1, 2019 for public business entities, affect both our accounting for leases as well as that of our current and potential tenants. These changes may affect how the real estate leasing business is conducted. For example, as a result of the revised accounting standards regarding the financial statement classification of operating leases, companies may be less willing to enter into leases in general or desire to enter into leases with shorter terms because the apparent benefits to their balance sheets could be reduced or eliminated. For additional information on the new standard issued in the U.S., which we adopted on January 1, 2019, see Note 3 — Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements to our consolidated financial statements included in this Annual Report on Form 10-K.
Risks Related to Retail Properties
Retail conditions may adversely affect our income and our ability to pay dividends to our stockholders.
A substantial amount of our rental income is generated by retail properties, some of which are subject to net leases. The market for retail space has been and could be adversely affected by weaknesses in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, changes in consumer preferences and spending, excess amounts of retail space in a number of markets and competition for tenants in the markets, as well as the increasing use of the Internet by retailers and consumers. Customer traffic to these shopping areas may be adversely affected by the closing of stores in the same multi-tenant property, or by a reduction in traffic to these stores resulting from a regional economic downturn, a general downturn in the local area where our property is located, or a decline in the desirability of the shopping environment of a particular retail property.
A retail property’s revenues and value may also be adversely affected by the perceptions of retailers or shoppers regarding the safety, convenience and attractiveness of the retail property. Many of our multi-tenant properties, such as shopping centers and malls, are open to the public and any incidents of crime or violence would result in a reduction of business traffic to tenant stores in our properties. Any such incidents may also expose us to civil liability. In addition, to the extent that the investing public has a negative perception of the retail sector, the value of our Class A common stock may be negatively impacted.
The majority of our leases provide for base rent plus contractual base rent increases. Our portfolio also includes some leases with a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases which contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue which we may derive from percentage rent leases could be adversely affected by a general economic downturn.
We are subject to risks related to our multi-tenant retail properties.
We own a portfolio of 33 multi-tenant retail properties that are not subject to net leases representing 36.1% of our annualized rental income on a straight-line basis as of December 31, 2018. Multi-tenant retail properties are subject to increased risk relating to the operation and management of the property, including:
•risks affecting the retail industry generally;
•the reliance on anchor tenants; and
•competition with other retail channels, including e-commerce.
In addition, because our multi-tenant retail properties are not net leased, we bear certain costs and expenses of these properties, as opposed to net leased properties that require tenants to bear all, or substantially all, of the costs and expenses of the properties.
Competition with other retail channels may reduce our profitability.
Our retail tenants face changing consumer preferences and increasing competition from other forms of retailing, such as e-commerce, discount shopping centers, outlet centers, upscale neighborhood strip centers, catalogues and other forms of direct marketing, discount shopping clubs and telemarketing. Other retail centers within the market area of our multi-tenant retail properties also compete with our properties for customers, affecting their tenant cash flows and thus affecting their ability to pay rent. In addition, in some cases our leases may require tenants to pay rent based on the amount of sales revenue that they generate. If these tenants experience competition, the amount of their rent may decrease and cash flows will decrease.
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A shift in retail shopping from brick and mortar stores to online shopping may have an adverse impact on our cash flow, financial condition and results of operations.
Many retailers operating brick and mortar stores have made online sales a vital piece of their business. Although our strategy is to build a diverse portfolio of service retail properties, which is intended to help better insulate us from the effects online commerce has had on some retail operators that lease space in properties like ours, but there can be no assurance this strategy will be successful. The shift to online shopping may nonetheless cause declines in brick and mortar sales generated by certain of our tenants and may cause certain of our tenants to reduce the size or number of their retail locations in the future. As a result, our cash flow, financial condition and results of operations could be adversely affected.
Competition may impede our ability to renew leases or re-let space as leases expire and require us to undertake unbudgeted capital improvements, which could harm our operating results.
We may compete for tenants with respect to the renewal of leases and re-letting of space as leases expire. Any competitive properties that are developed close to our existing properties also may impact our ability to lease space to creditworthy tenants. Increased competition for tenants may require us to make capital improvements to properties that we would not have otherwise planned to make. Any unbudgeted capital improvements may negatively impact our financial position. Also, to the extent we are unable to renew leases or re-let space as leases expire, it would result in decreased cash flow from tenants and reduce the income produced by our properties. Excessive vacancies (and related reduced shopper traffic) at one of our properties may hurt sales of other tenants at that property and may discourage them from renewing leases.
Several of our properties may rely on tenants who are in similar industries or who are affiliated with certain large companies, which would magnify the effects of downturns in those industries, or companies and have a disproportionate adverse effect on the value of our investments.
Certain tenants of our properties are concentrated in certain industries or retail categories and we have a large number of tenants that are affiliated with certain large companies. As a result, any adverse effect to those industries, retail categories or companies generally would have a disproportionately adverse effect on our portfolio. As of December 31, 2018, the following industries had concentrations of properties representing 5.0% of our consolidated annualized rental income on a straight-line basis:
Industry | December 31, 2018 | |
Restaurant | 15.5% | |
Specialty Retail | 12.2% | |
Healthcare | 11.2% | |
Retail Banking | 9.8% | |
Home Improvement | 5.8% | |
Discount Retail | 5.3% | |
Grocery | 5.3% | |
Refrigerated Warehousing | 5.2% | |
Distribution | 5.0% | |
Any adverse situation that disproportionately affects the industries listed above may have a magnified adverse effect on our portfolio.
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Our revenue is impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space.
In the retail sector, any tenant occupying a large portion of the gross leasable area of a retail center, commonly referred to as an anchor tenant, or a tenant that is an anchor tenant at more than one retail center, may become insolvent, may suffer a downturn in business, or may decide not to renew its lease. Any of these events would result in a reduction or cessation in rental payments to us. A lease termination by an anchor tenant could result in lease terminations or reductions in rent by other tenants whose leases permit cancellation or rent reduction if another tenant’s lease is terminated. We own properties where the tenants may have rights to terminate their leases if certain other tenants are no longer open for business. These “co-tenancy” provisions also may exist in some leases where we own a portion of a retail property and one or more of the anchor tenants lease space in that portion of the center not owned or controlled by us. If these tenants were to vacate their space, tenants with co-tenancy provisions would have the right to terminate their leases or seek a rent reduction. Even if co-tenancy rights do not exist, other tenants may experience downturns in their businesses that could threaten their ongoing ability to continue paying rent and remain solvent. In such event, we may be unable to re-lease the vacated space. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant, or the bankruptcy, insolvency or downturn in business of any of our anchor tenants, could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. Many expenses associated with properties (such as operating expenses and capital expenses) cannot be reduced when there is a reduction in income from the properties. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases at the retail center. If we are unable to re-lease the vacated space to a new anchor tenant, we may incur additional expenses in order to remodel the space to be able to re-lease the space to more than one tenant.
Risks Related to Debt Financing
Our level of indebtedness may increase our business risks.
As of December 31, 2018, we had total outstanding indebtedness of approximately $1.5 billion, net. In addition, we may incur additional indebtedness in the future for various purposes. The amount of this indebtedness could have material adverse consequences for us, including:
•hindering our ability to adjust to changing market, industry or economic conditions;
• | limiting our ability to access the capital markets to raise additional equity or debt on favorable terms or at all, whether to refinance maturing debt, to fund acquisitions, to fund dividends or for other corporate purposes; |
• | limiting the amount of free cash flow available for future operations, acquisitions, distributions, stock repurchases or other uses; and |
•making us more vulnerable to economic or industry downturns, including interest rate increases.
In most instances, we acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties or for other corporate purposes. We may also borrow if we need funds to satisfy the REIT tax qualification requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a property, then we must identify other sources to fund the payment or risk defaulting on the indebtedness. In addition, incurring mortgage debt increases the risk of loss because defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of our stockholders’ investments. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In this event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for repaying the debt if it is not paid by the entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected which could result in our losing our REIT status.
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The Credit Facility, and certain of our other indebtedness, contains restrictive covenants that limit our ability to pay distributions and otherwise limit our operating flexibility.
The Credit Facility (as defined herein) contains various customary operating covenants, including a restricted payments covenant that limits our ability to declare or pay dividends or other distributions on, or to purchase or redeem, any of our equity interests, with certain permitted exceptions, including the payment of distributions based on a percentage of MFFO (as defined in the Credit Facility) for an applicable period, as well as covenants restricting, among other things, the incurrence of liens, investments, fundamental changes, agreements with affiliates and changes in the nature of our business. The Credit Facility also contains financial covenants with respect to maximum consolidated leverage, maximum consolidated secured leverage, minimum fixed charge coverage, maximum other recourse debt to total asset value, and minimum net worth. Certain of our other indebtedness, and future indebtedness we may incur, contain or may contain similar restrictions. These or other restrictions may adversely affect our flexibility and our ability to achieve our investment and operating objectives.
Increases in mortgage rates may make it difficult for us to finance or refinance properties.
We have incurred, and may continue to incur, mortgage debt. We run the risk of being unable to refinance our mortgage loans when they come due or we otherwise desire to do so on favorable terms, or at all. If interest rates are higher when the properties are refinanced, we may not be able to refinance the properties and we may be required to obtain equity financing to repay the mortgage or the property may be subject to foreclosure.
Increasing interest rates could increase the amount of our debt payments and adversely affect our ability to pay dividends, and we may be adversely affected by uncertainty surrounding the LIBOR.
We have incurred, and may continue to incur, variable-rate debt. As of December 31, 2018 approximately 20.1% of our $1.8 billion in total outstanding debt was variable-rate debt and not fixed by swap. Increases in interest rates on our variable-rate debt would increase our interest cost.
Some or all of our variable-rate indebtedness may use the London Inter-Bank Offered Rate (“LIBOR”) or similar rates
as a benchmark for establishing the applicable interest rate. LIBOR rates increased in 2018 and may continue to increase
in future periods. If we need to repay existing debt during periods of rising interest rates, we may need to sell one or more
of our investments in properties even though we would not otherwise choose to do so. Moreover, in July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The consequence of these developments cannot be entirely predicted but could include an increase in the cost of our variable rate indebtedness.
U.S. Federal Income Tax Risks
Our failure to remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock.
We elected to be taxed as a REIT commencing with our taxable year ended December 31, 2013 and intend to operate in a manner that would allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification, if our board of directors determines that not qualifying as a REIT is in our best interests, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion of our counsel, including tax counsel, as to our eligibility to remain qualified as a REIT is not binding on the IRS and is not a guarantee that we will continue to qualify as a REIT. Accordingly, we cannot be certain that we will be successful in operating so we can remain qualified as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
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If we fail to continue to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at the corporate rate. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to pay distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even with our REIT qualification, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to our stockholders.
Even with our REIT qualification, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT and that do not meet a safe harbor available under the Code (a “prohibited transaction” under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable cause and not willful neglect), we would be subject to tax on the income that does not meet the income test requirements. We also may decide to retain net capital gains we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of our OP or at the level of the other companies through which we indirectly own our assets, such as our taxable REIT subsidiaries, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to our stockholders.
To qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders’ investments.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT and provided we do not meet a safe harbor available under the Code, we will be subject to a 100% penalty tax on the net income recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity, including our OP, but generally excluding taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (a) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary (but such taxable REIT subsidiary would incur corporate rate income taxes with respect to any income or gain recognized by it), (b) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or indirectly through any subsidiary, will be treated as a prohibited transaction or (c) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements, have been held for at least two years. Despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our OP, but generally excluding taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
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Our taxable REIT subsidiaries are subject to corporate-level taxes and our dealings with our taxable REIT subsidiaries may be subject to a 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 20% (25% for taxable years beginning prior to January 1, 2018) of the gross value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. Accordingly, we may use taxable REIT subsidiaries generally to hold properties for sale in the ordinary course of a trade or business or to hold assets or conduct activities that we cannot conduct directly as a REIT. A taxable REIT subsidiary will be subject to applicable U.S. federal, state, local and foreign income tax on its REIT taxable income. In addition, the taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. In addition, the Code imposes a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis.
If our OP failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT.
We intend to maintain the status of our OP as a partnership or a disregarded entity for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of our OP as a partnership or disregarded entity for such purposes, our OP would be taxable as a corporation. In such event, this would reduce the amount of distributions that the OP could make to us. This also would result in our failing to qualify as a REIT, and becoming subject to a corporate level tax on our income. This substantially would reduce our cash available to pay distributions and the yield on our stockholders’ investments. In addition, if any of the partnerships or limited liability companies through which our OP owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, such partnership or limited liability company would be subject to taxation as a corporation, thereby reducing distributions to the OP. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
We may choose to make distributions in our own stock, in which case our stockholders may be required to pay U.S. federal income taxes in excess of the cash portion of distributions they receive.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may make distributions that are payable in cash and/or shares of our common stock (which could account for up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock.
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The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income, which may reduce our stockholders’ anticipated return from an investment in us.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. For tax years beginning after December 31, 2017, noncorporate stockholders are entitled to a 20% deduction with respect to these ordinary REIT dividends which would, if allowed in full, result in a maximum effective federal income tax rate on them of 29.6% (or 33.4% including the 3.8% surtax on net investment income); although the 20% deduction is scheduled to sunset after December, 2025. However, a portion of our distributions may (1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us as qualified dividend income, taxable at capital gains rates, generally to the extent they are attributable to dividends we receive from our taxable REIT subsidiaries, or (3) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the tax basis of a stockholder’s investment in our common stock. Distributions that exceed our current and accumulated earnings and profits and a stockholder’s tax basis in our common stock generally will be taxable as capital gain.
Our stockholders may have tax liability on distributions that they elect to reinvest in common stock, but they would not receive the cash from such distributions to pay such tax liability.
If our stockholders participate in our DRIP, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the value of the shares of common stock received.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock. Tax rates could be changed in future legislation.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or in certain cases to hedge previously acquired hedges entered into to manage risks associated with property that has been disposed of or liabilities that have been extinguished, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary. This could increase the cost of our hedging activities because our taxable REIT subsidiaries would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a taxable REIT subsidiary generally will not provide any tax benefit, except for being carried forward against future taxable income of such taxable REIT subsidiary.
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To maintain our qualification as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than securities that qualify for the 75% asset test and securities of qualified REIT subsidiaries and taxable REIT subsidiaries) generally cannot exceed 10% of the outstanding voting securities of any one issuer, 10% of the total value of the outstanding securities of any one issuer or 5% of the value of our assets as to any one issuer. In addition, no more than 20% of the value of our total assets may consist of stock or securities of one or more taxable REIT subsidiaries and no more than 25% of our assets may consist of publicly offered REIT debt instruments that do not otherwise qualify under the 75% test. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from
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our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. While we intend to continue to elect and qualify to be taxed as a REIT, we may not elect to be treated as a REIT or may terminate our REIT election if we determine that qualifying as a REIT is no longer in our best interests. If we cease to be a REIT, we would become subject to corporate-level U.S. federal income tax on our taxable income (as well as any applicable state and local corporate tax) and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the market price of our common stock.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common stock.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their tax advisor with respect to the impact of recent legislation on their investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. Our stockholders should also note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help insure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by our board of directors, for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8% in value of the aggregate of our outstanding shares of stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.
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Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), capital gain distributions attributable to sales or exchanges of “U.S. real property interests” (“USRPIs”), generally will be taxed to a non-U.S. stockholder (other than a qualified pension plan, entities wholly owned by a qualified pension plan and certain foreign publicly traded entities) as if such gain were effectively connected with a U.S. trade or business. However, a capital gain distribution will not be treated as effectively connected income if (a) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States and (b) the non-U.S. stockholder does not own more than 10% of the class of our stock at any time during the one-year period ending on the date the distribution is received.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI under FIRPTA. Our common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe, but cannot assure our stockholders, that we will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our common stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 10% or less of our common stock at any time during the five-year period ending on the date of the sale.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (a) we are a “pension-held REIT,” (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock, or (c) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
The following table represents certain additional information about the properties we owned at December 31, 2018:
Portfolio | Acquisition Date | Number of Properties | Rentable Square Feet | Remaining Lease Term (1) | Percentage Leased | ||||||
(In thousands) | |||||||||||
Dollar General I | Apr. & May 2013 | 2 | 18 | 9.3 | 100.0% | ||||||
Walgreens I | Jul. 2013 | 1 | 11 | 18.8 | 100.0% | ||||||
Dollar General II | Jul. 2013 | 2 | 18 | 9.4 | 100.0% | ||||||
AutoZone I | Jul. 2013 | 1 | 7 | 8.6 | 100.0% | ||||||
Dollar General III | Jul. 2013 | 5 | 46 | 9.4 | 100.0% | ||||||
BSFS I | Jul. 2013 | 1 | 9 | 5.1 | 100.0% | ||||||
Dollar General IV | Jul. 2013 | 2 | 18 | 7.2 | 100.0% | ||||||
Tractor Supply I | Aug. 2013 | 1 | 19 | 8.9 | 100.0% | ||||||
Dollar General V | Aug. 2013 | 1 | 12 | 9.1 | 100.0% | ||||||
Mattress Firm I | Aug. & Nov. 2013; Feb, Mar. 2014 & Apr. 2014 | 5 | 24 | 8.0 | 100.0% | ||||||
Family Dollar I | Aug. 2013 | 1 | 8 | 2.5 | 100.0% | ||||||
Lowe's I | Aug. 2013 | 5 | 671 | 10.5 | 100.0% | ||||||
O'Reilly Auto Parts I | Aug. 2013 | 1 | 11 | 11.5 | 100.0% | ||||||
Food Lion I | Aug. 2013 | 1 | 45 | 10.8 | 100.0% | ||||||
Family Dollar II | Aug. 2013 | 1 | 8 | 4.5 | 100.0% | ||||||
Walgreens II | Aug. 2013 | 1 | 14 | 14.3 | 100.0% | ||||||
Dollar General VI | Aug. 2013 | 1 | 9 | 7.2 | 100.0% | ||||||
Dollar General VII | Aug. 2013 | 1 | 9 | 9.3 | 100.0% | ||||||
Family Dollar III | Aug. 2013 | 1 | 8 | 3.8 | 100.0% | ||||||
Chili's I | Aug. 2013 | 2 | 13 | 6.9 | 100.0% | ||||||
CVS I | Aug. 2013 | 1 | 10 | 7.1 | 100.0% | ||||||
Joe's Crab Shack I | Aug. 2013 | 1 | 8 | 8.3 | 100.0% | ||||||
Dollar General VIII | Sep. 2013 | 1 | 9 | 9.6 | 100.0% | ||||||
Tire Kingdom I | Sep. 2013 | 1 | 7 | 6.3 | 100.0% | ||||||
AutoZone II | Sep. 2013 | 1 | 7 | 4.4 | 100.0% | ||||||
Family Dollar IV | Sep. 2013 | 1 | 8 | 4.5 | 100.0% | ||||||
Fresenius I | Sep. 2013 | 1 | 6 | 6.5 | 100.0% | ||||||
Dollar General IX | Sep. 2013 | 1 | 9 | 6.3 | 100.0% | ||||||
Advance Auto I | Sep. 2013 | 1 | 11 | 4.5 | 100.0% | ||||||
Walgreens III | Sep. 2013 | 1 | 15 | 7.3 | 100.0% | ||||||
Walgreens IV | Sep. 2013 | 1 | 14 | 5.8 | 100.0% | ||||||
CVS II | Sep. 2013 | 1 | 14 | 18.1 | 100.0% | ||||||
Arby's I | Sep. 2013 | 1 | 3 | 9.5 | 100.0% | ||||||
Dollar General X | Sep. 2013 | 1 | 9 | 9.3 | 100.0% | ||||||
AmeriCold I | Sep. 2013 | 9 | 1,407 | 8.8 | 100.0% | ||||||
Home Depot I | Sep. 2013 | 2 | 1,315 | 8.1 | 100.0% | ||||||
New Breed Logistics I | Sep. 2013 | 1 | 390 | 2.8 | 100.0% | ||||||
American Express Travel Related Services I | Sep. 2013 | 1 | 396 | 1.3 | 100.0% | ||||||
SunTrust Bank I (2) | Sep. 2013 | 22 | 113 | 9.4 | 90.7% | ||||||
National Tire & Battery I | Sep. 2013 | 1 | 11 | 4.9 | 100.0% | ||||||
Circle K I | Sep. 2013 | 19 | 55 | 9.8 | 100.0% | ||||||
Walgreens V | Sep. 2013 | 1 | 14 | 8.7 | 100.0% | ||||||
Walgreens VI | Sep. 2013 | 1 | 15 | 10.3 | 100.0% | ||||||
FedEx Ground I | Sep. 2013 | 1 | 22 | 4.4 | 100.0% | ||||||
Walgreens VII | Sep. 2013 | 8 | 113 | 10.4 | 100.0% | ||||||
O'Charley's I | Sep. 2013 | 20 | 136 | 12.8 | 100.0% | ||||||
Krystal I | Sep. 2013 | 6 | 13 | 10.7 | 100.0% | ||||||
1st Constitution Bancorp I | Sep. 2013 | 1 | 5 | 5.1 | 100.0% | ||||||
American Tire Distributors I | Sep. 2013 | 1 | 125 | 5.1 | 100.0% | ||||||
Tractor Supply II | Oct. 2013 | 1 | 24 | 4.8 | 100.0% | ||||||
United Healthcare I | Oct. 2013 | 1 | 400 | 2.5 | 100.0% | ||||||
29
Portfolio | Acquisition Date | Number of Properties | Rentable Square Feet | Remaining Lease Term (1) | Percentage Leased | ||||||
(In thousands) | |||||||||||
National Tire & Battery II | Oct. 2013 | 1 | 7 | 13.5 | 100.0% | ||||||
Tractor Supply III | Oct. 2013 | 1 | 19 | 9.3 | 100.0% | ||||||
Mattress Firm II | Oct. 2013 | 1 | 4 | 4.7 | 100.0% | ||||||
Dollar General XI | Oct. 2013 | 1 | 9 | 8.3 | 100.0% | ||||||
Academy Sports I | Oct. 2013 | 1 | 72 | 9.5 | 100.0% | ||||||
Talecris Plasma Resources I | Oct. 2013 | 1 | 22 | 4.3 | 100.0% | ||||||
Amazon I | Oct. 2013 | 1 | 79 | 4.6 | 100.0% | ||||||
Fresenius II | Oct. 2013 | 2 | 16 | 8.6 | 100.0% | ||||||
Dollar General XII | Nov. 2013 & Jan. 2014 | 2 | 18 | 10.0 | 100.0% | ||||||
Dollar General XIII | Nov. 2013 | 1 | 9 | 7.3 | 100.0% | ||||||
Advance Auto II | Nov. 2013 | 2 | 14 | 4.4 | 100.0% | ||||||
FedEx Ground II | Nov. 2013 | 1 | 49 | 4.6 | 100.0% | ||||||
Burger King I | Nov. 2013 | 41 | 168 | 14.9 | 100.0% | ||||||
Dollar General XIV | Nov. 2013 | 3 | 27 | 9.4 | 100.0% | ||||||
Dollar General XV | Nov. 2013 | 1 | 9 | 9.8 | 100.0% | ||||||
FedEx Ground III | Nov. 2013 | 1 | 24 | 4.7 | 100.0% | ||||||
Dollar General XVI | Nov. 2013 | 1 | 9 | 6.9 | 100.0% | ||||||
Family Dollar V | Nov. 2013 | 1 | 8 | 4.3 | 100.0% | ||||||
CVS III | Dec. 2013 | 1 | 11 | 5.1 | 100.0% | ||||||
Mattress Firm III | Dec. 2013 | 1 | 5 | 9.5 | 100.0% | ||||||
Arby's II | Dec. 2013 | 1 | 3 | 9.3 | 100.0% | ||||||
Family Dollar VI | Dec. 2013 | 2 | 17 | 5.1 | 100.0% | ||||||
SAAB Sensis I | Dec. 2013 | 1 | 91 | 6.3 | 100.0% | ||||||
Citizens Bank I | Dec. 2013 | 9 | 35 | 5.0 | 100.0% | ||||||
SunTrust Bank II (2) | Jan. 2014 | 23 | 115 | 10.1 | 100.0% | ||||||
Mattress Firm IV | Jan. 2014 | 1 | 5 | 5.7 | 100.0% | ||||||
FedEx Ground IV | Jan. 2014 | 1 | 59 | 4.5 | 100.0% | ||||||
Mattress Firm V | Jan. 2014 | 1 | 6 | 4.8 | 100.0% | ||||||
Family Dollar VII | Feb. 2014 | 1 | 8 | 5.5 | 100.0% | ||||||
Aaron's I | Feb. 2014 | 1 | 8 | 4.7 | 100.0% | ||||||
AutoZone III | Feb. 2014 | 1 | 7 | 4.3 | 100.0% | ||||||
C&S Wholesale Grocer I | Feb. 2014 | 2 | 1,671 | 4.2 | 100.0% | ||||||
Advance Auto III | Feb. 2014 | 1 | 6 | 5.7 | 100.0% | ||||||
Family Dollar VIII | Mar. 2014 | 3 | 25 | 4.6 | 100.0% | ||||||
Dollar General XVII | Mar. & May 2014 | 3 | 27 | 9.3 | 100.0% | ||||||
SunTrust Bank III (2) | Mar. 2014 | 85 | 483 | 10.9 | 88.2% | ||||||
SunTrust Bank IV (2) | Mar. 2014 | 18 | 96 | 10.9 | 100.0% | ||||||
Dollar General XVIII | Mar. 2014 | 1 | 9 | 9.3 | 100.0% | ||||||
Sanofi US I | Mar. 2014 | 1 | 737 | 14.0 | 100.0% | ||||||
Family Dollar IX | Apr. 2014 | 1 | 8 | 5.3 | 100.0% | ||||||
Stop & Shop I | May 2014 | 7 | 492 | 8.0 | 100.0% | ||||||
Bi-Lo I | May 2014 | 1 | 56 | 7.0 | 100.0% | ||||||
Dollar General XIX | May 2014 | 1 | 12 | 9.7 | 100.0% | ||||||
Dollar General XX | May 2014 | 5 | 49 | 8.3 | 100.0% | ||||||
Dollar General XXI | May 2014 | 1 | 9 | 9.7 | 100.0% | ||||||
Dollar General XXII | May 2014 | 1 | 11 | 8.3 | 100.0% | ||||||
FedEx Ground V | Feb. 2016 | 1 | 46 | 6.6 | 100.0% | ||||||
FedEx Ground VI | Feb. 2016 | 1 | 121 | 6.7 | 100.0% | ||||||
FedEx Ground VII | Feb. 2016 | 1 | 42 | 6.8 | 100.0% | ||||||
FedEx Ground VIII | Feb. 2016 | 1 | 79 | 6.8 | 100.0% | ||||||
Liberty Crossing | Feb. 2017 | 1 | 106 | 3.9 | 90.9% | ||||||
San Pedro Crossing | Feb. 2017 | 1 | 202 | 3.6 | 59.9% | ||||||
Tiffany Springs MarketCenter | Feb. 2017 | 1 | 265 | 6.0 | 88.4% | ||||||
The Streets of West Chester | Feb. 2017 | 1 | 237 | 10.1 | 95.1% | ||||||
Prairie Towne Center | Feb. 2017 | 1 | 289 | 5.8 | 95.3% | ||||||
30
Portfolio | Acquisition Date | Number of Properties | Rentable Square Feet | Remaining Lease Term (1) | Percentage Leased | ||||||
(In thousands) | |||||||||||
Southway Shopping Center | Feb. 2017 | 1 | 182 | 4.3 | 88.7% | ||||||
Stirling Slidell Centre | Feb. 2017 | 1 | 134 | 3.2 | 56.0% | ||||||
Northwoods Marketplace | Feb. 2017 | 1 | 236 | 3.1 | 96.5% | ||||||
Centennial Plaza | Feb. 2017 | 1 | 234 | 4.7 | 77.8% | ||||||
Northlake Commons | Feb. 2017 | 1 | 109 | 3.0 | 86.6% | ||||||
Shops at Shelby Crossing | Feb. 2017 | 1 | 236 | 3.8 | 97.6% | ||||||
Shoppes of West Melbourne | Feb. 2017 | 1 | 144 | 3.4 | 97.3% | ||||||
The Centrum | Feb. 2017 | 1 | 271 | 4.7 | 52.5% | ||||||
Shoppes at Wyomissing | Feb. 2017 | 1 | 103 | 3.1 | 90.0% | ||||||
Southroads Shopping Center | Feb. 2017 | 1 | 438 | 4.6 | 71.2% | ||||||
Parkside Shopping Center | Feb. 2017 | 1 | 182 | 4.5 | 90.5% | ||||||
Colonial Landing | Feb. 2017 | 1 | 264 | 4.1 | 70.0% | ||||||
The Shops at West End | Feb. 2017 | 1 | 382 | 7.5 | 73.6% | ||||||
Township Marketplace | Feb. 2017 | 1 | 299 | 4.1 | 93.9% | ||||||
Cross Pointe Centre | Feb. 2017 | 1 | 226 | 10.0 | 100.0% | ||||||
Towne Centre Plaza | Feb. 2017 | 1 | 94 | 4.1 | 100.0% | ||||||
Village at Quail Springs | Feb. 2017 | 1 | 100 | 6.8 | 100.0% | ||||||
Pine Ridge Plaza | Feb. 2017 | 1 | 239 | 3.6 | 97.4% | ||||||
Bison Hollow | Feb. 2017 | 1 | 135 | 4.9 | 100.0% | ||||||
Jefferson Commons | Feb. 2017 | 1 | 206 | 7.5 | 93.7% | ||||||
Northpark Center | Feb. 2017 | 1 | 318 | 5.7 | 99.2% | ||||||
Anderson Station | Feb. 2017 | 1 | 244 | 3.3 | 98.0% | ||||||
Patton Creek | Feb. 2017 | 1 | 491 | 3.8 | 85.8% | ||||||
North Lakeland Plaza | Feb. 2017 | 1 | 171 | 1.7 | 94.9% | ||||||
Riverbend Marketplace | Feb. 2017 | 1 | 143 | 5.1 | 90.5% | ||||||
Montecito Crossing | Feb. 2017 | 1 | 180 | 3.5 | 96.7% | ||||||
Best on the Boulevard | Feb. 2017 | 1 | 205 | 4.4 | 91.0% | ||||||
Shops at RiverGate South | Feb. 2017 | 1 | 141 | 6.7 | 100.0% | ||||||
Dollar General XXIII | Mar. & May 2017 | 8 | 72 | 10.6 | 100.0% | ||||||
Jo-Ann Fabrics I | Apr. 2017 | 1 | 18 | 6.1 | 100.0% | ||||||
Bob Evans I | Apr. 2017 | 23 | 117 | 18.3 | 100.0% | ||||||
FedEx Ground IX | May 2017 | 1 | 54 | 7.4 | 100.0% | ||||||
Chili's II | May 2017 | 1 | 6 | 8.8 | 100.0% | ||||||
Sonic Drive In I | June 2017 | 2 | 3 | 13.5 | 100.0% | ||||||
Bridgestone HOSEPower I | June 2017 | 2 | 41 | 10.6 | 100.0% | ||||||
Bridgestone HOSEPower II | July 2017 | 1 | 25 | 10.8 | 100.0% | ||||||
FedEx Ground X | July 2017 | 1 | 142 | 8.5 | 100.0% | ||||||
Chili's III | Aug. 2017 | 1 | 6 | 8.8 | 100.0% | ||||||
FedEx Ground XI | Sep. 2017 | 1 | 29 | 8.5 | 100.0% | ||||||
Hardee's I | Sep. 2017 | 4 | 13 | 18.8 | 100.0% | ||||||
Tractor Supply IV | Oct. 2017 | 2 | 51 | 7.9 | 100.0% | ||||||
Circle K II | Nov. 2017 | 6 | 20 | 18.5 | 100.0% | ||||||
Sonic Drive In II | Nov. 2017 | 20 | 30 | 18.9 | 100.0% | ||||||
Bridgestone HOSEPower III | Dec. 2017 | 1 | 21 | 11.5 | 100.0% | ||||||
Sonny's BBQ I | Jan. 2018 | 3 | 19 | 15.1 | 100.0% | ||||||
Mountain Express I | Jan. 2018 | 9 | 30 | 19.0 | 100.0% | ||||||
Kum & Go I | Feb. 2018 | 1 | 5 | 9.4 | 100.0% | ||||||
DaVita I | Feb. 2018 | 2 | 13 | 7.2 | 100.0% | ||||||
White Oak I | Mar. 2018 | 9 | 22 | 19.9 | 100.0% | ||||||
Mountain Express II | June 2018 | 15 | 59 | 19.3 | 100.0% | ||||||
Dialysis I | July 2018 | 7 | 65 | 9.4 | 100.0% | ||||||
Children of America I | Aug. 2018 | 2 | 32 | 14.7 | 100.0% | ||||||
Burger King II | Aug. 2018 | 1 | 3 | 14.7 | 100.0% | ||||||
White Oak II | Aug. 2018 | 9 | 18 | 18.9 | 100.0% | ||||||
31
Portfolio | Acquisition Date | Number of Properties | Rentable Square Feet | Remaining Lease Term (1) | Percentage Leased | ||||||
(In thousands) | |||||||||||
Bob Evans II | Aug. 2018 | 22 | 112 | 18.3 | 100.0% | ||||||
Mountain Express III | Sep. 2018 | 14 | 47 | 19.6 | 100.0% | ||||||
Taco John's | Sep. 2018 | 7 | 15 | 14.8 | 100.0% | ||||||
White Oak III | Oct. 2018 | 1 | 4 | 19.9 | 100% | ||||||
DaVita II | Oct. 2018 | 1 | 9 | 8.2 | 100% | ||||||
Pizza Hut I | Oct. 2018 | 9 | 23 | 14.8 | 100% | ||||||
Little Caesars I | Dec. 2018 | 11 | 19 | 20.0 | 100% | ||||||
Caliber Collision I | Dec. 2018 | 3 | 48 | 13.3 | 100% | ||||||
Tractor Supply V | Dec. 2018 | 4 | 79 | 12.7 | 100% | ||||||
626 | 19,050 | 8.6 | 94.7% | ||||||||
(1) | Remaining lease term in years as of December 31, 2018. If the portfolio has multiple properties with varying lease expirations, remaining lease term is calculated on a weighted-average basis. |
(2) | Includes certain of the seven properties leased to SunTrust which were unoccupied as of December 31, 2018. There were six properties that had leases expire on December 31, 2017 and one property that had lease expire on March 31, 2018, comprising less than 0.1 million rentable square feet. As of December 31, 2018, these seven properties were being marketed for sale, subject to a LOI or PSA. There can be no guarantee that these properties will be sold on the terms contemplated by any applicable LOI or PSA, or at all. Please see Note 4 — Real Estate Investments to our consolidated financial statements included in this Annual Report on Form 10-K for further details. |
32
The following table details the geographic distribution, by state, of our properties owned as of December 31, 2018:
State | Number of Properties | Annualized Rental Income on a Straight-Line Basis(1) | Annualized Rental Income on a Straight-Line Basis % | Square Feet | Square Feet % | ||||||||||
(In thousands) | (In thousands) | ||||||||||||||
Alabama | 27 | $ | 17,978 | 7.6 | % | 2,565 | 13.1 | % | |||||||
Arizona | 1 | 352 | 0.1 | % | 22 | 0.1 | % | ||||||||
Arkansas | 6 | 662 | 0.3 | % | 55 | 0.3 | % | ||||||||
Colorado | 3 | 504 | 0.2 | % | 25 | 0.1 | % | ||||||||
Connecticut | 2 | 1,640 | 0.7 | % | 84 | 0.4 | % | ||||||||
Delaware | 1 | 176 | 0.1 | % | 5 | 0.1 | % | ||||||||
District Of Columbia | 1 | 235 | 0.1 | % | 3 | 0.1 | % | ||||||||
Florida | 67 | 19,337 | 7.9 | % | 1,196 | 6.3 | % | ||||||||
Georgia | 70 | 20,456 | 8.4 | % | 1,778 | 9.3 | % | ||||||||
Idaho | 3 | 321 | 0.1 | % | 14 | 0.1 | % | ||||||||
Illinois | 33 | 8,757 | 3.6 | % | 664 | 3.5 | % | ||||||||
Indiana | 10 | 1,409 | 0.6 | % | 59 | 0.3 | % | ||||||||
Iowa | 23 | 2,584 | 1.1 | % | 149 | 0.8 | % | ||||||||
Kansas | 2 | 2,516 | 1.0 | % | 241 | 1.3 | % | ||||||||
Kentucky | 8 | 7,141 | 2.9 | % | 511 | 2.7 | % | ||||||||
Louisiana | 16 | 2,299 | 0.9 | % | 273 | 1.4 | % | ||||||||
Maine | 1 | 202 | 0.1 | % | 12 | 0.1 | % | ||||||||
Maryland | 5 | 1,096 | 0.4 | % | 21 | 0.1 | % | ||||||||
Massachusetts | 6 | 6,069 | 2.5 | % | 589 | 3.1 | % | ||||||||
Michigan | 33 | 5,707 | 2.3 | % | 338 | 1.8 | % | ||||||||
Minnesota | 8 | 11,342 | 4.6 | % | 752 | 3.9 | % | ||||||||
Mississippi | 26 | 3,031 | 1.2 | % | 149 | 0.8 | % | ||||||||
Missouri | 11 | 6,597 | 2.7 | % | 557 | 2.9 | % | ||||||||
Nebraska | 3 | 514 | 0.2 | % | 12 | 0.1 | % | ||||||||
Nevada | 3 | 6,652 | 2.7 | % | 396 | 2.1 | % | ||||||||
New Jersey | 4 | 18,655 | 7.6 | % | 818 | 4.3 | % | ||||||||
New Mexico | 2 | 336 | 0.1 | % | 27 | 0.2 | % | ||||||||
New York | 10 | 2,351 | 1.0 | % | 172 | 0.9 | % | ||||||||
North Carolina | 36 | 16,614 | 6.8 | % | 1,440 | 7.6 | % | ||||||||
North Dakota | 3 | 1,222 | 0.5 | % | 170 | 0.9 | % | ||||||||
Ohio | 64 | 16,085 | 6.6 | % | 840 | 4.4 | % | ||||||||
Oklahoma | 5 | 7,515 | 3.1 | % | 799 | 4.2 | % | ||||||||
Pennsylvania | 20 | 9,147 | 3.7 | % | 510 | 2.7 | % | ||||||||
Rhode Island | 2 | 2,419 | 1.0 | % | 149 | 0.8 | % | ||||||||
South Carolina | 17 | 12,840 | 5.3 | % | 1,410 | 7.4 | % | ||||||||
South Dakota | 2 | 339 | 0.1 | % | 47 | 0.2 | % | ||||||||
Tennessee | 32 | 4,248 | 1.7 | % | 280 | 1.5 | % | ||||||||
Texas | 23 | 10,160 | 4.2 | % | 726 | 3.8 | % | ||||||||
Utah | 1 | 3,397 | 1.4 | % | 396 | 2.1 | % | ||||||||
Virginia | 23 | 2,930 | 1.2 | % | 181 | 1.0 | % | ||||||||
West Virginia | 7 | 1,175 | 0.5 | % | 39 | 0.2 | % | ||||||||
Wisconsin | 4 | 6,629 | 2.7 | % | 532 | 2.8 | % | ||||||||
Wyoming | 2 | 583 | 0.2 | % | 44 | 0.2 | % | ||||||||
Total | 626 | $ | 244,222 | 100.0 | % | 19,050 | 100.0 | % | |||||||
(1) | Annualized rental income on a straight-line basis is calculated using the most recent available lease terms as of December 31, 2018, which includes tenant concessions such as free rent, as applicable. |
33
Future Minimum Lease Payments
The following table presents future minimum base rent payments, on a cash basis, due to us over the next ten years and thereafter for the properties we owned as of December 31, 2018. 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 indexes among other items.
(In thousands) | Future Minimum Base Rent Payments | |||
2019 | $ | 232,222 | ||
2020 | 223,025 | |||
2021 | 211,918 | |||
2022 | 200,974 | |||
2023 | 185,455 | |||
2024 | 165,851 | |||
2025 | 152,923 | |||
2026 | 142,418 | |||
2027 | 120,636 | |||
2028 | 93,177 | |||
Thereafter | 409,419 | |||
$ | 2,138,018 | |||
Future Lease Expiration Table
The following is a summary of lease expirations for the next ten years at the properties we owned as of December 31, 2018:
Year of Expiration | Number of Leases Expiring | Annualized Rental Income on a Straight-Line Basis(1) | Annualized Rental Income on a Straight-Line Basis % | Square Feet | Square Feet % | |||||||||||
(In thousands) | (In thousands) | |||||||||||||||
2019 | 84 | $ | 7,242 | 3.0 | % | 473 | 2.6 | % | ||||||||
2020 | 97 | 12,362 | 5.1 | % | 990 | 5.5 | % | |||||||||
2021 | 79 | 16,043 | 6.6 | % | 1,378 | 7.6 | % | |||||||||
2022 | 79 | 10,886 | 4.5 | % | 1,097 | 6.1 | % | |||||||||
2023 | 117 | 22,403 | 9.2 | % | 2,557 | 14.2 | % | |||||||||
2024 | 68 | 15,850 | 6.5 | % | 1,201 | 6.7 | % | |||||||||
2025 | 60 | 17,034 | 7.0 | % | 1,398 | 7.7 | % | |||||||||
2026 | 38 | 15,509 | 6.4 | % | 1,029 | 5.7 | % | |||||||||
2027 | 95 | 33,025 | 13.5 | % | 3,523 | 19.5 | % | |||||||||
2028 | 71 | 9,798 | 3.8 | % | 790 | 4.4 | % | |||||||||
788 | $ | 160,152 | 65.6 | % | 14,436 | 80.0 | % | |||||||||
(1) | Annualized rental income on a straight-line basis is calculated using the most recent available lease terms as of December 31, 2018, which includes tenant concessions such as free rent, as applicable. |
Tenant Concentration
There were no tenants whose rentable square footage or annualized rental income on a straight-line basis represented greater than 10.0% of total portfolio rentable square footage or annualized rental income on a straight-line basis as of December 31, 2018.
Significant Portfolio Properties
The rentable square feet or annualized rental income on a straight-line basis of the following properties each represents 5.0% or more of our total portfolio’s rentable square feet or annualized rental income on a straight-line basis as of December 31, 2018. The tenant concentrations of these properties are summarized below:
34
C&S Wholesale Grocers - Birmingham, AL
C&S Wholesale Grocers - Birmingham, AL is a freestanding, single-tenant distribution facility, comprised of 1,311,295 total rentable square feet and is 100.0% leased to a subsidiary of C&S Wholesale Grocers, Inc., and the lease is guaranteed by C&S Wholesale Grocers, Inc. As of December 31, 2018, the tenant has 4.5 years remaining on its lease which expires in June 2023. The lease has annualized rental income on a straight-line basis of $4.7 million and contains one ten-year renewal option, followed by six five-year renewal options.
Sanofi US - Bridgewater, NJ
Sanofi US - Bridgewater, NJ is a freestanding, single-tenant office facility, comprised of 736,572 total rentable square feet and is 100.0% leased to Aventis, Inc., a member of the Sanofi-Aventis Group. As of December 31, 2018, the tenant has 14.0 years remaining on its lease which expires in December 2032. The lease has annualized rental income on a straight-line basis of $17.1 million and contains two five-year renewal options.
Property Financings
See Note 5 — Mortgage Notes Payable, Net and Note 6 — Credit Facility to our consolidated financial statements included in this Annual Report on Form 10-K for information regarding property financings as of December 31, 2018 and 2017.
Item 3. Legal Proceedings.
On January 13, 2017, four affiliated stockholders of RCA filed in the United States District Court for the District of Maryland a putative class action lawsuit against us, RCA, Edward M. Weil, Jr., Leslie D. Michelson, Edward G. Rendell (Weil, Michelson and Rendell, the “Director Defendants”), and AR Global, alleging violations of Sections 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by RCA and the Director Defendants, violations of Section 20(a) of the Exchange Act by AR Global and the Director Defendants, breaches of fiduciary duty by the Director Defendants, and aiding and abetting breaches of fiduciary duty by AR Global and us in connection with the negotiation of and proxy solicitation for a shareholder vote on the proposed merger of us and RCA and an amendment to RCA’s charter. The complaint sought on behalf of the putative class rescission of the merger transaction, which was voted on and approved by stockholders on February 13, 2017, and closed on February 16, 2017, together with unspecified rescissory damages, unspecified actual damages, and costs and disbursements of the action. On April 26, 2017, the Court appointed a lead plaintiff. Lead plaintiff, along with other stockholders of RCA, filed an amended complaint on June 19, 2017. The amended complaint named additional individuals and entities as defendants (David Gong, Stanley Perla, Lisa Kabnick (“Additional Director Defendants”), Nicholas Radesca and American Realty Capital Retail Advisor, LLC), added counts under Sections 11, 12(a)(2) and 15 of the Securities Act in connection with the Registration Statement for the proposed merger, under Section 13(e) of the Exchange Act, and counts for breach of contract and unjust enrichment. We, in addition to RCA, the Director Defendants, the Additional Director Defendants and Nicholas Radesca deny wrongdoing and liability and intend to vigorously defend the action. On August 14, 2017, defendants moved to dismiss the amended complaint. On March 29, 2018, the Court granted defendants’ motion to dismiss and dismissed the amended complaint. On April 26, 2018, the plaintiffs filed a notice of appeal of the court’s order, which appeal is pending. Due to the early stage of the litigation, no estimate of a probable loss or any reasonable possible losses are determinable at this time. No provisions for such losses have been recorded in the accompanying consolidated financial statements for the year ended December 31, 2018 or 2017.
On February 8, 2018, Carolyn St. Clair-Hibbard, a purported stockholder of ours, filed a putative class action complaint in the United States District Court for the Southern District of New York against us, AR Global, the Advisor, Nicholas S. Schorsch and William M. Kahane. On February 23, 2018, the complaint was amended to, among other things, assert some claims on the plaintiff’s own behalf and other claims on behalf of herself and other similarly situated shareholders of ours as a class. On April 26, 2018, defendants moved to dismiss the amended complaint. On May 25, 2018, plaintiff filed a second amended complaint. The second amended complaint alleges that the proxy materials used to solicit stockholder approval of the Merger at our 2017 annual meeting were materially incomplete and misleading. The complaint asserts violations of Section 14(a) of the Exchange Act against us, as well as control person liability against the Advisor, AR Global, and Messrs. Schorsch and Kahane under 20(a). It also asserts state law claims for breach of fiduciary duty against the Advisor, and claims for aiding and abetting such breaches, of fiduciary duty against the Advisor, AR Global and Messrs. Schorsch and Kahane. The complaint seeks unspecified damages, rescission of our advisory agreement (or severable portions thereof) which became effective when the Merger became effective, and a declaratory judgment that certain provisions of our advisory agreement are void. We believe the second amended complaint is without merit and intend to defend vigorously. On June 22, 2018, defendants moved to dismiss the second amended complaint. On August 1, 2018, plaintiff filed an opposition to defendants’ motions to dismiss. Defendants filed reply papers on August 22, 2018, and oral argument was held on September 26, 2018. That motion is now pending. Due to the early stage of the litigation, no estimate of a probable loss or any reasonably possible losses are determinable at this time.
On October 26, 2018, Terry Hibbard, a purported stockholder of ours, filed a putative class action complaint in New York State Supreme Court, New York County, against us, AR Global, the Advisor, Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Nicholas Radesca, David Gong, Stanley R. Perla, and Lisa D. Kabnick. The complaint alleges that the registration statement pursuant to which RCA shareholders acquired shares of our common stock during the Merger contained materially
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incomplete and misleading information. The complaint asserts violations of Section 11 of the Securities Act against Messrs. Weil, Radesca, Gong, and Perla, and Ms. Kabnick, violations of Section 12(a)(2) of the Securities Act against us and Mr. Weil, and control person liability against the Advisor, AR Global, and Messrs. Schorsch and Kahane under Section 15 of the Securities Act. The complaint seeks unspecified damages and rescission of our sale of stock pursuant to the registration statement. We believe the complaint is without merit and intend to defend vigorously. We have not yet answered or moved to dismiss the complaint. The parties have agreed to stay this litigation pending a decision on the motion to dismiss in the St. Clair-Hibbard litigation pending in the United States District Court for the Southern District of New York. Due to the early stage of the litigation, no estimate of a probable loss or any reasonably possible losses are determinable at this time.
There are no other material legal or regulatory proceedings pending or known to be contemplated against us.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A common stock began trading on the Nasdaq under the symbol “AFIN” as of July 19, 2018. Set forth below is a line graph comparing the cumulative total stockholder return on our Class A common stock, based on the market price of Class A common stock, with the FTSE National Association of Real Estate Investment Trusts Equity Index ("NAREIT"), Modern Index Strategy Indexes ("MSCI"), and the Nasdaq Index for the period commencing July 19, 2018, the date on which we listed our Class A common stock on the Nasdaq and ending December 31, 2018. The graph assumes an investment of $100 on July 19, 2018.
Holders
As of February 28, 2019, we had 106.1 million shares of common stock outstanding held by a total of 42,007 stockholders.
Common Stock Dividends
We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2013. As a REIT, we are required, among other things, to distribute at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP and determined without regard for the deduction for dividends paid and excluding net capital gains) to our stockholders annually. The amount of dividends payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for dividends, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Code. Our board of directors may reduce the amount of dividends paid or suspend dividend payments at any time prior to dividends being declared. Therefore, dividend payments are not assured.
Under the restricted payments covenant in the Credit Facility, we may declare or pay cash dividends in an aggregate amount (excluding cash dividends reinvested through our DRIP) not to exceed the greater of (i) 120% of our MFFO (as defined in the Credit Facility); or (ii) the amount necessary for us to be able to make dividends required to maintain our status as a REIT. For more information on the Credit Facility, see Note 6 — Credit Facility to our consolidated financial statements included in this Annual Report on Form 10-K.
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The following table details from a tax perspective, the portion of dividends classified as return of capital and ordinary dividend income, per share per annum, for the years ended December 31, 2018, 2017 and 2016:
Year Ended December 31, | |||||||||||||||||||||
(In thousands) | 2018 | 2017 | 2016 | ||||||||||||||||||
Return of capital | 93.2 | % | $ | 1.03 | 82.7 | % | $ | 1.22 | 76.0 | % | $ | 1.25 | |||||||||
Ordinary dividend income | 6.8 | % | 0.07 | 17.3 | % | 0.25 | 24.0 | % | 0.40 | ||||||||||||
Total | 100.0 | % | $ | 1.10 | 100.0 | % | $ | 1.47 | 100.0 | % | $ | 1.65 | |||||||||
On April 9, 2013, our board of directors authorized, and we declared a dividend payable to stockholders of record equivalent to $1.65 per annum, per share of common stock. On June 14, 2017, we announced that our board of directors authorized a decrease in the daily accrual of dividends to an annualized rate of $1.30 per annum, per share of common stock, effective July 1, 2017. The first dividends declared under the new rate were paid on or about August 5, 2017. In connection with the Listing, our board of directors changed the rate at which we pay dividends on our common stock to an annualized rate equal to $1.10 per share, or $0.0916667 per share on a monthly basis, effective as of July 1, 2018. Additionally, effective July 1, 2018, we transitioned to declaring dividends based on monthly, rather than daily, record dates and will generally pay dividends on or around the 15th day of each month (or, if not a business day, the next succeeding business day) to common stock holders of record on the applicable record date of such month. Prior to July 1, 2018, dividends were payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month.
During the years ended December 31, 2018 and 2017, cash used to pay our dividends was generated from cash flows provided by operations, a portion of proceeds from shares issued pursuant to the DRIP and available cash on hand, which includes proceeds from financings and the sale of real estate investments.
Share-Based Compensation
Prior to the Listing, our board of directors had adopted an employee and director restricted share plan (the “RSP”). Effective at the Listing, our board of directors adopted an equity plan for the Advisor (the “Advisor Plan”) and an equity plan for individuals (the “Individual Plan” and together with the Advisor Plan, the “2018 Equity Plan”). The 2018 Equity Plan succeeded and replaced the existing RSP. Also, we granted an award of LTIP Units to the Advisor pursuant to the 2018 OPP.
The following table sets forth information regarding securities authorized for issuance under the 2018 Equity Plan and the 2018 OPP as of December 31, 2018.
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) | |||||||
(a) | (b) | (c) | ||||||||
Equity Compensation Plans approved by security holders | — | — | — | |||||||
Equity Compensation Plans not approved by security holders | 4,496,786 | (1) | — | 5,970,710 | (2) | |||||
Total | 4,496,786 | (1) | — | 5,970,710 | (2) | |||||
(1) Represents shares of Class A common stock underlying LTIP Units awarded pursuant to the 2018 OPP. These LTIP Units may be earned by the Advisor based on our achieving of threshold, target or maximum performance goals based on our absolute and relative total stockholder return over a performance period commencing on July 19, 2018 and ending on the earliest of (i) July 19, 2021, (ii) the effective date of any Change of Control (as defined in the 2018 OPP) and (iii) the effective date of any termination of the Advisor’s service as our advisor. LTIP Units earned as of the last day of the performance period will also become vested as of that date. Effective as of that same date, any LTIP Units that are not earned will automatically and without notice be forfeited without the payment of any consideration by us. For additional information on the 2018 OPP, please see Note 13 — Share-Based Compensation to our consolidated financial statements included in this Annual Report on Form 10-K.
(2) We have the Advisor Plan and the Individual Plan which we refer to together as the 2018 Equity Plan. The Advisor Plan is substantially similar to the Individual Plan, except with respect to the eligible participants. Participation in the Individual Plan is open to our directors, officers and employees (if we ever have employees), employees of the Advisor and its affiliates, employees of entities that provide services to us, directors of the Advisor or of entities that provide services to us, certain consultants to us and the Advisor and its affiliates or to entities that provide services to us. By contrast, participation in the Advisor Plan is only open to the Advisor. The number of shares that may be subject to awards under the 2018 Equity Plan, in the aggregate, is 10.0% of our outstanding shares on a fully diluted basis at any time. Shares subject to awards under the Individual Plan will reduce the number of shares available for awards under the Advisor Plan on a one-for-one basis and vice versa. As of December 31, 2018, we had 106,230,901 shares of our common stock issued and outstanding on a fully diluted basis, and 4,652,380 shares of our Class A common stock had been issued under or were subject to awards under the 2018 Equity Plan (including
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unearned LTIP Units). For additional information on the 2018 Equity Plan, please see Note 13 — Share-Based Compensation to our consolidated financial statements included in this Annual Report on Form 10-K.
Recent Sale of Unregistered Equity Securities
There were no recent sales of unregistered equity securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On October 10, 2018, we repurchased approximately 19,945 fractional shares of Class B-1 common stock in connection with the automatic conversion of all shares of Class B-1 common stock into shares of Class A common stock at a price of $14.79 per share, the closing price of Class A common stock on October 9, 2018. See Note 9 — Common Stock to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Item 6. Selected Financial Data.
The following selected financial data as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations” below.
Historical | ||||||||||||||||||||
December 31, | ||||||||||||||||||||
Balance sheet data (In thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Total real estate investments, at cost | $ | 3,484,797 | $ | 3,510,907 | $ | 2,024,387 | $ | 2,218,127 | $ | 2,218,127 | ||||||||||
Commercial mortgage loans, held for investment, net | — | — | 17,175 | 17,135 | — | |||||||||||||||
Assets held for sale | 44,519 | 4,682 | 137,602 | 56,884 | — | |||||||||||||||
Total assets | 3,262,547 | 3,296,650 | 2,064,459 | 2,237,088 | 2,224,805 | |||||||||||||||
Mortgage notes payable, net | 1,196,113 | 1,303,433 | 1,032,956 | 1,048,474 | 487,954 | |||||||||||||||
Credit Facility | 324,700 | 95,000 | — | — | 423,000 | |||||||||||||||
Total liabilities | 1,652,812 | 1,555,594 | 1,079,593 | 1,110,339 | 959,640 | |||||||||||||||
Total stockholders’ equity | 1,609,735 | 1,741,056 | 984,866 | 1,126,749 | 1,265,165 | |||||||||||||||
Historical | ||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
Operating data (In thousands, except share and per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Total revenues | $ | 291,207 | $ | 270,910 | $ | 177,668 | $ | 174,498 | $ | 158,380 | ||||||||||
Operating expenses | (294,528 | ) | (272,548 | ) | (178,287 | ) | (141,347 | ) | (135,477 | ) | ||||||||||
Gains on dispositions of real estate investments | 31,776 | 15,128 | 454 | — | — | |||||||||||||||
Operating income (loss) | 28,455 | 13,490 | (165 | ) | 33,151 | 22,903 | ||||||||||||||
Total other expenses, net | (65,926 | ) | (60,067 | ) | (54,090 | ) | (54,268 | ) | (24,900 | ) | ||||||||||
Net loss | (37,471 | ) | (46,577 | ) | (54,255 | ) | (21,117 | ) | (1,997 | ) | ||||||||||
Net loss attributable to non-controlling interests | 62 | 83 | — | — | — | |||||||||||||||
Net loss attributable to stockholders | $ | (37,409 | ) | $ | (46,494 | ) | $ | (54,255 | ) | $ | (21,117 | ) | $ | (1,997 | ) | |||||
Other data: | ||||||||||||||||||||
Cash flows provided by operating activities | $ | 95,037 | $ | 92,464 | $ | 73,369 | $ | 89,458 | $ | 99,811 | ||||||||||
Cash flows (used in) provided by investing activities | (188,215 | ) | (19,159 | ) | 37,830 | (61,718 | ) | (490,814 | ) | |||||||||||
Cash flows provided by (used in) by financing activities | 75,555 | (85,156 | ) | (110,481 | ) | 35,887 | 364,587 | |||||||||||||
Per share data: | ||||||||||||||||||||
Basic and diluted net loss per share | $ | (0.35 | ) | $ | (0.47 | ) | $ | (0.83 | ) | $ | (0.32 | ) | $ | (0.03 | ) | |||||
Common stock dividends declared per share | $ | 1.10 | $ | 1.47 | $ | 1.65 | $ | 1.65 | $ | 1.65 | ||||||||||
Basic and diluted weighted-average shares outstanding | 105,560,053 | 99,649,471 | 65,450,432 | 66,028,245 | 64,333,260 | |||||||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Forward-Looking Statements” elsewhere in this report for a description of these risks and uncertainties.
Overview
We are a diversified REIT focused on acquiring and managing a diversified portfolio of primarily service-oriented and traditional retail and distribution related commercial real estate properties in the U.S. We own a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants and, as a result of the Merger, a portfolio of retail properties consisting primarily of power centers and lifestyle centers. We intend to focus our future acquisitions primarily on net leased retail properties. As of December 31, 2018, we owned 626 properties, comprised of 19.1 million rentable square feet, which were 94.7% leased, including 593 of net leased commercial properties (554 which are retail properties), representing 64% of annualized rental income on straight-line basis, and 33 retail properties which were acquired in the Merger. As of December 31, 2017, we owned 505 of net leased commercial properties, representing 61% of annualized rental income on straight-line basis.
We are a Maryland corporation, incorporated on January 22, 2013, that elected to be taxed as a REIT beginning with the taxable year ended December 31, 2013. Substantially all of our business is conducted through the OP and its wholly-owned subsidiaries.
On the Listing Date, we listed shares of our common stock, which had been renamed “Class A common stock” in connection with a series of corporate actions effected earlier in July 2018, on the Nasdaq under the symbol “AFIN.” Related to the Listing, we incurred fees of $5.0 million for the year ended December 31, 2018 for financial advisory and other transaction related costs.
To effect the Listing, and to address the potential for selling pressure that may have existed at the outset of listing, we listed only shares of our Class A common stock, which represented approximately 50% of our outstanding shares of common stock, on Nasdaq on the Listing Date. Our two other classes of outstanding stock at the time of the Listing were Class B-1 common stock, which comprised approximately 25% of our outstanding shares of common stock at that time, and Class B-2 common stock, which comprised approximately 25% of our outstanding shares of common stock at that time. As of December 31, 2018, we had 106.2 million shares of common stock outstanding, comprised of approximately 80.0 million shares of Class A common stock and approximately 26.2 million shares of Class B-2 common stock. In accordance with their terms, all shares of Class B-1 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on October 10, 2018 and all shares of Class B-2 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on January 9, 2019. For additional information, see Note 9 — Common Stock and Note 16 — Subsequent Events to our consolidated financial statements included in this Annual Report on Form 10-K.
We have no employees. We have retained the Advisor to manage our affairs on a day-to-day basis. The Property Manager serves as our property manager. The Advisor and the Property Manager are under common control with AR Global, and these related parties of ours receive compensation, fees and expense reimbursements for services related to managing our business. Lincoln and its affiliates provide services to the Advisor in connection with our multi-tenant retail properties that are not net leased. The Advisor has informed us that the Advisor has agreed to pass through to Lincoln a portion of the fees and other expense reimbursements otherwise payable to the Advisor or its affiliates by us for services rendered by Lincoln. We are not a party to any contract with, and have no obligation to, Lincoln.
Completed Merger
American Realty Capital — Retail Centers of America, Inc. Merger
On February 16, 2017, we completed the Merger, representing (a) the merger of RCA with and into one of our wholly owned subsidiaries and (b) the merger of the RCA OP with and into the OP, with the OP as the surviving entity. RCA was sponsored and advised by affiliates of the Advisor. We issued 38.2 million shares of our common stock and paid $94.5 million in cash as consideration to complete the Merger. For additional information on the Merger, see Note 2 — Merger Transaction to our consolidated financial statements included in this Annual Report on Form 10-K.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
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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. Because 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 rents receivable that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease is executed. We defer the revenue related to lease payments received from tenants in advance of their due dates.
We own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant’s sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, we defer the recognition of contingent rental income, until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. Contingent rental income is included in rental income on the consolidated statements of operations and comprehensive loss.
We continually review receivables related to rent and unbilled rents receivable 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 and comprehensive loss.
Cost recoveries from tenants are included in operating expense reimbursements in our consolidated statements of operations and comprehensive loss in the period the related costs are incurred, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In both a business combination and an asset acquisition, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests in a business combination are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates. In a business combination, the difference between the purchase price and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain.
In allocating non-controlling interests in a business combination, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations, prepared by independent valuation firms. We also consider information and other factors including: market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental rates, tenant credit profile, store profitability and the importance of the location of the real estate to the operations of the tenant’s business.
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Real estate investments that are intended to be sold are designated as “held for sale” on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on our operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all applicable periods.
Depreciation and Amortization
We are required to make subjective assessments as to the useful lives of the components of our real estate investments for purposes of determining the amount of depreciation to record on an annual basis. These assessments have a direct impact on our results from operations because if we were to shorten the expected useful lives of our real estate investments, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower earnings on an annual basis.
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to the results of operations.
Goodwill
Goodwill, which is not amortized, represents the difference between the purchase price and the fair value of identifiable net assets acquired in a business combination. We review goodwill for impairment indicators throughout the year and test for impairment annually in the fourth quarter. Impairment indicators may be an event or circumstance that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For 2018, we used a qualitative assessment approach to determine whether it is more likely than not that the fair value of the reporting unit, which contains goodwill, is less than its carrying value. Based on our assessment we determined that goodwill was not impaired as of December 31, 2018, and no further analysis was required.
Purchase Price Allocation
We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired, including those acquired in the Merger, 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 and the value of in-place leases as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, 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 24 months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.
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Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below-market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
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 in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Recently Issued Accounting Pronouncements
See Note 3 — Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements to the consolidated financial statements in this Annual Report on Form 10-K for further discussion.
Results of Operations
Comparison of the Year Ended December 31, 2018 to 2017
There were 388 properties that we owned for the entirety of the years ended December 31, 2018 and 2017 (our “2017-2018 Same Store”), comprised of approximately 10.6 million rentable square feet that were 99.4% leased as of December 31, 2018. On February 16, 2017, we acquired 35 retail properties in the Merger (the “Merger Acquisitions”), comprised of 7.5 million rentable square feet that were 87.0% leased as of December 31, 2018. Additionally, during 2018 and 2017, excluding properties acquired in the Merger, we acquired 205 properties (our “Acquisitions Since January 1, 2017”), comprised of 1.3 million rentable square feet that were 100.0% leased as of December 31, 2018. During 2018 and 2017, we sold 69 properties, including two properties acquired in the Merger (our “Disposals Since January 1, 2017”), comprised of approximately 3.0 million rentable square feet.
The following table summarizes our leasing activity during the year ended December 31, 2018:
Year Ended December 31, 2018 | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||
Number of Leases | Rentable Square Feet | Annualized SLR (1) prior to Lease Execution/Renewal | Annualized SLR (1) after Lease Execution/Renewal | Costs to execute leases | Costs to execute leases - per square foot | |||||||||||||||||
New leases (2) | 30 | 441,996 | $ | — | $ | 4,283 | $ | 2,075 | $ | 4.69 | ||||||||||||
Lease renewals/amendments (2) | 89 | 807,024 | 12,581 | 12,081 | 625 | 0.77 | ||||||||||||||||
Lease terminations (3) | (15 | ) | 158,837 | 1,746 | — | — | — | |||||||||||||||
(1) | Annualized rental income on a straight-line basis. |
(2) | New leases reflect leases in which a new tenant took possession of the space during the year ended December 31, 2018, excluding new property acquisitions. Lease renewals/amendments reflect leases in which an existing tenant executed terms to extend the term or change the rental terms of the lease during the year ended December 31, 2018. |
(3) | Represents leases that were terminated prior to their contractual lease expiration dates. |
Net Loss
Net loss attributable to stockholders decreased $9.1 million to $37.4 million for the year ended December 31, 2018 from $46.5 million for the year ended December 31, 2017. The change in net loss attributable to stockholders is discussed in detail for each line item of the consolidated statements of operations and comprehensive loss in the sections that follow.
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Property Results of Operations
Same Store | Acquisitions | Disposals | Merger | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | $ | 2018 | 2017 | $ | 2018 | 2017 | $ | 2018 | 2017 | $ | 2018 | 2017 | $ | |||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 125,066 | $ | 126,212 | $ | (1,146 | ) | $ | 20,059 | $ | 5,626 | $ | 14,433 | $ | 10,435 | $ | 21,776 | $ | (11,341 | ) | 100,597 | $ | 86,650 | $ | 13,947 | $ | 256,157 | $ | 240,264 | $ | 15,893 | ||||||||||||||||||||||||||||
Operating Expense Re-imbursements | 2,745 | 2,624 | 121 | 605 | 138 | 467 | 1,120 | 2,643 | (1,523 | ) | 30,580 | 24,155 | 6,425 | 35,050 | 29,560 | 5,490 | |||||||||||||||||||||||||||||||||||||||||||
Less: Property operating expenses | 4,924 | 3,975 | 949 | 736 | 152 | 584 | 2,733 | 2,563 | 170 | 45,675 | 35,904 | 9,771 | 54,068 | 42,594 | 11,474 | ||||||||||||||||||||||||||||||||||||||||||||
NOI | $ | 122,887 | $ | 124,861 | $ | (1,974 | ) | $ | 19,928 | $ | 5,612 | $ | 14,316 | $ | 8,822 | $ | 21,856 | $ | (13,034 | ) | $ | 85,502 | $ | 74,901 | $ | 10,601 | $ | 237,139 | $ | 227,230 | $ | 9,909 | |||||||||||||||||||||||||||
Net operating income (“NOI”) is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to rental income and operating expense reimbursements less property operating expense. NOI excludes all other financial statement amounts included in net loss attributable to stockholders. We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See “Non-GAAP Financial Measures” included elsewhere in this Annual Report for additional disclosure and a reconciliation to our net loss attributable to stockholders.
Rental income increased $15.9 million to $256.2 million for the year ended December 31, 2018, compared to $240.3 million for the year ended December 31, 2017. This increase in rental income was primarily due to $13.9 million of incremental rental income from the Merger Acquisitions, as well as $14.4 million of incremental rental income from our Acquisitions Since January 1, 2017. These increases were partially offset by a decrease in rental income of $11.3 million from our Disposals Since January 1, 2017. Our 2017-2018 Same Store rental income decreased by $1.1 million primarily due to certain SunTrust leases that expired on December 31, 2017.
Property operating expenses primarily consist of the costs associated with maintaining our properties including real estate taxes, utilities, and repairs and maintenance. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. As such, operating expense reimbursement income and property operating expenses are generally linked. Operating expense reimbursement revenue increased $5.5 million to $35.1 million for the year ended December 31, 2018, compared to $29.6 million for the year ended December 31, 2017. This increase was primarily driven by a $6.4 million increase in operating expense reimbursements from the Merger Acquisitions, as well as increases in our 2017-2018 Same Store operating expense reimbursements and our Acquisitions Since January 1, 2017 of $0.1 million and $0.5 million, respectively. These increases were partially offset by a decrease in operating expense reimbursements of $1.5 million from our Disposals Since January 1, 2017 and with respect to our 2017-2018 Same Store, the cessation of operating expense reimbursements from certain SunTrust leases that expired on December 31, 2017.
Property operating expense increased $11.5 million to $54.1 million for the year ended December 31, 2018, compared to $42.6 million for the year ended December 31, 2017. This increase was primarily driven by an increase in property operating expense of $9.8 million from the Merger Acquisitions, as well as increases in our 2017-2018 Same Store property operating expense and our Acquisitions Since January 1, 2017 property operating expense of $0.9 million and $0.6 million, respectively.
Asset Management Fees to Related Party
Asset management fees paid to the Advisor increased $2.2 million to $23.1 million for the year ended December 31, 2018, compared to $20.9 million for the year ended December 31, 2017. Prior to the effective time of the Merger in February 2017, we paid the Advisor (i) a base management fee with a fixed portion of $1.5 million payable monthly and a variable portion, if applicable, payable quarterly in arrears, and (ii) a variable management fee payable only if we achieve a quarterly Core Earnings (as defined in the advisory agreement) per share threshold, payable quarterly in arrears. Following the effective time of the Merger, the fixed portion of the base management fee increased from $18.0 million annually to (i) $21.0 million annually for the first year following the effective time of the Merger; (ii) $22.5 million annually for the second year following the effective time of the Merger; and (iii) $24.0 million annually for the remainder of the term. We did not pay any variable management fees during the year ended December 31, 2018 and 2017. Please see Note 11 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for more information on fees incurred from the Advisor.
Impairment Charges
We incurred $21.1 million of impairment charges during the year ended December 31, 2018. This amount is comprised of impairment charges of $11.0 million, which were recorded upon reclassification of 25 properties (20 leased to SunTrust) to assets
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held for sale to adjust the properties to their fair value less estimated cost of disposal and impairment charges of $10.1 million, related to 12 properties (9 leased to SunTrust) classified as held for use, as the carrying amount of the long-lived assets associated with these properties was greater than our estimate of their fair value based on an executed LOI and PSA. We incurred $25.0 million of impairment charges during the year ended December 31, 2017, $4.5 million of which related to properties sold or reclassified as held for sale, as the carrying amount of the long-lived assets associated with these properties was greater than our estimate of their fair value less estimated costs to sell. The remaining $20.5 million of impairment charges were taken on held for use properties we sold during the year ended December 31, 2017 or that we owned as of December 31, 2017. See Note 4 — Real Estate Investments to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Acquisition and Transaction Related Expense
Acquisition and transaction related expense decreased $3.8 million to $5.6 million for the year ended December 31, 2018, compared to $9.4 million for the year ended December 31, 2017. Effective January 1, 2018, acquisition costs related to our asset acquisitions are capitalized rather than expensed (see Note 3 — Summary of Significant Accounting Policies — “Recently Issued Accounting Pronouncements” to our consolidated financial statements included in this Annual Report on Form 10-K for more information). Acquisition and transaction related expenses for the year ended December 31, 2018 were primarily related to prepayment charges on mortgages related to our disposition of 44 properties. Acquisition and transaction related expenses for the year ended December 31, 2017 were primarily due to costs incurred in connection with the Merger. These costs included fees to the special committee’s financial advisor and legal counsel of $4.1 million, fees to transfer RCA’s mortgages and credit facility of $0.8 million and legal and other fees related to the Merger of $0.5 million. Additionally, we incurred $4.0 million of costs related to our acquisition of 75 properties (excluding properties acquired in the Merger) during the year ended December 31, 2017.
Listing Fees
During the year ended December 31, 2018, we paid approximately $5.0 million in fees associated with the Listing. Of this amount, approximately $4.0 million was paid to BMO Capital Markets Corp., our financial advisor for the Listing.
Vesting and Conversion of Class B Units
During the year ended December 31, 2018, we recorded a non-cash expense of $15.8 million related to the vesting and conversion of units of limited partnership of the OP designated as “Class B Units” (“Class B Units”). The vesting conditions relating to the Class B Units, which were previously issued to the Advisor, were fully satisfied upon completion of the Listing. The Class B Units were then converted into an equal number of Class A Units and redeemed for an equal number of newly issued shares of Class A common stock. For additional details on the Class B Units, see Note 11 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K.
Share-Based Compensation — Multi-Year Outperformance Agreement
During the year ended December 31, 2018, we recorded non-cash share based compensation expense of $4.8 million resulting from the 2018 OPP. For additional details on the 2018 OPP, see Note 13 — Share-Based Compensation to our consolidated financial statements included in this Annual Report on Form 10-K.
General and Administrative Expense
General and administrative expense increased $4.5 million to $25.1 million for the year ended December 31, 2018, compared to $20.6 million for the year ended December 31, 2017. The increase was due to higher legal fees, transfer agent fees and general and administrative expense reimbursements to our Advisor, which increased $0.8 million to $9.3 million for the year ended December 31, 2018, compared to $8.5 million for the year ended December 31, 2017. These increases were partially offset by lower consulting fees and lower expense related to distributions on Class B Units, which vested and converted and were redeemed for shares of Class A common stock in connection with the Listing.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $14.1 million to $139.9 million for the year ended December 31, 2018, compared to $154.0 million for the year ended December 31, 2017. Depreciation and amortization expense was impacted by decreases of $8.7 million from our Disposals Since January 1, 2017 and $10.6 million from our 2017-2018 Same Store properties, partially offset by increases of $0.2 million from the Merger Acquisitions and $5.0 million related to our Acquisitions Since January 1, 2017. The decrease in depreciation expense from our 2017-2018 Same Store properties was primarily due to the expiration of in-place lease intangible assets in December 2017 and March 2018 related to certain properties leased to SunTrust.
The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.
Interest Expense
Interest expense increased $6.5 million to $66.8 million for the year ended December 31, 2018, compared to $60.3 million for the year ended December 31, 2017. This increase is primarily related to higher average mortgage notes payable in 2018,
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including debt assumed in the Merger on February 16, 2017, and higher weighted-average interest rates on the Credit Facility when compared to our prior revolving unsecured corporate credit facility (the “Prior Credit Facility”), which was repaid with the proceeds from the Credit Facility in May 2018. As of December 31, 2018 and 2017, the weighted-average interest rates on our mortgage notes payable were 4.60% and 4.68%, respectively and the weighted-average interest rate on our Credit Facility and our Prior Credit Facility was 4.10% and 2.48%, respectively.
Year Ended December 31, | ||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||
(Dollar amounts in thousands) | Weighted-Average Carrying Value | Interest Expense | Weighted-Average Interest Rate | Weighted-Average Carrying Value | Interest Expense | Weighted-Average Interest Rate | ||||||||||||||||
Mortgage notes payable | $ | 1,254,541 | $ | 58,274 | 4.60 | % | $ | 1,107,683 | $ | 52,377 | 4.68 | % | ||||||||||
Credit Facility/Prior Credit Facility | $ | 150,864 | 6,729 | 4.10 | % | $ | 194,154 | 5,462 | 2.48 | % | ||||||||||||
Amortization of deferred financing costs | 5,648 | 6,693 | ||||||||||||||||||||
Amortization of mortgage premiums | (3,790 | ) | (4,096 | ) | ||||||||||||||||||
Gain on derivative instruments | (72 | ) | (131 | ) | ||||||||||||||||||
Interest Expense | $ | 66,789 | $ | 60,305 | ||||||||||||||||||
Gain on Sale of Real Estate Investments
During the year ended December 31, 2018, we sold 44 properties which resulted in gains on sale. These properties sold for an aggregate contract price of $161.5 million, resulting in aggregate gains on sale of $31.8 million.
During the year ended December 31, 2017, we sold three properties leased to Merrill Lynch, Pierce, Fenner & Smith for a contract price of $145.5 million, net of closing costs. These properties had a net carrying value at the date of disposition of $140.3 million, resulting in a gain on sale of $5.2 million. Additionally, we sold three properties leased to C&S Wholesale Grocer for an aggregate contract price of $120.2 million, net of closing costs, resulting in a gain on sale of $8.6 million. We also sold 18 properties leased to SunTrust for an aggregate contract price of $14.6 million resulting in a gain on sale of $0.9 million and we sold one property leased to Stop & Shop for a contract price of $7.9 million, resulting in a gain on sale of $0.2 million.
For additional information on real estate sales, see Note 4 — Real Estate Investments to our consolidated financial statements included in this Annual Report on Form 10-K.
Comparison of the Year Ended December 31, 2017 to 2016
There were 426 properties that we owned for the entirety of the years ended December 31, 2017 and 2016 (our “2016-2017 Same Store”), comprised of 11.0 million rentable square feet that were 99.9% leased. We acquired 35 retail properties in the Merger (the “Merger Acquisitions”), comprised of 7.5 million rentable square feet that were 87.6% leased as of December 31, 2017. Additionally, during 2016 and 2017, excluding properties acquired in the Merger, we acquired 79 properties (our “Acquisitions Since January 1, 2016”), comprised of 0.9 million rentable square feet that were 100.0% leased as of December 31, 2017. During 2016 and 2017, we sold 37 properties (our “Disposals Since January 1, 2016”), comprised of 2.1 million rentable square feet.
The following table summarizes our leasing activity during the year ended December 31, 2017:
Year Ended December 31, 2017 | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||
Number of Leases | Rentable Square Feet | Annualized SLR (1) prior to Lease Execution/Renewal | Annualized SLR (1) after Lease Execution/Renewal | Costs to execute leases | Costs to execute leases - per square foot | |||||||||||||||||
New leases (2) | 12 | 58,651 | $ | — | $ | 925 | $ | 585 | $ | 9.97 | ||||||||||||
Lease renewals/amendments (2) | 69 | 1,527,746 | 28,727 | 27,465 | 7,397 | 4.84 | ||||||||||||||||
Lease terminations (3) | (9 | ) | 240,038 | 3,113 | — | — | — | |||||||||||||||
(1) | Annualized rental income on a straight-line basis. |
(2) | New leases reflect leases in which a new tenant took possession of the space during the year ended December 31, 2017, excluding new property acquisitions. Lease renewals/amendments reflect leases in which an existing tenant executed terms to extend the term or change the rental terms of the lease during the year ended December 31, 2017. |
(3) | Represents leases that were terminated prior to their contractual lease expiration dates. |
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Lease renewals/amendments in the table above includes an amendment to our lease with Sanofi US, which extended its remaining lease term from nine years as of June 30, 2017 to 15 years as of December 31, 2017. In connection with the amendment, we paid a $6.1 million leasing commission, which has been capitalized to deferred costs, net on the accompanying consolidated balance sheet as of December 31, 2017 and will be amortized over the term of the lease. As of December 31, 2017, Sanofi US was our second largest tenant, representing 7.1% of total annualized rental income on a straight-line basis.
Net Loss
Net loss attributable to stockholders decreased $7.8 million to $46.5 million for the year ended December 31, 2017 from $54.3 million for the year ended December 31, 2016. The change in net loss attributable to stockholders is discussed in detail for each line item of the consolidated statements of operations and comprehensive loss in the sections that follow.
Property Results of Operations
Same Store | Acquisitions | Disposals | Merger | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | $ | 2017 | 2016 | $ | 2017 | 2016 | $ | 2017 | 2016 | $ | 2017 | 2016 | $ | |||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 137,853 | $ | 138,230 | $ | (377 | ) | $ | 5,626 | $ | — | $ | 5,626 | $ | 6,447 | $ | 26,156 | $ | (19,709 | ) | $ | 90,338 | $ | — | $ | 90,338 | $ | 240,264 | $ | 164,386 | $ | 75,878 | |||||||||||||||||||||||||||
Operating Expense Re-imbursements | 2,807 | 2,878 | (71 | ) | 138 | — | 138 | 1,424 | 9,354 | (7,930 | ) | 25,191 | $ | — | 25,191 | 29,560 | 12,232 | 17,328 | |||||||||||||||||||||||||||||||||||||||||
Less: Property operating | 4,435 | 4,216 | 219 | 152 | — | 152 | 642 | 9,398 | (8,756 | ) | 37,365 | — | 37,365 | 42,594 | 13,614 | 28,980 | |||||||||||||||||||||||||||||||||||||||||||
NOI | $ | 136,225 | $ | 136,892 | $ | (667 | ) | $ | 5,612 | $ | — | $ | 5,612 | $ | 7,229 | $ | 26,112 | $ | (18,883 | ) | $ | 78,164 | $ | — | $ | 78,164 | $ | 227,230 | $ | 163,004 | $ | 64,226 | |||||||||||||||||||||||||||
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to rental income and operating expense reimbursements less property operating expense. NOI excludes all other financial statement amounts included in net loss attributable to stockholders. We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See “Non-GAAP Financial Measures” included elsewhere in this Annual Report for additional disclosure and a reconciliation to our net loss attributable to stockholders.
Rental income increased $75.9 million to $240.3 million for the year ended December 31, 2017, compared to $164.4 million for the year ended December 31, 2016. This increase in rental income was primarily due to $90.3 million of incremental income from the Merger Acquisitions, as well as a $5.6 million of incremental rental income from our other acquisitions since January 1, 2016. These increases were partially offset by a decrease in rental income of $19.7 million from our disposals since January 1, 2016.
Property operating expenses primarily consist of the costs associated with maintaining our properties including real estate taxes, utilities, and repairs and maintenance. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. As such, operating expense reimbursement income and property operating expenses are generally linked. Operating expense reimbursement revenue increased $17.3 million to $29.6 million for the year ended December 31, 2017, compared to $12.2 million for the year ended December 31, 2016. This increase was primarily driven by $25.2 million of operating expense reimbursements from the Merger Acquisitions. This increase was partially offset by a decrease in operating expense reimbursements of $7.9 million from our disposals since January 1, 2016. Our year-over-year Same Store operating expense reimbursements remained relatively consistent at $2.8 million.
Property operating expense increased $29.0 million to $42.6 million for the year ended December 31, 2017, compared to $13.6 million for the year ended December 31, 2016. This increase was primarily driven by property operating expense of $37.4 million from the Merger Acquisitions, partially offset by a decrease of $8.8 million from our Disposals Since January 1, 2016. Our year-over-year Same Store property operating expense remained relatively consistent at $4.0 million.
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Other Results of Operations
Interest Income from Debt Investments
Interest income from debt investments was relatively flat for the year ended December 31, 2017, when compared to the year ended December 31, 2016. Interest income from debt investments related to our commercial real estate loan investments. For the year ended December 31, 2017, the average carrying value of our commercial mortgage loans was $15.8 million, with a weighted-average yield of 6.43%. For the year ended December 31, 2016, we had commercial mortgage loans with a weighted-average carrying value of $21.5 million and a weighted-average yield of 4.57%.
Asset Management Fees to Related Party
Asset management fees paid to the Advisor increased $2.9 million to $20.9 million for the year ended December 31, 2017, compared to $18.0 million for the year ended December 31, 2016. Prior to the effective time of the Merger, we paid our Advisor i) a base management fee with a fixed portion of $1.5 million payable monthly and a variable portion, if applicable, payable quarterly in arrears, and ii) a variable management fee, if applicable, payable quarterly in arrears. Following the Effective Time of the Merger, the fixed portion of the base management fee increased from $18.0 million annually to (i) $21.0 million annually for the first year following the Effective Time; (ii) $22.5 million annually for the second year following the Effective Time; and (iii) $24.0 million annually for the remainder of the term. We did not incur any variable management fees during the years ended December 31, 2017 and 2016. Please see Note 11 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for more information on fees incurred from the Advisor.
Impairment Charges
We incurred $25.0 million of impairment charges during the year ended December 31, 2017, $4.5 million of which related to properties sold or reclassified as held for sale, as the carrying amount of the long-lived assets associated with these properties was greater than our estimate of their fair value less estimated costs to sell.
The remaining $20.5 million of impairment charges were taken on held for use properties we sold during the year ended December 31, 2017 or that we owned as of December 31, 2017. Most of these properties are operated by SunTrust and had lease terms set to expire between December 31, 2017 and March 31, 2018. As of December 31, 2017, 14 of these SunTrust properties were either being marketed for sale or were subject to a LOI or a PSA. There can be no guarantee that these properties will be sold on the terms contemplated by any applicable LOI or PSA, or at all. See Note 4 — Real Estate Investments to our consolidated financial statements included in this Annual Report on Form 10-K for further details. We determined, based on LOIs or PSAs entered into, that the carrying value of these properties exceeded their estimated fair values as of December 31, 2017. We incurred $27.3 million of impairment charges during the year ended December 31, 2016.
Acquisition and Transaction Related Expense
Acquisition and transaction related expense increased $2.3 million to $9.4 million for the year ended December 31, 2017, compared to $7.1 million for the year ended December 31, 2016. Acquisition and transaction related expenses for the year ended December 31, 2017 were primarily in connection with the Merger. These costs include fees to the special committee’s financial advisor and legal counsel of $4.1 million, fees to transfer RCA’s mortgages and credit facility of $0.8 million and legal and other fees related to the Merger of $0.5 million. Additionally, we incurred $4.0 million of costs related to our acquisition of 75 properties (excluding properties acquired in the Merger) during the year ended December 31, 2017. Acquisition and transaction related expenses for the year ended December 31, 2016 were primarily in connection with the Merger.
General and Administrative Expense
General and administrative expense increased $9.4 million to $20.6 million for the year ended December 31, 2017, compared to $11.2 million for year ended December 31, 2016. This increase primarily related to an increase in the amount of expenses incurred by the Advisor and its affiliates that we are required to reimburse resulting from incremental personnel costs from the Merger, as well as an increase in legal and audit fees.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $52.9 million to $154.0 million for the year ended December 31, 2017, compared to $101.1 million for the year ended December 31, 2016. We incurred depreciation and amortization expense of $65.4 million for the approximately 10.5 months that we owned the properties acquired from RCA in the Merger and $2.3 million on our Acquisitions since January 1, 2016. Additionally, depreciation and amortization expense decreased $14.3 million on our Disposals since January 1, 2016. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.
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Interest Expense
Interest expense increased $6.1 million to $60.3 million for the year ended December 31, 2017, compared to $54.3 million for the year ended December 31, 2016. This increase is primarily related to the debt we assumed from RCA in the Merger. In connection with the Merger and as of the date of the closing of the Merger, we assumed mortgage notes payable with a total principal balance of $127.7 million, as well as the Prior Credit Facility with an outstanding balance of $304.0 million. The Prior Credit Facility had an outstanding balance as of December 31, 2017 of $95 million. Additionally, we took out a $24.0 million mortgage during the third quarter of 2017 encumbering 23 Bob Evans properties. This increase was partially offset by the repayment of an $82.3 million mortgage secured by certain properties operated by C&S Wholesale Grocer that we sold during the quarter of 2017. During the year ended December 31, 2017, the weighted-average interest rate on the Prior Credit Facility and total mortgage notes payable was 4.68% and 2.48%, respectively, as compared to a weighted-average interest rate of 4.75% on our mortgage debt during the year ended December 31, 2016.
Year Ended December 31, | ||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||
(Dollar amounts in thousands) | Weighted-Average Carrying Value | Interest Expense | Weighted-Average Interest Rate | Weighted-Average Carrying Value | Interest Expense | Weighted-Average Interest Rate | ||||||||||||||||
Mortgage notes payable | $ | 1,107,683 | $ | 52,377 | 4.68 | % | $ | 1,045,695 | $ | 49,814 | 4.75 | % | ||||||||||
Prior Credit Facility | $ | 194,154 | 5,462 | 2.48 | % | $ | — | — | — | % | ||||||||||||
Amortization of deferred financing costs | 6,693 | 8,650 | ||||||||||||||||||||
Amortization of mortgage premiums | (4,096 | ) | (4,211 | ) | ||||||||||||||||||
Gain on derivative instruments | (131 | ) | — | |||||||||||||||||||
Interest Expense | $ | 60,305 | $ | 54,253 | ||||||||||||||||||
Gain on Sale of Real Estate Investments
During the year ended December 31, 2017, we sold three properties leased to Merrill Lynch, Pierce, Fenner & Smith for a contract price of $145.5 million, net of closing costs. These properties had a net carrying value at the date of disposition of $140.3 million, resulting in a gain on sale of $5.2 million. Additionally, we sold three properties leased to C&S Wholesale Grocer for an aggregate contract price of $120.2 million, net of closing costs, resulting in a gain on sale of $8.6 million. We also sold 18 properties leased to SunTrust for an aggregate contract price of $14.6 million resulting in a gain on sale of $0.9 million and we sold one property leased to Stop & Shop for a contract price of $7.9 million, resulting in a gain on sale of $0.2 million. The gain on sale of real estate investments of $0.5 million for the year ended December 31, 2016 resulted from the sale of eight single-tenant net lease properties operated by SunTrust with an aggregate cost basis of $27.8 million for an aggregate contract price of $28.3 million, inclusive of closing costs.
Cash Flows from Operating Activities
The level of cash flows provided by or used in operating activities is affected by the leasing activity, including leasing activity due to acquisitions and dispositions, restricted cash we are required to maintain, the timing of interest payments, the receipt of scheduled rent payments and the level of property operating expenses.
Cash flows provided by operating activities of $95.0 million during the year ended December 31, 2018 included a net loss of $37.5 million, adjusted for non-cash items of $140.8 million, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, amortization of mortgage premiums on borrowings, share-based compensation, vesting and conversion of Class B Units, mark-to-market adjustments, gain on sale of real estate investments and impairment charges. In addition, the increase in straight-line rent receivable of $9.5 million and the increase in prepaid expenses and other assets of $4.1 million were partially offset by an increase in accounts payable and accrued expenses of $1.7 million and an increase in deferred rent and other liabilities of $3.6 million.
Cash flows provided by operating activities of $92.5 million during the year ended December 31, 2017 included a net loss of $46.6 million, adjusted for non-cash items of $161.3 million, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, impairment charges, share-based compensation, amortization of mortgage premiums, discount accretion and premium amortization on investments, net and gain on sale of real estate investments. These operating cash inflows were also impacted by a decrease in prepaid expenses and other assets of $2.6 million, partially offset by an increase in straight-line rent receivable of $7.7 million, a decrease in accounts payable and accrued expenses of $7.8 million and a decrease in deferred rent and other liabilities of $9.4 million.
Cash flows provided by operating activities of $73.4 million during the year ended December 31, 2016 included a net loss adjusted for non-cash items of $78.7 million (net loss of $54.3 million adjusted for non-cash items, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, impairment charges and share-based compensation, partially offset by amortization of mortgage premiums, discount accretion and premium amortization on investments, net and gain on sale of real estate investments of $133.0 million), an increase in accounts payable and accrued expenses of $3.2 million and an increase in deferred rent and other liabilities of $0.4 million. These operating cash flows were partially offset by an increase in straight-line rent receivable of $6.8 million and increase in prepaid expenses and other assets of $2.1 million.
Cash Flows from Investing Activities
The net cash used in investing activities during the year ended December 31, 2018 of $188.2 million consisted of cash paid for investments in real estate and other assets of $241.8 million, capital expenditures of $10.4 million and deposits for real estate investments of $2.5 million, partially offset by cash received from the sale of real estate investments of $66.5 million.
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The net cash used in investing activities during the year ended December 31, 2017 of $19.2 million consisted of cash paid to acquire RCA in the Merger of $94.5 million, amounts invested in real estate and other assets of $149.3 million, deposits for real estate acquisitions of $0.6 million and capital expenditures of $8.9 million, partially offset by the sale of real estate investments of $190.8 million, cash acquired in the Merger of $26.2 million and proceeds from the settlement of CMBS of $17.2 million.
The net cash provided by investing activities during the year ended December 31, 2016 of $37.8 million was generated from the proceeds from the sale of commercial mortgage loans of $56.9 million and the sale of real estate investments of $15.2 million, partially offset by amounts invested in real estate and other assets of $34.2 million.
Cash Flows from Financing Activities
The net provided by financing activities of $75.6 million during the year ended December 31, 2018 consisted primarily of proceeds from mortgage notes payable of $29.9 million and proceeds from the Credit Facility of $324.7 million, partially offset by payments of mortgage notes payable of $47.2 million, payments on our Prior Credit Facility of $95.0 million, payments of deferred financing costs of $7.0 million, prepayment charges on mortgages of $4.2 million, common stock repurchases of $20.5 million and cash dividends of $104.8 million.
The net cash used in financing activities of $85.2 million during the year ended December 31, 2017 consisted primarily of payments on the Prior Credit Facility of $294.0 million, common stock repurchases of $29.1 million, cash dividends of $87.7 million, payments of deferred financing costs of $4.9 million and payments of mortgage notes payable of $21.8 million. These financing cash outflows were partially offset by proceeds from the Prior Credit Facility of $85.0 million and proceeds from mortgage notes payable of $267.4 million.
The net cash used in financing activities of $110.5 million during the year ended December 31, 2016 consisted primarily of cash dividends of $87.5 million, common stock repurchases of $16.3 million, payments of deferred financing costs of $5.7 million and payments of mortgage notes payable of $1.0 million.
Liquidity and Capital Resources
We expect to fund our future short-term operating liquidity requirements through a combination of cash on hand, net cash provided by our property operations, proceeds from shares issued through the DRIP and proceeds from our Credit Facility. We may also generate additional liquidity through property dispositions and, to the extent available, secured or unsecured borrowings and offerings of debt or equity securities. As of December 31, 2018 and 2017, we had cash and cash equivalents of $91.5 million and $107.7 million, respectively. Our principal demands for funds are for payment of our operating and administrative expenses, property acquisitions, capital expenditures, debt service obligations, cash dividends to our stockholders and share repurchases, if any, as authorized by our board of directors.
Mortgage Notes Payable and Credit Facility
As of December 31, 2018, we had $1.2 billion of mortgage notes payable, net outstanding and $324.7 million outstanding under the Credit Facility, with a net debt to gross asset value ratio of 38.6%. Net debt excludes the effect of deferred financing costs, net and mortgage premiums, net and includes cash and cash equivalents. Gross asset value is defined as total assets plus accumulated depreciation and amortization. As of December 31, 2018, the weighted-average interest rate on the mortgage notes payable and Credit Facility was 4.6% and 4.1%, respectively. The Prior Credit Facility was scheduled to mature on May 1, 2018. On April 26, 2018, we repaid the Prior Credit Facility in full and entered into the Credit Facility.
During the quarter ended March 31, 2018, we entered into a $29.9 million mortgage loan agreement with the Bank of Texas. The mortgage loan has a stated maturity in March 2025 and an effective interest rate of 5.16%. As of December 31, 2018 the mortgage loan was secured by mortgage interests in 39 of our properties. Proceeds from the mortgage loan were used to repay approximately $25.0 million under the Prior Credit Facility.
As of December 31, 2018, we had $3.5 billion in gross real estate assets and we had pledged approximately $2.3 billion in gross real estate investments as collateral for our mortgage notes payable. In addition, approximately $1.1 billion in gross real estate investments were included in the unencumbered asset pool comprising the borrowing base under the Credit Facility. Therefore, this real estate is only available to serve as collateral or satisfy other debts and obligations if it is first removed from the borrowing base under the Credit Facility.
Credit Facility - Terms and Capacity
On February 16, 2017, we assumed the $325.0 million Prior Credit Facility in connection with the Merger. On April 26, 2018, we repaid the Prior Credit Facility in full and entered into the Credit Facility with BMO Bank, as administrative agent, Citizens Bank, N.A. and SunTrust Robinson Humphrey, Inc., as joint lead arrangers, and the other lenders from time to time party thereto. Affiliates of SunTrust Robinson Humphrey, Inc. are tenants at several of our properties. The Credit Facility initially provided for commitments for aggregate revolving loan borrowings of up to $415.0 million. In September 2018, the lenders under the Credit Facility increased the aggregate total commitments under the Credit Facility by $125.0 million, bringing total commitments to $540.0 million.
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The Credit Facility includes an uncommitted “accordion feature” whereby, upon the request of the OP, but at the sole discretion of the participating lenders, the commitments under the Credit Facility may be increased by up to an additional $500.0 million, subject to obtaining commitments from new lenders or additional commitments from participating lenders and certain customary conditions. As of December 31, 2018, and as discussed above, we increased our commitments through this accordion feature by $125.0 million, leaving $375.0 million of potential increase remaining.
The amount available for future borrowings under the Credit Facility is based on the lesser of (1) a percentage of the value of the pool of eligible unencumbered real estate assets comprising the borrowing base, and (2) a maximum amount permitted to maintain a minimum debt service coverage ratio with respect to the borrowing base, in each case, as of the determination date. As of December 31, 2018, we had a total borrowing capacity under the Credit Facility of $461.5 million based on the value of the borrowing base under the Credit Facility. Of this amount, $324.7 million was outstanding under the Credit Facility as of December 31, 2018 and $136.8 million remained available for future borrowings.
The Credit Facility is interest-only. Upon the Listing, the maturity date of the Credit Facility was automatically extended from April 26, 2020 to April 26, 2022. We also have a one-time right, subject to customary conditions, to extend the maturity date for an additional term of one year to April 26, 2023. Borrowings under the Credit Facility bear interest at either (i) the Base Rate (as defined in the Credit Facility) plus an applicable spread ranging from 0.60% to 1.20%, depending on our consolidated leverage ratio, or (ii) LIBOR plus an applicable spread ranging from 1.60% to 2.20%, depending on our consolidated leverage ratio.
Acquisitions and Dispositions
One of our primary uses of cash during the year ended December 31, 2018 has been for acquisitions of properties.
We acquired 130 properties during the year ended December 31, 2018 for $241.8 million, including capitalized acquisition costs. These acquisitions were funded through a combination of mortgage debt, draws on the Prior Credit Facility and the Credit Facility (see Credit Facility discussion above), proceeds from dispositions of properties (see below) and available cash on hand.
During the year ended December 31, 2018, we closed on the sale of 44 properties, for an aggregate contract price of $161.5 million, excluding disposition related costs. In connection with these sales, we repaid approximately $90.0 million of mortgage debt. After all disposition related costs, net proceeds from these dispositions, classified as investing cash flows, were $66.5 million which were redeployed in line with our investing strategy.
Subsequent to December 31, 2018, we purchased an additional 58 properties with an aggregate base purchase price of $96.2 million, excluding acquisition related costs. We also have entered into PSAs to acquire an additional eight properties for an aggregate contract purchase price of approximately $23.1 million. The PSAs are subject to conditions. There can be no assurance we will complete any of these acquisitions on their contemplated terms, or at all. We anticipate using available cash on hand, proceeds from future dispositions of properties and proceeds from borrowings (including borrowings under the Credit Facility) to pay the consideration required to complete these and future acquisitions.
Subsequent to December 31, 2018, we sold five properties, with an aggregate contract sale price of $10.4 million, excluding disposition related costs. In connection with these sales, we repaid approximately $9.7 million of mortgage debt. We also have entered into PSAs to dispose of an additional 11 properties (nine leased to SunTrust), for an aggregate contract sale price of approximately $25.9 million. Additionally, we entered into non-binding LOIs to dispose of three SunTrust properties for approximately $11.2 million. The LOIs may not lead to definitive agreements and the PSAs are subject to conditions. There can be no assurance we will complete any of these dispositions on their contemplated terms, or at all.
Common Stock Repurchases
During the year ended December 31, 2018, we repurchased 1,142,190 shares of our common stock for approximately $20.5 million as described below.
Common Stock Repurchases under the SRP
In anticipation of the Listing, our board of directors terminated our share repurchase program (the “SRP”) in accordance with its terms, effective June 30, 2018. Prior to this termination, we repurchased 412,939 shares of our common stock during the first quarter of 2018 pursuant to the SRP, for approximately $9.7 million, at a price of $23.37 per share equal to the then current estimated net asset value per share of our common stock (the “Estimated Per-Share NAV”) in effect as of December 31, 2016. These repurchases were funded with approximately $9.0 million of proceeds from the Pre-Listing DRIP and approximately $0.7 million of cash on hand. Our SRP was terminated in anticipation of the Listing, effective June 30, 2018.
Common Stock Repurchases Related to Tender Offers
During the year ended December 31, 2018, we repurchased 483,133 and 207,713 shares of our common stock at prices of $14.35 and $15.45 per share, respectively, pursuant to tender offers which expired on March 27, 2018 and May 31, 2018, respectively. The total cost of the shares repurchased in the two tender offers was approximately $6.9 million and $3.2 million, respectively. These repurchases were funded from cash on hand.
Common Stock Repurchases Related to Listing
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During the year ended December 31, 2018, we repurchased approximately 18,460 fractional shares of Class A common stock at a price of $23.56 per share, the Estimated Per Share NAV as of December 31, 2017 for a total of $0.4 million, in connection with the reverse stock split related to the Listing and approximately 19,945 fractional shares of Class B-1 common stock in connection with the automatic conversion of all shares of Class B-1 common stock into shares of Class A common stock on October 10, 2018 at a price of $14.79 per share, the closing price of Class A common stock on October 9, 2018, for a total of approximately $0.3 million. Additionally, in accordance with their terms, all shares of Class B-2 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on January 9, 2019. Fractional shares of Class B-2 totaling approximately 19,863 a price of $13.78 per share were repurchased by us as a result of the automatic conversion. (see Note 9 — Common Stock to our consolidated financial statements included in this Annual Report on Form 10-K). These repurchases were also funded from cash on hand.
Authorized Repurchase Program
Effective at the Listing, our board of directors authorized, repurchase, from time to time, of up to $200.0 million of Class A common stock we may implement through open market repurchases or in privately negotiated transaction based on our board of directors’ and management’s assessment of, among other things, market conditions prevailing at the particular time. We will have the ability to repurchase shares of Class A common stock up to this amount at its discretion, subject to authorization by our board of directors prior to any such repurchase. As of December 31, 2018 the total of our remaining availability for future borrowings and cash and cash equivalents was $228.2 million. In accordance with our Credit Facility, if we make any restricted payments, which would include payments for this authorized repurchase program, or certain other payments, we would be required to maintain a combination of cash and availability for future borrowings totaling $40.0 million following such payments. Accordingly, if we decided to purchase shares under this program, the ultimate amount repurchased would depend on the amount of cash and availability for future borrowings at that time. There have not been any purchases authorized, through open market purchases or otherwise, under this program through the date of this Annual Report on Form 10-K.
Distribution Reinvestment Program
Our Pre-Listing DRIP was suspended on June 29, 2018 in anticipation of the Listing, and reinstated, amended and restated, effective on the Listing Date with the Post-Listing DRIP. Participants in the Pre-Listing DRIP prior to this amendment and restatement continued to be participants in the Post-Listing DRIP. Commencing with the dividend paid on August 3, 2018 (the first dividend paid following the Listing Date), our stockholders that have elected to participate in the Post-Listing DRIP may have dividends payable with respect to all or a portion of their shares of each class of our common stock reinvested in shares of Class A common stock. Shares issued pursuant to the Post-Listing DRIP are, at our election, either (i) acquired directly from us, by issuing new shares, at a price based on the average of the high and low sales prices of Class A common stock on Nasdaq on the date of reinvestment, or (ii) acquired through open market purchases by the plan administrator at a price based on the weighted-average of the actual prices paid for all of the shares of Class A common stock purchased by the plan administrator with all participants’ reinvested dividends for the related quarter, less a per share processing fee. During 2018, all shares acquired by participants pursuant to the Post-Listing DRIP were acquired through open market purchases by the plan administrator and not acquired directly from us.
Non-GAAP Financial Measures
This section includes non-GAAP financial measures, including Funds from Operations (“FFO”), Adjusted Funds from Operations (“AFFO”) and NOI. While NOI is a property-level measure, AFFO is based on our total performance and therefore reflects the impact of other items not specifically associated with NOI such as, interest expense, general and administrative expenses and operating fees to related parties. Additionally, NOI as defined here, includes an adjustment for straight-line rent which is excluded from AFFO. A description of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure, which is net income, is provided below. Adjustments for unconsolidated partnerships and joint ventures are calculated to exclude the proportionate share of the non-controlling interest to arrive at FFO, AFFO and NOI attributable to stockholders.
Funds from Operations and Adjusted Funds from Operations
Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the NAREIT, an industry trade group, has promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. FFO is not equivalent to net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper and approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from sales of certain real estate assets, gain and losses from change in control and impairment write-downs
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of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to exclude the proportionate share of the non-controlling interest to arrive at FFO attributable to stockholders. Our FFO calculation complies with NAREIT’s definition.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time, especially if not adequately maintained or repaired and renovated as required by relevant circumstances or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation and certain other items may be less informative. 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, among other things, 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.
Adjusted Funds from Operations
In calculating AFFO, we start with FFO, then we exclude certain income or expense items from AFFO that we consider to be more reflective of investing activities, such as fees related to the Listing, non-cash income and expense items and the income and expense effects of other activities that are not a fundamental attribute of our day to day operating business plan, such as amounts related to the Merger litigation. These amounts include legal costs incurred as a result of the litigation, a portion of which may be covered under insurance policies maintained by us, which could result in future reimbursements to us. Insurance reimbursements in future periods, if any, will be deducted from AFFO in the period of reimbursement. We believe that excluding the litigation costs and subsequent insurance reimbursements, if any, related to the Merger helps to provide a better understanding of the operating performance of our business. Other income and expense items also include early extinguishment of debt and unrealized gains and losses, which may not ultimately be realized, such as gains or losses on derivative instruments and gains and losses on investments. In addition, by excluding non-cash income and expense items such as amortization of above-market and below-market leases intangibles, amortization of deferred financing costs, straight-line rent, vesting and conversion of the Class B Units and share-based compensation related to restricted shares and the 2018 OPP from AFFO, we believe we provide useful information regarding income and expense items which have a direct impact on our ongoing operating performance. By providing AFFO, we believe we are presenting useful information that can be used to better assess the sustainability of our ongoing operating performance without the impacts of transactions that are not related to the ongoing profitability of our portfolio of properties. AFFO presented by us may not be comparable to AFFO reported by other REITs that define AFFO differently.
In calculating AFFO, we exclude certain expenses which under GAAP are characterized as operating expenses in determining operating income. All paid and accrued merger, acquisition and transaction related fees and certain other expenses negatively impact our operating performance during the period in which expenses are incurred or properties are acquired will also have negative effects on returns to investors, but are not reflective of our on-going performance. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income. In addition, as discussed above, we view gains and losses from fair value adjustments as items which are unrealized and may not ultimately be realized and not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. Excluding income and expense items detailed above from our calculation of AFFO provides information consistent with management’s analysis of our operating performance. 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 AFFO provides useful supplemental information. We believe that in order to facilitate a clear understanding of our operating results, AFFO should be examined in conjunction with net loss as presented in our consolidated financial statements. AFFO should not be considered as an alternative to net loss as an indication of our performance or to cash flows as a measure of our liquidity or ability to pay dividends.
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The table below reflects the items deducted or added to net loss in our calculation of FFO and AFFO for the periods presented:
Year Ended December 31, | ||||||||||||
(In thousands) | 2018 | 2017 | 2016 | |||||||||
Net loss attributable to stockholders (in accordance with GAAP) | $ | (37,409 | ) | $ | (46,494 | ) | $ | (54,255 | ) | |||
Impairment charges | 21,080 | 25,049 | 27,299 | |||||||||
Depreciation and amortization | 139,907 | 154,027 | 101,143 | |||||||||
Gain on sale of real estate investments | (31,776 | ) | (15,128 | ) | (454 | ) | ||||||
Proportionate share of adjustments for non-controlling interests to arrive at FFO | (228 | ) | (291 | ) | — | |||||||
FFO attributable to stockholders | 91,574 | 117,163 | 73,733 | |||||||||
Acquisition and transaction related | 5,612 | 9,356 | 7,063 | |||||||||
Litigation costs related to the Merger [1] | 1,945 | 796 | — | |||||||||
Listing fees | 4,988 | — | — | |||||||||
Vesting and conversion of Class B Units | 15,786 | — | — | |||||||||
Amortization of market lease and other intangibles, net | (15,498 | ) | (5,173 | ) | 477 | |||||||
Straight-line rent | (9,501 | ) | (7,744 | ) | (6,830 | ) | ||||||
Amortization of mortgage premiums on borrowings | (3,790 | ) | (4,096 | ) | (4,211 | ) | ||||||
Discount accretion on investment | — | (25 | ) | (40 | ) | |||||||
Mark-to-market adjustments | (72 | ) | (130 | ) | — | |||||||
Share-based compensation — restricted shares | 450 | 128 | 67 | |||||||||
Share-based compensation — multi-year outperformance agreement | 4,816 | — | — | |||||||||
Amortization of deferred financing costs, net and change in accrued interest | 6,740 | 7,384 | 9,325 | |||||||||
Proportionate share of adjustments for non-controlling interests to arrive at AFFO | (19 | ) | 5 | — | ||||||||
AFFO attributable to stockholders | $ | 103,031 | $ | 117,664 | $ | 79,584 | ||||||
[1] The litigation costs related to the Merger are included as an adjustment in the calculation above beginning in the fourth quarter of 2018, and were not presented as an adjustment in our Annual Report on Form 10-K for the year ended December 31, 2017 or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018, June 30, 2018 and September 30, 2018. Insurance reimbursements in future periods, if any, will be deducted from AFFO in the period of reimbursement.
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate. NOI is equal to total revenues, excluding contingent purchase price consideration, less property operating and maintenance expense. NOI excludes all other items of expense and income included in the financial statements in calculating net loss.
We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. We use NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net loss.
NOI excludes certain components from net loss in order to provide results that are more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net loss as presented in our consolidated financial statements. NOI should not be considered as an alternative to net loss as an indication of our performance or to cash flows as a measure of our liquidity or ability to pay dividends.
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The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of NOI for the year ended December 31, 2018:
(In thousands) | Same Store | Acquisitions | Disposals | Merger | Non-Property Specific | Total | ||||||||||||||||||
Net (loss) income attributable to stockholders (in accordance with GAAP) | $ | (7,329 | ) | $ | 12,474 | $ | 19,243 | $ | 18,719 | $ | (80,516 | ) | $ | (37,409 | ) | |||||||||
Asset management fees to related party | — | — | — | — | 23,143 | 23,143 | ||||||||||||||||||
Impairment charges | 3,438 | — | 17,642 | — | — | 21,080 | ||||||||||||||||||
Acquisition and transaction related | 4,483 | 171 | 38 | 15 | 905 | 5,612 | ||||||||||||||||||
Listing fees | — | — | — | — | 4,988 | 4,988 | ||||||||||||||||||
Vesting and conversion of Class B Units | — | — | — | — | 15,786 | 15,786 | ||||||||||||||||||
Share-based compensation — multi-year outperformance agreement | — | — | — | — | 4,816 | 4,816 | ||||||||||||||||||
General and administrative | 426 | 55 | 76 | 1,040 | 23,531 | 25,128 | ||||||||||||||||||
Depreciation and amortization | 65,740 | 7,230 | 3,634 | 63,303 | — | 139,907 | ||||||||||||||||||
Interest expense | 56,187 | — | — | 3,211 | 7,391 | 66,789 | ||||||||||||||||||
Gain on sale of real estate investments | — | — | (31,776 | ) | — | — | (31,776 | ) | ||||||||||||||||
Other income | (58 | ) | (2 | ) | (35 | ) | (786 | ) | 18 | (863 | ) | |||||||||||||
Net loss attributable to non-controlling interests | — | — | — | — | (62 | ) | (62 | ) | ||||||||||||||||
NOI | $ | 122,887 | $ | 19,928 | $ | 8,822 | $ | 85,502 | $ | — | $ | 237,139 | ||||||||||||
The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of NOI for the year ended December 31, 2017:
(In thousands) | Same Store | Acquisitions | Disposals | Merger | Non-Property Specific | Total | ||||||||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | (2,885 | ) | $ | 1,785 | $ | 824 | $ | 7,334 | $ | (53,552 | ) | $ | (46,494 | ) | |||||||||
Asset management fees to related party | — | — | — | — | 20,908 | 20,908 | ||||||||||||||||||
Impairment charges | 2,721 | — | 22,328 | — | — | 25,049 | ||||||||||||||||||
Acquisition and transaction related | 2,180 | 1,631 | 1 | 1 | 5,543 | 9,356 | ||||||||||||||||||
General and administrative | 254 | 6 | 54 | 849 | 19,451 | 20,614 | ||||||||||||||||||
Depreciation and amortization | 76,382 | 2,190 | 12,376 | 63,079 | — | 154,027 | ||||||||||||||||||
Interest expense | 47,313 | — | 1,183 | 4,013 | 7,796 | 60,305 | ||||||||||||||||||
Gain on sale of real estate investments | — | — | (14,865 | ) | (263 | ) | — | (15,128 | ) | |||||||||||||||
Other income | (1,104 | ) | — | (45 | ) | (112 | ) | (63 | ) | (1,324 | ) | |||||||||||||
Net loss attributable to non-controlling interests | — | — | — | — | (83 | ) | (83 | ) | ||||||||||||||||
NOI | $ | 124,861 | $ | 5,612 | $ | 21,856 | $ | 74,901 | $ | — | $ | 227,230 | ||||||||||||
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The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of NOI for the year ended December 31, 2016:
(In thousands) | Same Store | Acquisitions | Disposals | Merger | Non-Property Specific | Total | ||||||||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | (12,960 | ) | $ | — | $ | (1,887 | ) | $ | — | $ | (39,408 | ) | $ | (54,255 | ) | ||||||||
Asset management fees to related party | — | — | — | — | 18,000 | 18,000 | ||||||||||||||||||
Impairment charges | 17,895 | — | 9,404 | — | — | 27,299 | ||||||||||||||||||
Acquisition and transaction related | 630 | — | 2 | — | 6,431 | 7,063 | ||||||||||||||||||
General and administrative | 206 | — | 8 | — | 10,954 | 11,168 | ||||||||||||||||||
Depreciation and amortization | 85,485 | — | 15,658 | — | — | 101,143 | ||||||||||||||||||
Interest expense | 47,159 | — | 2,929 | — | 4,165 | 54,253 | ||||||||||||||||||
Gain on sale of real estate investments | (454 | ) | — | — | — | — | (454 | ) | ||||||||||||||||
Other income | (1,069 | ) | — | (2 | ) | — | (142 | ) | (1,213 | ) | ||||||||||||||
NOI | $ | 136,892 | $ | — | $ | 26,112 | $ | — | $ | — | $ | 163,004 | ||||||||||||
Common Stock Dividends
Prior to and continuing into 2017, our board of directors authorized, and we declared, a dividend payable on a monthly basis to stockholders of record on each day at a rate equal to $1.65 per annum, per share of common stock. On June 14, 2017, we announced that our board of directors authorized a decrease in the daily accrual of dividends to an annualized rate of $1.30 per annum, per share of common stock, effective July 1, 2017. The first dividends declared under the new rate were paid on or about August 5, 2017. In connection with the Listing, our board of directors changed the rate at which we pay dividends on our common stock from an annualized rate equal to $1.30 per share to an annualized rate equal to $1.10 per share, or $0.0916667 per share on a monthly basis, effective as of July 1, 2018. Also, effective July 1, 2018, we transitioned to declaring dividends based on monthly, rather than daily, record dates and will generally pay dividends on the 15th day of each month (or, if not a business day, the next succeeding business day) to common stock holders of record on the applicable record date of such month. Prior to July 1, 2018, dividends were payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month. Dividends were paid on shares of Class B-1 common stock (which automatically converted to Class A common stock in accordance with their terms on October 10, 2018) and Class B- 2 common stock (which automatically converted to Class A common stock in accordance with their terms on January 9, 2019) at the same rate as Class A common stock. The first dividends declared under the new rate were paid in August 2018.
The amount of dividends payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for dividends, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). Our board of directors may reduce the amount of dividends paid or suspend dividend payments at any time prior to dividends being declared. Therefore, dividend payments are not assured. In addition, provisions in our Credit Facility restrict our ability to pay dividends, including cash dividends or other dividends payable with respect to our common stock.
During the year ended December 31, 2018, dividends paid to common stockholders totaled $128.1 million, distributions paid to holders of LTIP Units and units of limited partnership designated as “OP Units” (as Class A Units were previously designated under the agreement of limited partnership of the OP in effect prior to the Listing) totaled $0.2 million and $0.2 million, respectively. On March 19, 2018, our board of directors approved an estimated net asset value per share of our common stock (“Estimated Per-Share NAV”) as of December 31, 2017, which was published on March 20, 2018 and which served as the purchase price under the Pre-Listing DRIP, prior to its amendment and restatement. During the year ended December 31, 2018, $23.2 million of dividends were reinvested in additional shares of our common stock at a price based on the then applicable Estimated Per-Share NAV, up until the dividend paid on August 3, 2018. During the year ended December 31, 2018, cash used to pay common stock dividends, LTIP Unit distributions and OP Unit distributions was generated from cash flows provided by operations of $95.0 million, a portion of proceeds from the DRIP in the amount of $14.3 million and $18.7 million of cash on hand, which consists of proceeds from financings and sales of real estate investments. The remaining $9.0 million of proceeds from the DRIP received during the period were used to fund repurchase of shares under our SRP during the first quarter of 2018.
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The following table shows the sources for the payment of dividends to common stockholders, including dividends on unvested restricted shares, for the periods indicated:
Three Months Ended | Year Ended December 31, 2018 | ||||||||||||||||||||||||||||||||||
March 31, 2018 | June 30, 2018 | September 30, 2018 | December 31, 2018 | ||||||||||||||||||||||||||||||||
(In thousands) | Percentage of Dividends | Percentage of Dividends | Percentage of Dividends | Percentage of Dividends | Percentage of Dividends | ||||||||||||||||||||||||||||||
Cash dividends paid to stockholders not reinvested in common stock | $ | 21,906 | $ | 22,961 | $ | 30,713 | $ | 29,244 | $ | 104,824 | |||||||||||||||||||||||||
Cash dividends reinvested in common stock issued under the Pre-Listing DRIP | 11,773 | 11,475 | — | — | 23,248 | ||||||||||||||||||||||||||||||
Total dividends paid | $ | 33,679 | $ | 34,436 | $ | 30,713 | $ | 29,244 | $ | 128,072 | |||||||||||||||||||||||||
Source of dividend coverage: | |||||||||||||||||||||||||||||||||||
Cash flows provided by operations | $ | 22,348 | 66.4 | % | $ | 31,480 | 91.4 | % | $ | 19,933 | 64.9 | % | $ | 21,276 | 72.8 | % | $ | 95,037 | 74.2 | % | |||||||||||||||
Cash proceeds received from common stock issued under the DRIP | 11,331 | 33.6 | % | 2,956 | 8.6 | % | — | — | % | — | — | % | 14,287 | 11.2 | % | ||||||||||||||||||||
Available cash on hand (1) | — | — | % | — | — | % | 10,780 | 35.1 | % | 7,968 | 23.1 | % | 18,748 | 14.6 | % | ||||||||||||||||||||
Total source of dividend coverage | $ | 33,679 | 100.0 | % | $ | 34,436 | 100.0 | % | $ | 30,713 | 100.0 | % | $ | 29,244 | 95.9 | % | $ | 128,072 | 100.0 | % | |||||||||||||||
Cash flows provided by operations (GAAP basis) | $ | 22,348 | $ | 31,480 | $ | 19,933 | $ | 21,276 | $ | 95,037 | |||||||||||||||||||||||||
Net income (loss) (in accordance with GAAP) | $ | 15,431 | $ | (12,065 | ) | $ | (27,291 | ) | $ | (13,484 | ) | $ | (37,409 | ) | |||||||||||||||||||||
_____________________
(1) | Consists of proceeds from financings and sales of real estate investments. |
We have not generated, and in the future may not generate, operating cash flows sufficient to fund all of the dividends we pay to our stockholders. If we do not generate sufficient cash flows from our operations in the future we may have to reduce our dividend rate or continue to fund dividends from other sources, such as from borrowings or the sale of properties, loans or securities, and available cash on hand, which consists of proceeds from sale of real estate investments and proceeds from financings. Moreover, our board of directors may change our dividend policy, in its sole discretion, at any time to either reduce the amount of dividends that we pay or use other sources to fund dividends such as borrowing monies, using the proceeds from asset sales or using the proceeds from the sale of shares, including shares sold under our DRIP. Funding dividends from borrowings could restrict the amount that we can borrow for investments. Funding dividends with the sale of assets may affect our ability to generate additional operating cash flows. Funding dividends from the sale of additional securities could dilute each stockholder’s 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 dividends from these sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the dividends payable to stockholders upon a liquidity event, any or all of which may have an adverse effect on an investment in our shares.
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Share Repurchase Programs
Terminated Share Repurchase Program
Our board of directors adopted the SRP to enable our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requested a repurchase, we, subject to certain conditions, repurchased the shares presented for repurchase for cash. Our SRP was terminated in anticipation of the Listing, effective June 30, 2018. For additional information on the SRP, see Note 9 — Common Stock to our consolidated financial statements included in this Annual Report on Form 10-K.
The following table summarizes the repurchases of shares under the SRP cumulatively through the termination date of June 30, 2018:
Number of Shares | Weighted-Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2013 | 8,082 | $ | 24.98 | ||||
Year ended December 31, 2014 | 295,825 | 23.99 | |||||
Year ended December 31, 2015 | 1,769,738 | 24.13 | |||||
Year ended December 31, 2016 | 7,854 | 24.17 | |||||
Year ended December 31, 2017 | 1,225,365 | (1) | 23.71 | ||||
Year ended December 31, 2018 | 412,939 | (2) | 23.37 | ||||
Cumulative repurchases as of December 31, 2018 | 3,719,803 | 23.90 | |||||
(1) | Excludes unapproved repurchase requests received during 2016 with respect to 5.9 million shares for $140.1 million at a weighted-average price per share of $23.65. Also, in July, 2017, following the effectiveness of the amendment and restatement of the SRP, our board of directors approved 100% of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to December 31, 2017. No repurchases were made with respect to requests received during 2017 that are not valid requests in accordance with the amended and restated SRP. At the time the SRP was terminated in anticipation of the Listing, effective June 30, 2018, we had received repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2018 to June 30, 2018 with respect to 0.6 million shares that were therefore not repurchased. |
(2) | During January 2018, we repurchased 412,939 shares for approximately $9.7 million at a price of $23.37 per share equal to the then current Estimated Per-Share NAV. |
Authorized Repurchase Program
Effective at the Listing, our board of directors authorized, repurchase, from time to time, of up to $200.0 million of Class A common stock we may implement through open market repurchases or in privately negotiated transaction based on our board of directors’ and management’s assessment of, among other things, market conditions prevailing at the particular time. We will have the ability to repurchase shares of Class A common stock up to this amount at its discretion, subject to authorization by our board of directors prior to any such repurchase. As of December 31, 2018 the total of our remaining availability for future borrowings and cash and cash equivalents was $228.2 million. In accordance with our Credit Facility, if we make any restricted payments, which would include payments for this authorized repurchase program, or certain other payments, we would be required to maintain a combination of cash and availability for future borrowings totaling $40.0 million following such payments. Accordingly, if we decided to purchase shares under this program, the ultimate amount repurchased would depend on the amount of cash and availability for future borrowings at that time. There have not been any purchases authorized, through open market repurchases or otherwise, under this program through the date of this Annual Report on Form 10-K.
Loan Obligations
The payment terms of certain of our mortgage loan obligations require principal and interest payments monthly, with all unpaid principal and interest due at maturity. Our loan agreements stipulate that we comply with specific reporting covenants. As of December 31, 2018, we were in compliance with the debt covenants under our loan agreements.
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Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable based on anticipated repayment dates, as well as minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of December 31, 2018. These minimum base rental cash payments due for leasehold interests amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items:
Years Ended December 31, | ||||||||||||||||||||
(In thousands) | Total | 2019 | 2020-2021 | 2022-2023 | Thereafter | |||||||||||||||
Principal on mortgage notes payable | $ | 1,200,538 | $ | 2,533 | $ | 873,831 | $ | 2,501 | $ | 321,673 | ||||||||||
Interest on mortgage notes payable | 201,512 | 55,724 | 68,568 | 28,609 | 48,611 | |||||||||||||||
Principal on Credit Facility (1) | 324,700 | — | — | 324,700 | — | |||||||||||||||
Interest on Credit Facility | 61,470 | 14,227 | 28,494 | 18,749 | — | |||||||||||||||
Ground lease rental payments due | 17,086 | 1,461 | 2,168 | 1,859 | 11,598 | |||||||||||||||
$ | 1,805,306 | $ | 73,945 | $ | 973,061 | $ | 376,418 | $ | 381,882 | |||||||||||
(1) | Upon the Listing, the maturity date of the Credit Facility was automatically extended from April 26, 2020 to April 26, 2022 and we have a one-time right, subject to customary conditions, to extend the maturity date for an additional term of one year to April 26, 2023. |
Several of the loan agreements on our mortgage notes payable feature anticipated repayment dates in advance of the stated maturity dates. Please see Note 5 — Mortgage Notes Payable, Net to our consolidated financial statements included in this Annual Report on Form 10-K.
Election as a REIT
We elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2013. We believe that, commencing with such taxable year, we have been organized and have operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT. In order to continue to qualify for taxation 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 regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we 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
Some of our leases with our tenants contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions. However, our net leases require the tenant to pay its allocable share of operating expenses, which may include common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
Please see Note 11 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements 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.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, bears interest at fixed rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus are not exposed to foreign currency fluctuations.
As of December 31, 2018, our fixed rate debt consisted of secured mortgage financings with a gross carrying value of $1.2 billion and a fair value of $1.2 billion. Changes in market interest rates on our fixed-rate debt impact its fair value, but it has no impact on interest expense incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed-rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 2018 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 $37.3 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 $35.2 million.
As of December 31, 2018, our variable-rate debt consisted of our Credit Facility, which had a carrying and fair value of $324.7 million. Interest rate volatility associated with the 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 from December 31, 2018 levels with all other variables held constant. A 100 basis point increase or decrease in variable rates on the Credit Facility would increase or decrease our interest expense by $3.2 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and, assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of December 31, 2018 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Exchange Act, we are required to establish and maintain disclosure controls and procedures as defined in subparagraph (e) of that rule. Management is required to evaluate, with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.
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Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) promulgated under the Exchange Act and as set forth below. Under Rule 13a-15(c), management must evaluate, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness, as of the end of each calendar year, of our internal control over financial reporting. The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
(1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
(2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
(3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In the course of preparing this Annual Report on Form 10-K and the consolidated financial statements included herein, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2018.
KPMG LLP, an independent registered public accounting firm was engaged to audit the consolidated financial statements as of and for the years ended December 31, 2018 and 2017 included in this Annual Report on Form 10-K, and their audit report is included on Page F-2 of this Annual Report on Form 10-K. KPMG LLP was not engaged to audit the effectiveness of our internal control over financial reporting as of December 31, 2018 and accordingly you will not find a report from KPMG LLP regarding the effectiveness of internal controls over financial reporting in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. A copy of our code of ethics may be obtained, free of charge, by sending a written request to our executive office: 405 Park Avenue – 3rd Floor, New York, NY 10022, Attention: Chief Financial Officer. Our Code of Business Conduct and Ethics is also publicly available on our website at www.americanfinancetrust.com. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the Code of Business Conduct and Ethics to our chief executive officer, chief financial officer, chief accounting officer or controller or persons performing similar functions, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
Additional information required by this Item is incorporated by reference to our proxy statement to be filed with the SEC with respect to our 2019 annual meeting of stockholders (our “Proxy Statement”).
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to our Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to our Proxy Statement.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Financial Statement Schedules
See the Index to Consolidated Financial Statements at page F-1 of this report.
The following financial statement schedules are included herein beginning at page F-36 of this report:
Schedule III — Real Estate and Accumulated Depreciation — Part I
Schedule III — Real Estate and Accumulated Depreciation — Part II
(b) Exhibits
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2018 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. | Description | |
2.1 (4) | Agreement and Plan of Merger, dated as of September 6, 2016, among American Finance Trust, Inc., American Finance Operating Partnership, L.P., Genie Acquisition, LLC, American Realty Capital - Retail Centers of America, Inc. and American Realty Capital Retail Operating Partnership, L.P. | |
3.1 (2) | Articles of Amendment and Restatement | |
3.2 (14) | Fourth Amended and Restated Bylaws | |
3.3 (7) | Articles Supplementary relating to election to be subject to Section 3-803 of MGCL. | |
3.4 (15) | Articles of Amendment relating to reverse stock split, dated July 3, 2018 | |
3.5 (15) | Articles of Amendment relating to par value decrease, dated July 3, 2018 | |
3.6 (15) | Articles of Amendment relating to common stock name change, dated July 3, 2018 | |
3.7 (15) | Articles Supplementary relating to reclassification of common stock, dated July 3, 2018 | |
3.8 (13) | Certification of Notice of American Finance Trust, Inc. filed with the State Department of Assessments and Taxation of Maryland on September 18, 2018 | |
3.9 (11) | Certification of Notice of American Finance Trust, Inc. filed with the State Department of Assessments and Taxation of Maryland on December 20, 2018 | |
4.1 (4) | Amended and Restated Agreement of Limited Partnership of American Finance Operating Partnership, L.P., dated as of September 6, 2016 | |
4.2 (5) | Amendment No. 1 to Amended and Restated Limited Partnership Agreement of American Finance Operating Partnership, L.P., dated as of February 16, 2017 | |
4.3 (14) | Second Amended and Restated Agreement of Limited Partnership of American Finance Operating Partnership, L.P., dated as of July 19, 2018 | |
4.4 (12) | First Amendment to Second Amended and Restated Agreement of Limited Partnership of American Finance Operating Partnership, L.P., dated as of November 6, 2018 | |
4.5 (9) | Amended and Restated Distribution Reinvestment Plan (Pre-Listing) | |
4.6 (10) | First Amendment to Amended and Restated Distribution Reinvestment Plan (Pre-Listing) | |
4.7 (14) | Amended and Restated Distribution Reinvestment Plan (Post-Listing) | |
10.1 (4) | Third Amended and Restated Advisory Agreement, dated as of September 6, 2016, by and among American Finance Trust, Inc., American Finance Operating Partnership, L.P. and American Finance Advisors, LLC | |
10.2 (14) | Amendment No. 1 to the Third Amended and Restated Advisory Agreement, dated July 19, 2018, among American Finance Trust, Inc., American Finance Operating Partnership, L.P. and American Finance Advisors, LLC | |
10.3 (4) | Amended and Restated Property Management Agreement, dated as of September 6, 2016, by and among American Finance Trust, Inc. and American Finance Properties, LLC (as assignee of American Realty Capital Retail Advisor, LLC) | |
10.4 (4) | Amended and Restated Leasing Agreement, dated as of September 6, 2016, by and among American Finance Trust, Inc. and American Finance Properties, LLC (as assignee of American Realty Capital Retail Advisor, LLC) | |
10.5 (4) | Amended and Restated Property Management and Leasing Agreement, dated as of September 6, 2016, by and among American Finance Trust, Inc., American Finance Trust Operating Partnership, L.P. and American Finance Properties, LLC | |
10.6 (3) | Form of Restricted Stock Unit Award Agreement Pursuant to the Employee and Director Incentive Restricted Share Plan of American Finance Trust, Inc. (Pre-Listing) | |
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Exhibit No. | Description | |
10.7 (1) | Indemnification Agreement by and among American Finance Trust, Inc., Peter M. Budko, Robert H. Burns, David Gong, William M. Kahane, Stanley R. Perla, Nicholas Radesca, Nicholas S. Schorsch, Edward M. Weil, Jr., American Realty Capital Advisors V, LLC, AR Capital, LLC and RCS Capital Corporation, dated December 31, 2014 | |
10.8 (1) | Indemnification Agreement by and between American Finance Trust, Inc., and Herbert Vederman, dated May 14, 2015 | |
10.9 (2) | Indemnification Agreement by and between American Finance Trust, Inc., Donald MacKinnon, Donald R. Ramon and Andrew Winer, dated May 26, 2015 | |
10.10 (5) | Second Amendment to Amended and Restated Credit Agreement, Assumption, Joinder and Reaffirmation of Guaranties, dated as of February 16, 2017, among American Finance Operating Partnership, L.P., as successor to American Realty Capital Operating Partnership, L.P., Genie Acquisition, LLC as successor to American Realty Capital - Retail Centers of America, Inc., American Finance Trust, Inc., the guarantors party thereto, the lenders party thereto and BMO Harris Bank N.A. | |
10.11 (16) | Credit Agreement, dated as of April 26, 2018, by and among American Finance Operating Partnership, L.P., the guarantors party thereto, the lenders from time to time party thereto, Citizens Bank N.A. and SunTrust Robinson Humphrey, Inc., as syndication agents, and BMO Harris Bank N.A., as administrative agent | |
10.12 (12) | First Amendment to Credit Agreement, dated as of September 24, 2018, among American Finance Operating Partnership, L.P., Genie Acquisition, LLC, American Finance Trust, Inc., the lenders party thereto and BMO Harris Bank N.A. | |
10.13 (5) | Indemnification Agreement, dated as of February 16, 2017, by and between American Finance Trust, Inc. and Leslie D. Michelson and Edward G. Rendell | |
10.14 (7) | Indemnification Agreement between American Finance Trust, Inc. and Katie P. Kurtz | |
10.15 (17) | Loan Agreement dated as of December 8, 2017 among Societe Generale and UBS AG as Lenders and certain subsidiaries of American Finance Operating Partnership, LP, as Borrowers | |
10.16 (17) | Guaranty of Recourse Obligations dated as of December 8, 2017 by American Finance Trust, Inc. in favor of Societe Generale and UBS AG | |
10.17 (17) | First Amendment to Amended and Restated Property Management Agreement, dated as of December 8, 2017, by and among American Finance Trust, Inc. and American Finance Properties, LLC and certain subsidiaries of American Finance Operating Partnership, LP | |
10.18 (17) | Form of Property Management Agreement by and between American Finance Properties, LLC and certain subsidiaries of American Finance Operating Partnership, LP | |
10.19 (12) | Form of Restricted Stock Award Agreement (Post-Listing) | |
10.20 (14) | Listing Note Agreement, dated as of July 19, 2018, between American Finance Operating Partnership, L.P. and American Finance Special Limited Partner, LLC | |
10.21 (14) | Subordination Agreement, dated as of July 19, 2018, among American Finance Special Limited Partner, LLC, BMO Harris Bank N.A. and American Finance Operating Partnership, L.P. | |
10.22 (14) | Advisor Multi-Year Outperformance Award Agreement, dated as of July 19, 2018, between American Finance Operating Partnership, L.P. and America Finance Advisors, LLC | |
10.23 (14) | 2018 Advisor Omnibus Incentive Compensation Plan | |
10.24 (14) | 2018 Omnibus Incentive Compensation Plan | |
10.25 (14) | Form of Indemnification Agreement (Post-Listing) | |
10.26 * | First Amendment, dated as of March 6, 2019, to 2018 Advisor Multi-Year Outperformance Award Agreement, dated as of July 19, 2018, between American Finance Operating Partnership, L.P. and America Finance Advisors, LLC | |
14.1 (14) | Amended and Restated Code of Business Conduct and Ethics | |
21.1 * | List of Subsidiaries | |
23.1 * | Consent of KPMG LLP | |
31.1 * | Certification of the Principal Executive Officer of American Finance Trust, Inc. 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 American Finance Trust, Inc. 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 American Finance Trust, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
65
Exhibit No. | Description | |
101 * | XBRL (eXtensible Business Reporting Language). The following materials from American Finance Trust, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive (Loss) Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. | |
____________________
* Filed herewith.
(1) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on May 15, 2015. |
(2) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 filed with the SEC on August 11, 2015. |
(3) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on August 11, 2016. |
(4) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on September 7, 2016. |
(5) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on February 21, 2017. |
(6) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 13, 2017. |
(7) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed with the SEC on November 13, 2017. |
(8) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 14, 2017. |
(9) | Filed as Appendix A to our Registration Statement on Form S-3 filed with the SEC on April 1, 2016. |
(10) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 30, 2016. |
(11) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on December 20, 2018. |
(12) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 filed with the SEC on November 6, 2018. |
(13) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on September 20, 2018. |
(14) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on July 19, 2018. |
(15) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on July 9, 2018. |
(16) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on May 2, 2018. |
(17) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 19, 2018. |
Item 16. Form 10-K Summary.
Not applicable.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized this 7th day of March, 2019.
AMERICAN FINANCE TRUST, INC. | ||
By: | /s/ EDWARD M. WEIL, JR. | |
EDWARD M. WEIL, JR. | ||
CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Capacity | Date | ||
/s/ Edward M. Weil, Jr. | Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) | March 7, 2019 | ||
Edward M. Weil, Jr. | ||||
/s/ Katie P. Kurtz | Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) | March 7, 2019 | ||
Katie P. Kurtz | ||||
/s/ Lisa D. Kabnick | Lead Independent Director | March 7, 2019 | ||
Lisa D. Kabnick | ||||
/s/ Stanley Perla | Independent Director | March 7, 2019 | ||
Stanley Perla | ||||
/s/ Leslie D. Michelson | Independent Director | March 7, 2019 | ||
Leslie D. Michelson | ||||
/s/ Edward G. Rendell | Independent Director | March 7, 2019 | ||
Edward G. Rendell | ||||
67
Page | |
Financial Statement Schedules: | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
American Finance Trust, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of American Finance Trust, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes and financial statement schedules titled Schedule III - Real Estate and Accumulated Depreciation - Part I, as of December 31, 2018 and Schedule III - Real Estate and Accumulated Depreciation - Part II, for the three-year period ended December 31, 2018 (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
New York, New York
March 7, 2019
F-2
AMERICAN FINANCE TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, | |||||||
2018 | 2017 | ||||||
ASSETS | |||||||
Real estate investments, at cost: | |||||||
Land | $ | 629,190 | $ | 607,675 | |||
Buildings, fixtures and improvements | 2,441,659 | 2,449,020 | |||||
Acquired intangible lease assets | 413,948 | 454,212 | |||||
Total real estate investments, at cost | 3,484,797 | 3,510,907 | |||||
Less: accumulated depreciation and amortization | (454,614 | ) | (408,194 | ) | |||
Total real estate investments, net | 3,030,183 | 3,102,713 | |||||
Cash and cash equivalents | 91,451 | 107,666 | |||||
Restricted cash | 18,180 | 19,588 | |||||
Deposits for real estate acquisitions | 3,037 | 565 | |||||
Derivative assets, at fair value | — | 23 | |||||
Goodwill | 1,605 | 1,605 | |||||
Deferred costs, net | 16,222 | 8,949 | |||||
Straight-line rent receivable | 37,911 | 28,515 | |||||
Prepaid expenses and other assets | 19,439 | 22,344 | |||||
Assets held for sale | 44,519 | 4,682 | |||||
Total assets | $ | 3,262,547 | $ | 3,296,650 | |||
LIABILITIES AND EQUITY | |||||||
Mortgage notes payable, net | $ | 1,196,113 | $ | 1,303,433 | |||
Credit facility | 324,700 | 95,000 | |||||
Market lease liabilities, net | 89,938 | 108,772 | |||||
Accounts payable and accrued expenses (including $2,634 and $3,169 due to related parties as of December 31, 2018 and 2017, respectively) | 28,383 | 27,355 | |||||
Derivative liabilities, at fair value | 531 | — | |||||
Deferred rent and other liabilities | 13,067 | 9,421 | |||||
Dividends payable | 80 | 11,613 | |||||
Total liabilities | 1,652,812 | 1,555,594 | |||||
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, none issued and outstanding | — | — | |||||
Common stock, $0.01 par value per share, 300,000,000 shares authorized, 106,230,901 and 105,172,185 shares issued and outstanding as of December 31, 2018 and 2017, respectively | 1,063 | 1,052 | |||||
Additional paid-in capital | 2,412,915 | 2,393,237 | |||||
Accumulated other comprehensive (loss) income | (531 | ) | 95 | ||||
Accumulated deficit | (812,047 | ) | (657,874 | ) | |||
Total stockholders’ equity | 1,601,400 | 1,736,510 | |||||
Non-controlling interests | 8,335 | 4,546 | |||||
Total equity | 1,609,735 | 1,741,056 | |||||
Total liabilities and equity | $ | 3,262,547 | $ | 3,296,650 | |||
The accompanying notes are an integral part of these audited consolidated financial statements.
F-3
AMERICAN FINANCE TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
Year Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Revenues: | |||||||||||
Rental income | $ | 256,157 | $ | 240,264 | $ | 164,386 | |||||
Operating expense reimbursements | 35,050 | 29,560 | 12,232 | ||||||||
Interest income from debt investments | — | 1,086 | 1,050 | ||||||||
Total revenues | 291,207 | 270,910 | 177,668 | ||||||||
Operating expenses: | |||||||||||
Asset management fees to related party | 23,143 | 20,908 | 18,000 | ||||||||
Property operating | 54,068 | 42,594 | 13,614 | ||||||||
Impairment charges | 21,080 | 25,049 | 27,299 | ||||||||
Acquisition and transaction related | 5,612 | 9,356 | 7,063 | ||||||||
Listing fees | 4,988 | — | — | ||||||||
Vesting and conversion of Class B Units | 15,786 | — | — | ||||||||
Share-based compensation — multi-year outperformance agreement | 4,816 | — | — | ||||||||
General and administrative | 25,128 | 20,614 | 11,168 | ||||||||
Depreciation and amortization | 139,907 | 154,027 | 101,143 | ||||||||
Total operating expenses | 294,528 | 272,548 | 178,287 | ||||||||
Operating loss before gain on sale of real estate investments | (3,321 | ) | (1,638 | ) | (619 | ) | |||||
Gain on sale of real estate investments | 31,776 | 15,128 | 454 | ||||||||
Operating income (loss) | 28,455 | 13,490 | (165 | ) | |||||||
Other (expenses) income: | |||||||||||
Interest expense | (66,789 | ) | (60,305 | ) | (54,253 | ) | |||||
Other income | 863 | 238 | 163 | ||||||||
Total other expenses, net | (65,926 | ) | (60,067 | ) | (54,090 | ) | |||||
Net loss | (37,471 | ) | (46,577 | ) | (54,255 | ) | |||||
Net loss attributable to non-controlling interests | 62 | 83 | — | ||||||||
Net loss attributable to stockholders | (37,409 | ) | (46,494 | ) | (54,255 | ) | |||||
Other comprehensive (loss) income: | |||||||||||
Change in unrealized (loss) gain on derivative | (626 | ) | 95 | — | |||||||
Other comprehensive (loss) income | (626 | ) | 95 | — | |||||||
Comprehensive loss attributable to stockholders | $ | (38,035 | ) | $ | (46,399 | ) | $ | (54,255 | ) | ||
Basic and diluted weighted-average shares outstanding | 105,560,053 | 99,649,471 | 65,450,432 | ||||||||
Basic and diluted net loss per share attributable to stockholders | $ | (0.35 | ) | $ | (0.47 | ) | $ | (0.83 | ) | ||
The accompanying notes are an integral part of these audited consolidated financial statements.
F-4
AMERICAN FINANCE TRUST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share data)
Common Stock | ||||||||||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | |||||||||||||||||||||||
Balance, December 31, 2015 | 64,961,256 | $ | 650 | $ | 1,429,294 | $ | — | $ | (303,195 | ) | $ | 1,126,749 | $ | — | $ | 1,126,749 | ||||||||||||||
Common stock issued through distribution reinvestment plan | 848,059 | 8 | 20,491 | — | — | 20,499 | — | 20,499 | ||||||||||||||||||||||
Common stock repurchases | (7,854 | ) | — | (190 | ) | — | — | (190 | ) | — | (190 | ) | ||||||||||||||||||
Share-based compensation | 3,723 | — | 67 | — | — | 67 | — | 67 | ||||||||||||||||||||||
Distributions declared | — | — | — | — | (108,004 | ) | (108,004 | ) | — | (108,004 | ) | |||||||||||||||||||
Net loss | — | — | — | — | (54,255 | ) | (54,255 | ) | — | (54,255 | ) | |||||||||||||||||||
Balance, December 31, 2016 | 65,805,184 | 658 | 1,449,662 | — | (465,454 | ) | 984,866 | — | 984,866 | |||||||||||||||||||||
Issuance of common stock | 38,210,213 | 382 | 916,664 | — | — | 917,046 | — | 917,046 | ||||||||||||||||||||||
Common stock issued through distribution reinvestment plan | 2,373,256 | 24 | 55,829 | — | — | 55,853 | — | 55,853 | ||||||||||||||||||||||
Common stock repurchases | (1,225,365 | ) | (12 | ) | (29,046 | ) | — | — | (29,058 | ) | — | (29,058 | ) | |||||||||||||||||
Share-based compensation, net of forfeitures | 8,897 | — | 128 | — | — | 128 | — | 128 | ||||||||||||||||||||||
Distributions declared | — | — | — | — | (145,926 | ) | (145,926 | ) | — | (145,926 | ) | |||||||||||||||||||
Issuances of operating partnership units | — | — | — | — | — | — | 4,887 | 4,887 | ||||||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | — | (258 | ) | (258 | ) | ||||||||||||||||||||
Net loss | — | — | — | — | (46,494 | ) | (46,494 | ) | (83 | ) | (46,577 | ) | ||||||||||||||||||
Other comprehensive income | — | — | — | 95 | — | 95 | — | 95 | ||||||||||||||||||||||
Balance, December 31, 2017 | 105,172,185 | 1,052 | 2,393,237 | 95 | (657,874 | ) | 1,736,510 | 4,546 | 1,741,056 | |||||||||||||||||||||
Common stock issued through distribution reinvestment plan | 990,393 | 10 | 23,238 | — | — | 23,248 | — | 23,248 | ||||||||||||||||||||||
Common stock repurchases | (1,142,190 | ) | (11 | ) | (20,520 | ) | — | — | (20,531 | ) | — | (20,531 | ) | |||||||||||||||||
Vesting and conversion of Class B Units | 1,052,420 | 11 | 15,775 | — | — | 15,786 | — | 15,786 | ||||||||||||||||||||||
Redemption of Class A Units | 30,691 | — | 736 | — | — | 736 | (736 | ) | — | |||||||||||||||||||||
Share-based compensation - restricted shares | 127,402 | 1 | 449 | — | — | 450 | — | 450 | ||||||||||||||||||||||
Share-based compensation - multi-year outperformance agreement | — | — | — | — | — | — | 4,816 | 4,816 | ||||||||||||||||||||||
Dividends declared | — | — | — | — | (116,539 | ) | (116,539 | ) | — | (116,539 | ) | |||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | (225 | ) | (225 | ) | (229 | ) | (454 | ) | ||||||||||||||||||
Net loss | — | — | — | — | (37,409 | ) | (37,409 | ) | (62 | ) | (37,471 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | (626 | ) | — | (626 | ) | — | (626 | ) | |||||||||||||||||||
Balance, December 31, 2018 | 106,230,901 | $ | 1,063 | $ | 2,412,915 | $ | (531 | ) | $ | (812,047 | ) | $ | 1,601,400 | $ | 8,335 | $ | 1,609,735 | |||||||||||||
The accompanying notes are an integral part of these audited consolidated financial statements.
F-5
Year Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (37,471 | ) | $ | (46,577 | ) | $ | (54,255 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
Depreciation | 84,482 | 85,175 | 66,831 | ||||||||
Amortization of in-place lease assets | 54,439 | 68,477 | 34,247 | ||||||||
Amortization of deferred leasing costs | 986 | 375 | 65 | ||||||||
Amortization (including accelerated write-off) of deferred financing costs | 5,648 | 6,693 | 8,651 | ||||||||
Accretion of mortgage premiums on borrowings | (3,790 | ) | (4,096 | ) | (4,211 | ) | |||||
Discount accretion and premium amortization on investments, net | — | (25 | ) | (40 | ) | ||||||
Amortization (accretion) of market lease intangibles, net | (15,518 | ) | (5,173 | ) | 477 | ||||||
Share-based compensation - restricted shares | 450 | 128 | 67 | ||||||||
Share-based compensation -multi-year outperformance agreement | 4,816 | — | — | ||||||||
Vesting and conversion of Class B Units | 15,786 | — | — | ||||||||
Mark-to-market adjustments | (72 | ) | (130 | ) | — | ||||||
Gain on sale of real estate investments | (31,776 | ) | (15,128 | ) | (454 | ) | |||||
Impairment charges | 21,080 | 25,049 | 27,299 | ||||||||
Prepayment costs on mortgages | 4,224 | — | — | ||||||||
Changes in assets and liabilities: | |||||||||||
Straight-line rent receivable | (9,501 | ) | (7,744 | ) | (6,830 | ) | |||||
Prepaid expenses and other assets | (4,086 | ) | 2,575 | (2,052 | ) | ||||||
Accounts payable and accrued expenses | 1,694 | (7,780 | ) | 3,173 | |||||||
Deferred rent and other liabilities | 3,646 | (9,355 | ) | 401 | |||||||
Net cash, cash equivalents and restricted cash provided by operating activities | 95,037 | 92,464 | 73,369 | ||||||||
Cash flows from investing activities: | |||||||||||
Proceeds from sale of commercial mortgage loans | — | — | 56,884 | ||||||||
Proceeds from the settlement of CMBS | — | 17,200 | — | ||||||||
Capital expenditures | (10,426 | ) | (8,917 | ) | — | ||||||
Investments in real estate and other assets | (241,772 | ) | (149,337 | ) | (34,244 | ) | |||||
Proceeds from sale of real estate investments | 66,455 | 190,801 | 15,190 | ||||||||
Deposits for real estate acquisitions | (2,472 | ) | (565 | ) | — | ||||||
Cash paid in merger transaction | — | (94,504 | ) | — | |||||||
Cash acquired in merger transaction | — | 26,163 | — | ||||||||
Net cash, cash equivalents and restricted cash (used in) provided by investing activities | (188,215 | ) | (19,159 | ) | 37,830 | ||||||
Cash flows from financing activities: | |||||||||||
Proceeds from mortgage notes payable | 29,887 | 267,350 | — | ||||||||
Payments on mortgage notes payable | (47,197 | ) | (21,841 | ) | (1,014 | ) | |||||
Proceeds from credit facility | 324,700 | 85,000 | — | ||||||||
Payments on credit facility | (95,000 | ) | (294,000 | ) | — | ||||||
Payments of financing costs | (7,031 | ) | (4,948 | ) | (5,709 | ) | |||||
Payments of prepayment costs on mortgages | (4,224 | ) | — | — | |||||||
Common stock repurchases | (20,531 | ) | (29,058 | ) | (16,253 | ) | |||||
Distributions to non-controlling interest holders | (225 | ) | — | — | |||||||
Dividends paid | (104,824 | ) | (87,659 | ) | (87,505 | ) | |||||
Net cash, cash equivalents and restricted cash provided by (used in) financing activities | 75,555 | (85,156 | ) | (110,481 | ) | ||||||
Net change in cash, cash equivalents and restricted cash | (17,623 | ) | (11,851 | ) | 718 | ||||||
Cash, cash equivalents and restricted cash, beginning of period | 127,254 | 139,105 | 138,387 | ||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 109,631 | $ | 127,254 | $ | 139,105 | |||||
F-6
Year Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Supplemental Disclosures: | |||||||||||
Cash paid for interest | $ | 63,839 | $ | 57,017 | $ | 49,140 | |||||
Cash paid for income taxes | $ | 1,100 | $ | 827 | $ | 739 | |||||
Non-Cash Investing and Financing Activities: | |||||||||||
Equity issued in the merger transaction | $ | — | $ | 921,930 | $ | — | |||||
Credit facility assumed or used to acquire investments in real estate | $ | — | $ | 304,000 | $ | — | |||||
Mortgage notes payable released in connection with disposition of real estate | $ | (90,038 | ) | $ | (103,041 | ) | $ | (14,867 | ) | ||
Mortgage notes payable assumed or used to acquire investments in real estate | $ | — | $ | 127,651 | $ | — | |||||
Premiums on assumed mortgage notes payable | $ | — | $ | 4,143 | $ | — | |||||
Common stock issued through distribution reinvestment plan | $ | 23,248 | $ | 55,853 | $ | 20,499 | |||||
Accrued capital expenditures | $ | 341 | $ | 933 | $ | — | |||||
The accompanying notes are an integral part of these audited consolidated financial statements.
F-7
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Note 1 — Organization
American Finance Trust, Inc. (the “Company”) is a diversified REIT focused on acquiring and managing a diversified portfolio of primarily service-oriented and traditional retail and distribution related commercial real estate properties in the U.S. The Company owns a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants and, as a result of the Merger (as defined in Note 2 — Merger Transaction), a portfolio of retail properties consisting primarily of power centers and lifestyle centers. The Company intends to focus its future acquisitions primarily on net leased retail properties. As of December 31, 2018, the Company owned 626 properties, comprised of 19.1 million rentable square feet, which were 94.7% leased, including 593 net leased commercial properties (554 of which are retail properties) and 33 retail properties which were acquired in the Merger.
The Company, incorporated on January 22, 2013, is a Maryland corporation that elected to be taxed as a real estate investment trust for U.S. federal income tax purposes (“REIT”) beginning with the taxable year ended December 31, 2013. Substantially all of the Company’s business is conducted through American Finance Operating Partnership, L.P. (the “OP”), a Delaware limited partnership, and its wholly-owned subsidiaries.
On July 19, 2018 (the “Listing Date”), the Company listed shares of its common stock, which had been renamed “Class A common stock” in connection with a series of corporate actions effected earlier in July 2018, on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “AFIN” (the “Listing”). Related to the Listing, the Company incurred fees of $5.0 million for the year ended December 31, 2018 for financial advisory and other transaction related costs.
To effect the Listing, and to address the potential for selling pressure that may have existed at the outset of listing, the Company listed only shares of Class A common stock, which represented approximately 50% of its outstanding shares of common stock, on Nasdaq on the Listing Date. The Company’s two other classes of outstanding stock at the time of the Listing were Class B-1 common stock, which comprised approximately 25% of the Company’s outstanding shares of common stock at that time, and Class B-2 common stock, which comprised approximately 25% of the Company’s outstanding shares of common stock at that time. As of December 31, 2018, the Company had 106.2 million shares of common stock outstanding, comprised of approximately 80.0 million shares of Class A common stock and approximately 26.2 million shares of Class B-2 common stock. In accordance with their terms, all shares of Class B-1 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on October 10, 2018 and all shares of Class B-2 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on January 9, 2019. For additional information see Note 9 — Common Stock.
The Company has no employees. The Company has retained American Finance Advisors, LLC (the “Advisor”) to manage the Company’s affairs on a day-to-day basis. American Finance Properties, LLC (the “Property Manager”) serves as the Company’s property manager. The Advisor and the Property Manager are under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, “AR Global”), and these related parties of the Company receive compensation, fees and expense reimbursements for services related to managing the Company’s business. Lincoln Retail REIT Services, LLC (“Lincoln”) and its affiliates provide services to the Advisor in connection with our multi-tenant retail properties that are not net leased. The Advisor has informed the Company that the Advisor has agreed to pass through to Lincoln a portion of the fees and other expense reimbursements otherwise payable to the Advisor or its affiliates by the Company for services rendered by Lincoln. The Company is not a party to any contract with, and has no obligation to, Lincoln.
In addition to the above events, the Listing resulted in other impacts to our financial statements which are discussed throughout these financial statements, including:
• | The vesting and conversion of performance-based restricted, forfeitable partnership units of the OP designated as “Class B Units” (“Class B Units”) held by the Advisor into units of limited partnership designated as “Class A Units” (“Class A Units”) which were previously designated as “OP Units” under the agreement of limited partnership of the OP in effect prior to the Listing (“OP Units”) that were redeemed for shares of Class A common stock (these transactions are collectively referred to herein as “Vesting and conversion of Class B Units,” (see Note 9 — Common Stock and Note 11 — Related Party Transactions and Arrangements—“Asset Management Fees and Variable Management/Incentive Fees”). |
• |
• | The Company entered into the Listing Note (as defined herein) with the Advisor (see Note 11 — Related Party Transactions and Arrangements — “Listing Arrangements”). |
F-8
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
• | The advisory agreement with the Advisor was amended to lower the quarterly thresholds the Company must reach on a quarterly basis for the Advisor to receive a variable management fee (see Note 11 — Related Party Transactions and Arrangements — “Asset Management Fees and Variable Management/Incentive Fees”). |
• |
• | The change in the rate at which the Company pays dividends on its common stock from an annualized rate equal to $1.30 per share to an annualized rate equal to $1.10 per share (see Note 9 — Common Stock). |
Note 2 — Merger Transaction
On February 16, 2017, the Company and the OP completed (a) the merger of American Realty Capital — Retail Centers of America, Inc. (“RCA”) with and into a subsidiary of the Company (the “Merger Sub”), with the Merger Sub surviving as a wholly owned subsidiary of the Company and (b) the merger of American Realty Capital Retail Operating Partnership, L.P. (the “RCA OP”) with and into the OP, with the OP as the surviving entity (together, the “Merger”). Pursuant to the terms and subject to the conditions set forth in the Agreement and Plan of Merger (the “Merger Agreement”) entered into by the Company and the OP with RCA, the RCA OP and the Merger Sub, at the effective time of the Merger on February 16, 2017 (the “Effective Time”), each outstanding share of common stock of RCA, $0.01 par value per share (“RCA Common Stock”) (including any restricted shares of RCA Common Stock and fractional shares), was converted into (x) 0.385 shares of the Company’s common stock (the “Stock Consideration”) and (y) cash from the Company, in an amount equal to $0.95 per share (the “Cash Consideration,” and together with the Stock Consideration, the “Merger Consideration”).
In addition, at the Effective Time, (i) each unit of partnership interest of the RCA OP designated as an OP unit issued and outstanding immediately prior to the Effective Time (other than those held by RCA as described in clause (ii) below) was automatically converted into 0.424 validly issued units of limited partnership interest of the OP (the “Partnership Merger Consideration”); (ii) each unit of partnership interest of the RCA OP designated as either an OP unit or a GP unit held by RCA and issued and outstanding immediately prior to the Effective Time was automatically converted into 0.385 validly issued units of limited partnership interest of the OP; (iii) each unit of partnership interest of the RCA OP designated as a Class B Unit held by RCA’s advisor and a sub-advisor issued and outstanding immediately prior to the Effective Time was converted into the Partnership Merger Consideration (the “Class B Consideration,” and together with the Partnership Merger Consideration and the Merger Consideration, the “Total Merger Consideration”), and (iv) the interest of American Realty Capital Retail Advisor, LLC, the special limited partner of the RCA OP (the “RCA Advisor”), in the RCA OP was redeemed for a cash payment, determined in accordance with the existing terms of the RCA OP’s agreement of limited partnership.
In addition, as provided in the Merger Agreement, all outstanding restricted shares of RCA Common Stock previously issued by RCA became fully vested and entitled to receive the Merger Consideration.
The Company issued 38.2 million shares of its common stock as Stock Consideration and paid $94.5 million in Cash Consideration.
Prior to the Merger, the Company and RCA each were sponsored, directly or indirectly, by AR Global. AR Global and its affiliates provide investment and advisory services to the Company, and previously provided such services to RCA, pursuant to written advisory agreements. In connection with, and subject to the terms and conditions of the Merger Agreement, RCA OP units held by AR Global and its affiliates were exchanged for OP Units and certain special limited partner interests in the RCA OP held by AR Global and its affiliates were, consistent with the terms of the RCA OP partnership agreement, redeemed for a cash payment of approximately $2.8 million.
The Advisor informed the Company that the Advisor engaged Lincoln as an independent service provider to provide real estate-related services similar to the services provided by Lincoln to the RCA Advisor prior to the Effective Time. Lincoln will continue to provide, subject to the Advisor’s or its affiliates’ oversight, asset management, property management and leasing services for those multi-tenant properties acquired by the Company from RCA in the Merger. The Advisor informed the Company that the Advisor agreed to pass through to Lincoln a portion of the fees and other expense reimbursements otherwise payable to the Advisor or its affiliates by the Company for services rendered by Lincoln. The Company is not a party to any contract with, and has no obligation to, Lincoln.
F-9
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Accounting Treatment for the Merger
The Merger was accounted for under the acquisition method for business combinations pursuant to accounting principles generally accepted in the United States of America (“GAAP”), with the Company as the accounting acquirer of RCA. The consideration transferred by the Company to acquire RCA established a new accounting basis for the assets acquired, liabilities assumed and any non-controlling interests, measured at their respective fair value as of the Effective Time. In determining the fair value of the consideration transferred, including the Stock Consideration and any non-controlling interests, the Company utilized multiple sources including real estate valuations prepared by independent valuation firms and market sales data. The fair value of the Total Merger Consideration that exceeded the fair value of net assets acquired, was recorded as goodwill.
The following table summarizes the estimated fair value of the consideration transferred pursuant to the Merger and the estimated fair values of the assets acquired and liabilities assumed as of the Effective Time.
(In thousands) | RCA | |||
Total Consideration: | ||||
Fair value of the Cash Consideration, including redemption of fractional shares, as defined in the Merger Agreement | $ | 94,504 | ||
Fair value of the Stock Consideration (1) | 917,046 | |||
Fair value of the Partnership Merger Consideration | 2 | |||
Fair value of the Class B Consideration | 4,882 | |||
Fair value of the Total Merger Consideration | $ | 1,016,434 | ||
Assets Acquired at Fair Value | ||||
Land | $ | 282,063 | ||
Buildings, fixtures and improvements | 1,079,944 | |||
Acquired intangible lease assets | 178,634 | |||
Total real estate investments, at fair value | 1,540,641 | |||
Cash and cash equivalents | 21,922 | |||
Restricted cash | 4,241 | |||
Prepaid expenses and other assets | 18,959 | |||
Goodwill | 1,605 | |||
Total assets acquired at fair value | 1,587,368 | |||
Liabilities Assumed at Fair Value | ||||
Mortgage notes payable | 127,651 | |||
Mortgage premiums | 4,143 | |||
Credit facility | 304,000 | |||
Market lease liabilities | 104,840 | |||
Derivatives | 203 | |||
Accounts payable and accrued expenses | 21,291 | |||
Deferred rent and other liabilities | 8,806 | |||
Total liabilities assumed at fair value | 570,934 | |||
Net assets acquired | $ | 1,016,434 | ||
_________________________________
(1) | Valued at $24.00 per share as of the date of the Merger. |
As a result of the Merger, the Company recorded goodwill of $1.6 million, which is primarily attributable to expected synergies from combining operations of the Company and RCA.
F-10
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Note 3 — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The Company currently presents Straight-line rent receivable on its own line item in the consolidated balance sheets and the consolidated statement of cash flows, which was previously included within Prepaid expenses and other assets. Additionally, we separated amortization of deferred leasing costs presented in the consolidated statement of cash flows onto its own line item with prior presentation of these costs included in amortization (including accelerated write-off) of deferred financing costs. Also, Gain on sale of real estate investments is now included as part of operating income.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity (“VIE”) for which the Company is the primary beneficiary. The Company has determined the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company’s assets and liabilities are held by the OP.
Purchase Accounting
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired, including those acquired in the Merger, based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company’s analysis of comparable properties in the Company’s portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates and the value of in-place leases as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 24 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below-market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company’s pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Reportable Segment
The Company has one reportable segment, income-producing properties, which consists of activities related to investing in real estate.
F-11
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, and fair value measurements, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In both a business combination and an asset acquisition, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests in a business combination are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates. In a business combination, the difference between the purchase price and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain.
In allocating non-controlling interests in a business combination, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including real estate valuations, prepared by independent valuation firms. The Company also considers information and other factors including: market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental rates, tenant credit profile, store profitability and the importance of the location of the real estate to the operations of the tenant’s business.
Real estate investments that are intended to be sold are designated as “held for sale” on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on the Company’s operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all applicable periods.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
F-12
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If an impairment exists, due to the inability to recover the carrying value of a property, the Company would recognize an impairment loss in the consolidated statement of operations to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss recorded would equal the adjustment to fair value less estimated cost to dispose of the asset.
Goodwill
Goodwill, which is not amortized, represents the difference between the purchase price and the fair value of identifiable net assets acquired in a business combination. We review goodwill for impairment indicators throughout the year and test for impairment annually in the fourth quarter. Impairment indicators may be an event or circumstance that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For 2018, the Company used a qualitative assessment approach to determine whether it is more likely than not that the fair value of the reporting unit, which contains the Company’s goodwill, is less than its carrying value. Based on our assessment we determined that the Company’s goodwill was not impaired as of December 31, 2018, and no further analysis was required.
Derivative Instruments
The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any change in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the accompanying consolidated statements of operations and comprehensive loss. If the derivative is designated and qualifies for hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.
Non-controlling Interests
F-13
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
The non-controlling interests represent the portion of the equity in the OP that is not owned by the Company. Non-controlling interests are presented as a separate component of equity on the consolidated balance sheets and presented as net loss attributable to non-controlling interests on the consolidated statements of operations and comprehensive loss. Non-controlling interests are allocated a share of net loss based on their share of equity ownership.
Non-controlling interests resulted from the issuance of OP Units in conjunction with the Merger and were recognized at fair value as of the Effective Time. In determining the fair value of the non-controlling interests, the Company utilized multiple sources including real estate valuations prepared by independent valuation firms and market sales data. Please see Note 2 — Merger Transaction for additional information on the Merger. Also, see Note 9 — Common Stock and Note 13 — Share-Based Compensation for additional information on transactions that impacted the amounts recorded for non-controlling interests during the year ended December 31, 2018.
Commercial Mortgage Loans
The Company did not own any commercial mortgage loans as of December 31, 2018 and 2017. As of December 31, 2016, the Company owned a commercial mortgage loan with a balance of $17.2 million which was repaid by the borrower during the year ended December 31, 2017. The commercial mortgage loans owned by the Company as of December 31, 2016 were anticipated to be held until maturity, and accordingly, were carried at cost, net of unamortized acquisition fees and expenses capitalized, discounts or premiums and unfunded commitments. Commercial mortgage loans that were deemed to be impaired would have been carried at amortized cost less a specific allowance for loan losses. Interest income was recorded on the accrual basis and related discounts, premiums and capitalized acquisition fees and expenses on investments are amortized over the life of the investment using the effective interest method. Amortization was reflected as an adjustment to interest income from debt investments in the Company’s consolidated statements of operations and comprehensive loss. Guaranteed loan exit fees payable by the borrower upon maturity were accreted over the life of the investment using the effective interest method. The accretion of guaranteed loan exit fees were recognized in interest income from debt investments in the Company’s consolidated statements of operations and comprehensive loss.
Acquisition fees and expenses incurred in connection with the origination and acquisition of commercial mortgage loan investments were evaluated based on the nature of the expense to determine if they should be expensed in the period incurred or capitalized and amortized over the life of the investment.
For the years ended December 31, 2017 and 2016, the activity in the Company’s commercial mortgage loans, held for investment, was as follows:
Year Ended December 31, | ||||||||
(In thousands) | 2017 | 2016 | ||||||
Beginning balance | $ | 17,175 | $ | 17,135 | ||||
Discount accretion and premium amortization (1) | 25 | 40 | ||||||
Principal repayments | (17,200 | ) | — | |||||
Ending balance | $ | — | $ | 17,175 | ||||
_____________________________________
(1) | Includes amortization of capitalized origination fees and expenses. |
Cash and Cash Equivalents
Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less and funds in overnight sweeps, in which excess funds over an established threshold are swept daily. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company (the “FDIC”) up to an insurance limit. As of December 31, 2018, the Company had cash and cash equivalents of $91.5 million of which $89.7 million were in excess of the amount insured by the FDIC. As of December 31, 2017, the Company had cash and cash equivalents of $107.7 million of which $105.9 million were in excess of the amount insured by the FDIC. Although the Company bears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result thereof.
Deferred Costs, Net
Deferred costs, net consists of debt issuance costs associated with the Credit Facility (as defined in Note 6 — Credit Facility) and deferred leasing costs, net of accumulated amortization. Deferred leasing costs consist primarily of lease commissions and payments made to execute new leases and are deferred and amortized over the term of the lease.
F-14
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Deferred costs associated with the Credit Facility represent commitment fees, legal fees, and other costs associated with obtaining commitments for financing. These costs are amortized over the term of the financing agreement using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or paid down before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Deferred leasing costs consist primarily of lease commissions and payments made to execute new leases and are deferred and amortized over the term of the lease.
Revenue Recognition
The Company’s revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Because many of the Company’s leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rents receivable that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When the Company acquires a property, acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease is executed. The Company defers the revenue related to lease payments received from tenants in advance of their due dates.
The Company owns certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant’s sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, the Company defers the recognition of contingent rental income, until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. For the year ended December 31, 2018, approximately $0.9 million in contingent rental income is included in rental income on the accompanying consolidated statements of operations and comprehensive loss.
The Company continually reviews receivables related to rent and unbilled rents receivable and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company records an increase in the Company’s allowance for uncollectible accounts or records a direct write-off of the receivable in the Company’s consolidated statements of operations and comprehensive loss.
Cost recoveries from tenants are included in operating expense reimbursements on the accompanying consolidated statements of operations and comprehensive loss in the period the related costs are incurred, as applicable.
Share-Based Compensation
The Company has a stock-based award plan, which is accounted for under the guidance for share based payments. The expense for such awards is included in general and administrative expenses are recognized in accordance with the service period required or when the requirements for exercise of the award have been met. Effective at the Listing, the Company entered into a multi-year outperformance agreement with the Advisor (the “2018 OPP”) under which a new class of units of limited partnership designated as “LTIP Units” (“LTIP Units”) were issued to the Advisor. The expense for these non-employee awards is included in the share-based compensation - multi-year outperformance agreement line item of the consolidated statements of operations. For additional information on the accounting for these non-employee awards, see the “Recently Issued Accounting Pronouncements” section below and see Note 13 — Share-Based Compensation.
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the taxable year ended December 31, 2013. The Company believes that, commencing with such taxable year, it has been organized and has operated in a manner so that it qualifies for taxation as a REIT under the Code. The Company intends to continue to operate in such a manner, but no assurance can be given that the Company will operate in a manner so as to remain qualified as a REIT. In order to continue to qualify for taxation as a REIT, the Company must distribute annually at least 90% of its REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If the Company continues to qualify for taxation as a REIT, it generally will not be subject to federal corporate income tax on that portion of its REIT taxable income that it distributes to its stockholders. Even if
F-15
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and properties, as well as federal income and excise taxes on its undistributed income.
The amount of dividends payable to the Company’s stockholders is determined by the board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable, and annual distribution requirements needed to qualify and maintain the Company’s status as a REIT under the Code.
The following table details from a tax perspective, the portion of dividends classified as return of capital and ordinary dividend income, per share per annum, for the years ended December 31, 2018, 2017 and 2016:
Year Ended December 31, | |||||||||||||||||||||
2018 | 2017 | 2016 | |||||||||||||||||||
Return of capital | 93.2 | % | $ | 1.03 | 82.7 | % | $ | 1.22 | 76.0 | % | $ | 1.25 | |||||||||
Ordinary dividend income | 6.8 | % | 0.07 | 17.3 | % | 0.25 | 24.0 | % | 0.40 | ||||||||||||
Total | 100.0 | % | $ | 1.10 | 100.0 | % | $ | 1.47 | 100.0 | % | $ | 1.65 | |||||||||
Per Share Data
Basic net loss per share of common stock is calculated by dividing net loss by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net loss per share of common stock considers the effect of potentially dilutive instruments outstanding during such period.
Recently Issued Accounting Pronouncements
Adopted as of January 1, 2018:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and has since issued several additional amendments thereto (collectively referred to herein as “ASC 606”). ASC 606 establishes a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under ASC 606, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A reporting entity may apply the amendments in ASC 606 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. The Company adopted this guidance effective January 1, 2018 using the modified retrospective approach, and it did not have an impact on the Company’s consolidated financial statements. The new guidance did not have an impact on the Company’s consolidated financial statements, primarily as a result of revenue being sourced from lease arrangements that are outside the scope of ASC 606 until the new lease standard is adopted.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10), that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The Company adopted this guidance effective January 1, 2018 and there was no impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The Company adopted the new guidance beginning in the first quarter of 2018, and it did not have a material impact on the Company’s consolidated statement of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which revises the definition of a business. This new guidance is applicable when evaluating whether an acquisition should be treated as either a business acquisition or an asset acquisition. Under the revised guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not be considered a business. The Company adopted this guidance effective January 1, 2018, and will apply the new rules prospectively. The Company expects, based on historical property acquisitions, that in most cases, a future property acquired after adoption will be treated as an asset acquisition rather than a business acquisition, which will result in the capitalization of related transaction costs. The Company has evaluated the impact of this new guidance beginning in the first quarter of 2018,
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
and determined that it did not have a material impact on the Company’s consolidated financial statements. As a result, the Company has treated its property acquisitions during the year ended December 31, 2018 as asset acquisitions, and has capitalized the related transaction costs of approximately $2.9 million.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Assets Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance related to partial sales of non-financial assets, eliminates rules specifically addressing the sales of real estate, clarifies the definition of in substance non-financial assets, removes the exception to the financial asset derecognition model and clarifies the accounting for contributions of non-financial assets to joint ventures. The Company adopted this guidance effective January 1, 2018 using the modified transition method. Sales of real estate in which the Company loses its controlling interest in the real estate property will result in the full gain amount being recognized at the time of the partial sale. During the year ended December 31, 2018 the Company did not retain any interest in properties in which it sold.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update states that modification accounting should be used unless the fair value of the award, the vesting terms of the award and the classification of the award as either equity or liability, all do not change as a result of the modification. The Company adopted this guidance effective January 1, 2018 and it did not have an impact on the Company’s consolidated financial statements. The Company expects that any future modifications to its issued share-based awards will be accounted for using modification accounting, unless the modification meets all of the exception criteria noted above. As a result, the modification would be treated as an exchange of the original award for a new award, with any incremental fair value being treated as additional compensation cost.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting as an amendment and update expanding the scope of Topic 718 (“ASU 2018-07”). ASU 2018-07 specifies that Topic 718 now applies to all share-based payment transactions, even non-employee awards, in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Under the new guidance, awards to nonemployees are measured on the grant date, rather than on the earlier of the performance commitment date or the date at which the nonemployee’s performance is complete. Also, the awards would be measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can be measured more reliably. In addition, entities may use the expected term to measure nonemployee awards or elect to use the contractual term as the expected term, on an award-by-award basis. The new guidance is effective for the Company in annual periods beginning after December 15, 2018 and interim periods within those annual periods, however early adoption is permitted. The Company early adopted ASU 2018-07 on July 1, 2018 as it relates to the award made to the Advisor pursuant to the 2018 OPP (see Note 13 — Share-Based Compensation for additional details).
Pending Adoption as of December 31, 2018:
ASU No. 2016-02 — Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02"). The most significant changes in ASU 2016-02 is recognition of right-of-use ("ROU") assets and lease liabilities by lessees for those leases classified as operating leases, with less significant changes for lessors. Also, beginning in the first quarter of 2019, the new guidance requires additional disclosures that help enable users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company elected the practical expedient package that allows the Company: (a) to not reassess whether any expired or existing contracts entered into prior to January 1, 2019 are or contain leases; (b) to not reassess the lease classification for any expired or existing leases entered into prior to January 1, 2019; and (c) to not reassess initial direct costs for any expired or existing leases entered into prior to January 1, 2019. In addition, the Company elected to not record on its consolidated balance sheets leases whose term is less than 12 months at lease inception. ASU 2016-02 originally required a modified retrospective method of adoption, however, ASU No. 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"), provides companies with an additional transition option that would permit the application of ASU 2016-02 as of the adoption date rather than to all periods presented. The Company assessed the impact of adoption from both a lessor and lessee perspective, which is discussed in more detail below, and adopted the new guidance prospectively on January 1, 2019, as allowed under ASU 2018-11.
Lessor Accounting
ASU 2016-02 originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, ASU 2018-11 allows lessors a practical expedient, which we have elected, by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. Additionally, only
F-17
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
incremental direct leasing costs may be capitalized under this new guidance, which is consistent with the Company’s existing policies.
Upon adoption, the new guidance did not impact the Company's revenue recognition pattern or have any other impacts on its leases in place as of January 1, 2019 in which it is the lessor.
Lessee Accounting
Under ASU 2016-02, companies are required to record a ROU asset and a lease liability for all leases with a term greater than 12 months equal to the present value of the remaining lease payments as of the adoption date of the new standard. Since our leases do not provide an implicit rate, we will use our incremental borrowing rate in determining the present value of lease payments. The new standard also requires lessees to apply a dual lease classification approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively, as well as the balance sheet classification of the ROU asset. Leases with a term of 12 months or less will be accounted for similar to previous guidance for operating leases.
The Company is a lessee for several properties in which it has ground leases as of December 31, 2018. Since the Company has elected the practical expedients described above, it determined that its current ground leases will continue to be classified as operating leases under the new standard. As a result, the Company recorded a ROU asset and lease liability of approximately $4.2 million, which is equal to the present value of the remaining lease payments as of January 1, 2019. Future lease expenses after adoption will continue to be recorded on a straight-line basis as required for operating leases.
Other Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. On July 25, 2018, the FASB proposed an amendment to ASU 2016-13 to clarify that operating lease receivables recorded by lessors (including unbilled straight-line rent) are explicitly excluded from the scope of ASU 2016-13. The new guidance is effective for reporting periods beginning after December 15, 2019, with early adoption permitted for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This new standard simplifies subsequent measurements of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, entities will perform their interim or annual goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge based on the amount that the carrying amount exceeds the reporting unit's fair value. The loss recognized should not exceed the total goodwill allocated to the reporting unit. The amendments become effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the potential impact of this new guidance.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to better align cash flow and fair value hedge accounting with the corresponding risk management activities. Among other things, the amendments expand which hedging strategies are eligible for hedge accounting, align the timing of recognition of hedge results with the earnings effect of the hedged item and allow companies to include the change in fair value of the derivative in the same income statement line item as the earnings effect of the hedged item. Additionally, for cash flow hedges that are highly effective, the update allows for all changes in fair value of the derivative to be recorded in other comprehensive income. The Company has adopted ASU 2017-12 on January 1, 2019, as required under the guidance, using a modified retrospective transition method and the adoption on January 1, 2019 did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to the financial statements by removing, modifying, and adding certain fair value disclosure requirements to facilitate clear communication of the information required by generally accepted accounting principles. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted upon issuance of this ASU. The Company is currently evaluating the potential impact of this new guidance.
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Note 4 — Real Estate Investments
The following table presents the allocation of assets acquired and liabilities assumed during the years ended December 31, 2018, 2017 and 2016.
Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
Real estate investments, at cost: | ||||||||||||
Land | $ | 61,745 | $ | 313,423 | $ | 1,729 | ||||||
Buildings, fixtures and improvements | 140,151 | 1,176,909 | 29,664 | |||||||||
Total tangible assets | 201,896 | 1,490,332 | 31,393 | |||||||||
Acquired intangible assets and liabilities: (1) | ||||||||||||
In-place leases | 39,978 | 177,152 | 3,162 | |||||||||
Above-market lease assets | 1,055 | 22,934 | 548 | |||||||||
Below-market ground lease asset | — | 1,233 | ||||||||||
Above-market ground lease liability | — | — | (85 | ) | ||||||||
Below-market lease liabilities | (1,157 | ) | (106,513 | ) | (774 | ) | ||||||
Total intangible assets, net | 39,876 | 94,806 | 2,851 | |||||||||
Prior Credit Facility assumed in the Merger (2) | — | (304,000 | ) | |||||||||
Mortgage notes payable assumed in the Merger | — | (127,651 | ) | — | ||||||||
Premiums on mortgage notes payable assumed in the Merger | — | (4,143 | ) | — | ||||||||
Other assets acquired and (liabilities assumed) in the Merger, net | — | 16,427 | ||||||||||
Consideration paid for acquired real estate investments, net of liabilities assumed | $ | 241,772 | $ | 1,165,771 | $ | 34,244 | ||||||
Number of properties purchased | 130 | 110 | 4 | |||||||||
_____________________________________
(1) | Weighted-average remaining amortization periods for in-place leases, above-market lease assets, below-market ground lease asset, and below-market lease liabilities acquired during the year ended December 31, 2018 were 17.3 years, 15.9 years, and 20.1 years, respectively, as of each property’s respective acquisition date. |
(2) The Prior Credit Facility was scheduled to mature on May 1, 2018. On April 26, 2018, the Company repaid the Prior Credit Facility in full and entered into the Credit Facility (see Note 6 — Credit Facility for definitions and additional information).
Total acquired intangible lease assets and liabilities consist of the following as of the dates presented:
December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Intangible assets: | ||||||||||||||||||||||||
In-place lease assets | $ | 388,323 | $ | 135,864 | $ | 252,459 | $ | 421,369 | $ | 140,085 | $ | 281,284 | ||||||||||||
Above-market lease assets | 24,392 | 7,477 | 16,915 | 31,610 | 11,309 | 20,301 | ||||||||||||||||||
Below-market ground lease assets | 1,233 | 60 | 1,173 | 1,233 | 28 | 1,205 | ||||||||||||||||||
Total acquired intangible lease assets | $ | 413,948 | $ | 143,401 | $ | 270,547 | $ | 454,212 | $ | 151,422 | $ | 302,790 | ||||||||||||
Intangible liabilities: | ||||||||||||||||||||||||
Above-market ground lease liability | $ | 85 | $ | 5 | $ | 80 | $ | 85 | $ | 3 | $ | 82 | ||||||||||||
Below-market lease liabilities | 107,401 | 17,543 | 89,858 | 119,249 | 10,559 | 108,690 | ||||||||||||||||||
Total acquired intangible lease liabilities | $ | 107,486 | $ | 17,548 | $ | 89,938 | $ | 119,334 | $ | 10,562 | $ | 108,772 | ||||||||||||
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
The following table presents amortization expenses and adjustments to revenue and property operating expenses for intangible assets and liabilities for the years ended December 31, 2018, 2017 and 2016:
Year Ended December 31, | ||||||||||||
(In thousands) | 2018 | 2017 | 2016 | |||||||||
In-place lease assets | $ | 54,439 | $ | 68,477 | $ | 34,247 | ||||||
Total added to depreciation and amortization | $ | 54,439 | $ | 68,477 | $ | 34,247 | ||||||
Above-market lease assets | $ | (4,441 | ) | $ | (6,007 | ) | $ | (2,943 | ) | |||
Below-market lease liabilities | 19,989 | 11,212 | 2,465 | |||||||||
Total added (deducted) to/from rental income | $ | 15,548 | $ | 5,205 | $ | (478 | ) | |||||
Below-market ground lease assets | $ | 32 | $ | (28 | ) | $ | — | |||||
Above-market ground lease liability | (2 | ) | (2 | ) | (1 | ) | ||||||
Total added to (deducted from) property operating expenses | $ | 30 | $ | (30 | ) | $ | (1 | ) | ||||
The following table provides the projected amortization expenses and adjustments to revenue and property operating expenses for intangible assets and liabilities for the next five years:
(In thousands) | 2019 | 2020 | 2021 | 2022 | 2023 | |||||||||||||||
In-place lease assets | $ | 41,273 | $ | 34,470 | $ | 30,020 | $ | 25,998 | $ | 23,588 | ||||||||||
Total to be added to depreciation and amortization | $ | 41,273 | $ | 34,470 | $ | 30,020 | $ | 25,998 | $ | 23,588 | ||||||||||
Above-market lease assets | $ | (3,249 | ) | $ | (2,428 | ) | $ | (2,113 | ) | $ | (1,738 | ) | $ | (1,489 | ) | |||||
Below-market lease liabilities | 7,752 | 7,048 | 6,379 | 5,974 | 5,803 | |||||||||||||||
Total to be added to rental income | $ | 4,503 | $ | 4,620 | $ | 4,266 | $ | 4,236 | $ | 4,314 | ||||||||||
Below-market ground lease assets | $ | 32 | $ | 32 | $ | 32 | $ | 32 | $ | 32 | ||||||||||
Above-market ground lease liability | (2 | ) | (2 | ) | (2 | ) | (2 | ) | (2 | ) | ||||||||||
Total to be added to (deducted from) property operating expenses | $ | 30 | $ | 30 | $ | 30 | $ | 30 | $ | 30 | ||||||||||
The following table presents unaudited pro forma information as if the acquisitions, including the Merger, during the year ended December 31, 2017 had been consummated on January 1, 2016:
Year Ended December 31, | ||||||||
(In thousands, except per share data) | 2017 | 2016 | ||||||
Pro forma revenues | $ | 293,768 | $ | 276,972 | ||||
Pro forma net loss | $ | (38,113 | ) | $ | (11,042 | ) | ||
Basic and diluted pro forma net loss per share | $ | (0.36 | ) | $ | (0.11 | ) | ||
_____________________
(1) | For the year ended December 31, 2017, aggregate revenues and net income derived from the Company’s 2017 acquisitions (for the Company’s period of ownership) were $121.3 million and $11.6 million, respectively. |
F-20
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
The following table presents future minimum base rent payments on a cash basis due to the Company over the next five years and thereafter. 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 indexes among other items:
(In thousands) | Future Minimum Base Rent Payments | |||
2019 | $ | 232,222 | ||
2020 | 223,025 | |||
2021 | 211,918 | |||
2022 | 200,974 | |||
2023 | 185,455 | |||
Thereafter | 1,084,424 | |||
$ | 2,138,018 | |||
The following table lists the tenants (including, for this purpose, all affiliates of such tenants) from which the Company derives annualized rental income on a straight-line basis constituting 10.0% or more of the Company’s consolidated annualized rental income on a straight-line basis for all portfolio properties as of the dates indicated:
December 31, | ||||
Tenant | 2018 | 2017 | ||
SunTrust Bank | * | 11.2% | ||
_____________________
* | Tenant’s annualized rental income on a straight-line basis was not greater than or equal to 10.0% of consolidated annualized rental income for all properties as of the date specified. |
The termination, delinquency or non-renewal of leases by the above tenant may have a material adverse effect on revenues. No other tenant represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of December 31, 2018 and 2017.
The Company did not own property in any state that in total represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of December 31, 2018 and 2017.
Real Estate Held for Sale
When assets are identified by management as held for sale, the Company stops recognizing depreciation and amortization expense on the identified assets and estimates the sales price, net of costs to sell, of those assets. If the carrying amount of the assets classified as held for sale exceeds the estimated net sales price, the Company records an impairment charge equal to the amount by which the carrying amount of the assets exceeds the Company’s estimate of the net sales price of the assets. For additional information on impairment charges, see “Impairment Charges” section below.
As of December 31, 2018 and 2017, there were seven and four properties, respectively, classified as held for sale. During the twelve months ended December 31, 2018, the Company sold all four of the properties that were held for sale as of December 31, 2017 and had classified three additional properties as held for sale. The disposal of these properties does not represent a strategic shift. Accordingly, the operating results of the properties sold remain classified within continuing operations for all periods presented.
The following table details the major classes of assets associated with the properties that have been reclassified as held for sale as of December 31, 2018 and 2017:
F-21
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(In thousands) | December 31, 2018 | December 31, 2017 | ||||||
Real estate investments held for sale, at cost: | ||||||||
Land | $ | 6,113 | $ | 1,453 | ||||
Buildings, fixtures and improvements | 39,343 | 4,677 | ||||||
Acquired intangible lease assets | 12,517 | 1,252 | ||||||
Total real estate assets held for sale, at cost | 57,973 | 7,382 | ||||||
Less accumulated depreciation and amortization | (11,278 | ) | (2,666 | ) | ||||
Total real estate investments held for sale, net | 46,695 | 4,716 | ||||||
Impairment charges related to properties reclassified as held for sale | (2,176 | ) | (34 | ) | ||||
Assets held for sale | $ | 44,519 | $ | 4,682 | ||||
Real Estate Sales
During the year ended December 31, 2018, the Company closed on the sale of 44 properties, including 31 properties leased to SunTrust Bank, Inc. (“SunTrust”) which had lease terms that expired between December 31, 2017 and March 31, 2018, for an aggregate contract price of $161.5 million, exclusive of closing costs. These sales resulted in aggregate gains of $31.8 million, which are reflected in gain on sale of real estate investments on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2018.
During the year ended December 31, 2017, the Company closed on the sale of 25 properties, including 18 properties operated by SunTrust Banks, Inc. (as discussed below), for an aggregate contract price of $291.5 million, exclusive of closing costs. These sales resulted in aggregate gains of $15.1 million, which is reflected in gain on sale of real estate investments on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2017.
During the year ended December 31, 2016, the Company closed on the sale of 12 properties operated by SunTrust for an aggregate contract price of $30.2 million, exclusive of closing costs. The sale of these properties resulted in aggregate gains of $0.5 million, which is reflected in gain on sale of real estate investments on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2016.
Held for Use Real Estate Investments
As of December 31, 2018 and 2017, the Company owned seven and 41 held for use single-tenant net lease properties leased to SunTrust, which had lease terms that expired between December 31, 2017 and March 31, 2018. For all of its held for use properties, the Company had reconsidered the projected cash flows due to various performance indicators. As a result, the Company evaluated the impact on its ability to recover the carrying value of such properties based on the expected cash flows over its intended holding period.
For held for use assets, the Company primarily uses a market approach to estimate the future cash flows expected to be generated. This approach involves evaluating comparable sales of properties in the same geographic region as the held for use properties in order to generate an estimated sale price. The Company makes certain assumptions in this approach including, among others, that the properties in the comparable sales used in the analysis share similar characteristics to the held for use properties, and that market and economic conditions at the time of any potential sales of these properties, such as discount rates, demand for space, competition for tenants, changes in market rental rates, and costs to operate the property, would be similar to those in the comparable sales analyzed. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analysis may not be achieved, and actual losses or impairment may be realized in the future.
For some of the held for use properties, the Company has executed non-binding letters of intent (“LOIs”) or definitive purchase and sale agreements (“PSAs”) to sell the properties. In those instances, the Company uses the sale price from the applicable LOI or PSA to estimate the future cash flows expected to be generated. The Company makes certain assumptions in this approach as well, mainly that the sale of these properties would close at the terms specified in the LOI or PSA. There can be no guarantee that the sales of these properties will close under these terms or at all.
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Impairment Charges
The Company recorded total impairment charges of $21.1 million for the year ended December 31, 2018. This amount is comprised of impairment charges of $11.0 million, which were recorded upon reclassification of properties to assets held for sale to adjust the properties to their fair value less estimated cost of disposal and impairment charges of $10.1 million, which were recorded on 12 (including impairments of $1.7 million on nine properties leased to SunTrust) of the Company’s held for use properties. The majority of the impairment charges on the held for use properties related to two multi-tenant properties.
The Company recorded total impairment charges of $25.0 million for the year ended December 31, 2017. This amount is comprised of impairment charges of $4.5 million, which were recorded upon reclassification of properties to assets held for sale to adjust the properties to their fair value less estimated cost of disposal and impairment charges of $20.5 million were recorded on 38 (including impairments of $17.2 million on 36 properties leased to SunTrust) the Company’s held for use properties.
The Company recorded impairment charges of $27.3 million for the year ended December 31, 2016. This amount is comprised of impairment charges of $1.3 million, which were recorded upon reclassification of properties to assets held for sale to adjust the properties to their fair value less estimated cost of disposal and approximately $1.3 million related to the loss on sale of four single-tenant net lease properties operated by SunTrust. In addition, impairment charges include of $24.7 million of impairments recorded on 43 (all leased to SunTrust) of the Company’s held for use properties.
Note 5 — Mortgage Notes Payable, Net
The Company’s mortgage notes payable, net as of December 31, 2018 and 2017 consisted of the following:
Outstanding Loan Amount as of | Effective Interest Rate as of | ||||||||||||||||||
December 31, | December 31, | ||||||||||||||||||
Portfolio | Encumbered Properties | 2018 | 2017 | 2018 | Interest Rate | Maturity | Anticipated Repayment | ||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||||
SAAB Sensis I | 1 | $ | 7,077 | $ | 7,470 | 5.93 | % | Fixed | Apr. 2025 | Apr. 2025 | |||||||||
SunTrust Bank II | 23 | 13,412 | 21,243 | 5.50 | % | Fixed | Jul. 2031 | Jul. 2021 | |||||||||||
SunTrust Bank III | 85 | 68,080 | 79,729 | 5.50 | % | Fixed | Jul. 2031 | Jul. 2021 | |||||||||||
SunTrust Bank IV | 18 | 18,113 | 22,756 | 5.50 | % | Fixed | Jul. 2031 | Jul. 2021 | |||||||||||
Sanofi US I | 1 | 125,000 | 125,000 | 5.16 | % | Fixed | Jul. 2026 | Jan. 2021 | |||||||||||
Stop & Shop I | 4 | 36,812 | 37,562 | 5.63 | % | Fixed | Jun. 2041 | Jun. 2021 | |||||||||||
Mortgage Loan I | 250 | 572,199 | 638,115 | 4.36 | % | Fixed | Sep. 2020 | Sep. 2020 | |||||||||||
Liberty Crossing (1) | — | — | 11,000 | — | — | ||||||||||||||
Tiffany Springs MarketCenter (1) | — | — | 33,802 | — | — | ||||||||||||||
Shops at Shelby Crossing | 1 | 22,581 | 23,002 | 4.97 | % | Fixed | Mar. 2024 | Mar. 2024 | |||||||||||
Patton Creek | 1 | 40,027 | 40,858 | 5.76 | % | Fixed | Dec. 2020 | Dec. 2020 | |||||||||||
Bob Evans I | 23 | 23,950 | 23,950 | 4.71 | % | Fixed | Sep. 2037 | Sep. 2027 | |||||||||||
Mortgage Loan II | 12 | 210,000 | 210,000 | 4.25 | % | Fixed | Jan. 2028 | Jan. 2028 | |||||||||||
Mortgage Loan III | 22 | 33,400 | 33,400 | 4.12 | % | Fixed | Jan. 2028 | Jan. 2028 | |||||||||||
Mortgage Loan IV | 39 | 29,887 | — | 5.16 | % | Fixed | (3) | Mar. 2025 | Mar. 2025 | ||||||||||
Gross mortgage notes payable | 480 | 1,200,538 | 1,307,887 | 4.64 | % | (2) | |||||||||||||
Deferred financing costs, net of accumulated amortization (4) | (11,363 | ) | (15,182 | ) | |||||||||||||||
Mortgage premiums, net | 6,938 | 10,728 | |||||||||||||||||
Mortgage notes payable, net | $ | 1,196,113 | $ | 1,303,433 | |||||||||||||||
_____________________________________
(1) | These mortgage notes payable were repaid during the second quarter of 2018. |
(2) | Calculated on a weighted-average basis for all mortgages outstanding as of the dates indicated. |
F-23
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(3) | Fixed as a result of the Company having entered into swap agreements, which are included in derivatives, at fair value on the consolidated balance sheet as of December 31, 2018. |
(4) | Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining financing. These costs are amortized to interest expense over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are generally expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close. |
As of December 31, 2018 and 2017, the Company had pledged $2.3 billion and $2.5 billion, respectively, in real estate investments as collateral for its mortgage notes payable. This real estate is not available to satisfy other debts and obligations unless first satisfying the mortgage notes payable on the properties. In addition, as of December 31, 2018, $1.1 billion in real estate investments were included in the unencumbered asset pool comprising the borrowing base under the Credit Facility (see Note 6 — Credit Facility for definition). Therefore, this real estate is only available to serve as collateral or satisfy other debts and obligations if it is first removed from the borrowing base under the Credit Facility.
The following table summarizes the scheduled aggregate principal payments on mortgage notes payable based on stated maturity dates for the five years subsequent to December 31, 2018 and thereafter:
(In thousands) | Future Principal Payments | |||
2019 | $ | 2,533 | ||
2020 | 613,084 | |||
2021 | 260,747 | |||
2022 | 1,070 | |||
2023 | 1,431 | |||
Thereafter | 321,673 | |||
$ | 1,200,538 | |||
The Company’s mortgage notes payable agreements require the compliance of certain property-level financial covenants including debt service coverage ratios. As of December 31, 2018, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
Mortgage Loan I
During August 2015, certain subsidiaries of the Company entered into a mortgage loan agreement (“Mortgage Loan I”) with Barclays Bank PLC, Column Financial Inc. and UBS Real Estate Securities Inc. (together, the “Lenders I”). The Mortgage Loan I has a stated maturity of September 6, 2020 and is secured by mortgage interests in 250 of the Company’s properties. At the closing of the Mortgage Loan I, the Lenders I placed $42.5 million of the proceeds from the Mortgage Loan I in escrow, to be released to the Company upon certain conditions, including the receipt of ground lease estoppels, performance of certain repairs and receipt of environmental insurance. As of December 31, 2018, the Lenders had released $34.6 million of the amount originally placed in escrow to the Company leaving $7.9 million of the proceeds from the Mortgage Loan I in escrow and included in restricted cash on the consolidated balance sheet as of December 31, 2018. There were no material changes in escrow balances or restricted cash related to the Mortgage Loan I for the year ended December 31, 2018.
Mortgage Loan II
On December 8, 2017, certain subsidiaries of the Company entered into a loan agreement (“Mortgage Loan II”) with Societe Generale and UBS AG (collectively, the “Lenders II”). The Mortgage Loan II requires monthly interest-only payments, with the principal balance due on the maturity date and is secured by mortgage interests in 12 of the Company’s properties in eight states totaling approximately 2.4 million rentable square feet. The Mortgage Loan II permits the Lenders II to securitize the loan or any portion thereof.
Note 6 — Credit Facility
On February 16, 2017, the Company, the OP, and certain other subsidiaries of the Company acting as guarantors, entered into an amendment, assumption, joinder and reaffirmation of guaranties to an unsecured amended and restated credit agreement, dated December 2, 2014 by and among the RCA OP, to which the OP is successor by merger, BMO Harris Bank N.A. (“BMO Bank”) as administrative agent, letter of credit issuer, swingline lender and a lender, and the other parties thereto, relating to a $325.0 million revolving credit facility (the “Prior Credit Facility”).
F-24
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
On April 26, 2018, the Company repaid the Prior Credit Facility in full and entered into a $415.0 million revolving unsecured corporate credit facility (the “Credit Facility”) with BMO Bank, as administrative agent, Citizens Bank, N.A. and SunTrust Robinson Humphrey, Inc., as joint lead arrangers, and the other lenders from time to time party thereto. In September 2018, the lenders under the Credit Facility increased the aggregate total commitments under the Credit Facility by $125.0 million, bringing total commitments to $540.0 million.
The Credit Facility includes an uncommitted “accordion feature” whereby, upon the request of the OP, but at the sole discretion of the participating lenders, the commitments under the Credit Facility may be increased by up to an additional $500.0 million, subject to obtaining commitments from new lenders or additional commitments from participating lenders and certain customary conditions. As of December 31, 2018, as discussed above, the Company had increased its commitments through this accordion feature by $125.0 million, leaving $375.0 million of potential increase remaining.
The amount available for future borrowings under the Credit Facility is based on the lesser of (1) a percentage of the value of the pool of eligible unencumbered real estate assets comprising the borrowing base, and (2) a maximum amount permitted to maintain a minimum debt service coverage ratio with respect to the borrowing base, in each case, as of the determination date. As of December 31, 2018, the Company had a total borrowing capacity under the Credit Facility of $461.5 million based on the value of the borrowing base under the Credit Facility. Of this amount, $324.7 million was outstanding under the Credit Facility as of December 31, 2018 and $136.8 million remained available for future borrowings. In accordance with the Credit Facility, in order for the Company to make payments required to fund certain share repurchases, the Company would be required to satisfy a maximum leverage ratio after giving effect to the payments, and would be required to have a combination of cash, cash equivalents and amounts available for future borrowings under the Credit Facility of not less than $40.0 million.
The Credit Facility is interest-only. Upon the Listing, the maturity date of the Credit Facility was automatically extended from April 26, 2020 to April 26, 2022 and the Company has a one-time right, subject to customary conditions, to extend the maturity date for an additional term of one year to April 26, 2023. Borrowings under the Credit Facility bear interest at either (i) the Base Rate (as defined in the Credit Facility) plus an applicable spread ranging from 0.60% to 1.20%, depending on the Company’s consolidated leverage ratio, or (ii) LIBOR plus an applicable spread ranging from 1.60% to 2.20%, depending on the Company’s consolidated leverage ratio. As of December 31, 2018 and December 31, 2017, the weighted-average interest rate under the Credit Facility and Prior Credit Facility was 4.12% and 2.48%, respectively.
The Credit Facility contains various customary operating covenants, including a restricted payments covenant, as well as covenants restricting, among other things, the incurrence of liens, investments, fundamental changes, agreements with affiliates and changes in nature of business. The Credit Facility also contains financial maintenance covenants with respect to maximum consolidated leverage, maximum consolidated secured leverage, minimum fixed charge coverage, maximum other recourse debt to total asset value, and minimum net worth. As of December 31, 2018, the Company was in compliance with the financial covenants under the Credit Facility.
Note 7 — Fair Value Measurements
Fair Value Hierarchy
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair value. GAAP establishes market-based or observable inputs as the preferred sources of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
Level 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.
Derivative Instruments
The Company’s derivative instruments are measured at fair value on a recurring basis. 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 this derivative utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparty. However, as of December 31, 2018, 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 derivatives valuation in its entirety is 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.
Real Estate Investments - Held for Sale
The Company had impaired real estate investments held for sale (see Note 4 — Real Estate Investments for additional information on impairment charges recorded by the Company), which were carried at fair value on a non-recurring basis on the consolidated balance sheets as of December 31, 2018 and 2017. Impaired real estate investments held for sale were valued using the sale price from the applicable PSA less costs to sell, which is an observable input. As a result, the Company’s impaired real estate investments held for sale are classified in Level 2 of the fair value hierarchy.
Real Estate Investments - Held for Use
The Company also had impaired real estate investments held for use (see Note 4 — Real Estate Investments for additional information on impairment charges incurred by the Company), which were carried at fair value on a non-recurring basis on the consolidated balance sheets as of December 31, 2018 and 2017. The Company primarily used a market approach to estimate the future cash flows expected to be generated. This approach involved evaluating comparable sales of properties in the same geographic region as the impaired properties in order to generate an estimated sale price, which is an unobservable input. As a result, the impaired properties that the Company evaluated using this approach are classified in Level 3 of the fair value hierarchy. For some of the impaired properties, the Company had an executed LOI or PSA to sell the property. In those instances, the Company used the sale price from the applicable LOI or PSA to estimate the future cash flows expected to be generated, which is an observable input. As a result, the impaired properties that the Company evaluated using this approach are classified in Level 2 of the fair value hierarchy.
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2018 and 2017, aggregated by the level in the fair value hierarchy 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 | ||||||||||||
December 31, 2018 | ||||||||||||||||
Impaired real estate investments held for sale | $ | — | $ | 42,848 | $ | — | $ | 42,848 | ||||||||
Impaired real estate investments held for use | — | 7,765 | 886 | 8,651 | ||||||||||||
Interest rate swaps - liabilities | — | (531 | ) | — | (531 | ) | ||||||||||
Total | $ | — | $ | 50,082 | $ | 886 | $ | 50,968 | ||||||||
December 31, 2017 | ||||||||||||||||
Impaired real estate investments held for sale | $ | — | $ | 432 | $ | — | $ | 432 | ||||||||
Impaired real estate Investments held for use | — | 20,434 | 10,330 | 30,764 | ||||||||||||
Interest rate swaps - assets | — | 23 | — | 23 | ||||||||||||
Total | $ | — | $ | 20,889 | $ | 10,330 | $ | 31,219 | ||||||||
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 and liabilities. The Company’s policy with respect to transfers between levels of the fair value hierarchy is to recognize transfers into and out of each level as of the end of the reporting period. There were no transfers between levels of the fair value hierarchy during the years ended December 31, 2018 and 2017.
F-25
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, prepaid expenses and other assets, accounts payable and accrued expenses and dividends 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 as of December 31, 2018 and 2017 are reported in the following table:
December 31, 2018 | December 31, 2017 | |||||||||||||||||
(In thousands) | Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Gross mortgage notes payable | 3 | $ | 1,200,538 | $ | 1,209,364 | $ | 1,307,887 | $ | 1,332,240 | |||||||||
Credit facilities | 3 | $ | 324,700 | $ | 324,700 | $ | 95,000 | $ | 95,000 | |||||||||
The fair value of gross mortgage notes payable is based on combinations of independent third party estimates and management’s estimates of market interest rates. Advances under the Prior Credit Facility or the Credit Facility are considered to be reported at fair value, because its interest rate varies with changes in LIBOR, and there has not been a significant change in the credit risk of the Company or credit markets.
Note 8 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its related parties may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the accompanying consolidated balance sheets as of December 31, 2018 and 2017:
December 31, | ||||||||||
(In thousands) | Balance Sheet Location | 2018 | 2017 | |||||||
Derivatives designated as hedging instruments: | ||||||||||
Interest Rate Swaps | Derivative assets, at fair value | $ | — | $ | 23 | |||||
Interest Rate Swaps | Derivative liabilities, at fair value | $ | 531 | $ | — | |||||
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and collars as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.
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 loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2018, 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. Additionally, during the twelve months ended December 31, 2018, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amounts resulted in a gain of $81,863.
F-26
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Amounts reported in accumulated other comprehensive (loss) income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that approximately $74,757 will be reclassified from accumulated other comprehensive (loss) income as an increase to interest expense.
As of December 31, 2018 and 2017, the Company had the following derivatives that were designated as cash flow hedges of interest rate risk:
December 31, 2018 | December 31, 2017 | |||||||||||
Interest Rate Derivative | Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | ||||||||
(In thousands) | (In thousands) | |||||||||||
Interest Rate Swaps | 4 | $ | 29,887 | 1 | $ | 34,098 | ||||||
The table below details the location in the consolidated financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the period ended December 31, 2018 and 2017, respectively. There was no gain or loss recognized on interest rate derivatives during the year ended December 31, 2016:
Year Ended December 31, | ||||||||
(In thousands) | 2018 | 2017 | ||||||
Amount of (loss) gain recognized in accumulated other comprehensive (loss) income on interest rate derivatives (effective portion) | $ | (670 | ) | $ | 56 | |||
Amount of loss reclassified from accumulated other comprehensive loss into income as interest expense | $ | (125 | ) | $ | (39 | ) | ||
Amount of gain recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing) | $ | 81 | $ | — | ||||
Non-Designated Hedges
As of December 31, 2018, the Company did not have any derivatives that were not designated as hedges of in qualifying hedging relationships. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. A gain of approximately $21,000 is included in interest expense on the consolidated statements of operations and comprehensive loss for the year ended December 31, 2017. There were no gains or losses on non-designated hedging relationships during the years ended December 31, 2018 and 2016.
Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of December 31, 2018 and 2017. 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 consolidated balance sheets.
Gross Amounts Not Offset on the Balance Sheet | ||||||||||||||||||||||||||||
(In thousands) | Gross Amounts of Recognized Assets | Gross Amounts of Recognized (Liabilities) | Gross Amounts Offset on the Balance Sheet | Net Amounts of Assets (Liabilities) Presented on the Balance Sheet | Financial Instruments | Cash Collateral Received (Posted) | Net Amount | |||||||||||||||||||||
December 31, 2018 | $ | — | $ | (531 | ) | $ | — | $ | (531 | ) | $ | — | $ | — | $ | (531 | ) | |||||||||||
December 31, 2017 | $ | 23 | $ | — | $ | — | $ | 23 | $ | — | $ | — | $ | 23 | ||||||||||||||
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.
F-27
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
As of December 31, 2018, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustments for nonperformance risk related to these agreements was $0.6 million. The Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $0.6 million.
Note 9 — Common Stock
As of December 31, 2018 and 2017, the Company had 106.2 million and 105.2 million shares of common stock outstanding, respectively, comprised of, as of December 31, 2018 and following a sequence of corporate actions during July 2018 as described in more detail below, 80.0 million shares of Class A common stock and 26.2 million shares of Class B-2 common stock.
In April 2013, the Company’s board of directors authorized a monthly dividend equivalent to $1.65 per annum, per share of common stock. Effective July 1, 2017, the Company’s board of directors authorized a decrease in the daily accrual of dividends to an annualized rate of $1.30 per annum, per share of common stock. In connection with the Listing, the Company’s board of directors changed the rate at which the Company pays dividends on its common stock to an annualized rate equal to $1.10 per share, or $0.0916667 per share on a monthly basis, effective as of July 1, 2018. Additionally, effective July 1, 2018, the Company transitioned to declaring dividends based on quarterly basis with one month in arrears using monthly, rather than daily, record dates and will generally pay dividends on or around the 15th day of each month (or, if not a business day, the next succeeding business day) to common stockholders of record on the applicable record date of such month. Prior to July 1, 2018, dividends were payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month. In January 2019, the Company declared a dividend for December 2018, January 2019 and February 2019 resulting in only 11 months declared dividends during the year ended December 31, 2018. Notwithstanding the changes to the declaration dates, the Company paid 12 months of dividends during the year ended December 31, 2018.
Dividend payments are dependent on the availability of funds. The Company’s board of directors may reduce the amount of dividends paid or suspend dividend payments at any time and therefore dividends payments are not assured.
On March 19, 2018, the Company’s board of directors approved an estimated net asset value per share of the Company’s common stock (“Estimated Per-Share NAV”) as of December 31, 2017, which was published on March 20, 2018.
Listing of the Company’s Common Stock
To address the potential for selling pressure that may have existed at the outset of listing, the Company listed only shares of Class A common stock, which represented approximately 50% of its outstanding shares of common stock, on Nasdaq on the Listing Date. The Company’s two other classes of outstanding stock at the time of the Listing were Class B-1 common stock, which comprised approximately 25% of the Company’s outstanding shares of common stock at that time, and Class B-2 common stock, which comprised approximately 25% of the Company’s outstanding shares of common stock at that time. In accordance with their terms, all shares of Class B-1 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on October 10, 2018 and all shares of Class B-2 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on January 9, 2019. Each share of Class B-1 common stock and Class B-2 common stock was otherwise identical to each share of Class A common stock in all other respects, including the right to vote on matters presented to the Company’s stockholders, and shares of all classes of common stock were expected to receive the same dividends.
Corporate Actions
In order to effect the Listing described above, the Company took the following corporate actions on July 3, 2018:
• | The Company effected a 2-to-1 reverse stock split combining every two shares of common stock, par value $0.01 per share, into one share of common stock, par value $0.02 per share, and subsequently reducing the resulting par value of the shares of common stock outstanding after the reverse stock split from $0.02 per share back to $0.01 per share. In addition, the Company changed the name of its common stock to “Class A common stock.” |
• | The Company reclassified a number of authorized but unissued shares of Class A common stock equal to half of the number of shares of Class A common stock then outstanding into equal numbers of shares of Class B-1 common stock and shares of Class B-2 common stock. |
• | The Company distributed to the holders of shares of Class A common stock a stock dividend equal to one-half share of Class B-1 common stock and one-half share of Class B-2 common stock for each share of Class A common stock outstanding. |
F-28
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
As a result of the corporate actions described above, the number of outstanding shares in total, and on a weighted-average basis for earnings per share purposes, remained the same with the exception of any fractional shares that were repurchased or forfeited as a result of the reverse stock split.
The table below provides details of the Company’s outstanding shares of common stock as of June 30, 2018 (prior to the Listing) and December 31, 2018:
June 30, 2018 (prior to the Listing) | As of December 31, 2018 | |||||||||||
Shares Outstanding | Class A Common Stock | Class B-2 Common Stock | Shares Outstanding | |||||||||
Shares of common stock (1) | 105,049,705 | 78,749,079 | 26,262,477 | 105,011,556 | ||||||||
Vesting and conversion of Class B Units (2) (3) | — | 1,052,420 | — | 1,052,420 | ||||||||
Redemption of Class A Units (formerly known as OP Units) (3) (4) | — | 30,691 | — | 30,691 | ||||||||
Unvested restricted shares (5) | 9,088 | 134,025 | 2,209 | 136,234 | ||||||||
Total | 105,058,793 | 79,966,215 | 26,264,686 | 106,230,901 | ||||||||
_________________________________
(1) See “Corporate Actions” above for a description of the reverse stock split and classification of shares as Class A common stock, Class B-1 common stock and Class B-2 common stock. Fractional shares of Class A common stock totaling 18,460 were repurchased by the Company as a result of the reverse stock split. In accordance with their terms, all shares of Class B-1 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on October 10, 2018. As a result of this conversion, on October 10, 2018, all fractional shares of Class B-1 common stock totaling approximately 19,945 shares were repurchased by the Company. Amount at June 30, 2018 included 8,888 shares of common stock owned by the Special Limited Partner. During the second half of 2018, 4,444 shares of Class A common stock owned by the Special Limited Partner were distributed to individual members of the entity and, as a result, the Special Limited Partner owned 2,222 shares of Class A common stock and 2,222 shares of Class B-2 common stock as of December 31, 2018.
(2) The Class B Units were converted into an equal number of Class A Units. In addition, effective at the Listing following this conversion and as approved by the Company’s board of directors, these Class A Units were redeemed for an equal number of newly issued shares of Class A common stock consistent with the redemption provisions contained in the agreement of limited partnership of the OP (see Note 11 — Related Party Transactions and Arrangements for additional information).
(3) Following the Listing, all of the shares of Class A common stock, Class B-1 common stock and Class B-2 common stock owned by the Advisor and its affiliates (including the Special Limited Partner) were distributed pro rata to the individual members of those entities, including Edward M. Weil, Jr., the Company’s chairman and chief executive officer.
(4) Pursuant to the redemption provisions contained in the agreement of limited partnership of the OP, holders of Class A Units may redeem all or a portion of their Class A Units for, at the Company’s election, either shares of Class A common stock or the cash equivalent thereof. 203,612 Class A Units were eligible for redemption after the Listing. On July 20, 2018, 30,691 Class A Units held by the RCA Advisor and the Special Limited Partner were redeemed for an equal number of newly issued shares of Class A common stock consistent with the redemption provisions contained in the agreement of limited partnership of the OP.
(5) Fractional unvested restricted shares of common stock (“restricted shares”) held by the Company’s independent directors totaled approximately seven, and these fractional shares were forfeited in connection with the reverse stock split effected prior to the Listing. Also, during the three months ended September 30, 2018, the Company issued 127,402 restricted shares in the aggregate to members of the Company’s board of directors (see Note 13 — Share-Based Compensation).
Tender Offers
On February 15, 2018, in response to an unsolicited offer to the Company’s stockholders to purchase 1,000,000 shares of the Company’s common stock at a price of $13.66 per share, the Company commenced a tender offer for up to 1,000,000 shares at a price of $14.35 per share (the “February Offer”). The Company made the February Offer in order to deter an unsolicited bidder and other potential future bidders that may try to exploit the illiquidity of the Company’s common stock and acquire it from stockholders at prices substantially below the current Estimated Per-Share NAV. In accordance with the terms of the February
F-29
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Offer, which expired on March 27, 2018, the Company accepted for purchase 483,133 shares for a total cost of approximately $6.9 million, excluding fees and expenses relating to the February Offer.
On May 1, 2018, in response to an unsolicited offer to the Company’s stockholders to purchase 1,000,000 shares of the Company’s common stock at a price of $15.35 per share, the Company commenced a tender offer for up to 1,000,000 shares at a price of $15.45 per share (the “May Offer”). The Company made the May Offer in order to deter an unsolicited bidder and other potential future bidders that may try to exploit the illiquidity of the Company’s common stock and acquire it from stockholders at prices substantially below the current Estimated Per-Share NAV. In accordance with the May Offer, which expired on May 31, 2018, the Company accepted for purchase 207,713 shares for a total cost of approximately $3.2 million, excluding fees and expenses relating to the May Offer.
Authorized Repurchase Program
Effective at the Listing, the Company’s board of directors authorized a share repurchase program of up to $200.0 million of Class A common stock (the “Authorized Repurchase Program”) that the Company may implement from time to time, following the Listing, through open market repurchases or in privately negotiated transactions based on the Company’s board of directors and management’s assessment of, among other things, market conditions prevailing at the particular time. The Company will have the ability to repurchase shares of Class A common stock up to this amount at its discretion, subject to authorization by the Company’s board of directors prior to any such repurchase. There have not been any purchases under the Authorized Repurchase Program.
Terminated Share Repurchase Program
In anticipation of the Listing, the Company’s board of directors terminated the Company’s previous share repurchase program (the “SRP”) in accordance with its terms, effective June 30, 2018. The Company’s board of directors had previously authorized the Company to repurchase shares pursuant to the SRP, which permitted investors to offer to sell their shares back to the Company after they held them for at least one year, subject to certain conditions and limitations. The Company repurchased shares on a semiannual basis, in its sole discretion, at each six-month period ending June 30 and December 31.
On June 14, 2017, the Company announced that its board of directors had adopted an amendment and restatement of the SRP that superseded and replaced the existing SRP effective as of July 14, 2017. Under the amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of the Company’s common stock or received their shares from the Company (directly or indirectly) through one or more non-cash transactions were considered for repurchase. Other terms and provisions of the amended and restated SRP remained consistent with the SRP then in effect.
Under the SRP, prior to the amendment and restatement, the repurchase price per share for requests other than for death or disability was as follows:
• | after one year from the purchase date — 92.5% of the then-current Estimated Per-Share NAV; |
• | after two years from the purchase date — 95.0% of the then-current Estimated Per-Share NAV; |
• | after three years from the purchase date — 97.5% of the then-current Estimated Per-Share NAV; and |
• | after four years from the purchase date — 100.0% of the then-current Estimated Per-Share NAV. |
In the case of requests for death or disability, the repurchase price per share was equal to the Estimated Per-Share NAV applicable on the last day of the semiannual period, as described below.
Under the SRP, repurchases at each semiannual period were limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding during the previous fiscal year. Repurchases pursuant to the SRP for any given semiannual period were funded from proceeds received during that same semiannual period through the issuance of common stock pursuant to the Pre-Listing DRIP (as defined herein), as well as any funds reserved by the Company in the sole discretion of the board of directors. Repurchases were made at a price based on Estimated Per-Share NAV applicable on the last day of the semiannual period, as described above.
The Company’s board of directors had the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase, change the purchase price for repurchases or otherwise amend the terms of, suspend or terminate the SRP pursuant to any applicable notice requirements under the SRP. Due to these limitations, the Company did not guarantee that it was able to accommodate all repurchase requests.
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
When a stockholder requested repurchases and the repurchases were approved, the Company reclassified such an obligation from equity to a liability based on the settlement value of the obligation. Shares repurchased have the status of authorized but unissued shares.
The following table summarizes the repurchases of shares under the SRP cumulatively through the SRP termination date of June 30, 2018:
Number of Shares | Weighted-Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2014 | 303,907 | $ | 24.01 | ||||
Year ended December 31, 2015 | 1,769,738 | 24.13 | |||||
Year ended December 31, 2016 | 7,854 | 24.17 | |||||
Year ended December 31, 2017 | 1,225,365 | (1) | 23.71 | ||||
Year ended December 31, 2018 | 412,939 | (2) | 23.37 | ||||
Cumulative repurchases as of December 31, 2018 | 3,719,803 | 23.90 | |||||
___________________________________
(1) | Excludes rejected repurchase requests received during 2016 with respect to 5.9 million shares for $140.1 million at a weighted-average price per share of $23.65. Also, in July 2017, following the effectiveness of the amendment and restatement of the SRP, the Company’s board of directors approved 100% of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to December 31, 2017. No repurchases were made with respect to requests received during 2017 that are not valid requests in accordance with the amended and restated SRP. At the time the SRP was terminated in anticipation of the Listing, effective June 30, 2018, we had received repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2018 to June 30, 2018 with respect to 0.6 million shares that were therefore not repurchased. |
(2) | During January 2018, the Company repurchased 412,939 shares for approximately $9.7 million at a price of $23.37 per share equal to the then current Estimated Per-Share NAV. |
Distribution Reinvestment Plan
On June 29, 2018, the Company announced that its board of directors had suspended the Company’s then effective distribution reinvestment plan (the “Pre-Listing DRIP”) effective June 30, 2018. As a result, all dividends paid for the month of June 2018 were paid in cash in July 2018. Prior to its suspension, the Company’s stockholders were able to elect to reinvest dividends by purchasing shares of common stock from the Company at the applicable Estimated Per-Share NAV. On the Listing Date, an amendment and restatement of the Pre-Listing DRIP approved by the Company’s board of directors became effective (as so amended and restated, the “Post-Listing DRIP”).
Commencing with the dividend paid on August 3, 2018 (the first dividend paid following the Listing Date), the Company’s stockholders that have elected to participate in the Post-Listing DRIP may have dividends payable with respect to all or a portion of their shares of the Company’s common stock (including Class A common stock, Class B-1 common stock, prior to its automatic conversion in Class A common stock on October 10, 2018, and Class B-2 common stock, prior to its automatic conversion in Class A common stock on January 9, 2019) reinvested in shares of Class A common stock. Shares issued pursuant to the Post-Listing DRIP represent shares that are, at the election of the Company, either (i) acquired directly from the Company, which would issue new shares, at a price based on the average of the high and low sales prices of Class A common stock on Nasdaq on the date of reinvestment, or (ii) acquired through open market purchases by the plan administrator at a price based on the weighted-average of the actual prices paid for all of the shares of Class A common stock purchased by the plan administrator with all participants’ reinvested dividends for the related quarter, less a per share processing fee. During 2018, all shares acquired by participants pursuant to the Post-Listing DRIP were acquired through open market purchases by the plan administrator and not acquired directly from the Company.
No dealer manager fees or selling commissions were paid with respect to shares purchased pursuant to the Pre-Listing DRIP or the Post-Listing DRIP. Shares issued pursuant to the Pre-Listing DRIP or the Post-Listing DRIP are recorded within stockholders’ equity in the accompanying consolidated balance sheets in the period dividends are declared. During the year ended December 31, 2018, approximately 1.0 million shares of common stock were issued by the Company pursuant to the Pre-Listing DRIP, and no shares were issued by the Company pursuant to the Post-Listing DRIP.
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Note 10 — Commitments and Contingencies
Future Minimum Ground Lease Payments
The Company entered into ground lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter:
(In thousands) | Future Minimum Base Rent Payments | |||
2019 | $ | 1,461 | ||
2020 | 1,243 | |||
2021 | 925 | |||
2022 | 942 | |||
2023 | 917 | |||
Thereafter | 11,598 | |||
$ | 17,086 | |||
Litigation and Regulatory Matters
On January 13, 2017, four affiliated stockholders of RCA filed in the United States District Court for the District of Maryland a putative class action lawsuit against RCA, the Company, Edward M. Weil, Jr., Leslie D. Michelson, Edward G. Rendell (Weil, Michelson and Rendell, the “Director Defendants”), and AR Global, alleging violations of Sections 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by RCA and the Director Defendants, violations of Section 20(a) of the Exchange Act by AR Global and the Director Defendants, breaches of fiduciary duty by the Director Defendants, and aiding and abetting breaches of fiduciary duty by AR Global and the Company in connection with the negotiation of and proxy solicitation for a shareholder vote on the proposed merger of the Company and RCA and an amendment to RCA’s charter. The complaint sought on behalf of the putative class rescission of the merger transaction, which was voted on and approved by stockholders on February 13, 2017, and closed on February 16, 2017, together with unspecified rescissory damages, unspecified actual damages, and costs and disbursements of the action. On April 26, 2017, the Court appointed a lead plaintiff. Lead plaintiff, along with other stockholders of RCA, filed an amended complaint on June 19, 2017. The amended complaint named additional individuals and entities as defendants (David Gong, Stanley Perla, Lisa Kabnick (“Additional Director Defendants”), Nicholas Radesca and the RCA Advisor), added counts under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended (the “Securities Act”) in connection with the Registration Statement for the proposed merger, under Section 13(e) of the Exchange Act, and counts for breach of contract and unjust enrichment. The Company, RCA, the Director Defendants, the Additional Director Defendants and Nicholas Radesca deny wrongdoing and liability and intend to vigorously defend the action. On August 14, 2017, defendants moved to dismiss the amended complaint. On March 29, 2018, the Court granted defendants’ motion to dismiss and dismissed the amended complaint. On April 26, 2018, the plaintiffs filed a notice of appeal of the court’s order, which appeal is pending. Due to the early stage of the litigation, no estimate of a probable loss or any reasonable possible losses are determinable at this time. No provisions for such losses have been recorded in the accompanying consolidated financial statements for the years ended December 31, 2018 or 2017.
On February 8, 2018, Carolyn St. Clair-Hibbard, a purported stockholder of the Company, filed a putative class action complaint in the United States District Court for the Southern District of New York against the Company, AR Global, the Advisor, Nicholas S. Schorsch and William M. Kahane. On February 23, 2018, the complaint was amended to, among other things, assert some claims on the plaintiff’s own behalf and other claims on behalf of herself and other similarly situated shareholders of the Company as a class. On April 26, 2018, defendants moved to dismiss the amended complaint. On May 25, 2018, plaintiff filed a second amended complaint. The second amended complaint alleges that the proxy materials used to solicit stockholder approval of the Merger at the Company’s 2017 annual meeting were materially incomplete and misleading. The complaint asserts violations of Section 14(a) of the Exchange Act against the Company, as well as control person liability against the Advisor, AR Global, and Messrs. Schorsch and Kahane under 20(a). It also asserts state law claims for breach of fiduciary duty against the Advisor, and claims for aiding and abetting such breaches, of fiduciary duty against the Advisor, AR Global and Messrs. Schorsch and Kahane. The complaint seeks unspecified damages, rescission of the Company’s advisory agreement (or severable portions thereof) which became effective when the Merger became effective, and a declaratory judgment that certain provisions of the Company’s advisory agreement are void. The Company believes the second amended complaint is without merit and intends to defend vigorously. On June 22, 2018, defendants moved to dismiss the second amended complaint. On August 1, 2018, plaintiff filed an opposition to defendants’ motions to dismiss. Defendants filed reply papers on August 22, 2018, and oral argument was held on September 26,
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
2018. That motion is now pending. Due to the early stage of the litigation, no estimate of a probable loss or any reasonably possible losses are determinable at this time.
On October 26, 2018, Terry Hibbard, a purported stockholder of the Company, filed a putative class action complaint in New York State Supreme Court, New York County, against the Company, AR Global, the Advisor, Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Nicholas Radesca, David Gong, Stanley R. Perla, and Lisa D. Kabnick. The complaint alleges that the registration statement pursuant to which RCA shareholders acquired shares of the Company during the Merger contained materially incomplete and misleading information. The complaint asserts violations of Section 11 of the Securities Act against Messrs. Weil, Radesca, Gong, and Perla, and Ms. Kabnick, violations of Section 12(a)(2) of the Securities Act against the Company and Mr. Weil, and control person liability against the Advisor, AR Global, and Messrs. Schorsch and Kahane under Section 15 of the Securities Act. The complaint seeks unspecified damages and rescission of the Company’s sale of stock pursuant to the registration statement. The Company believes the complaint is without merit and intends to defend vigorously. The Company has not yet answered or moved to dismiss the complaint. The parties have agreed to stay this litigation pending a decision on the motion to dismiss in the St. Clair-Hibbard litigation pending in the United States District Court for the Southern District of New York. Due to the early stage of the litigation, no estimate of a probable loss or any reasonably possible losses are determinable at this time.
During the years ended December 31, 2018 and 2017, the Company incurred approximately $1.9 million and $0.8 million in legal costs related to the above litigations. A portion of these litigation costs are subject to a claim for reimbursement under insurance policies maintained by the Company, which could result in future reimbursements to the Company. There are no other material legal or regulatory proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company maintains environmental insurance for its properties that provides coverage for potential environmental liabilities, subject to the policy’s coverage conditions and limitations. The Company has 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 its financial position or results of operations.
Note 11 — Related Party Transactions and Arrangements
As of December 31, 2018, American Finance Special Limited Partner, LLC (the “Special Limited Partner”), an entity controlled by AR Global, owned 2,222 shares of Class A common stock and 2,222 shares of Class B-2 common stock and together with its affiliates, no OP Units after the distribution of 4,444 shares of Class A common stock to the individual members of the Special Limited Partner and the redemption of all OP Units previously held by the Special Limited Partner and its affiliates for shares of Class A common stock and the distribution of those shares to the individual members of those entities (see Note 9 — Common Stock for additional information). As of December 31, 2017, the Special Limited Partner owned 8,888 shares of the Company’s outstanding common stock and owned 90 Class A Units (then known as OP Units).
On September 6, 2016, the agreement of limited partnership of the OP was amended and restated in connection with the effectiveness of the Merger (as so amended and restated, the “A&R OP Agreement”). On the Listing Date, the A&R OP Agreement was amended and restated in connection with the effectiveness of the Listing (as so amended and restated, the “Second A&R OP Agreement”). The amendments effected to the A&R OP Agreement pursuant to the Second A&R OP Agreement generally reflect provisions more consistent with agreements of limited partnership of other operating partnerships controlled by real estate investment trusts whose securities are publicly traded and listed and make other changes in light of the transactions entered into by the Company in connection with the Listing, including designating the units of limited partnership previously designated as “OP Units” that correspond to each share of the Company’s common stock, with respect to dividends and otherwise, as “Class A Units” and setting forth the terms of a new class of units of limited partnership designated as LTIP Units including the Master LTIP Unit (the “Master LTIP Unit”) issued to the Advisor on the Listing Date pursuant to the 2018 OPP. In addition, the Second A&R OP Agreement describes the procedures pursuant to which holders of Class A Units may redeem all or a portion of their Class A Units for, at the Company’s election, either shares of Class A common stock or the cash equivalent thereof. The Second A&R OP Agreement also requires the Company, upon the request of a holder of Class A Units but subject to certain conditions and limitations, to register under the Securities Act the issuance or resale of the shares of Class A common stock issuable upon redemption of Class A Units in accordance with the Second A&R OP Agreement.
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Holders of OP Units or Class A Units have the right to redeem their OP Units or Class A 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 applicable 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.
Subsequent to the Listing, all of the Class A Units held by the Advisor and its affiliates were redeemed for shares of Class A common stock and all of the shares of Class A common stock, Class B-1 common stock and Class B-2 common stock owned by the Advisor and its affiliates (including the Special Limited Partner) were distributed pro rata to the individual members of those entities, including Edward M. Weil, Jr., the Company’s chairman and chief executive officer. See Note 9 — Common Stock for additional information regarding these transactions.
Fees and Participations Incurred in Connection with the Operations of the Company
On April 29, 2015, the independent directors of the board of directors unanimously approved certain amendments to the Amended and Restated Advisory Agreement, as amended (the “First A&R Advisory Agreement”), by and among the Company, the OP and the Advisor (the “Second A&R Advisory Agreement”). The Second A&R Advisory Agreement, which superseded the First A&R Advisory Agreement, took effect on July 20, 2015, the date on which the Company filed certain changes to the Company’s charter, which were approved by the Company’s stockholders on June 23, 2015. The initial term of the Second A&R Advisory Agreement of 20 years began on April 29, 2015, and is automatically renewable for another 20-year term upon each 20-year anniversary unless terminated by the board of directors for cause.
On September 6, 2016, the date of the Merger Agreement, the Company entered into an amendment and restatement of the Second A&R Advisory Agreement (the “Third A&R Advisory Agreement”), which became effective at the Effective Time. The Third A&R Advisory Agreement grants the Company the right to internalize the services provided under the Third A&R Advisory Agreement (“Internalization”) and thereby terminate the Third A&R Advisory Agreement pursuant to a notice received by the Advisor after January 1, 2018 as long as (i) more than 67% of the Company’s independent directors have approved the Internalization; and (ii) the Company pays the Advisor a specified Internalization fee pursuant to the terms of the Third A&R Advisory Agreement, which is equal to $15.0 million plus either (x) if the Internalization occurs on or before December 31, 2028, Subject Fees (defined below) multiplied by 4.5 and (y) if the Internalization occurs on or after January 1, 2029, Subject Fees multiplied by 3.5 plus 1% of the purchase price of each acquisition or merger that occurs between the date of the notice of Internalization received by the Advisor and the Internalization or 1% of the cumulative net proceeds of any equity raised by the Company between the end of the fiscal quarter in which notice was received and the Internalization. The “Subject Fees” are equal to (i) the product of four multiplied by the sum of (A) the actual base management fee plus (B) the actual variable management fee, in each of clauses (A) and (B), payable for the fiscal quarter in which the notice of Internalization is received by the Advisor, plus, (ii) without duplication, the annual increase in the base management fee resulting from the cumulative net proceeds of any equity raised in respect of the fiscal quarter in which the notice of Internalization is received by the Advisor. Up to 10% of the Internalization fee may be payable in shares of common stock subject to certain conditions.
The initial term of the Third A&R Advisory Agreement expires on April 29, 2035, the twentieth anniversary of Second A&R Advisory Agreement. This term is automatically renewed for successive twenty year terms upon expiration unless the Third A&R Advisory Agreement is terminated (1) in accordance with an Internalization, (2) by the Company or the Advisor with cause, without penalty, with 60 days’ notice, (3) by the Advisor for (a) a failure to obtain a satisfactory agreement for any successor to the Company to assume and agree to perform obligations under the Third A&R Advisory Agreement or (b) any material breach of the Third A&R Advisory Agreement of any nature whatsoever by the Company, or (4) by the Advisor in connection with a change of control of the Company. Upon the termination of the Third A&R Advisory Agreement, the Advisor will be entitled to receive from the Company all amounts due to the Advisor, as well as the then-present fair market value of the Advisor’s interest in the Company.
On September 6, 2016, the date of the Merger Agreement, the Company entered into the A&R OP Agreement, which became effective upon the Effective Time. The A&R OP Agreement made certain changes to the provisions of the partnership agreement relating to (a) distributions of net sales proceeds and the Termination Note (as defined in the A&R OP Agreement) issuable on termination of the Third A&R Advisory Agreement to address the issuance of shares of the Company’s common stock pursuant to the Merger and in future transactions; (b) an Internalization; and (c) certain matters related to changes in the Third A&R Advisory Agreement.
F-34
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Acquisition Fees
Prior to January 16, 2016, the Advisor was paid an acquisition fee equal to 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment. The Second A&R Advisory Agreement terminated the acquisition fees and financing coordination fees (both as described in the Second A&R Advisory Agreement) effective January 16, 2016. As of January 16, 2016, aggregate acquisition fees and financing coordination fees did not exceed the 1.5% threshold. Further, the total of all acquisition fees, acquisition expenses and any financing coordination fees payable was not to exceed 4.5% of the Company’s total portfolio contract purchase price or 4.5% of the amount advanced for the Company’s total portfolio of loans or other investments. As of January 16, 2016, the total of all cumulative acquisition fees, acquisition expenses and financing coordination fees did not exceed the 4.5% threshold. In addition to the now terminated acquisition and financing coordination fees, the Advisor also has been and may continue to be reimbursed for costs it incurs in providing investment-related services, or “insourced expenses.” These insourced expenses may not exceed 0.5% of the contract purchase price of each acquired property and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company has paid and may continue to pay third party acquisition expenses. The aggregate amount of acquisition fees and financing coordination fees (as described below) were not to exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. The Company has incurred $0.3 million and $0.2 million of acquisition expenses and related cost reimbursements for the year ended December 31, 2018 and 2017, respectively. No acquisition fees and related cost reimbursements were incurred for the year ended December 31, 2016.
Financing Coordination Fees
Additionally, prior to January 16, 2016, if the Advisor provided services in connection with the origination or refinancing of any debt that the Company obtained and used to acquire properties or to make other permitted investments, or that was assumed, directly or indirectly, in connection with the acquisition of properties, the Company paid the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations. The Second A&R Advisory Agreement terminated the financing coordination fees effective January 16, 2016.
Asset Management Fees and Variable Management/Incentive Fees
Prior to April 15, 2015, in connection with asset management services provided by the Advisor, the Company issued to the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the Company’s board of directors) Class B Units to the Advisor. The Class B Units were intended to be profit interests that would vest, and no longer be subject to forfeiture, at such time as: (a) the value of the OP’s assets plus all distributions paid by the Company equaled or exceeded the total amount of capital contributed by investors plus a 6.0% cumulative, pretax, non-compounded annual return thereon (the “Economic Hurdle”); (b) any one of the following events occurred concurrently with or subsequently to the achievement of the Economic Hurdle: (i) a listing; (ii) a transaction to which the Company or the OP was a party, as a result of which OP Units or the Company’s common stock are exchanged for, or converted into, the right, or the holders of such securities are otherwise entitled, to receive cash, securities or other property or any combination thereof; or (iii) the termination of the advisory agreement without cause; and (c) the Advisor pursuant to the advisory agreement was providing services to the Company immediately prior to the occurrence of an event of the type described in clause (b) above, unless the failure to provide such services was attributable to the termination without cause of the advisory agreement by an affirmative vote of a majority of the Company’s independent directors after the Economic Hurdle above has been met. Unvested Class B Units were to be forfeited immediately if: (x) the advisory agreement was terminated for any reason other than a termination without cause; or (y) the advisory agreement was terminated without cause by an affirmative vote of a majority of the Company’s board of directors before the Economic Hurdle has been met.
Prior to the Listing, in aggregate, the Company’s board of directors had approved and the Company had issued 1,052,420 Class B Units to the Advisor in connection with the arrangement described above. Pursuant to the terms of the A&R OP Agreement, the Advisor was entitled to receive distributions on unvested Class B Units equal to the dividend amount received on the same number of shares of the Company’s common stock. Such distributions on issued Class B Units were included in general and administrative expenses in the consolidated statements of operations and comprehensive loss. As a result of the Listing and the prior determination by the Company’s board of directors that the Economic Hurdle, had been satisfied, the Class B Units vested in accordance with their terms as the Economic Hurdle had been satisfied and the Listing qualified as a liquidity event. The Class B Units were converted into an equal number of Class A Units. In addition, effective at the Listing following this conversion and as approved by the Company’s board of directors, these Class A Units were redeemed for an equal number of newly issued shares of Class A common stock consistent with the redemption provisions contained in the Second A&R OP Agreement. As a result, the Company recorded a non-cash expense of approximately $15.8 million recorded in vesting and conversion of Class B Units in the unaudited consolidated statements of operations and comprehensive loss for the year ended December 31, 2018.
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Under the Second A&R Advisory Agreement, the Company was required to pay a fixed base management fee of $18.0 million annually. Under the Third A&R Advisory Agreement, the fixed portion of the base management fee increased from $18.0 million annually to (i) $21.0 million annually for the first year following the Effective Time; (ii) $22.5 million annually for the second year following the Effective Time; and (iii) $24.0 million annually for the remainder of the term. If the Company acquires (whether by merger, consolidation or otherwise) any REIT that is advised by an entity that is wholly-owned, directly or indirectly, by AR Global, other than any joint ventures, (a “Specified Transaction”), the fixed portion of the base management fee will be increased by an amount equal to the consideration paid for the acquired company’s equity multiplied by 0.0031, 0.0047 and 0.0062 for years one, two and three and thereafter, respectively, following the Specified Transaction. The variable portion of the base management fee changed from a quarterly fee equal to 0.375% of the cumulative net proceeds of any equity raised (including certain convertible debt, proceeds from the DRIP and any cumulative Core Earnings (as defined below) in excess of dividends paid on common stock but excluding equity based compensation and proceeds from an Specified Transaction after the Effective Time) after the Company lists its common stock on a national securities exchange to a monthly fee equal to one-twelfth of 1.25% of the cumulative net proceeds of the cumulative net proceeds of any equity raised by the Company or its subsidiaries from and after the Effective Time. Base management fees are included in asset management fees to related party on the consolidated statements of operations and comprehensive loss for the years ended December 31, 2018, 2017 and 2016.
In addition, under the Third A&R Advisory Agreement, the Company is required to pay the Advisor a variable management fee. Prior to the Listing Date, the amount that was required to be paid was equal to the product of (1) the fully diluted shares of common stock outstanding multiplied by (2) (x) 15.0% of the applicable quarter’s Core Earnings per share in excess of $0.375 per share plus (y) 10.0% of the applicable quarter’s Core Earnings per share in excess of $0.50 per share, in each case as adjusted for changes in the number of shares of common stock outstanding. On the Listing Date, the Company entered into an amendment to the Third A&R Advisory Agreement (the “Listing Amendment") which lowered the quarterly thresholds of Core Earnings per share the Company must reach in a particular quarter for the Advisor to receive a Variable Management Fee (as defined in the Third A&R Advisory Agreement) from $0.375 and $0.50 to $0.275 and $0.3125. The Listing Amendment also revised the definition of Adjusted Outstanding Shares (as defined in the Third A&R Advisory Agreement), which is used to calculate Core Earnings per share, to be based on the Company’s reported diluted weighted-average shares outstanding. The Company’s board of directors unanimously approved the Listing Amendment upon the unanimous recommendation of the Company’s nominating and corporate governance committee, which is comprised entirely of independent directors.
Core Earnings is defined as, for the applicable period, net income or loss computed in accordance with GAAP excluding non-cash equity compensation expense, the variable management fee, acquisition and transaction related fees and expenses, financing related fees and expenses, depreciation and amortization, realized gains and losses on the sale of assets, any unrealized gains or losses or other non-cash items recorded in net income or loss for the applicable period, regardless of whether such items are included in other comprehensive income or loss, or in net income, one-time events pursuant to changes in GAAP and certain non-cash charges, impairment losses on real estate related investments and other than temporary impairments of securities, amortization of deferred financing costs, amortization of tenant inducements, amortization of straight-line rent, amortization of market lease intangibles, provision for loss loans, and other non-recurring revenue and expenses (in each case after discussions between the Advisor and the independent directors and the approval of a majority of the independent directors). The variable management fee is payable to the Advisor or its assignees in cash or shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor and the value of any share to be determined by the Advisor acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. The Company did not incur a variable management fee during the years ended December 31, 2018, 2017 and 2016.
Property Management Fees
On September 6, 2016, the date of the Merger Agreement, RCA’s former property manager and leasing agent, assigned RCA’s existing property management agreement (as amended and restated in connection with the execution of the Merger Agreement and further amended from time to time, the “Multi-Tenant Property Management Agreement”) and existing leasing agreement (as amended and restated in connection with the execution of the Merger Agreement, the “Multi-Tenant Leasing Agreement”) to the Property Manager. The Multi-Tenant Property Management Agreement and the Multi-Tenant Leasing Agreement became effective at the Effective Time.
The Multi-Tenant Property Management Agreement provides that, unless a property is subject to a separate property management agreement with the Property Manager, the Property Manager is the sole and exclusive property manager for (1) the properties owned by RCA prior to the Merger and (2) any existing anchored, retail properties, such as power centers and lifestyle centers, acquired by the Company after the Effective Time and during the term of the Multi-Tenant Property Management Agreement and the Multi-Tenant Leasing Agreement, (the “Multi-Tenant Properties”). In December 2017, in connection with a $210.0 million
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
mortgage loan secured by 12 of the Company’s anchored, stabilized core retail properties, the Company entered into 12 identical property management agreements with the Property Manager, the substantive terms of which are substantially identical to the terms of the Multi-Tenant Property Management Agreement, with the exception of the transition fees described below.
The Multi-Tenant Property Management Agreement entitles the Property Manager to a management fee equal to 4% of the gross rental receipts from the Multi-Tenant Properties, including common area maintenance reimbursements, tax and insurance reimbursements, percentage rental payments, utility reimbursements, late fees, vending machine collections, service charges, rental interruption insurance, and a 15% administrative charge for common area expenses.
In addition, the Property Manager is entitled to transition fees of up to $2,500 for each Multi-Tenant Property managed, a construction fee equal to 6% of construction costs incurred, if any, and reimbursement of all expenses specifically related to the operation of a Multi-Tenant Property, including compensation and benefits of property management, accounting, lease administration, executive and supervisory personnel of the Property Manager, and excluding expenses of the Property Manager’s corporate and general management office and excluding compensation and other expenses applicable to time spent on matters other than the Multi-Tenant Properties.
Pursuant to the Multi-Tenant Leasing Agreement, the Company may, under certain circumstances and subject to certain conditions, pay the Property Manager a leasing fee for services in leasing Multi-Tenant Properties to third parties.
In addition, also in connection with entering into the Merger Agreement, the Company entered into an amendment and restatement of its existing property management and leasing agreement with the Property Manager (the “Property Management Agreement”), under which the properties owned by the Company prior to the Merger and any double- and triple-net leased single- tenant properties acquired by the Company after the Effective Time have been and will be managed. The amendment and restatement did not change the substantive terms of the Property Management Agreement, which permit the Property Manager to subcontract its duties to third parties and provide that the Company is responsible for all costs and expenses of managing the properties, except for general overhead and administrative expenses of the Property Manager.
The Multi-Tenant Property Management Agreement, the Multi-Tenant Leasing Agreement and the Property Management Agreement each had an initial term ending October 1, 2018, with automatic renewal for successive one-year terms unless terminated 60 days prior to the end of a term or terminated for cause due to material breach of the agreement, fraud, criminal conduct or willful misconduct, insolvency or bankruptcy of the Property Manager. The current term of the Multi-Tenant Property Management Agreement, the Multi-Tenant Leasing Agreement will therefore end on October 1, 2019.
Professional Fees and Other Reimbursements
The Company reimburses the Advisor’s costs of providing administrative services. During the years ended December 31, 2018, 2017 and 2016, the Company incurred $8.6 million, $7.8 million and $2.9 million, respectively, of reimbursement expenses from the Advisor for providing administrative services exclusive of fees and other expense reimbursements incurred from and due to the Advisor that are passed through and ultimately paid to Lincoln as a result of the Advisor’s arrangements with Lincoln. This reimbursement includes reasonable overhead expenses for employees of the Advisor or its affiliates directly involved in the performance of services on behalf of the Company, including the reimbursement of rent expense at certain properties that are both occupied by employees of the Advisor or its affiliates and owned by affiliates of the Advisor. These reimbursements are included in general and administrative expense on the consolidated statements of operations and comprehensive loss.
In order to improve operating cash flows and the ability to pay dividends from operating cash flows, the Advisor may elect to forgive certain fees. Because the Advisor may forgive certain fees, cash flows from operations that would have been paid to the Advisor may be available to pay dividends to stockholders. The fees that are 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 costs. No such fees were forgiven or costs were absorbed by the Advisor during the years ended December 31, 2018, 2017 and 2016.
F-37
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
The following table details amounts incurred and payable to related parties in connection with the operations-related services described above as of and for the periods presented. Amounts below include fees and other expense reimbursements incurred from and due to the Advisor that are passed through and ultimately paid to Lincoln as a result of the Advisor’s arrangements with Lincoln:
Year Ended December 31, | Payable as of December 31, | ||||||||||||||||||||
(In thousands) | 2018 | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||
One-time fees and reimbursements: | |||||||||||||||||||||
Acquisition related cost reimbursements (1) | $ | 318 | $ | 180 | $ | — | $ | 70 | $ | 9 | |||||||||||
Vesting and conversion of Class B Units | 15,786 | — | — | — | — | ||||||||||||||||
Ongoing fees: | |||||||||||||||||||||
Asset management fees | 23,143 | 20,908 | 18,000 | 95 | 408 | ||||||||||||||||
Property management and leasing fees (2) | 9,620 | 7,167 | — | 1,272 | 1,114 | ||||||||||||||||
Professional fees and other reimbursements (3) | 9,314 | 8,540 | 3,104 | 1,197 | 1,522 | (4) | |||||||||||||||
Distributions on Class B Units (3) | 736 | 1,551 | 1,736 | — | 116 | ||||||||||||||||
Total related party operation fees and reimbursements | $ | 58,917 | $ | 38,346 | $ | 22,840 | $ | 2,634 | $ | 3,169 | |||||||||||
_________________________________
(1) Amounts included in acquisition and transaction related expenses in the consolidated statements of operations and comprehensive loss.
(2) Amounts included in property operating expenses in the consolidated statements of operations and comprehensive loss.
(3) Amounts included in general and administrative expense in the consolidated statements of operations and comprehensive loss.
(4) Balance includes costs which were incurred and accrued due to American National Stock Transfer, LLC, a subsidiary of RCS Capital Corporation (“RCAP”), which at that time and prior to its bankruptcy filing was under common control with our Advisor. RCAP was also the parent company of the Realty Capital Securities, LLC, the dealer manager in the Company’s initial public offering.
Listing Arrangements
Fees Incurred in Connection with a Listing
Pursuant to the A&R OP Agreement, in the event that the Company’s common stock was listed on a national exchange, the OP was obligated to distribute to the Special Limited Partner a promissory note in an aggregate amount (the “Listing Amount”) equal to 15.0% of the difference (to the extent the result is a positive number) between:
• | the sum of (i) the “market value” (as defined in the A&R OP Agreement) of the Company’s common stock plus (ii) the sum of all distributions or dividends (from any source) paid by the Company to its stockholders prior to the Listing; and |
• | the sum of (i) the gross proceeds (“Gross Proceeds”) of all public and private offerings, including issuance of the Company’s common stock pursuant to a merger (including the Merger) or business combination (an “Offering”) as of the Listing Date plus (ii) the total amount of cash that, if distributed to those stockholders who purchased shares of the Company’s common stock in an Offering prior to the Listing, would have provided those stockholders a 6.0% cumulative, non-compounded, pre-tax annual return (based on a 365-day year) on the Gross Proceeds. |
Effective at the Listing, the OP entered into a listing note agreement with respect to this obligation (the “Listing Note”) with the Special Limited Partner and entered into a related subordination agreement (the “Subordination Agreement”) with the administrative agent under the Credit Facility, BMO Bank. The Listing Note evidences the OP’s obligation to distribute to the Special Limited Partner the Listing Amount, which will be calculated based on the Market Value of the Company’s common stock. The measurement period used to calculate the Market Value of the Company’s common stock will not be determinable until the end of the 30 consecutive trading days commencing on the 180th day following the date on which shares of Class B-2 common stock convert into shares of Class A common stock. Because the conversion of shares of Class B-2 common stock into shares of Class A common stock occurred on January 9, 2019, the measurement period will be the 30 trading days commencing on July 8, 2019 and ending on August 16, 2019. Until the amount of the Listing Note can be determined, the Listing Note will be considered a liability which will be marked to fair value at each reporting date, with changes in the fair value recorded in the consolidated statements of operations and comprehensive loss. The fair value of the Listing Note at issuance and at December 31, 2018 was not material and was determined using a Monte Carlo simulation, which uses a combination of observable and unobservable inputs. If another liquidity event occurs prior to the end of the measurement period, the Listing Note provides for appropriate adjustment to the calculation of the Listing Amount. The Special Limited Partner has the right to receive distributions of Net Sales Proceeds (as defined in the Listing Note), until the Listing Note is paid in full; provided that, the Special Limited Partner has the right, but not the obligation, to convert its entire special limited partnership interest in the OP into Class A Units.
F-38
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Multi-Year Outperformance Agreement
On the Listing Date, the Company granted a performance-based equity award to the Advisor in the form of a Master LTIP Unit pursuant to the 2018 OPP which, together with the Second A&R OP Agreement, superseded in all respects the general terms of the multi-year outperformance agreement and the amendment and restatement of the limited partnership agreement of the OP previously approved by the Company’s board of directors in April 2015 to be effective upon a listing of the Company’s common stock. On August 30, 2018, the Master LTIP Units automatically converted into 4,496,796 LTIP Units in accordance with its terms. For additional information on the 2018 OPP, see Note 13 — Share-Based Compensation.
Real Estate Commissions
Under the First A&R Advisory Agreement, the Advisor was paid a brokerage commission on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and one-half of the total brokerage commission paid, if a third party broker was also involved; provided, however, that in no event could 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. During the year ended December 31, 2016, the Company incurred $0.6 million of real estate commissions from the Advisor for its services in connection with the sale of real estate investments. The impact of the real estate commissions is included in gain on sale of real estate investments on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2016. No such commissions were incurred during the years ended December 31, 2018 and 2017. The Second A&R Advisory Agreement terminated the brokerage commission to the Advisor.
Note 12 — 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, as well as other administrative responsibilities for the Company including accounting and legal services, human resources and information technology.
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 13 — Share-Based Compensation
Equity Plans
Restricted Share Plan
Prior to the Listing, the Company’s board of directors had adopted an employee and director restricted share plan (the “RSP”), pursuant to which the Company could issue restricted shares and restricted stock units in respect of shares of common stock (“RSUs”) under specific award agreements 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.
2018 Equity Plan
Effective at the Listing, the Company’s board of directors adopted an equity plan for the Advisor (the “Advisor Plan”) and an equity plan for individuals (the “Individual Plan” and together with the Advisor Plan, the “2018 Equity Plan”). The Advisor Plan is substantially similar to the Individual Plan, except with respect to the eligible participants. Participation in the Individual Plan is open 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. By contrast, participation in the Advisor Plan is only open to the Advisor.
The 2018 Equity Plan succeeded and replaced the existing RSP. Following the effectiveness of the 2018 Equity Plan at the Listing, no further awards will be issued under the RSP; provided, however, that any outstanding awards under the RSP, such as
F-39
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
unvested restricted shares held by the Company’s independent directors, will remain outstanding in accordance with their terms and the terms of the RSP until all those awards are vested, forfeited, canceled, expired or otherwise terminated in accordance with their terms. The Company accounts for forfeitures when they occur. While the RSP provided only for awards of restricted shares and RSUs, the 2018 Equity Plan has been expanded to permit awards of options, stock appreciation rights, stock awards, LTIP Units and other equity awards in addition to restricted shares and restricted stock units. The 2018 Equity Plan has a term of 10 years, commencing on the Listing Date. Identical to the RSP, the number of shares of the Company’s capital stock available for awards under the 2018 Equity Plan, in the aggregate, is equal to 10.0% of the Company’s outstanding shares of common stock on a fully diluted basis at any time. Shares subject to awards under the Individual Plan reduce the number of shares available for awards under the Advisor Plan on a one-for-one basis and vice versa. If any awards granted under the RSP are forfeited for any reason, the number of forfeited shares is again available for purposes of granting awards under the RSP.
RSUs and Restricted Shares
RSUs represent a contingent right to receive shares of common stock at a future settlement date, subject to satisfaction of applicable vesting conditions and/or other restrictions, as set forth in the RSP and an award agreement evidencing the grant of RSUs. RSUs may not, in general, be sold or otherwise transferred until restrictions are removed and the rights to the shares of common stock have vested. Holders of RSUs do not have or receive any voting rights with respect to the RSUs or any shares underlying any award of RSUs, but such holders are generally credited with dividend or other distribution equivalents which are subject to the same vesting conditions and/or other restrictions as the underlying RSUs and only paid at the time such RSUs are settled in shares of common stock. The Company has not granted any RSU awards, and no unvested RSU awards were outstanding during the year ended December 31, 2018.
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. For restricted share awards granted prior to July 1, 2015 under the RSP, the awards would typically be forfeited with respect to the unvested restricted shares upon the termination of the recipient’s employment or other relationship with the Company. For restricted share awards granted on or after July 1, 2015 under the RSP and restricted share awards granted under the Individual Plan, the awards provide for accelerated vesting of the portion of the unvested restricted shares scheduled to vest in the year of the recipient’s termination of his or her position as a director of the Company due to a voluntary resignation or failure to be re-elected to the Company’s board of directors following nomination. All unvested restricted shares also vest in the event of a Change of Control (as defined in the RSP or the Individual Plan) or a termination of a directorship without cause or as a result of death or disability. 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 dividends prior to the time that the restrictions on the restricted shares have lapsed. Any dividends to holders of restricted shares payable in shares of common stock are subject to the same restrictions as the underlying restricted shares.
The following table reflects restricted share award activity for the years ended December 31, 2018, 2017 and 2016:
Number of Shares of Common Stock | Weighted-Average Issue Price | |||||
Unvested, December 31, 2015 | 7,455 | $ | 23.34 | |||
Granted | 3,723 | 24.17 | ||||
Vested | (1,811 | ) | 23.19 | |||
Unvested, December 31, 2016 | 9,367 | 23.70 | ||||
Granted | 8,897 | 23.59 | ||||
Vested | (2,556 | ) | 23.47 | |||
Unvested, December 31, 2017 | 15,708 | 23.67 | ||||
Granted | 127,402 | 16.01 | ||||
Vested | (6,869 | ) | 23.58 | |||
Forfeited | (7 | ) | — | |||
Unvested, December 31, 2018 | 136,234 | 16.51 | ||||
As of December 31, 2018, the Company had $1.8 million of unrecognized compensation cost related to unvested restricted share awards granted. That cost is expected to be recognized over a weighted-average period of 2.3 years.
F-40
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
The fair value of the restricted shares is being expensed in accordance with the service period required. Compensation expense related to restricted shares was approximately $450,000, $128,000 and $67,000 for the years ended December 31, 2018, 2017 and 2016, respectively. Compensation expense related to restricted shares is included in general and administrative expense on the accompanying consolidated statements of operations and comprehensive loss.
Multi-Year Outperformance Agreement
On the Listing Date, the Company granted a performance-based equity award to the Advisor in the form of a Master LTIP Unit pursuant to the 2018 OPP. The Master LTIP Unit was automatically converted on August 30, 2018 (the “Effective Date”), the 30th trading day following the Listing Date, into 4,496,796 LTIP Units (the “Award LTIP Units”) equal to the quotient of $72.0 million divided by $16.0114, the ten-day trailing average closing price of the Company’s Class A common stock on Nasdaq over the ten consecutive trading days immediately prior to the Effective Date (the “Initial Share Price”). The Effective Date was the grant date for accounting purposes. In accordance with the early adoption of ASU 2018-07 (see Note 3 — Summary of Significant Accounting Policies), the total fair value of the Award LTIP Units of $32.0 million was calculated and fixed as of the grant date, and will be recorded over the requisite service period of three years. As a result, during the year ended December 31, 2018, the Company recorded share-based compensation expense related to the Award LTIP Units of $4.8 million, which is recorded in share-based compensation — multi-year outperformance agreement in the consolidated statements of operations and comprehensive loss. As of December 31, 2018, the Company had $27.2 million of unrecognized compensation expense related the Award LTIP Units which is expected to be recognized over a period of 2.5 years.
The Award LTIP Units represent the maximum number of LTIP Units that may be earned by the Advisor during a performance period (the “Performance Period”) commencing on the Listing Date and ending on the earliest of (i) the third anniversary of the Listing Date, (ii) the effective date of any Change of Control (as defined in the 2018 OPP) and (iii) the effective date of any termination of the Advisor’s service as advisor of the Company.
Half of the Award LTIP Units (the “Absolute TSR LTIP Units”) are eligible to be earned as of the last day of the Performance Period (the “Valuation Date”) if Company achieves an absolute total stockholder return (“TSR”) for the Performance Period as follows:
Performance Level | Absolute TSR | Percentage of Award LTIPs Units Earned | ||||||
Below Threshold | Less than | 24 | % | — | % | |||
Threshold | 24 | % | 25 | % | ||||
Target | 30 | % | 50 | % | ||||
Maximum | 36 | % | or higher | 100 | % | |||
If the Company’s absolute TSR is more than 24% but less than 30%, or more than 30% but less than 36%, the percentage of the Absolute TSR Award LTIP Units earned is determined using linear interpolation as between those tiers, respectively.
Half of the Award LTIP Units (the “Relative TSR LTIP Units”) are eligible to be earned as of the Valuation Date if the amount, expressed in terms of basis points, whether positive or negative, by which the Company’s absolute TSR on the Valuation Date exceeds the average TSR of a peer group as of the Valuation Date consisting of Colony Capital, Inc., Lexington Realty Trust, Ramco-Gershenson Properties Trust, Spirit Realty Capital, Inc. and (following an amendment to the 2018 OPP in March 2019 in light of the effectiveness of a merger of one member of the peer group, Select Income REIT, with Government Properties Income Trust, with the entity surviving the merger renamed as Office Properties Income Trust) Office Properties Income Trust as follows:
Performance Level | Relative TSR Excess | Percentage of Relative TSR Award LTIPs Units Earned | ||||||
Below Threshold | Less than | -600 | basis points | — | % | |||
Threshold | -600 | basis points | 25 | % | ||||
Target | — | basis points | 50 | % | ||||
Maximum | +600 | basis points | 100 | % | ||||
If the relative TSR excess is more than -600 bps but less than 0 bps, or more than 0 bps but less than +600 bps, the percentage of the Relative TSR Award LTIP Units earned is determined using linear interpolation as between those tiers, respectively.
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Until an LTIP Unit is earned in accordance with the provisions of the 2018 OPP, the holder of the LTIP Unit will be entitled to distributions on the LTIP Unit equal to 10% of the distributions made per Class A Unit (other than distribution of sale proceeds). Distributions paid with respect to an LTIP Unit are not subject to forfeiture, even if the LTIP Unit is ultimately forfeited because it is not earned in accordance with the 2018 OPP. Moreover, the Master LTIP Unit was entitled, on the Effective Date, to receive a distribution equal to the product of 10% of the distributions made per Class A Unit during the period from the Listing Date to the Effective Date multiplied by the number of Award LTIP Units. For the year ended December 31, 2018, the Company recorded distributions related to the LTIP Units (representing the Master LTIP Unit and the Award LTIP Units) of $0.2 million, which is recorded in the consolidated statement of changes in equity. After an LTIP Unit is earned, the holder will be entitled to a priority catch-up distribution per earned LTIP Unit equal to the aggregate distributions paid on a Class A Unit during the Performance Period, less the aggregate distributions paid on the LTIP Unit during the Performance Period. As of the Valuation Date, the earned LTIP Units will become entitled to receive the same distributions as are paid on Class A Units. At the time the Advisor’s capital account with respect to an LTIP Unit is economically equivalent to the average capital account balance of a Class A Unit, the LTIP Unit has been earned and it has been vested for 30 days, the Advisor, in its sole discretion, will be entitled to convert the LTIP Unit into a Class A Unit in accordance with the Second A&R OP Agreement. In accordance with, and subject to the terms of, the Second A&R OP Agreement, Class A Units may be redeemed on a one-for-one basis for, at the Company’s election, shares of Class A common stock or the cash equivalent thereof.
If the Valuation Date is the effective date of a Change of Control or a termination of the Advisor without Cause (as defined in the Advisory Agreement), then calculations relating to the number of LTIP Units earned pursuant to the 2018 OPP will be performed based on actual performance as of (and including) the effective date of the Change of Control or termination (as applicable) based on the performance through the last trading day prior to the effective date of the Change of Control or termination (as applicable), with the hurdles for calculating absolute TSR pro-rated to reflect that the Performance Period lasted less than three years but without pro-rating the number of Absolute TSR LTIP Units or Relative TSR LTIP Units the Advisor would be eligible to earn to reflect the shortened period.
If the Valuation Date is the effective date of a termination of the Advisor with Cause, then calculations relating to the number of LTIP Units earned pursuant to the 2018 OPP will also be performed based on actual performance as of (and including) the effective date of the termination based on the performance through the last trading day prior to the effective date of the termination, with the hurdles for calculating absolute TSR pro-rated to reflect that the Performance Period lasted less than three years and with the number of Absolute TSR LTIP Units or Relative TSR LTIP Units the Advisor would be eligible to earn also pro-rated to reflect the shortened period.
The award of LTIP Units under the 2018 OPP is administered by the Compensation Committee, provided that any of the Compensation Committee’s powers can be exercised instead by the Company’s board of directors if the board of directors so elects. Following the Valuation Date, the Compensation Committee is responsible for determining the number of Absolute TSR Award LTIPs and Relative TSR Award LTIPs earned, as calculated by an independent consultant engaged by the Compensation Committee and as approved by the Compensation Committee in its reasonable and good faith discretion. The Compensation Committee also must approve the transfer of any Absolute TSR Award LTIP Units and Relative TSR Award LTIP Units (or Class A Units into which they may be converted in accordance with the terms of the A&R LPA).
LTIP Units earned as of the Valuation Date will also become vested as of the Valuation Date. Any LTIP Units that are not earned and vested after the Compensation Committee makes the required determination will automatically and without notice be forfeited without the payment of any consideration by the Company or the OP, effective as of the Valuation Date.
Director Compensation
Effective on the Listing Date, the Company’s board of directors approved a new director compensation program, which replaced the Company’s existing director compensation program and superseded in all respects the director compensation previously approved by the Company’s board of directors in April 2015. Under the new director compensation program, each of the Company’s directors received a one-time retention grant on September 5, 2018 of 21,234 restricted shares, representing the number of restricted shares equal to the quotient of $340,000 divided by the Initial Share Price, vesting annually over a three-year period commencing on the Listing Date in equal installments. In addition, under the new director compensation program, on a regular basis, each independent director will receive an annual cash retainer of $60,000 and, in connection with each of the Company’s annual meetings of stockholders, a grant of $85,000 in restricted shares, vesting on the one-year anniversary of the annual meeting. Also, members of the Company’s board of directors will no longer be receiving fees for attending meetings or taking actions by written consent. Because the independent directors did not receive an annual grant of restricted shares in connection with the Company’s 2018 annual meeting of stockholders pursuant to the Company’s existing director compensation program, on September 5, 2018 the independent directors received a grant of 5,308 restricted shares pursuant to the new director compensation program, representing
F-42
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
the number of restricted shares equal to the quotient of $85,000 divided by the Initial Share price, vesting on the first anniversary of the Listing Date.
The lead independent director receives an additional annual cash retainer of $100,000, the chair of the audit committee of the Company’s board of directors (the “Audit Committee”) receives an additional annual cash retainer of $30,000, each other member of the Audit Committee receives an additional annual cash retainer of $15,000, the chair of each of the Compensation Committee and the NCG Committee receives an additional annual cash retainer of $15,000, and each other member of each of the Compensation Committee and the NCG Committee will receive an additional annual cash retainer of $10,000.
The Company continues to reimburse directors for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the Company’s board of directors and its committees and pay each independent director for each external seminar, conference, panel, forum or other industry-related event attended in person and in which the independent director actively participates, solely in his or her capacity as an independent director of the Company.
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 no shares of common stock issued to directors in lieu of cash compensation during the years ended December 31, 2018, 2017 and 2016.
Note 14 — Net Loss Per Share
The following table sets forth the basic and diluted net loss per share computations for the years ended December 31, 2018, 2017 and 2016:
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Basic and diluted net loss attributable to stockholders (in thousands) | $ | (37,409 | ) | $ | (46,494 | ) | $ | (54,255 | ) | |||
Basic and diluted weighted-average shares outstanding | 105,560,053 | 99,649,471 | 65,450,432 | |||||||||
Basic and diluted net loss per share | $ | (0.35 | ) | $ | (0.47 | ) | $ | (0.83 | ) | |||
Diluted net loss per share assumes the vesting or conversion of restricted shares and OP Units into an equivalent number of unrestricted shares of common stock and the conversion of Class B Units, prior to their vesting and conversion into Class A Units which were redeemed for shares of Class A common stock in connection with the Listing (see Note 11 — Related Party Transactions and Arrangements for additional information), unless the effect is antidilutive. The Company had the following restricted shares, OP Units, Class B Units and Award LTIP Units on a weighted-average basis that were excluded from the calculation of diluted net loss per share as their effect would have been antidilutive for the periods presented, or in the case of Class B Units, certain contingencies had not been met as of December 31, 2017 or 2016:
December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Unvested restricted shares (1) | 52,847 | 12,957 | 7,985 | ||||||
OP Units (2) | 189,737 | 177,962 | 90 | ||||||
Class B Units (3) | 573,785 | 1,052,420 | 1,052,420 | ||||||
Award LTIP Units (4) | 1,515,359 | — | — | ||||||
Total | 2,331,728 | 1,243,339 | 1,060,495 | ||||||
_____________________
(1) | Weighted-average number of shares of unvested restricted shares outstanding for the periods presented. There were 136,234, 15,708 and 9,367 shares of unvested restricted stock outstanding as of December 31, 2018, 2017 and 2016, respectively. |
(2) | Weighted-average number of shares of OP Units outstanding for the periods presented. There were 172,921, 203,612 and 90 OP Units outstanding as of December 31, 2018, 2017 and 2016, respectively. |
(3) | Weighted-average number of Class B Units outstanding for the periods presented. There were no Class B Units outstanding as of December 31, 2018 and 1,052,420 Class B Units outstanding as of December 31, 2017 and 2016. |
(4) | Weighted-average number of Award LTIP Units outstanding for the periods presented. There were 4,496,796 Award LTIP Units outstanding as of December 31, 2018. |
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AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Note 15 – Quarterly Results (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2018 and 2017:
Quarter Ended | ||||||||||||||||
(In thousands, except share and per share amounts) | March 31, 2018 | June 30, 2018 | September 30, 2018 | December 31, 2018 | ||||||||||||
Total revenues | $ | 70,119 | $ | 71,108 | $ | 74,888 | $ | 75,092 | ||||||||
Net income (loss) attributable to stockholders | $ | 15,401 | $ | (12,041 | ) | $ | (27,245 | ) | $ | (13,524 | ) | |||||
Basic weighted-average shares outstanding | 105,196,387 | 105,028,459 | 105,905,281 | 106,096,401 | ||||||||||||
Diluted weighted-average shares outstanding | 105,415,211 | 105,028,459 | 105,905,281 | 106,096,401 | ||||||||||||
Basic and diluted net income (loss) per share attributable to stockholders | $ | 0.15 | $ | (0.11 | ) | $ | (0.26 | ) | $ | (0.13 | ) | |||||
Quarter Ended | ||||||||||||||||
(In thousands, except share and per share amounts) | March 31, 2017 | June 30, 2017 | September 30, 2017 | December 31, 2017 | ||||||||||||
Total revenues | $ | 57,220 | $ | 71,607 | $ | 69,729 | $ | 72,354 | ||||||||
Net loss attributable to stockholders | (10,717 | ) | (1,021 | ) | (15,367 | ) | $ | (19,389 | ) | |||||||
Basic and diluted weighted-average shares outstanding | 84,652,179 | 104,140,631 | 104,545,591 | 104,982,273 | ||||||||||||
Basic and diluted net loss per share attributable to stockholders | $ | (0.13 | ) | $ | (0.01 | ) | $ | (0.15 | ) | $ | (0.18 | ) | ||||
Note 16 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K, and determined that there have not been any events that have occurred that would require adjustments to, or disclosures in, the consolidated financial statements except for the following disclosures:
Acquisitions
From January 1, 2019 to March 7, 2019, the Company acquired 58 properties with an aggregate base purchase price of $96.2 million, excluding acquisition related costs.
Dispositions
From January 1, 2019 to March 7, 2019, the Company sold five properties with an aggregate contract sale price of $10.4 million.
Conversion of Class B-2 Common Stock
In accordance with their terms, all shares of Class B-2 common stock automatically converted into shares of Class A common stock and were listed on Nasdaq on January 9, 2019. Fractional shares of Class B-2 totaling approximately 19,863 shares were repurchased at a price of $13.78 per share by the Company as a result of the conversion of the automatic conversion. For addition information related to the Company’s common stock, see Note 9 — Common Stock.
F-44
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | ||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | |||||||||||||||||||||||||
Dollar General I | Retail | Mission | TX | 4/29/2013 | — | (1) | $ | 142 | $ | 807 | $ | — | $ | — | $ | 949 | $ | 242 | |||||||||||||||||
Dollar General I | Retail | Sullivan | MO | 5/3/2013 | — | (1) | 146 | 825 | — | — | 971 | 247 | |||||||||||||||||||||||
Walgreens I | Retail | Pine Bluff | AR | 7/8/2013 | — | (1) | 159 | 3,016 | — | — | 3,175 | 950 | |||||||||||||||||||||||
Dollar General II | Retail | Bogalusa | LA | 7/12/2013 | — | (1) | 107 | 965 | — | — | 1,072 | 285 | |||||||||||||||||||||||
Dollar General II | Retail | Donaldsonville | LA | 7/12/2013 | — | (1) | 97 | 871 | — | — | 968 | 257 | |||||||||||||||||||||||
AutoZone I | Retail | Cut Off | LA | 7/16/2013 | — | (1) | 67 | 1,282 | — | — | 1,349 | 375 | |||||||||||||||||||||||
Dollar General III | Retail | Athens | MI | 7/16/2013 | — | (1) | 48 | 907 | — | — | 955 | 265 | |||||||||||||||||||||||
Dollar General III | Retail | Fowler | MI | 7/16/2013 | — | (1) | 49 | 940 | — | — | 989 | 275 | |||||||||||||||||||||||
Dollar General III | Retail | Hudson | MI | 7/16/2013 | — | (1) | 102 | 922 | — | — | 1,024 | 270 | |||||||||||||||||||||||
Dollar General III | Retail | Muskegon | MI | 7/16/2013 | — | (1) | 49 | 939 | — | — | 988 | 275 | |||||||||||||||||||||||
Dollar General III | Retail | Reese | MI | 7/16/2013 | — | (1) | 150 | 848 | — | — | 998 | 248 | |||||||||||||||||||||||
BSFS I | Retail | Fort Myers | FL | 7/18/2013 | — | (1) | 1,215 | 1,822 | — | — | 3,037 | 556 | |||||||||||||||||||||||
Dollar General IV | Retail | Bainbridge | GA | 7/29/2013 | — | (1) | 233 | 700 | — | — | 933 | 205 | |||||||||||||||||||||||
Dollar General IV | Retail | Vanleer | TN | 7/29/2013 | — | (1) | 78 | 705 | — | — | 783 | 206 | |||||||||||||||||||||||
Tractor Supply I | Retail | Vernon | CT | 8/1/2013 | — | (1) | 358 | 3,220 | — | — | 3,578 | 813 | |||||||||||||||||||||||
Dollar General V | Retail | Meraux | LA | 8/2/2013 | — | (1) | 708 | 1,315 | — | — | 2,023 | 385 | |||||||||||||||||||||||
Mattress Firm I | Retail | Tallahassee | FL | 8/7/2013 | — | (1) | 1,015 | 1,241 | — | — | 2,256 | 363 | |||||||||||||||||||||||
Family Dollar I | Retail | Butler | KY | 8/12/2013 | — | (1) | 126 | 711 | — | — | 837 | 208 | |||||||||||||||||||||||
Lowe's I | Retail | Macon | GA | 8/19/2013 | — | (1) | — | 8,420 | — | — | 8,420 | 2,089 | |||||||||||||||||||||||
Lowe's I | Retail | Fayetteville | NC | 8/19/2013 | — | — | 6,422 | — | — | 6,422 | 1,593 | ||||||||||||||||||||||||
Lowe's I | Retail | New Bern | NC | 8/19/2013 | — | (1) | 1,812 | 10,269 | — | — | 12,081 | 2,548 | |||||||||||||||||||||||
Lowe's I | Retail | Rocky Mount | NC | 8/19/2013 | — | (1) | 1,931 | 10,940 | — | — | 12,871 | 2,714 | |||||||||||||||||||||||
O'Reilly Auto Parts I | Retail | Manitowoc | WI | 8/19/2013 | — | (1) | 85 | 761 | — | — | 846 | 221 | |||||||||||||||||||||||
Food Lion I | Retail | Charlotte | NC | 8/19/2013 | — | (1) | 3,132 | 4,697 | — | — | 7,829 | 1,205 | |||||||||||||||||||||||
Lowe's I | Retail | Aiken | SC | 8/21/2013 | — | (1) | 1,764 | 7,056 | — | — | 8,820 | 1,748 | |||||||||||||||||||||||
Family Dollar II | Retail | Danville | AR | 8/22/2013 | — | (1) | 170 | 679 | — | — | 849 | 197 | |||||||||||||||||||||||
Walgreens II | Retail | Tucker | GA | 8/23/2013 | — | (1) | — | 2,524 | — | — | 2,524 | 782 | |||||||||||||||||||||||
Dollar General VI | Retail | Natalbany | LA | 8/23/2013 | — | (1) | 379 | 883 | — | — | 1,262 | 256 | |||||||||||||||||||||||
Dollar General VII | Retail | Gasburg | VA | 8/23/2013 | — | (1) | 52 | 993 | — | — | 1,045 | 288 | |||||||||||||||||||||||
Family Dollar III | Retail | Challis | ID | 8/27/2013 | — | (1) | 44 | 828 | — | — | 872 | 240 | |||||||||||||||||||||||
Chili's I | Retail | Lake Jackson | TX | 8/30/2013 | — | (1) | 746 | 1,741 | — | — | 2,487 | 631 | |||||||||||||||||||||||
Chili's I | Retail | Victoria | TX | 8/30/2013 | — | (1) | 813 | 1,897 | — | — | 2,710 | 687 | |||||||||||||||||||||||
CVS I | Retail | Anniston | AL | 8/30/2013 | — | (1) | 472 | 1,887 | — | — | 2,359 | 585 | |||||||||||||||||||||||
Joe's Crab Shack I | Retail | Westminster | CO | 8/30/2013 | — | (1) | 1,136 | 2,650 | — | — | 3,786 | 960 | |||||||||||||||||||||||
Tire Kingdom I | Retail | Lake Wales | FL | 9/4/2013 | — | (1) | 556 | 1,296 | — | — | 1,852 | 392 | |||||||||||||||||||||||
F-45
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | ||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | |||||||||||||||||||||||||
Dollar General VIII | Retail | Stanleytown | VA | 9/6/2013 | — | (1) | 185 | 1,049 | — | — | 1,234 | 304 | |||||||||||||||||||||||
AutoZone II | Retail | Temple | GA | 9/6/2013 | — | (1) | 569 | 854 | — | — | 1,423 | 248 | |||||||||||||||||||||||
Family Dollar IV | Retail | Oil City | LA | 9/9/2013 | — | (1) | 76 | 685 | — | — | 761 | 199 | |||||||||||||||||||||||
Fresenius I | Retail | Montevallo | AL | 9/12/2013 | — | (1) | 300 | 1,699 | — | — | 1,999 | 416 | |||||||||||||||||||||||
Dollar General IX | Retail | Mabelvale | AR | 9/13/2013 | — | (1) | 38 | 723 | — | — | 761 | 210 | |||||||||||||||||||||||
Advance Auto I | Retail | Angola | IN | 9/19/2013 | — | (1) | 35 | 671 | — | — | 706 | 193 | |||||||||||||||||||||||
Walgreens III | Retail | Lansing | MI | 9/19/2013 | — | (1) | 216 | 4,099 | — | — | 4,315 | 1,261 | |||||||||||||||||||||||
CVS II | Retail | Holyoke | MA | 9/19/2013 | — | (1) | — | 2,258 | — | — | 2,258 | 694 | |||||||||||||||||||||||
Arby's I | Retail | Hernando | MS | 9/19/2013 | — | (1) | 624 | 1,455 | — | — | 2,079 | 523 | |||||||||||||||||||||||
Walgreens IV | Retail | Beaumont | TX | 9/20/2013 | — | (1) | 499 | 1,995 | — | — | 2,494 | 613 | |||||||||||||||||||||||
Dollar General X | Retail | Greenwell Springs | LA | 9/24/2013 | — | (1) | 114 | 1,029 | — | — | 1,143 | 296 | |||||||||||||||||||||||
National Tire & Battery I | Retail | San Antonio | TX | 9/24/2013 | — | (1) | 577 | 577 | — | — | 1,154 | 172 | |||||||||||||||||||||||
American Express Travel Related Services I | Office | Salt Lake City | UT | 9/24/2013 | — | (1) | 4,150 | 32,789 | — | — | 36,939 | 13,388 | |||||||||||||||||||||||
AmeriCold I | Distribution | Belvidere | IL | 9/24/2013 | — | (1) | 2,170 | 17,843 | — | — | 20,013 | 5,607 | |||||||||||||||||||||||
AmeriCold I | Distribution | Brooklyn Park | MN | 9/24/2013 | — | (1) | 1,590 | 11,940 | — | — | 13,530 | 3,752 | |||||||||||||||||||||||
AmeriCold I | Distribution | Cartersville | GA | 9/24/2013 | — | (1) | 1,640 | 14,533 | — | — | 16,173 | 4,567 | |||||||||||||||||||||||
AmeriCold I | Distribution | Douglas | GA | 9/24/2013 | — | (1) | 750 | 7,076 | — | — | 7,826 | 2,224 | |||||||||||||||||||||||
AmeriCold I | Distribution | Gaffney | SC | 9/24/2013 | — | (1) | 1,360 | 5,666 | — | — | 7,026 | 1,780 | |||||||||||||||||||||||
AmeriCold I | Distribution | Gainesville | GA | 9/24/2013 | — | (1) | 1,580 | 13,838 | — | — | 15,418 | 4,348 | |||||||||||||||||||||||
AmeriCold I | Distribution | Pendergrass | GA | 9/24/2013 | — | (1) | 2,810 | 26,572 | — | — | 29,382 | 8,350 | |||||||||||||||||||||||
AmeriCold I | Distribution | Piedmont | SC | 9/24/2013 | — | (1) | 3,030 | 24,067 | — | — | 27,097 | 7,563 | |||||||||||||||||||||||
AmeriCold I | Distribution | Zumbrota | MN | 9/24/2013 | — | (1) | 2,440 | 18,152 | — | — | 20,592 | 5,704 | |||||||||||||||||||||||
Home Depot I | Distribution | Valdosta | GA | 9/24/2013 | — | (1) | 2,930 | 30,538 | — | — | 33,468 | 7,472 | |||||||||||||||||||||||
Home Depot I | Distribution | Birmingham | AL | 9/24/2013 | — | (1) | 3,660 | 33,667 | — | — | 37,327 | 8,238 | |||||||||||||||||||||||
New Breed Logistics I | Distribution | Hanahan | SC | 9/24/2013 | — | (1) | 2,940 | 19,171 | — | — | 22,111 | 6,025 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Washington | DC | 9/24/2013 | — | (1) | 590 | 2,366 | — | — | 2,956 | 650 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Fort Pierce | FL | 9/24/2013 | — | (1) | 720 | 1,434 | (161 | ) | (248 | ) | 1,745 | 379 | |||||||||||||||||||||
SunTrust Bank I | Retail | New Smyrna Beach | FL | 9/24/2013 | — | (1) | 740 | 2,859 | — | — | 3,599 | 786 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Orlando | FL | 9/24/2013 | — | (1) | 540 | 3,069 | — | — | 3,609 | 843 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Orlando | FL | 9/24/2013 | — | (1) | 410 | 2,078 | — | — | 2,488 | 571 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Atlanta | GA | 9/24/2013 | — | (1) | 570 | 1,152 | — | — | 1,722 | 317 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Dunwoody | GA | 9/24/2013 | — | (1) | 460 | 2,714 | (203 | ) | (941 | ) | 2,030 | 673 | |||||||||||||||||||||
SunTrust Bank I | Retail | Thomson | GA | 9/24/2013 | — | (1) | 480 | 1,015 | — | — | 1,495 | 279 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Waycross | GA | 9/24/2013 | — | (1) | 300 | 1,425 | — | — | 1,725 | 392 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Cary | NC | 9/24/2013 | — | (1) | 370 | 841 | — | — | 1,211 | 231 | |||||||||||||||||||||||
F-46
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | ||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | |||||||||||||||||||||||||
SunTrust Bank I | Retail | Stokesdale | NC | 9/24/2013 | — | (1) | 230 | 581 | — | — | 811 | 160 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Summerfield | NC | 9/24/2013 | — | (1) | 210 | 605 | — | — | 815 | 166 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Waynesville | NC | 9/24/2013 | — | (1) | 200 | 874 | — | — | 1,074 | 240 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Fountain Inn | SC | 9/24/2013 | — | (1) | 290 | 1,086 | (250 | ) | (754 | ) | 372 | 223 | |||||||||||||||||||||
SunTrust Bank I | Retail | Chattanooga | TN | 9/24/2013 | — | (1) | 220 | 781 | — | — | 1,001 | 215 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Nashville | TN | 9/24/2013 | — | (1) | 190 | 666 | — | — | 856 | 183 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Oak Ridge | TN | 9/24/2013 | — | (1) | 500 | 1,277 | — | — | 1,777 | 351 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Savannah | TN | 9/24/2013 | — | (1) | 390 | 1,179 | — | — | 1,569 | 324 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Doswell | VA | 9/24/2013 | — | (1) | 190 | 510 | — | — | 700 | 140 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Nassawadox | VA | 9/24/2013 | — | (1) | 70 | 484 | (52 | ) | (269 | ) | 233 | 127 | |||||||||||||||||||||
SunTrust Bank I | Retail | New Market | VA | 9/24/2013 | — | (1) | 330 | 948 | — | — | 1,278 | 261 | |||||||||||||||||||||||
SunTrust Bank I | Retail | Vinton | VA | 9/24/2013 | — | (1) | 120 | 366 | — | — | 486 | 100 | |||||||||||||||||||||||
Circle K I | Retail | Burlington | IA | 9/25/2013 | — | (1) | 224 | 523 | — | — | 747 | 151 | |||||||||||||||||||||||
Circle K I | Retail | Clinton | IA | 9/25/2013 | — | (1) | 334 | 779 | — | — | 1,113 | 224 | |||||||||||||||||||||||
Circle K I | Retail | Muscatine | IA | 9/25/2013 | — | (1) | 274 | 821 | — | — | 1,095 | 236 | |||||||||||||||||||||||
Circle K I | Retail | Aledo | IL | 9/25/2013 | — | (1) | 427 | 1,709 | — | — | 2,136 | 492 | |||||||||||||||||||||||
Circle K I | Retail | Bloomington | IL | 9/25/2013 | — | (1) | 316 | 586 | — | — | 902 | 169 | |||||||||||||||||||||||
Circle K I | Retail | Bloomington | IL | 9/25/2013 | — | (1) | 395 | 592 | — | — | 987 | 171 | |||||||||||||||||||||||
Circle K I | Retail | Champaign | IL | 9/25/2013 | — | (1) | 412 | 504 | — | — | 916 | 145 | |||||||||||||||||||||||
Circle K I | Retail | Galesburg | IL | 9/25/2013 | — | (1) | 355 | 829 | — | — | 1,184 | 239 | |||||||||||||||||||||||
Circle K I | Retail | Jacksonville | IL | 9/25/2013 | — | (1) | 351 | 818 | — | — | 1,169 | 236 | |||||||||||||||||||||||
Circle K I | Retail | Jacksonville | IL | 9/25/2013 | — | (1) | 316 | 474 | — | — | 790 | 136 | |||||||||||||||||||||||
Circle K I | Retail | Mattoon | IL | 9/25/2013 | — | (1) | 608 | 1,129 | — | — | 1,737 | 325 | |||||||||||||||||||||||
Circle K I | Retail | Morton | IL | 9/25/2013 | — | (1) | 350 | 525 | — | — | 875 | 151 | |||||||||||||||||||||||
Circle K I | Retail | Paris | IL | 9/25/2013 | — | (1) | 429 | 797 | — | — | 1,226 | 230 | |||||||||||||||||||||||
Circle K I | Retail | Staunton | IL | 9/25/2013 | — | (1) | 467 | 1,867 | — | — | 2,334 | 538 | |||||||||||||||||||||||
Circle K I | Retail | Vandalia | IL | 9/25/2013 | — | (1) | 529 | 983 | — | — | 1,512 | 283 | |||||||||||||||||||||||
Circle K I | Retail | Virden | IL | 9/25/2013 | — | (1) | 302 | 1,208 | — | — | 1,510 | 348 | |||||||||||||||||||||||
Circle K I | Retail | Lafayette | IN | 9/25/2013 | — | (1) | 401 | 746 | — | — | 1,147 | 215 | |||||||||||||||||||||||
Circle K I | Retail | Bedford | OH | 9/25/2013 | — | (1) | 702 | 702 | — | — | 1,404 | 202 | |||||||||||||||||||||||
Circle K I | Retail | Streetsboro | OH | 9/25/2013 | — | (1) | 540 | 540 | — | — | 1,080 | 156 | |||||||||||||||||||||||
Walgreens V | Retail | Oklahoma City | OK | 9/27/2013 | — | (1) | 1,295 | 3,884 | — | — | 5,179 | 1,194 | |||||||||||||||||||||||
Walgreens VI | Retail | Gillette | WY | 9/27/2013 | — | (1) | 1,198 | 2,796 | — | — | 3,994 | 860 | |||||||||||||||||||||||
FedEx Ground I | Distribution | Watertown | SD | 9/30/2013 | — | (1) | 136 | 2,581 | — | — | 2,717 | 811 | |||||||||||||||||||||||
American Tire Distributors I | Distribution | Chattanooga | TN | 9/30/2013 | — | (1) | 401 | 7,626 | — | — | 8,027 | 2,396 | |||||||||||||||||||||||
F-47
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | ||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | |||||||||||||||||||||||||
Krystal I | Retail | Jacksonville | FL | 9/30/2013 | — | (1) | 533 | 799 | — | — | 1,332 | 288 | |||||||||||||||||||||||
Krystal I | Retail | Columbus | GA | 9/30/2013 | — | (1) | 143 | 1,288 | — | — | 1,431 | 463 | |||||||||||||||||||||||
Krystal I | Retail | Ft. Oglethorpe | GA | 9/30/2013 | — | (1) | 181 | 1,024 | — | — | 1,205 | 368 | |||||||||||||||||||||||
Krystal I | Retail | Chattanooga | TN | 9/30/2013 | — | (1) | 285 | 855 | — | — | 1,140 | 308 | |||||||||||||||||||||||
Krystal I | Retail | Cleveland | TN | 9/30/2013 | — | (1) | 207 | 1,172 | — | — | 1,379 | 421 | |||||||||||||||||||||||
Krystal I | Retail | Madison | TN | 9/30/2013 | — | (1) | 416 | 624 | — | — | 1,040 | 225 | |||||||||||||||||||||||
O'Charley's I | Retail | Lexington | KY | 9/30/2013 | — | (1) | 409 | 955 | — | — | 1,364 | 344 | |||||||||||||||||||||||
O'Charley's I | Retail | Conyers | GA | 9/30/2013 | — | (1) | 373 | 2,113 | — | — | 2,486 | 760 | |||||||||||||||||||||||
O'Charley's I | Retail | Southaven | MS | 9/30/2013 | — | (1) | 836 | 1,553 | — | — | 2,389 | 559 | |||||||||||||||||||||||
O'Charley's I | Retail | Daphne | AL | 9/30/2013 | — | (1) | 142 | 1,275 | — | — | 1,417 | 459 | |||||||||||||||||||||||
O'Charley's I | Retail | Kennesaw | GA | 9/30/2013 | — | (1) | 142 | 1,280 | — | — | 1,422 | 460 | |||||||||||||||||||||||
O'Charley's I | Retail | Springfield | OH | 9/30/2013 | — | (1) | 262 | 1,484 | — | — | 1,746 | 534 | |||||||||||||||||||||||
O'Charley's I | Retail | Murfreesboro | TN | 9/30/2013 | — | (1) | 597 | 1,109 | — | — | 1,706 | 399 | |||||||||||||||||||||||
O'Charley's I | Retail | Mcdonough | GA | 9/30/2013 | — | (1) | 335 | 1,899 | — | — | 2,234 | 683 | |||||||||||||||||||||||
O'Charley's I | Retail | Simpsonville | SC | 9/30/2013 | — | (1) | 349 | 1,395 | — | — | 1,744 | 502 | |||||||||||||||||||||||
O'Charley's I | Retail | Grove City | OH | 9/30/2013 | — | (1) | 387 | 1,546 | — | — | 1,933 | 556 | |||||||||||||||||||||||
O'Charley's I | Retail | Clarksville | TN | 9/30/2013 | — | (1) | 917 | 1,376 | — | — | 2,293 | 495 | |||||||||||||||||||||||
O'Charley's I | Retail | Champaign | IL | 9/30/2013 | — | (1) | 256 | 1,449 | — | — | 1,705 | 521 | |||||||||||||||||||||||
O'Charley's I | Retail | Columbus | OH | 9/30/2013 | — | (1) | 271 | 1,533 | — | — | 1,804 | 551 | |||||||||||||||||||||||
O'Charley's I | Retail | Foley | AL | 9/30/2013 | — | (1) | 264 | 1,495 | — | — | 1,759 | 538 | |||||||||||||||||||||||
O'Charley's I | Retail | Corydon | IN | 9/30/2013 | — | (1) | 260 | 1,473 | — | — | 1,733 | 530 | |||||||||||||||||||||||
O'Charley's I | Retail | Salisbury | NC | 9/30/2013 | — | (1) | 439 | 1,024 | — | — | 1,463 | 368 | |||||||||||||||||||||||
O'Charley's I | Retail | Carrollton | GA | 9/30/2013 | — | (1) | 457 | 1,067 | — | — | 1,524 | 384 | |||||||||||||||||||||||
O'Charley's I | Retail | Lake Charles | LA | 9/30/2013 | — | (1) | 1,118 | 1,367 | — | — | 2,485 | 492 | |||||||||||||||||||||||
O'Charley's I | Retail | Hattiesburg | MS | 9/30/2013 | — | (1) | 413 | 1,651 | — | — | 2,064 | 594 | |||||||||||||||||||||||
O'Charley's I | Retail | Greenfield | IN | 9/30/2013 | — | (1) | 507 | 1,184 | — | — | 1,691 | 426 | |||||||||||||||||||||||
Walgreens VII | Retail | Monroe | MI | 9/30/2013 | — | (1) | 1,149 | 2,680 | — | — | 3,829 | 824 | |||||||||||||||||||||||
Walgreens VII | Retail | St Louis | MO | 9/30/2013 | — | (1) | 903 | 2,107 | — | — | 3,010 | 648 | |||||||||||||||||||||||
Walgreens VII | Retail | Florissant | MO | 9/30/2013 | — | (1) | 474 | 1,422 | — | — | 1,896 | 437 | |||||||||||||||||||||||
Walgreens VII | Retail | Florissant | MO | 9/30/2013 | — | (1) | 561 | 1,309 | — | — | 1,870 | 402 | |||||||||||||||||||||||
Walgreens VII | Retail | Alton | IL | 9/30/2013 | — | (1) | 1,158 | 3,474 | — | — | 4,632 | 1,068 | |||||||||||||||||||||||
Walgreens VII | Retail | Springfield | IL | 9/30/2013 | — | (1) | 1,319 | 3,078 | — | — | 4,397 | 946 | |||||||||||||||||||||||
Walgreens VII | Retail | Washington | IL | 9/30/2013 | — | (1) | 964 | 2,893 | — | — | 3,857 | 890 | |||||||||||||||||||||||
F-48
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | ||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | |||||||||||||||||||||||||
Walgreens VII | Retail | Mahomet | IL | 9/30/2013 | — | (1) | 1,432 | 2,659 | — | — | 4,091 | 818 | |||||||||||||||||||||||
1st Constitution Bancorp I | Retail | Hightstown | NJ | 9/30/2013 | — | (1) | 260 | 1,471 | — | — | 1,731 | 404 | |||||||||||||||||||||||
Tractor Supply II | Retail | Houghton | MI | 10/3/2013 | — | (1) | 204 | 1,158 | — | — | 1,362 | 286 | |||||||||||||||||||||||
National Tire & Battery II | Retail | Mundelein | IL | 10/4/2013 | — | (1) | — | 1,742 | — | — | 1,742 | 521 | |||||||||||||||||||||||
United Healthcare I | Office | Howard (Green Bay) | WI | 10/7/2013 | — | (1) | 3,805 | 47,565 | — | — | 51,370 | 6,652 | |||||||||||||||||||||||
Tractor Supply III | Retail | Harlan | KY | 10/16/2013 | — | (1) | 248 | 2,232 | — | — | 2,480 | 544 | |||||||||||||||||||||||
Mattress Firm II | Retail | Knoxville | TN | 10/18/2013 | — | (1) | 189 | 754 | — | — | 943 | 215 | |||||||||||||||||||||||
Dollar General XI | Retail | Greenville | MS | 10/23/2013 | — | (1) | 192 | 769 | — | — | 961 | 220 | |||||||||||||||||||||||
Academy Sports I | Retail | Cape Girardeau | MO | 10/29/2013 | — | (1) | 384 | 7,292 | (23 | ) | (341 | ) | 7,312 | 1,790 | |||||||||||||||||||||
Talecris Plasma Resources I | Office | Eagle Pass | TX | 10/29/2013 | — | (1) | 286 | 2,577 | — | — | 2,863 | 618 | |||||||||||||||||||||||
Amazon I | Office | Winchester | KY | 10/30/2013 | — | (1) | 362 | 8,070 | — | — | 8,432 | 2,111 | |||||||||||||||||||||||
Fresenius II | Retail | Montclair | NJ | 10/31/2013 | — | (1) | 1,214 | 2,255 | — | — | 3,469 | 541 | |||||||||||||||||||||||
Fresenius II | Retail | Sharon Hill | PA | 10/31/2013 | — | (1) | 345 | 1,956 | — | — | 2,301 | 469 | |||||||||||||||||||||||
Dollar General XII | Retail | Le Center | MN | 11/1/2013 | — | (1) | 47 | 886 | — | — | 933 | 253 | |||||||||||||||||||||||
Dollar General XIII | Retail | Vidor | TX | 11/7/2013 | — | (1) | 46 | 875 | — | — | 921 | 250 | |||||||||||||||||||||||
Advance Auto II | Retail | Bunnell | FL | 11/7/2013 | — | (1) | 92 | 1,741 | — | — | 1,833 | 497 | |||||||||||||||||||||||
Advance Auto II | Retail | Washington | GA | 11/7/2013 | — | (1) | 55 | 1,042 | — | — | 1,097 | 297 | |||||||||||||||||||||||
FedEx Ground II | Distribution | Leland | MS | 11/12/2013 | — | (1) | 220 | 4,186 | — | — | 4,406 | 1,303 | |||||||||||||||||||||||
Burger King I | Retail | Algonquin | IL | 11/14/2013 | — | (1) | 798 | 798 | — | — | 1,596 | 226 | |||||||||||||||||||||||
Burger King I | Retail | Antioch | IL | 11/14/2013 | — | (1) | 706 | 471 | — | — | 1,177 | 133 | |||||||||||||||||||||||
Burger King I | Retail | Crystal Lake | IL | 11/14/2013 | — | (1) | 541 | 232 | — | — | 773 | 66 | |||||||||||||||||||||||
Burger King I | Retail | Grayslake | IL | 11/14/2013 | — | (1) | 582 | 476 | — | — | 1,058 | 135 | |||||||||||||||||||||||
Burger King I | Retail | Gurnee | IL | 11/14/2013 | — | (1) | 931 | 931 | — | — | 1,862 | 263 | |||||||||||||||||||||||
Burger King I | Retail | McHenry | IL | 11/14/2013 | — | (1) | 742 | 318 | — | — | 1,060 | 90 | |||||||||||||||||||||||
Burger King I | Retail | Round Lake Beach | IL | 11/14/2013 | — | (1) | 1,273 | 1,042 | — | — | 2,315 | 295 | |||||||||||||||||||||||
Burger King I | Retail | Waukegan | IL | 11/14/2013 | — | (1) | 611 | 611 | — | — | 1,222 | 173 | |||||||||||||||||||||||
Burger King I | Retail | Woodstock | IL | 11/14/2013 | — | (1) | 869 | 290 | — | — | 1,159 | 82 | |||||||||||||||||||||||
Burger King I | Retail | Austintown | OH | 11/14/2013 | — | (1) | 221 | 1,251 | — | — | 1,472 | 354 | |||||||||||||||||||||||
Burger King I | Retail | Beavercreek | OH | 11/14/2013 | — | (1) | 410 | 761 | — | — | 1,171 | 215 | |||||||||||||||||||||||
Burger King I | Retail | Celina | OH | 11/14/2013 | — | (1) | 233 | 932 | — | — | 1,165 | 264 | |||||||||||||||||||||||
Burger King I | Retail | Chardon | OH | 11/14/2013 | — | (1) | 332 | 497 | — | — | 829 | 141 | |||||||||||||||||||||||
Burger King I | Retail | Chesterland | OH | 11/14/2013 | — | (1) | 320 | 747 | — | — | 1,067 | 211 | |||||||||||||||||||||||
F-49
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | ||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | |||||||||||||||||||||||||
Burger King I | Retail | Cortland | OH | 11/14/2013 | — | (1) | 118 | 1,063 | — | — | 1,181 | 301 | |||||||||||||||||||||||
Burger King I | Retail | Dayton | OH | 11/14/2013 | — | (1) | 464 | 862 | — | — | 1,326 | 244 | |||||||||||||||||||||||
Burger King I | Retail | Fairborn | OH | 11/14/2013 | — | (1) | 421 | 982 | — | — | 1,403 | 278 | |||||||||||||||||||||||
Burger King I | Retail | Girard | OH | 11/14/2013 | — | (1) | 421 | 1,264 | — | — | 1,685 | 358 | |||||||||||||||||||||||
Burger King I | Retail | Greenville | OH | 11/14/2013 | — | (1) | 248 | 993 | — | — | 1,241 | 281 | |||||||||||||||||||||||
Burger King I | Retail | Madison | OH | 11/14/2013 | — | (1) | 282 | 845 | — | — | 1,127 | 239 | |||||||||||||||||||||||
Burger King I | Retail | Mentor | OH | 11/14/2013 | — | (1) | 196 | 786 | — | — | 982 | 222 | |||||||||||||||||||||||
Burger King I | Retail | Niles | OH | 11/14/2013 | — | (1) | 304 | 1,214 | — | — | 1,518 | 344 | |||||||||||||||||||||||
Burger King I | Retail | North Royalton | OH | 11/14/2013 | — | (1) | 156 | 886 | — | — | 1,042 | 251 | |||||||||||||||||||||||
Burger King I | Retail | Painesville | OH | 11/14/2013 | — | (1) | 170 | 965 | — | — | 1,135 | 273 | |||||||||||||||||||||||
Burger King I | Retail | Poland | OH | 11/14/2013 | — | (1) | 212 | 847 | — | — | 1,059 | 240 | |||||||||||||||||||||||
Burger King I | Retail | Ravenna | OH | 11/14/2013 | — | (1) | 391 | 1,172 | — | — | 1,563 | 332 | |||||||||||||||||||||||
Burger King I | Retail | Salem | OH | 11/14/2013 | — | (1) | 352 | 1,408 | — | — | 1,760 | 399 | |||||||||||||||||||||||
Burger King I | Retail | Trotwood | OH | 11/14/2013 | — | (1) | 266 | 798 | — | — | 1,064 | 226 | |||||||||||||||||||||||
Burger King I | Retail | Twinsburg | OH | 11/14/2013 | — | (1) | 458 | 850 | — | — | 1,308 | 241 | |||||||||||||||||||||||
Burger King I | Retail | Vandalia | OH | 11/14/2013 | — | (1) | 182 | 728 | — | — | 910 | 206 | |||||||||||||||||||||||
Burger King I | Retail | Warren | OH | 11/14/2013 | — | (1) | 176 | 997 | — | — | 1,173 | 282 | |||||||||||||||||||||||
Burger King I | Retail | Warren | OH | 11/14/2013 | — | (1) | 168 | 1,516 | — | — | 1,684 | 429 | |||||||||||||||||||||||
Burger King I | Retail | Willoughby | OH | 11/14/2013 | — | (1) | 394 | 920 | — | — | 1,314 | 260 | |||||||||||||||||||||||
Burger King I | Retail | Youngstown | OH | 11/14/2013 | — | (1) | 300 | 901 | — | — | 1,201 | 255 | |||||||||||||||||||||||
Burger King I | Retail | Youngstown | OH | 11/14/2013 | — | (1) | 186 | 1,675 | — | — | 1,861 | 474 | |||||||||||||||||||||||
Burger King I | Retail | Youngstown | OH | 11/14/2013 | — | (1) | 147 | 1,324 | — | — | 1,471 | 375 | |||||||||||||||||||||||
Burger King I | Retail | Youngstown | OH | 11/14/2013 | — | (1) | 370 | 1,481 | — | — | 1,851 | 419 | |||||||||||||||||||||||
Burger King I | Retail | Bethel Park | PA | 11/14/2013 | — | (1) | 342 | 634 | — | — | 976 | 180 | |||||||||||||||||||||||
Burger King I | Retail | North Fayette | PA | 11/14/2013 | — | (1) | 463 | 1,388 | — | — | 1,851 | 393 | |||||||||||||||||||||||
Burger King I | Retail | North Versailles | PA | 11/14/2013 | — | (1) | 553 | 1,659 | — | — | 2,212 | 469 | |||||||||||||||||||||||
Burger King I | Retail | Columbiana | OH | 11/14/2013 | — | (1) | 581 | 871 | — | — | 1,452 | 246 | |||||||||||||||||||||||
Dollar General XIV | Retail | Fort Smith | AR | 11/20/2013 | — | (1) | 184 | 1,042 | — | — | 1,226 | 295 | |||||||||||||||||||||||
Dollar General XIV | Retail | Hot Springs | AR | 11/20/2013 | — | (1) | 287 | 862 | — | — | 1,149 | 244 | |||||||||||||||||||||||
Dollar General XIV | Retail | Royal | AR | 11/20/2013 | — | (1) | 137 | 777 | — | — | 914 | 220 | |||||||||||||||||||||||
Dollar General XV | Retail | Wilson | NY | 11/20/2013 | — | (1) | 172 | 972 | — | — | 1,144 | 275 | |||||||||||||||||||||||
Mattress Firm I | Retail | McDonough | GA | 11/22/2013 | — | (1) | 185 | 1,663 | — | — | 1,848 | 471 | |||||||||||||||||||||||
F-50
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | ||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | |||||||||||||||||||||||||
FedEx Ground III | Distribution | Bismarck | ND | 11/25/2013 | — | (1) | 554 | 3,139 | — | — | 3,693 | 967 | |||||||||||||||||||||||
Dollar General XVI | Retail | LaFollette | TN | 11/27/2013 | — | (1) | 43 | 824 | — | — | 867 | 233 | |||||||||||||||||||||||
Family Dollar V | Retail | Carrollton | MO | 11/27/2013 | — | (1) | 37 | 713 | — | — | 750 | 202 | |||||||||||||||||||||||
CVS III | Retail | Detroit | MI | 12/10/2013 | — | (1) | 447 | 2,533 | — | — | 2,980 | 766 | |||||||||||||||||||||||
Family Dollar VI | Retail | Walden | CO | 12/10/2013 | — | (1) | 100 | 568 | — | — | 668 | 161 | |||||||||||||||||||||||
Mattress Firm III | Retail | Valdosta | GA | 12/17/2013 | — | (1) | 169 | 1,522 | — | — | 1,691 | 427 | |||||||||||||||||||||||
Arby's II | Retail | Virginia | MN | 12/23/2013 | — | (1) | 117 | 1,056 | — | — | 1,173 | 293 | |||||||||||||||||||||||
Family Dollar VI | Retail | Kremmling | CO | 12/23/2013 | — | (1) | 194 | 778 | — | — | 972 | 218 | |||||||||||||||||||||||
SAAB Sensis I | Office | Syracuse | NY | 12/23/2013 | 7,077 | 2,516 | 12,570 | — | — | 15,086 | 1,785 | ||||||||||||||||||||||||
Citizens Bank I | Retail | Doylestown | PA | 12/27/2013 | — | (1) | 588 | 1,373 | — | — | 1,961 | 368 | |||||||||||||||||||||||
Citizens Bank I | Retail | Lansdale | PA | 12/27/2013 | — | (1) | 531 | 1,238 | — | — | 1,769 | 332 | |||||||||||||||||||||||
Citizens Bank I | Retail | Lima | PA | 12/27/2013 | — | (1) | 1,376 | 1,682 | — | — | 3,058 | 451 | |||||||||||||||||||||||
Citizens Bank I | Retail | Philadelphia | PA | 12/27/2013 | — | (1) | 473 | 2,680 | — | — | 3,153 | 718 | |||||||||||||||||||||||
Citizens Bank I | Retail | Philadelphia | PA | 12/27/2013 | — | (1) | 412 | 2,337 | — | — | 2,749 | 626 | |||||||||||||||||||||||
Citizens Bank I | Retail | Philadelphia | PA | 12/27/2013 | — | (1) | 321 | 2,889 | — | — | 3,210 | 774 | |||||||||||||||||||||||
Citizens Bank I | Retail | Philadelphia | PA | 12/27/2013 | — | (1) | 388 | 1,551 | — | — | 1,939 | 416 | |||||||||||||||||||||||
Citizens Bank I | Retail | Richboro | PA | 12/27/2013 | — | (1) | 642 | 1,193 | — | — | 1,835 | 320 | |||||||||||||||||||||||
Citizens Bank I | Retail | Wayne | PA | 12/27/2013 | — | (1) | 1,923 | 1,923 | — | — | 3,846 | 515 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Lakeland | FL | 1/8/2014 | — | (2) | 590 | 705 | — | — | 1,295 | 120 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Plant City | FL | 1/8/2014 | — | (2) | 499 | 1,139 | — | — | 1,638 | 176 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Vero Beach | FL | 1/8/2014 | — | (2) | 825 | 2,682 | — | — | 3,507 | 373 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Panama City | FL | 1/8/2014 | — | (2) | 484 | 1,075 | — | — | 1,559 | 164 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Winter Park | FL | 1/8/2014 | — | (2) | 2,264 | 1,079 | — | — | 3,343 | 169 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Seminole | FL | 1/8/2014 | — | (2) | 1,329 | 3,486 | — | — | 4,815 | 476 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Okeechobee | FL | 1/8/2014 | — | (2) | 339 | 1,569 | — | — | 1,908 | 284 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Douglasville | GA | 1/8/2014 | — | (2) | 410 | 749 | — | — | 1,159 | 111 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Duluth | GA | 1/8/2014 | — | (2) | 1,081 | 2,111 | — | — | 3,192 | 298 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Atlanta | GA | 1/8/2014 | — | (2) | 1,071 | 2,293 | — | — | 3,364 | 327 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Cockeysville | MD | 1/8/2014 | — | (2) | 2,184 | 479 | — | — | 2,663 | 68 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Apex | NC | 1/8/2014 | — | (2) | 296 | 1,240 | — | — | 1,536 | 170 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Arden | NC | 1/8/2014 | — | (2) | 374 | 216 | — | — | 590 | 38 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Greensboro | NC | 1/8/2014 | — | (2) | 326 | 633 | — | — | 959 | 92 | |||||||||||||||||||||||
F-51
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | ||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | |||||||||||||||||||||||||
SunTrust Bank II | Retail | Salisbury | NC | 1/8/2014 | — | (2) | 264 | 293 | — | — | 557 | 56 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Mauldin | SC | 1/8/2014 | — | (2) | 542 | 704 | — | — | 1,246 | 116 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Nashville | TN | 1/8/2014 | — | (2) | 890 | 504 | — | — | 1,394 | 89 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Chattanooga | TN | 1/8/2014 | — | (2) | 358 | 564 | — | — | 922 | 83 | |||||||||||||||||||||||
SunTrust Bank II | Retail | East Ridge | TN | 1/8/2014 | — | (2) | 276 | 475 | — | — | 751 | 78 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Fredericksburg | VA | 1/8/2014 | — | (2) | 1,623 | 446 | — | — | 2,069 | 77 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Lynchburg | VA | 1/8/2014 | — | (2) | 584 | 1,255 | — | — | 1,839 | 185 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Chesapeake | VA | 1/8/2014 | — | (2) | 490 | 695 | — | — | 1,185 | 106 | |||||||||||||||||||||||
SunTrust Bank II | Retail | Bushnell | FL | 1/8/2014 | — | (2) | 385 | 1,216 | — | — | 1,601 | 161 | |||||||||||||||||||||||
Mattress Firm IV | Retail | Meridian | ID | 1/9/2014 | — | (1) | 691 | 1,193 | — | — | 1,884 | 178 | |||||||||||||||||||||||
Dollar General XII | Retail | Sunrise Beach | MO | 1/15/2014 | — | (1) | 105 | 795 | — | — | 900 | 166 | |||||||||||||||||||||||
FedEx Ground IV | Distribution | Council Bluffs | IA | 1/24/2014 | — | (1) | 768 | 3,908 | — | — | 4,676 | 616 | |||||||||||||||||||||||
Mattress Firm V | Retail | Florence | AL | 1/28/2014 | — | (1) | 299 | 1,478 | — | — | 1,777 | 215 | |||||||||||||||||||||||
Mattress Firm I | Retail | Aiken | SC | 2/5/2014 | — | (1) | 426 | 1,029 | — | — | 1,455 | 174 | |||||||||||||||||||||||
Family Dollar VII | Retail | Bernice | LA | 2/7/2014 | — | (1) | 51 | 527 | — | — | 578 | 80 | |||||||||||||||||||||||
Aaron's I | Retail | Erie | PA | 2/10/2014 | — | (1) | 126 | 708 | — | — | 834 | 98 | |||||||||||||||||||||||
AutoZone III | Retail | Caro | MI | 2/13/2014 | — | (1) | 135 | 855 | — | — | 990 | 122 | |||||||||||||||||||||||
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
C&S Wholesale Grocer I | Distribution | Hatfield (South) | MA | 2/21/2014 | — | 1,420 | 14,169 | — | — | 15,589 | 1,786 | |||||||||||||||||||||||||
Advance Auto III | Retail | Taunton | MA | 2/25/2014 | — | (1) | 404 | 1,148 | — | — | 1,552 | 150 | ||||||||||||||||||||||||
Family Dollar VIII | Retail | Dexter | NM | 3/3/2014 | — | (1) | 79 | 745 | — | — | 824 | 126 | ||||||||||||||||||||||||
Family Dollar VIII | Retail | Hale Center | TX | 3/3/2014 | — | (1) | 111 | 624 | — | — | 735 | 106 | ||||||||||||||||||||||||
Family Dollar VIII | Retail | Plains | TX | 3/3/2014 | — | (1) | 100 | 624 | — | — | 724 | 105 | ||||||||||||||||||||||||
Dollar General XVII | Retail | Tullos | LA | 3/5/2014 | — | (1) | 114 | 736 | — | — | 850 | 107 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Sarasota | FL | 3/10/2014 | — | (3) | 741 | 852 | — | — | 1,593 | 132 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Fort Meade | FL | 3/10/2014 | — | (3) | 175 | 2,375 | (114 | ) | (1,401 | ) | 1,035 | 254 | ||||||||||||||||||||||
SunTrust Bank III | Retail | Port St. Lucie | FL | 3/10/2014 | — | (3) | 913 | 1,772 | — | — | 2,685 | 261 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Mulberry | FL | 3/10/2014 | — | (3) | 406 | 753 | — | — | 1,159 | 113 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Gainesville | FL | 3/10/2014 | — | (3) | 458 | 2,139 | — | — | 2,597 | 289 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Gainesville | FL | 3/10/2014 | — | (3) | 457 | 816 | — | — | 1,273 | 125 | ||||||||||||||||||||||||
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
SunTrust Bank III | Retail | Gulf Breeze | FL | 3/10/2014 | — | (3) | 1,092 | 1,569 | — | — | 2,661 | 229 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Sarasota | FL | 3/10/2014 | — | (3) | 955 | 1,329 | — | — | 2,284 | 191 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Mount Dora | FL | 3/10/2014 | — | (3) | 570 | 1,933 | — | — | 2,503 | 260 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Lutz | FL | 3/10/2014 | — | (3) | 438 | 1,477 | — | — | 1,915 | 199 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Jacksonville | FL | 3/10/2014 | — | (3) | 871 | 372 | — | — | 1,243 | 63 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Jacksonville | FL | 3/10/2014 | — | (3) | 366 | 1,136 | — | — | 1,502 | 162 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Tamarac | FL | 3/10/2014 | — | (3) | 997 | 1,241 | — | — | 2,238 | 179 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Pompano Beach | FL | 3/10/2014 | — | (3) | 886 | 2,024 | — | — | 2,910 | 271 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | St. Cloud | FL | 3/10/2014 | — | (3) | 1,046 | 1,887 | — | — | 2,933 | 265 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Ormond Beach | FL | 3/10/2014 | — | (3) | 1,047 | 1,566 | — | — | 2,613 | 234 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Daytona Beach | FL | 3/10/2014 | — | (3) | 443 | 1,586 | — | — | 2,029 | 234 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Ormond Beach | FL | 3/10/2014 | — | (3) | 854 | 1,385 | — | — | 2,239 | 200 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Ormond Beach | FL | 3/10/2014 | — | (3) | 873 | 2,235 | — | — | 3,108 | 303 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Inverness | FL | 3/10/2014 | — | (3) | 867 | 2,559 | — | — | 3,426 | 358 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Indian Harbour Beach | FL | 3/10/2014 | — | (3) | 914 | 1,181 | — | — | 2,095 | 235 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Melbourne | FL | 3/10/2014 | — | (3) | 772 | 1,927 | — | — | 2,699 | 270 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Orlando | FL | 3/10/2014 | — | (3) | 1,234 | 1,125 | — | — | 2,359 | 165 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Orlando | FL | 3/10/2014 | — | (3) | 874 | 1,922 | — | — | 2,796 | 263 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | St. Petersburg | FL | 3/10/2014 | — | (3) | 803 | 1,043 | — | — | 1,846 | 146 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Casselberry | FL | 3/10/2014 | — | (3) | 609 | 2,443 | — | — | 3,052 | 332 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Rockledge | FL | 3/10/2014 | — | (3) | 742 | 1,126 | — | — | 1,868 | 161 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Lakeland | FL | 3/10/2014 | — | (3) | 927 | 1,594 | — | — | 2,521 | 264 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Ocala | FL | 3/10/2014 | — | (3) | 347 | 1,336 | — | — | 1,683 | 258 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Atlanta | GA | 3/10/2014 | — | (3) | 3,027 | 4,873 | — | — | 7,900 | 626 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Atlanta | GA | 3/10/2014 | — | (3) | 4,422 | 1,559 | — | — | 5,981 | 221 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Stone Mountain | GA | 3/10/2014 | — | (3) | 605 | 522 | — | — | 1,127 | 73 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Lithonia | GA | 3/10/2014 | — | (3) | 212 | 770 | — | — | 982 | 109 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Union City | GA | 3/10/2014 | — | (3) | 400 | 542 | — | — | 942 | 82 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Peachtree City | GA | 3/10/2014 | — | (3) | 887 | 2,242 | — | — | 3,129 | 320 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Stockbridge | GA | 3/10/2014 | — | (3) | 358 | 760 | — | — | 1,118 | 112 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Conyers | GA | 3/10/2014 | — | (3) | 205 | 1,334 | — | — | 1,539 | 180 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Marietta | GA | 3/10/2014 | — | (3) | 2,168 | 1,169 | — | — | 3,337 | 176 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Marietta | GA | 3/10/2014 | — | (3) | 1,087 | 2,056 | — | — | 3,143 | 271 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Savannah | GA | 3/10/2014 | — | (3) | 224 | 1,116 | — | — | 1,340 | 155 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Savannah | GA | 3/10/2014 | — | (3) | 458 | 936 | — | — | 1,394 | 156 | ||||||||||||||||||||||||
F-52
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
SunTrust Bank III | Retail | Macon | GA | 3/10/2014 | — | (3) | 214 | 771 | — | — | 985 | 122 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Sylvester | GA | 3/10/2014 | — | (3) | 242 | 845 | — | — | 1,087 | 123 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Athens | GA | 3/10/2014 | — | (3) | 427 | 472 | — | — | 899 | 102 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Avondale | MD | 3/10/2014 | — | (3) | 1,760 | 485 | — | — | 2,245 | 71 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Asheboro | NC | 3/10/2014 | — | (3) | 458 | 774 | — | — | 1,232 | 116 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Charlotte | NC | 3/10/2014 | — | (3) | 563 | 750 | — | — | 1,313 | 115 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Dunn | NC | 3/10/2014 | — | (3) | 384 | 616 | — | — | 1,000 | 97 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Durham | NC | 3/10/2014 | — | (3) | 488 | 742 | — | — | 1,230 | 102 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Durham | NC | 3/10/2014 | — | (3) | 284 | 506 | — | — | 790 | 88 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Hendersonville | NC | 3/10/2014 | — | (3) | 468 | 945 | — | — | 1,413 | 135 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Lenoir | NC | 3/10/2014 | — | (3) | 1,021 | 3,980 | — | — | 5,001 | 516 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Mebane | NC | 3/10/2014 | — | (3) | 500 | 887 | — | — | 1,387 | 122 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Oxford | NC | 3/10/2014 | — | (3) | 530 | 1,727 | — | — | 2,257 | 227 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Winston-Salem | NC | 3/10/2014 | — | (3) | 362 | 513 | — | — | 875 | 76 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Yadkinville | NC | 3/10/2014 | — | (3) | 438 | 765 | — | — | 1,203 | 105 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Greenville | SC | 3/10/2014 | — | (3) | 377 | 871 | — | — | 1,248 | 124 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Greenville | SC | 3/10/2014 | — | (3) | 264 | 684 | — | — | 948 | 99 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Greenville | SC | 3/10/2014 | — | (3) | 590 | 1,007 | — | — | 1,597 | 152 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Greenville | SC | 3/10/2014 | — | (3) | 449 | 1,640 | — | — | 2,089 | 287 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Nashville | TN | 3/10/2014 | — | (3) | 1,776 | 1,601 | — | — | 3,377 | 253 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Brentwood | TN | 3/10/2014 | — | (3) | 885 | 1,987 | — | — | 2,872 | 273 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Brentwood | TN | 3/10/2014 | — | (3) | 996 | 1,536 | — | — | 2,532 | 214 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Smyrna | TN | 3/10/2014 | — | (3) | 501 | 767 | — | — | 1,268 | 121 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Murfreesboro | TN | 3/10/2014 | — | (3) | 451 | 847 | — | — | 1,298 | 111 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Soddy Daisy | TN | 3/10/2014 | — | (3) | 338 | 624 | — | — | 962 | 84 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Signal Mountain | TN | 3/10/2014 | — | (3) | 296 | 697 | — | — | 993 | 97 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Chattanooga | TN | 3/10/2014 | — | (3) | 419 | 811 | — | — | 1,230 | 110 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Chattanooga | TN | 3/10/2014 | — | (3) | 191 | 335 | — | — | 526 | 47 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Morristown | TN | 3/10/2014 | — | (3) | 214 | 444 | — | — | 658 | 86 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Richmond | VA | 3/10/2014 | — | (3) | 153 | 313 | — | — | 466 | 52 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Richmond | VA | 3/10/2014 | — | (3) | 233 | 214 | — | — | 447 | 36 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Fairfax | VA | 3/10/2014 | — | (3) | 2,835 | 1,081 | — | — | 3,916 | 147 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Lexington | VA | 3/10/2014 | — | (3) | 122 | 385 | — | — | 507 | 61 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Roanoke | VA | 3/10/2014 | — | (3) | 316 | 734 | — | — | 1,050 | 103 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Williamsburg | VA | 3/10/2014 | — | (3) | 447 | 585 | — | — | 1,032 | 93 | ||||||||||||||||||||||||
F-53
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
SunTrust Bank III | Retail | Onancock | VA | 3/10/2014 | — | (3) | 829 | 1,300 | — | — | 2,129 | 169 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Stafford | VA | 3/10/2014 | — | (3) | 2,130 | 1,714 | — | — | 3,844 | 236 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Roanoke | VA | 3/10/2014 | — | (3) | 753 | 1,165 | — | — | 1,918 | 169 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Melbourne | FL | 3/10/2014 | — | (3) | 788 | 1,888 | — | — | 2,676 | 255 | ||||||||||||||||||||||||
SunTrust Bank III | Retail | Richmond | VA | 3/10/2014 | — | (3) | 3,141 | 7,441 | (804 | ) | 181 | 9,959 | 1,100 | |||||||||||||||||||||||
SunTrust Bank IV | Retail | Lake Mary | FL | 3/10/2014 | — | (4) | 1,911 | 2,849 | — | — | 4,760 | 385 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | St. Augustine | FL | 3/10/2014 | — | (4) | 489 | 2,129 | — | — | 2,618 | 286 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Spring Hill | FL | 3/10/2014 | — | (4) | 673 | 2,550 | — | — | 3,223 | 337 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Pembroke Pines | FL | 3/10/2014 | — | (4) | 1,688 | 548 | — | — | 2,236 | 95 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Ocala | FL | 3/10/2014 | — | (4) | 581 | 1,091 | — | — | 1,672 | 177 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Ocala | FL | 3/10/2014 | — | (4) | 559 | 750 | — | — | 1,309 | 136 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Chamblee | GA | 3/10/2014 | — | (4) | 1,029 | 813 | — | — | 1,842 | 123 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Stone Mountain | GA | 3/10/2014 | — | (4) | 461 | 475 | — | — | 936 | 70 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Columbus | GA | 3/10/2014 | — | (4) | 417 | 1,395 | — | — | 1,812 | 195 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Madison | GA | 3/10/2014 | — | (4) | 304 | 612 | — | — | 916 | 80 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Prince Frederick | MD | 3/10/2014 | — | (4) | 2,431 | 940 | — | — | 3,371 | 142 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Creedmoor | NC | 3/10/2014 | — | (4) | 306 | 789 | (128 | ) | (300 | ) | 667 | 97 | ||||||||||||||||||||||
SunTrust Bank IV | Retail | Greensboro | NC | 3/10/2014 | — | (4) | 619 | 742 | — | — | 1,361 | 133 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Pittsboro | NC | 3/10/2014 | — | (4) | 61 | 510 | — | — | 571 | 64 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Nashville | TN | 3/10/2014 | — | (4) | 1,035 | 745 | — | — | 1,780 | 102 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Collinsville | VA | 3/10/2014 | — | (4) | 215 | 555 | — | — | 770 | 79 | ||||||||||||||||||||||||
SunTrust Bank IV | Retail | Stuart | VA | 3/10/2014 | — | (4) | 374 | 1,532 | — | — | 1,906 | 208 | ||||||||||||||||||||||||
Mattress Firm I | Retail | Holland | MI | 3/19/2014 | — | (1) | 507 | 1,014 | — | — | 1,521 | 161 | ||||||||||||||||||||||||
Dollar General XVIII | Retail | Deville | LA | 3/19/2014 | — | (1) | 93 | 741 | — | — | 834 | 106 | ||||||||||||||||||||||||
Sanofi US I | Office | Bridgewater | NJ | 3/20/2014 | 125,000 | 16,009 | 194,287 | — | — | 210,296 | 24,725 | |||||||||||||||||||||||||
Dollar General XVII | Retail | Hornbeck | LA | 3/25/2014 | — | (1) | 82 | 780 | — | — | 862 | 110 | ||||||||||||||||||||||||
Mattress Firm I | Retail | Saginaw | MI | 4/8/2014 | — | (1) | 337 | 1,140 | — | — | 1,477 | 172 | ||||||||||||||||||||||||
Family Dollar IX | Retail | Fannettsburg | PA | 4/8/2014 | — | (1) | 165 | 803 | — | — | 968 | 111 | ||||||||||||||||||||||||
Stop & Shop I | Retail | Cumberland | RI | 5/8/2014 | — | (1) | 3,295 | 13,693 | — | — | 16,988 | 1,827 | ||||||||||||||||||||||||
Stop & Shop I | Retail | Malden | MA | 5/8/2014 | — | (5) | 4,418 | 15,195 | — | — | 19,613 | 1,834 | ||||||||||||||||||||||||
Stop & Shop I | Retail | Swampscott | MA | 5/8/2014 | — | (5) | 3,644 | 12,982 | — | — | 16,626 | 1,564 | ||||||||||||||||||||||||
Stop & Shop I | Retail | Southington | CT | 5/8/2014 | — | (1) | 3,238 | 13,169 | — | — | 16,407 | 1,679 | ||||||||||||||||||||||||
Stop & Shop I | Retail | Framingham | MA | 5/8/2014 | — | (5) | 3,971 | 12,289 | — | — | 16,260 | 1,489 | ||||||||||||||||||||||||
Stop & Shop I | Retail | Bristol | RI | 5/8/2014 | — | (5) | 2,860 | 10,010 | — | — | 12,870 | 1,300 | ||||||||||||||||||||||||
Stop & Shop I | Retail | Sicklerville | NJ | 5/8/2014 | — | (1) | 2,367 | 9,873 | — | — | 12,240 | 1,244 | ||||||||||||||||||||||||
F-54
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
Bi-Lo I | Retail | Greenville | SC | 5/8/2014 | — | (1) | 1,504 | 4,770 | — | — | 6,274 | 636 | ||||||||||||||||||||||||
Dollar General XVII | Retail | Forest Hill | LA | 5/12/2014 | — | (1) | 83 | 728 | — | — | 811 | 103 | ||||||||||||||||||||||||
Dollar General XIX | Retail | Chelsea | OK | 5/13/2014 | — | (1) | 231 | 919 | — | — | 1,150 | 142 | ||||||||||||||||||||||||
Dollar General XX | Retail | Brookhaven | MS | 5/14/2014 | — | (1) | 186 | 616 | — | — | 802 | 85 | ||||||||||||||||||||||||
Dollar General XX | Retail | Columbus | MS | 5/14/2014 | — | (1) | 370 | 491 | — | — | 861 | 77 | ||||||||||||||||||||||||
Dollar General XX | Retail | Forest | MS | 5/14/2014 | — | (1) | 72 | 856 | — | — | 928 | 112 | ||||||||||||||||||||||||
Dollar General XX | Retail | Rolling Fork | MS | 5/14/2014 | — | (1) | 244 | 929 | — | — | 1,173 | 124 | ||||||||||||||||||||||||
Dollar General XX | Retail | West Point | MS | 5/14/2014 | — | (1) | 318 | 506 | — | — | 824 | 84 | ||||||||||||||||||||||||
Dollar General XXI | Retail | Huntington | WV | 5/29/2014 | — | (1) | 101 | 1,101 | — | — | 1,202 | 162 | ||||||||||||||||||||||||
Dollar General XXII | Retail | Warren | IN | 5/30/2014 | — | (1) | 88 | 962 | — | — | 1,050 | 119 | ||||||||||||||||||||||||
FedEx Ground V | Distribution | Sioux City | IA | 2/17/2016 | — | (10) | 199 | 5,639 | — | — | 5,838 | 465 | ||||||||||||||||||||||||
FedEx Ground VI | Distribution | Grand Forks | ND | 2/19/2016 | — | (10) | 1,287 | 8,988 | — | — | 10,275 | 841 | ||||||||||||||||||||||||
FedEx Ground VII | Distribution | Eagle River | WI | 2/19/2016 | — | (10) | 40 | 6,022 | — | — | 6,062 | 534 | ||||||||||||||||||||||||
FedEx Ground VIII | Distribution | Wausau | WI | 2/23/2016 | — | (10) | 202 | 9,017 | — | — | 9,219 | 849 | ||||||||||||||||||||||||
Liberty Crossing | (11) | Power Center | Rowlett | TX | 2/16/2017 | — | (10) | 6,285 | 20,700 | — | — | 26,985 | 1,148 | |||||||||||||||||||||||
San Pedro Crossing | (11) | Power Center | San Antonio | TX | 2/16/2017 | — | (7) | 10,118 | 38,655 | — | 667 | 49,440 | 2,066 | |||||||||||||||||||||||
Tiffany Springs MarketCenter | (11) | Power Center | Kansas City | MO | 2/16/2017 | — | (10) | 10,154 | 50,832 | — | 3,253 | 64,239 | 3,057 | |||||||||||||||||||||||
The Streets of West Chester | (11) | Lifestyle Center | West Chester | OH | 2/16/2017 | — | (10) | 11,313 | 34,305 | — | — | 45,618 | 1,870 | |||||||||||||||||||||||
Prairie Towne Center | (11) | Power Center | Schaumburg | IL | 2/16/2017 | — | (10) | 11,070 | 19,528 | — | — | 30,598 | 1,100 | |||||||||||||||||||||||
Southway Shopping Center | (11) | Power Center | Houston | TX | 2/16/2017 | — | (10) | 10,260 | 24,440 | — | 20 | 34,720 | 1,269 | |||||||||||||||||||||||
Stirling Slidell Centre | (11) | Power Center | Slidell | LA | 2/16/2017 | — | (10) | 3,495 | 18,113 | — | 12 | 21,620 | 999 | |||||||||||||||||||||||
Northwoods Marketplace | (11) | Power Center | North Charleston | SC | 2/16/2017 | — | (10) | 13,474 | 28,362 | — | 44 | 41,880 | 1,520 | |||||||||||||||||||||||
Centennial Plaza | (11) | Power Center | Oklahoma City | OK | 2/16/2017 | — | (7) | 3,488 | 30,054 | — | — | 33,542 | 1,553 | |||||||||||||||||||||||
Northlake Commons | (11) | Lifestyle Center | Charlotte | NC | 2/16/2017 | — | (10) | 17,539 | 16,342 | — | 55 | 33,936 | 997 | |||||||||||||||||||||||
Shops at Shelby Crossing | (11) | Power Center | Sebring | FL | 2/16/2017 | 22,581 | 4,478 | 32,316 | — | 85 | 36,879 | 2,035 | ||||||||||||||||||||||||
Shoppes of West Melbourne | (11) | Power Center | West Melbourne | FL | 2/16/2017 | — | (7) | 4,258 | 19,138 | — | 866 | 24,262 | 1,062 | |||||||||||||||||||||||
The Centrum | (11) | Power Center | Pineville | NC | 2/16/2017 | — | (10) | 12,013 | 26,242 | — | 622 | 38,877 | 1,448 | |||||||||||||||||||||||
Shoppes at Wyomissing | (11) | Lifestyle Center | Wyomissing | PA | 2/16/2017 | — | (10) | 4,108 | 32,446 | — | — | 36,554 | 1,730 | |||||||||||||||||||||||
Southroads Shopping Center | (11) | Power Center | Tulsa | OK | 2/16/2017 | — | (10) | 6,663 | 60,720 | 31 | 333 | 67,747 | 2,578 | |||||||||||||||||||||||
Parkside Shopping Center | (11) | Power Center | Frankfort | KY | 2/16/2017 | — | (10) | 9,978 | 29,996 | — | 167 | 40,141 | 1,775 | |||||||||||||||||||||||
Colonial Landing | (11) | Power Center | Orlando | FL | 2/16/2017 | — | (10) | — | 44,255 | — | — | 44,255 | 2,234 | |||||||||||||||||||||||
The Shops at West End | (11) | Lifestyle Center | St. Louis Park | MN | 2/16/2017 | — | (10) | 12,831 | 107,806 | — | 18 | 120,655 | 5,201 | |||||||||||||||||||||||
Township Marketplace | (11) | Power Center | Monaca | PA | 2/16/2017 | — | (10) | 8,146 | 39,267 | — | — | 47,413 | 2,022 | |||||||||||||||||||||||
Cross Pointe Centre | (11) | Power Center | Fayetteville | NC | 2/16/2017 | — | (7) | 8,075 | 19,717 | — | 234 | 28,026 | 1,044 | |||||||||||||||||||||||
F-55
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
Towne Centre Plaza | (11) | Power Center | Mesquite | TX | 2/16/2017 | — | (10) | 3,553 | 11,992 | — | (340 | ) | 15,205 | 667 | ||||||||||||||||||||||
Village at Quail Springs | (11) | Power Center | Oklahoma City | OK | 2/16/2017 | — | (10) | 2,307 | 9,983 | — | 2,045 | 14,335 | 556 | |||||||||||||||||||||||
Pine Ridge Plaza | (11) | Power Center | Lawrence | KS | 2/16/2017 | — | (10) | 14,008 | 20,935 | — | 502 | 35,445 | 1,249 | |||||||||||||||||||||||
Bison Hollow | (11) | Power Center | Traverse City | MI | 2/16/2017 | — | (10) | 4,346 | 15,944 | — | — | 20,290 | 833 | |||||||||||||||||||||||
Jefferson Commons | (11) | Power Center | Louisville | KY | 2/16/2017 | — | (7) | 5,110 | 29,432 | — | 211 | 34,753 | 1,593 | |||||||||||||||||||||||
Northpark Center | (11) | Power Center | Huber Heights | OH | 2/16/2017 | — | (7) | 8,975 | 28,552 | — | 986 | 38,513 | 1,568 | |||||||||||||||||||||||
Anderson Station | (11) | Power Center | Anderson | SC | 2/16/2017 | — | (7) | 5,201 | 27,100 | — | 225 | 32,526 | 1,558 | |||||||||||||||||||||||
Patton Creek | (11) | Power Center | Hoover | AL | 2/16/2017 | 40,027 | 15,799 | 79,150 | (405 | ) | 184 | 94,728 | 4,122 | |||||||||||||||||||||||
North Lakeland Plaza | (11) | Power Center | Lakeland | FL | 2/16/2017 | — | (7) | 2,599 | 12,652 | — | — | 15,251 | 692 | |||||||||||||||||||||||
Riverbend Marketplace | (11) | Power Center | Asheville | NC | 2/16/2017 | — | (7) | 4,949 | 18,213 | — | — | 23,162 | 990 | |||||||||||||||||||||||
Montecito Crossing | (11) | Power Center | Las Vegas | NV | 2/16/2017 | — | (7) | 16,204 | 36,476 | — | — | 52,680 | 2,027 | |||||||||||||||||||||||
Best on the Boulevard | (11) | Power Center | Las Vegas | NV | 2/16/2017 | — | (7) | 10,046 | 32,705 | — | 250 | 43,001 | 1,758 | |||||||||||||||||||||||
Shops at RiverGate South | (11) | Power Center | Charlotte | NC | 2/16/2017 | — | (7) | 5,202 | 28,378 | — | — | 33,580 | 1,514 | |||||||||||||||||||||||
Parkside Shopping Center - Excess Land | (11) | Land - Unimproved | Frankfort | KY | 2/16/2017 | — | 695 | — | — | — | 695 | — | ||||||||||||||||||||||||
The Streets of West Chester - Excess Land | (11) | Land - Unimproved | West Chester | OH | 2/16/2017 | — | 517 | — | — | — | 517 | — | ||||||||||||||||||||||||
Dollar General XXIII | Retail | Dewitt | NY | 3/31/2017 | — | (8) | 233 | 1,044 | — | — | 1,277 | 59 | ||||||||||||||||||||||||
Dollar General XXIII | Retail | Farmington | NY | 3/31/2017 | — | (8) | 374 | 1,037 | — | — | 1,411 | 59 | ||||||||||||||||||||||||
Dollar General XXIII | Retail | Geddes | NY | 3/31/2017 | — | (8) | 191 | 1,018 | — | — | 1,209 | 58 | ||||||||||||||||||||||||
Dollar General XXIII | Retail | Otego | NY | 3/31/2017 | — | (8) | 285 | 1,070 | — | — | 1,355 | 62 | ||||||||||||||||||||||||
Dollar General XXIII | Retail | Parish | NY | 3/31/2017 | — | (8) | 164 | 1,071 | — | — | 1,235 | 63 | ||||||||||||||||||||||||
Dollar General XXIII | Retail | Utica | NY | 3/31/2017 | — | (8) | 301 | 1,034 | — | — | 1,335 | 63 | ||||||||||||||||||||||||
Jo-Ann Fabrics I | Retail | Freeport | IL | 4/17/2017 | — | (8) | 119 | 1,663 | — | — | 1,782 | 82 | ||||||||||||||||||||||||
Bob Evans I | Retail | Kettering | OH | 4/28/2017 | — | (6) | 264 | 1,493 | — | — | 1,757 | 76 | ||||||||||||||||||||||||
Bob Evans I | Retail | Miamisburg | OH | 4/28/2017 | — | (6) | 339 | 1,791 | — | — | 2,130 | 88 | ||||||||||||||||||||||||
Bob Evans I | Retail | Elyria | OH | 4/28/2017 | — | (6) | 540 | 1,003 | — | — | 1,543 | 56 | ||||||||||||||||||||||||
Bob Evans I | Retail | Taylor | MI | 4/28/2017 | — | (6) | 542 | 1,210 | — | — | 1,752 | 66 | ||||||||||||||||||||||||
Bob Evans I | Retail | Lansing | MI | 4/28/2017 | — | (6) | 817 | 1,093 | — | — | 1,910 | 65 | ||||||||||||||||||||||||
Bob Evans I | Retail | Marietta | OH | 4/28/2017 | — | (6) | 631 | 1,890 | — | — | 2,521 | 94 | ||||||||||||||||||||||||
Bob Evans I | Retail | Roseville | MI | 4/28/2017 | — | (6) | 861 | 854 | — | — | 1,715 | 54 | ||||||||||||||||||||||||
Bob Evans I | Retail | Steubenville | OH | 4/28/2017 | — | (6) | 641 | 1,638 | — | — | 2,279 | 93 | ||||||||||||||||||||||||
Bob Evans I | Retail | Franklin | OH | 4/28/2017 | — | (6) | 620 | 1,581 | — | — | 2,201 | 81 | ||||||||||||||||||||||||
Bob Evans I | Retail | Ashland | KY | 4/28/2017 | — | (6) | 446 | 1,771 | — | — | 2,217 | 84 | ||||||||||||||||||||||||
Bob Evans I | Retail | Bloomington | IN | 4/28/2017 | — | (6) | 405 | 1,351 | — | — | 1,756 | 65 | ||||||||||||||||||||||||
Bob Evans I | Retail | Dublin | OH | 4/28/2017 | — | (6) | 701 | 645 | — | — | 1,346 | 40 | ||||||||||||||||||||||||
F-56
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
Bob Evans I | Retail | Streetsboro | OH | 4/28/2017 | — | (6) | 1,078 | 780 | — | — | 1,858 | 48 | ||||||||||||||||||||||||
Bob Evans I | Retail | Lewes | DE | 4/28/2017 | — | (6) | 660 | 1,016 | — | — | 1,676 | 55 | ||||||||||||||||||||||||
Bob Evans I | Retail | Lebanon | OH | 4/28/2017 | — | (6) | 628 | 1,328 | — | — | 1,956 | 73 | ||||||||||||||||||||||||
Bob Evans I | Retail | Ellicott City | MD | 4/28/2017 | — | (6) | 507 | 1,083 | — | — | 1,590 | 62 | ||||||||||||||||||||||||
Bob Evans I | Retail | Paducah | KY | 4/28/2017 | — | (6) | 296 | 697 | — | — | 993 | 41 | ||||||||||||||||||||||||
Bob Evans I | Retail | Uniontown | PA | 4/28/2017 | — | (6) | 494 | 1,104 | — | — | 1,598 | 65 | ||||||||||||||||||||||||
Bob Evans I | Retail | Weirton | WV | 4/28/2017 | — | (6) | 305 | 900 | — | — | 1,205 | 56 | ||||||||||||||||||||||||
Bob Evans I | Retail | Coshocton | OH | 4/28/2017 | — | (6) | 386 | 1,326 | — | — | 1,712 | 74 | ||||||||||||||||||||||||
Bob Evans I | Retail | Bucyrus | OH | 4/28/2017 | — | (6) | 224 | 1,450 | — | — | 1,674 | 72 | ||||||||||||||||||||||||
Bob Evans I | Retail | Columbia City | IN | 4/28/2017 | — | (6) | 333 | 594 | — | — | 927 | 36 | ||||||||||||||||||||||||
Bob Evans I | Retail | Plymouth | IN | 4/28/2017 | — | (6) | 172 | 1,023 | — | — | 1,195 | 53 | ||||||||||||||||||||||||
FedEx Ground IX | Distribution | Brainerd | MN | 5/3/2017 | — | (8) | 587 | 3,415 | — | — | 4,002 | 204 | ||||||||||||||||||||||||
Dollar General XXIII | Retail | Kingston | NY | 5/10/2017 | — | (8) | 432 | 1,027 | — | — | 1,459 | 59 | ||||||||||||||||||||||||
Chili's II | Retail | McHenry | IL | 5/10/2017 | — | (8) | 973 | 2,557 | — | — | 3,530 | 125 | ||||||||||||||||||||||||
Sonic Drive In I | Retail | Robertsdale | AL | 6/2/2017 | — | (8) | 358 | 1,043 | — | — | 1,401 | 53 | ||||||||||||||||||||||||
Sonic Drive In I | Retail | Tuscaloosa | AL | 6/2/2017 | — | (8) | 1,808 | 841 | — | — | 2,649 | 43 | ||||||||||||||||||||||||
Bridgestone HOSEpower I | Distribution | Columbia | SC | 6/9/2017 | — | (8) | 307 | 1,973 | — | — | 2,280 | 95 | ||||||||||||||||||||||||
Bridgestone HOSEpower I | Distribution | Elko | NV | 6/9/2017 | — | (8) | 358 | 1,642 | — | — | 2,000 | 85 | ||||||||||||||||||||||||
Dollar General XXIII | Retail | Kerhonskon | NY | 6/16/2017 | — | (8) | 247 | 953 | — | — | 1,200 | 48 | ||||||||||||||||||||||||
Bridgestone HOSEpower II | Distribution | Jacksonville | FL | 7/3/2017 | — | (8) | 236 | 1,762 | — | — | 1,998 | 78 | ||||||||||||||||||||||||
FedEx Ground X | Distribution | Rolla | MO | 7/14/2017 | — | (8) | 469 | 9,653 | — | — | 10,122 | 517 | ||||||||||||||||||||||||
Chili's III | Retail | Machesney Park | IL | 8/6/2017 | — | (8) | 1,254 | 2,922 | — | — | 4,176 | 123 | ||||||||||||||||||||||||
FedEx Ground XI | Distribution | Casper | WY | 9/15/2017 | — | (8) | 386 | 3,469 | — | — | 3,855 | 140 | ||||||||||||||||||||||||
Hardee's I | Retail | Ashland | AL | 9/26/2017 | — | (9) | 170 | 827 | — | — | 997 | 34 | ||||||||||||||||||||||||
Hardee's I | Retail | Jasper | AL | 9/26/2017 | — | (9) | 171 | 527 | — | — | 698 | 22 | ||||||||||||||||||||||||
Hardee's I | Retail | Jesup | GA | 9/26/2017 | — | (9) | 231 | 1,236 | — | — | 1,467 | 47 | ||||||||||||||||||||||||
Hardee's I | Retail | Waycross | GA | 9/26/2017 | — | (9) | 261 | 1,217 | — | — | 1,478 | 50 | ||||||||||||||||||||||||
Tractor Supply IV | Retail | Flandreau | SD | 10/30/2017 | — | (8) | 194 | 1,110 | — | — | 1,304 | 38 | ||||||||||||||||||||||||
Tractor Supply IV | Retail | Hazen | ND | 10/30/2017 | — | (8) | 242 | 1,290 | — | — | 1,532 | 48 | ||||||||||||||||||||||||
Circle K II | Retail | Harlingen | TX | 11/2/2017 | — | (9) | 575 | 945 | — | — | 1,520 | 34 | ||||||||||||||||||||||||
Circle K II | Retail | Laredo | TX | 11/2/2017 | — | (9) | 734 | 1,294 | — | — | 2,028 | 46 | ||||||||||||||||||||||||
Circle K II | Retail | Laredo | TX | 11/2/2017 | — | (9) | 226 | 443 | — | — | 669 | 16 | ||||||||||||||||||||||||
Circle K II | Retail | Laredo | TX | 11/2/2017 | — | (9) | 675 | 1,250 | — | — | 1,925 | 51 | ||||||||||||||||||||||||
Circle K II | Retail | Rio Grande City | TX | 11/2/2017 | — | (9) | 625 | 1,257 | — | — | 1,882 | 45 | ||||||||||||||||||||||||
Circle K II | Retail | Weslaco | TX | 11/2/2017 | — | (9) | 547 | 1,183 | — | — | 1,730 | 44 | ||||||||||||||||||||||||
F-57
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
Sonic Drive In II | Retail | Lithia | FL | 11/3/2017 | — | (9) | 352 | 478 | — | — | 830 | 21 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Plant City | FL | 11/3/2017 | — | (9) | 250 | 525 | — | — | 775 | 25 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Riverview | FL | 11/3/2017 | — | (9) | 392 | 679 | — | — | 1,071 | 26 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Riverview | FL | 11/3/2017 | — | (9) | 267 | 502 | — | — | 769 | 21 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Wauchula | FL | 11/3/2017 | — | (9) | 191 | 346 | — | — | 537 | 14 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Biloxi | MS | 11/3/2017 | — | (9) | 397 | 621 | — | — | 1,018 | 23 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Collins | MS | 11/3/2017 | — | (9) | 272 | 992 | — | — | 1,264 | 37 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Ellisville | MS | 11/3/2017 | — | (9) | 251 | 1,114 | — | — | 1,365 | 38 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Gulfport | MS | 11/3/2017 | — | (9) | 199 | 660 | — | — | 859 | 23 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Gulfport | MS | 11/3/2017 | — | (9) | 232 | 746 | — | — | 978 | 29 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Gulfport | MS | 11/3/2017 | — | (9) | 100 | 930 | — | — | 1,030 | 36 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Hattiesburg | MS | 11/3/2017 | — | (9) | 351 | 788 | — | — | 1,139 | 31 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Long Beach | MS | 11/3/2017 | — | (9) | 210 | 840 | — | — | 1,050 | 33 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Magee | MS | 11/3/2017 | — | (9) | 300 | 740 | — | — | 1,040 | 29 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Petal | MS | 11/3/2017 | — | (9) | 100 | 1,053 | — | — | 1,153 | 36 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Purvis | MS | 11/3/2017 | — | (9) | 129 | 896 | — | — | 1,025 | 31 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Tylertown | MS | 11/3/2017 | — | (9) | 191 | 1,197 | — | — | 1,388 | 44 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Waveland | MS | 11/3/2017 | — | (9) | 322 | 594 | — | — | 916 | 24 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Waynesboro | MS | 11/3/2017 | — | (9) | 188 | 517 | — | — | 705 | 20 | ||||||||||||||||||||||||
Sonic Drive In II | Retail | Woodville | MS | 11/3/2017 | — | (9) | 160 | 1,179 | — | — | 1,339 | 40 | ||||||||||||||||||||||||
Bridgestone HOSEPower III | Distribution | Sulphur | LA | 12/20/2017 | — | (8) | 882 | 2,176 | — | — | 3,058 | 65 | ||||||||||||||||||||||||
Sonny's BBQ I | Retail | Tallahassee | FL | 1/17/2018 | — | (10) | 491 | 2,281 | — | — | 2,772 | 62 | ||||||||||||||||||||||||
Sonny's BBQ I | Retail | Tallahassee | FL | 1/17/2018 | — | (10) | 521 | 1,561 | — | — | 2,082 | 44 | ||||||||||||||||||||||||
Sonny's BBQ I | Retail | Tallahassee | FL | 1/17/2018 | — | (10) | 717 | 1,510 | — | — | 2,227 | 45 | ||||||||||||||||||||||||
Mountain Express I | Retail | Buford | GA | 1/19/2018 | — | (9) | 883 | 1,130 | — | — | 2,013 | 37 | ||||||||||||||||||||||||
Mountain Express I | Retail | Douglasville | GA | 1/19/2018 | — | (9) | 958 | 808 | — | — | 1,766 | 24 | ||||||||||||||||||||||||
Mountain Express I | Retail | Woodstock | GA | 1/19/2018 | — | (9) | 578 | 804 | — | — | 1,382 | 25 | ||||||||||||||||||||||||
Mountain Express I | Retail | Canton | GA | 1/19/2018 | — | (9) | 348 | 1,463 | — | — | 1,811 | 48 | ||||||||||||||||||||||||
Mountain Express I | Retail | Jasper | GA | 1/19/2018 | — | (9) | 1,167 | 823 | — | — | 1,990 | 25 | ||||||||||||||||||||||||
Mountain Express I | Retail | Trion | GA | 1/19/2018 | — | (9) | 379 | 1,077 | — | — | 1,456 | 37 | ||||||||||||||||||||||||
Mountain Express I | Retail | Chatsworth | GA | 1/19/2018 | — | (9) | 673 | 1,108 | — | — | 1,781 | 36 | ||||||||||||||||||||||||
Mountain Express I | Retail | Baldwin | GA | 1/19/2018 | — | (9) | 861 | 690 | — | — | 1,551 | 22 | ||||||||||||||||||||||||
Mountain Express I | Retail | Summerville | GA | 1/19/2018 | — | (9) | 270 | 1,019 | — | — | 1,289 | 29 | ||||||||||||||||||||||||
Kum & Go I | Retail | Omaha | NE | 2/27/2018 | — | (10) | 1,391 | 1,350 | — | — | 2,741 | 52 | ||||||||||||||||||||||||
DaVita I | Retail | Bolivar | TN | 2/28/2018 | — | (10) | 101 | 623 | — | — | 724 | 15 | ||||||||||||||||||||||||
F-58
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
DaVita I | Retail | Brownsville | TN | 2/28/2018 | — | (10) | 61 | 1,166 | — | — | 1,227 | 27 | ||||||||||||||||||||||||
White Oak I | Retail | Casey | IA | 3/9/2018 | — | (10) | 512 | 164 | — | — | 676 | 5 | ||||||||||||||||||||||||
White Oak I | Retail | Hospers | IA | 3/9/2018 | — | (10) | 674 | 236 | — | — | 910 | 7 | ||||||||||||||||||||||||
White Oak I | Retail | Jefferson | IA | 3/9/2018 | — | (10) | 662 | 484 | — | — | 1,146 | 13 | ||||||||||||||||||||||||
White Oak I | Retail | Muscatine | IA | 3/9/2018 | — | (10) | 1,142 | 671 | — | — | 1,813 | 19 | ||||||||||||||||||||||||
White Oak I | Retail | Nevada | IA | 3/9/2018 | — | (10) | 928 | 377 | — | — | 1,305 | 11 | ||||||||||||||||||||||||
White Oak I | Retail | Nevada | IA | 3/9/2018 | — | (10) | 347 | 199 | — | — | 546 | 6 | ||||||||||||||||||||||||
White Oak I | Retail | Wapello | IA | 3/9/2018 | — | (10) | 708 | 627 | — | — | 1,335 | 17 | ||||||||||||||||||||||||
White Oak I | Retail | Omaha | NE | 3/9/2018 | — | (10) | 885 | 649 | — | — | 1,534 | 17 | ||||||||||||||||||||||||
White Oak I | Retail | Omaha | NE | 3/9/2018 | — | (10) | 867 | 273 | — | — | 1,140 | 9 | ||||||||||||||||||||||||
Mountain Express II | Retail | Arley | AL | 6/14/2018 | — | (10) | 590 | 428 | — | — | 1,018 | 9 | ||||||||||||||||||||||||
Mountain Express II | Retail | Cullman | AL | 6/14/2018 | — | (10) | 669 | 978 | — | — | 1,647 | 18 | ||||||||||||||||||||||||
Mountain Express II | Retail | Cullman | AL | 6/14/2018 | — | (10) | 794 | 858 | — | — | 1,652 | 17 | ||||||||||||||||||||||||
Mountain Express II | Retail | Eva | AL | 6/14/2018 | — | (10) | 782 | 258 | — | — | 1,040 | 6 | ||||||||||||||||||||||||
Mountain Express II | Retail | Good Hope | AL | 6/14/2018 | — | (10) | 1,080 | 685 | — | — | 1,765 | 15 | ||||||||||||||||||||||||
Mountain Express II | Retail | Huntsville | AL | 6/14/2018 | — | (10) | 1,882 | 316 | — | — | 2,198 | 7 | ||||||||||||||||||||||||
Mountain Express II | Retail | Huntsville | AL | 6/14/2018 | — | (10) | 1,470 | 659 | — | — | 2,129 | 12 | ||||||||||||||||||||||||
Mountain Express II | Retail | Huntsville | AL | 6/14/2018 | — | (10) | 2,468 | 710 | — | — | 3,178 | 13 | ||||||||||||||||||||||||
Mountain Express II | Retail | Oneonta | AL | 6/14/2018 | — | (10) | 1,057 | 532 | — | — | 1,589 | 9 | ||||||||||||||||||||||||
Mountain Express II | Retail | Owens Cross | AL | 6/14/2018 | — | (10) | 578 | 1,386 | — | — | 1,964 | 24 | ||||||||||||||||||||||||
Mountain Express II | Retail | Pine Campbell | AL | 6/14/2018 | — | (10) | 819 | 219 | — | — | 1,038 | 5 | ||||||||||||||||||||||||
Mountain Express II | Retail | Red Bay | AL | 6/14/2018 | — | (10) | 840 | 566 | — | — | 1,406 | 10 | ||||||||||||||||||||||||
Mountain Express II | Retail | Red Bay | AL | 6/14/2018 | — | (10) | 254 | 393 | — | — | 647 | 7 | ||||||||||||||||||||||||
Mountain Express II | Retail | Russellville | AL | 6/14/2018 | — | (10) | 594 | 378 | — | — | 972 | 7 | ||||||||||||||||||||||||
Mountain Express II | Retail | Vina | AL | 6/14/2018 | — | (10) | 549 | 300 | — | — | 849 | 5 | ||||||||||||||||||||||||
Dialysis I | Retail | Grand Rapids | MI | 7/20/2018 | — | (10) | 674 | 1,827 | — | — | 2,501 | 22 | ||||||||||||||||||||||||
Dialysis I | Retail | Michigan City | IN | 7/20/2018 | — | (10) | 360 | 1,726 | — | — | 2,086 | 24 | ||||||||||||||||||||||||
Dialysis I | Retail | Auburn | ME | 7/20/2018 | — | (10) | 78 | 2,766 | — | — | 2,844 | 31 | ||||||||||||||||||||||||
Dialysis I | Retail | Grand Rapids | MI | 7/20/2018 | — | (10) | 612 | 412 | — | — | 1,024 | 5 | ||||||||||||||||||||||||
Dialysis I | Retail | Sikeston | MO | 7/20/2018 | — | (10) | 221 | 1,762 | — | — | 1,983 | 23 | ||||||||||||||||||||||||
Dialysis I | Retail | East Knoxville | TN | 7/20/2018 | — | (10) | 497 | 1,429 | — | — | 1,926 | 18 | ||||||||||||||||||||||||
Dialysis I | Retail | Benton Harbor | MI | 7/20/2018 | — | (10) | 241 | 1,687 | — | — | 1,928 | 22 | ||||||||||||||||||||||||
Children of America I | Office | New Britain | PA | 8/13/2018 | — | (10) | 224 | 3,319 | — | — | 3,543 | 38 | ||||||||||||||||||||||||
Children of America I | Office | Warminster | PA | 8/13/2018 | — | (10) | 284 | 3,225 | — | — | 3,509 | 37 | ||||||||||||||||||||||||
Burger King II | Retail | Pineville | LA | 8/20/2018 | — | (10) | 462 | 1,136 | — | — | 1,598 | 12 | ||||||||||||||||||||||||
F-59
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
White Oak II | Retail | Council Bluffs | IA | 8/27/2018 | — | (10) | 111 | 628 | — | — | 739 | 7 | ||||||||||||||||||||||||
White Oak II | Retail | Council Bluffs | IA | 8/27/2018 | — | (10) | 122 | 566 | — | — | 688 | 6 | ||||||||||||||||||||||||
White Oak II | Retail | Glenwood | IA | 8/27/2018 | — | (10) | 20 | 351 | — | — | 371 | 3 | ||||||||||||||||||||||||
White Oak II | Retail | Missouri Valley | IA | 8/27/2018 | — | (10) | 40 | 388 | — | — | 428 | 4 | ||||||||||||||||||||||||
White Oak II | Retail | Red Oak | IA | 8/27/2018 | — | (10) | 30 | 543 | — | — | 573 | 6 | ||||||||||||||||||||||||
White Oak II | Retail | Sioux Center | IA | 8/27/2018 | — | (10) | 20 | 358 | — | — | 378 | 3 | ||||||||||||||||||||||||
White Oak II | Retail | Sioux City | IA | 8/27/2018 | — | (10) | 70 | 339 | — | — | 409 | 3 | ||||||||||||||||||||||||
White Oak II | Retail | Sioux City | IA | 8/27/2018 | — | (10) | 101 | 519 | — | — | 620 | 6 | ||||||||||||||||||||||||
White Oak II | Retail | Sioux City | IA | 8/27/2018 | — | (10) | 81 | 396 | — | — | 477 | 4 | ||||||||||||||||||||||||
Bob Evans II | Retail | Aurora | IN | 8/31/2018 | — | (10) | 237 | 1,675 | — | — | 1,912 | 17 | ||||||||||||||||||||||||
Bob Evans II | Retail | Lavale | MD | 8/31/2018 | — | (10) | 527 | 2,536 | — | — | 3,063 | 24 | ||||||||||||||||||||||||
Bob Evans II | Retail | Bay City | MI | 8/31/2018 | — | (10) | 796 | 313 | — | — | 1,109 | 4 | ||||||||||||||||||||||||
Bob Evans II | Retail | Cadillac | MI | 8/31/2018 | — | (10) | 345 | 1,447 | — | — | 1,792 | 15 | ||||||||||||||||||||||||
Bob Evans II | Retail | Bridgeport | OH | 8/31/2018 | — | (10) | 335 | 1,301 | — | — | 1,636 | 13 | ||||||||||||||||||||||||
Bob Evans II | Retail | Burbank | OH | 8/31/2018 | — | (10) | 172 | 1,804 | — | — | 1,976 | 19 | ||||||||||||||||||||||||
Bob Evans II | Retail | Circleville | OH | 8/31/2018 | — | (10) | 911 | 1,686 | — | — | 2,597 | 18 | ||||||||||||||||||||||||
Bob Evans II | Retail | Columbus | OH | 8/31/2018 | — | (10) | 615 | 1,252 | — | — | 1,867 | 13 | ||||||||||||||||||||||||
Bob Evans II | Retail | E Liverpool | OH | 8/31/2018 | — | (10) | 399 | 1,533 | — | — | 1,932 | 16 | ||||||||||||||||||||||||
Bob Evans II | Retail | Greenville | OH | 8/31/2018 | — | (10) | 460 | 1,900 | — | — | 2,360 | 18 | ||||||||||||||||||||||||
Bob Evans II | Retail | Hamilton | OH | 8/31/2018 | — | (10) | 441 | 1,344 | — | — | 1,785 | 14 | ||||||||||||||||||||||||
Bob Evans II | Retail | Jackson | OH | 8/31/2018 | — | (10) | 596 | 1,487 | — | — | 2,083 | 16 | ||||||||||||||||||||||||
Bob Evans II | Retail | Jeffersonville | OH | 8/31/2018 | — | (10) | 193 | 1,508 | — | — | 1,701 | 18 | ||||||||||||||||||||||||
Bob Evans II | Retail | Norwalk | OH | 8/31/2018 | — | (10) | 123 | 2,559 | — | — | 2,682 | 26 | ||||||||||||||||||||||||
Bob Evans II | Retail | South Point | OH | 8/31/2018 | — | (10) | 420 | 1,436 | — | — | 1,856 | 15 | ||||||||||||||||||||||||
Bob Evans II | Retail | Bluefield | VA | 8/31/2018 | — | (10) | 440 | 1,454 | — | — | 1,894 | 14 | ||||||||||||||||||||||||
Bob Evans II | Retail | Barbousvelle | WV | 8/31/2018 | — | (10) | 987 | 807 | — | — | 1,794 | 8 | ||||||||||||||||||||||||
Bob Evans II | Retail | Bridgeport | WV | 8/31/2018 | — | (10) | 481 | 1,819 | — | — | 2,300 | 18 | ||||||||||||||||||||||||
Bob Evans II | Retail | Huntington | WV | 8/31/2018 | — | (10) | 255 | 1,563 | — | — | 1,818 | 15 | ||||||||||||||||||||||||
Bob Evans II | Retail | New Martinsville | WV | 8/31/2018 | — | (10) | 703 | 1,206 | — | — | 1,909 | 12 | ||||||||||||||||||||||||
Bob Evans II | Retail | White Hall | WV | 8/31/2018 | — | (10) | 347 | 1,185 | — | — | 1,532 | 12 | ||||||||||||||||||||||||
Bob Evans II | Retail | Mt. Pleasant | MI | 8/31/2018 | — | (10) | 559 | 1,149 | — | — | 1,708 | 14 | ||||||||||||||||||||||||
Mountain Express III | Retail | Canton | GA | 9/19/2018 | — | (10) | 703 | 1,719 | — | — | 2,422 | 14 | ||||||||||||||||||||||||
Mountain Express III | Retail | Cornelia | GA | 9/19/2018 | — | (10) | 363 | 778 | — | — | 1,141 | 7 | ||||||||||||||||||||||||
Mountain Express III | Retail | Cumming | GA | 9/19/2018 | — | (10) | 161 | 1,403 | — | — | 1,564 | 11 | ||||||||||||||||||||||||
Mountain Express III | Retail | Ellijay | GA | 9/19/2018 | — | (10) | 517 | 1,803 | — | — | 2,320 | 15 | ||||||||||||||||||||||||
F-60
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
Mountain Express III | Retail | Hogansville | GA | 9/19/2018 | — | (10) | 141 | 1,068 | — | — | 1,209 | 10 | ||||||||||||||||||||||||
Mountain Express III | Retail | Homer | GA | 9/19/2018 | — | (10) | 221 | 991 | — | — | 1,212 | 8 | ||||||||||||||||||||||||
Mountain Express III | Retail | McGaysville | GA | 9/19/2018 | — | (10) | 371 | 720 | — | — | 1,091 | 5 | ||||||||||||||||||||||||
Mountain Express III | Retail | Riverdale | GA | 9/19/2018 | — | (10) | 1,001 | 1,920 | — | — | 2,921 | 15 | ||||||||||||||||||||||||
Mountain Express III | Retail | Toccoa | GA | 9/19/2018 | — | (10) | 315 | 708 | — | — | 1,023 | 6 | ||||||||||||||||||||||||
Mountain Express III | Retail | Toccoa | GA | 9/19/2018 | — | (10) | 262 | 908 | — | — | 1,170 | 7 | ||||||||||||||||||||||||
Mountain Express III | Retail | Woodstock | GA | 9/19/2018 | — | (10) | 913 | 1,628 | — | — | 2,541 | 14 | ||||||||||||||||||||||||
Mountain Express III | Retail | Woodstock | GA | 9/19/2018 | — | (10) | 2,202 | 1,234 | — | — | 3,436 | 10 | ||||||||||||||||||||||||
Mountain Express III | Retail | Nettleton | MS | 9/19/2018 | — | (10) | 212 | 660 | — | — | 872 | 5 | ||||||||||||||||||||||||
Mountain Express III | Retail | Clinton | SC | 9/19/2018 | — | (10) | 581 | 1,113 | — | — | 1,694 | 8 | ||||||||||||||||||||||||
Taco John's | Retail | Chanute | KS | 9/14/2018 | — | (10) | 81 | 642 | — | — | 723 | 6 | ||||||||||||||||||||||||
Taco John's | Retail | Mountain Home | ID | 9/14/2018 | — | (10) | 81 | 561 | — | — | 642 | 6 | ||||||||||||||||||||||||
Taco John's | Retail | Carroll | IA | 9/21/2018 | — | (10) | 171 | 541 | — | — | 712 | 4 | ||||||||||||||||||||||||
Taco John's | Retail | Cherokee | IA | 9/21/2018 | — | (10) | 131 | 347 | — | — | 478 | 3 | ||||||||||||||||||||||||
Taco John's | Retail | North Manakato | MN | 9/28/2018 | — | (10) | 213 | 334 | — | — | 547 | 3 | ||||||||||||||||||||||||
Taco John's | Retail | St. Peter | MN | 9/28/2018 | — | (10) | 112 | 559 | — | — | 671 | 4 | ||||||||||||||||||||||||
Taco John's | Retail | Independence | MO | 9/28/2018 | — | (10) | 242 | 822 | — | — | 1,064 | 7 | ||||||||||||||||||||||||
White Oak III | Retail | Bonham | TX | 10/5/2018 | — | (10) | 734 | 1,952 | — | — | 2,686 | 16 | ||||||||||||||||||||||||
DaVita II | Retail | Houston | TX | 10/26/2018 | — | (10) | 246 | 1,982 | — | — | 2,228 | 10 | ||||||||||||||||||||||||
Pizza Hut I | Retail | Charlotte | NC | 10/29/2018 | — | (10) | 236 | 916 | — | — | 1,152 | 5 | ||||||||||||||||||||||||
Pizza Hut I | Retail | Gastonia | NC | 10/29/2018 | — | (10) | 208 | 1,128 | — | — | 1,336 | 6 | ||||||||||||||||||||||||
Pizza Hut I | Retail | Newton | NC | 10/29/2018 | — | (10) | 79 | 755 | — | — | 834 | 4 | ||||||||||||||||||||||||
Pizza Hut I | Retail | Columbus | OH | 10/29/2018 | — | (10) | 305 | 922 | — | — | 1,227 | 5 | ||||||||||||||||||||||||
Pizza Hut I | Retail | Columbus | OH | 10/29/2018 | — | (10) | 187 | 464 | — | — | 651 | 3 | ||||||||||||||||||||||||
Pizza Hut I | Retail | New Lexington | OH | 10/29/2018 | — | (10) | 69 | 658 | — | — | 727 | 4 | ||||||||||||||||||||||||
Pizza Hut I | Retail | Westerville | OH | 10/29/2018 | — | (10) | 167 | 830 | — | — | 997 | 4 | ||||||||||||||||||||||||
Pizza Hut I | Retail | Zanesville | OH | 10/29/2018 | — | (10) | 99 | 745 | — | — | 844 | 4 | ||||||||||||||||||||||||
Pizza Hut I | Retail | Midland | TX | 10/29/2018 | — | (10) | 207 | 662 | — | — | 869 | 3 | ||||||||||||||||||||||||
Little Caesars I | Retail | Burton | MI | 12/21/2018 | — | (10) | 236 | 1,022 | — | — | 1,258 | — | ||||||||||||||||||||||||
Little Caesars I | Retail | Burton | MI | 12/21/2018 | — | (10) | 88 | 684 | — | — | 772 | — | ||||||||||||||||||||||||
Little Caesars I | Retail | Flint | MI | 12/21/2018 | — | (10) | 16 | 653 | — | — | 669 | — | ||||||||||||||||||||||||
Little Caesars I | Retail | Flint | MI | 12/21/2018 | — | (10) | 30 | 781 | — | — | 811 | — | ||||||||||||||||||||||||
Little Caesars I | Retail | Flint | MI | 12/21/2018 | — | (10) | 10 | 543 | — | — | 553 | — | ||||||||||||||||||||||||
Little Caesars I | Retail | Flint | MI | 12/21/2018 | — | (10) | 39 | 632 | — | — | 671 | — | ||||||||||||||||||||||||
Little Caesars I | Retail | Durand | MI | 12/21/2018 | — | (10) | 39 | 401 | — | — | 440 | — | ||||||||||||||||||||||||
F-61
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part I
December 31, 2018
(In thousands) | Initial Costs | Subsequent to Acquisition | Gross Amount Carried at December 31, 2018 (12) (13) | |||||||||||||||||||||||||||||||||
Property | Property Type | City | State | Acquisition Date | Encumbrances at December 31, 2018 | Land | Building and Improvements | Land (11) | Building and Improvements(11) | Accumulated Depreciation (14) (15) | ||||||||||||||||||||||||||
Little Caesars I | Retail | Flint | MI | 12/21/2018 | — | (10) | 108 | 569 | — | — | 677 | — | ||||||||||||||||||||||||
Little Caesars I | Retail | Flint | MI | 12/21/2018 | — | (10) | 30 | 553 | — | — | 583 | — | ||||||||||||||||||||||||
Little Caesars I | Retail | Flint | MI | 12/21/2018 | — | (10) | 49 | 577 | — | — | 626 | — | ||||||||||||||||||||||||
Little Caesars I | Retail | Swartz Creek | MI | 12/21/2018 | — | (10) | 79 | 492 | — | — | 571 | — | ||||||||||||||||||||||||
Caliber Collision I | Retail | Lutz | FL | 12/28/2018 | — | (10) | 1,745 | 2,696 | — | — | 4,441 | — | ||||||||||||||||||||||||
Caliber Collision I | Retail | Layetteville | NC | 12/28/2018 | — | (10) | 372 | 1,269 | — | — | 1,641 | — | ||||||||||||||||||||||||
Caliber Collision I | Retail | Nolansville | TX | 12/28/2018 | — | (10) | 360 | 973 | — | — | 1,333 | — | ||||||||||||||||||||||||
Tractor Supply V | Retail | Catalina | AZ | 12/27/2018 | — | (10) | 953 | 3,061 | — | — | 4,014 | — | ||||||||||||||||||||||||
Tractor Supply V | Retail | Americus | GA | 12/27/2018 | — | (10) | 329 | 2,522 | — | — | 2,851 | — | ||||||||||||||||||||||||
Tractor Supply V | Retail | Socorro | NM | 12/27/2018 | — | (10) | 413 | 2,602 | — | — | 3,015 | — | ||||||||||||||||||||||||
Tractor Supply V | Retail | Cadiz | OH | 12/27/2018 | — | (10) | 179 | 2,546 | — | — | 2,725 | — | ||||||||||||||||||||||||
Encumbrances allocated based on notes below | 1,005,853 | |||||||||||||||||||||||||||||||||||
Total | $ | 1,200,538 | $ | 631,302 | $ | 2,435,293 | $ | (2,109 | ) | $ | 6,366 | $ | 3,070,852 | $ | 311,214 | |||||||||||||||||||||
___________________________________
(1) | These properties collateralize the Mortgage Loan I, which had $572.2 million outstanding as of December 31, 2018. |
(2) | These properties collateralize the SunTrust Bank II mortgage note payable of $13.4 million as of December 31, 2018. |
(3) | These properties collateralize the SunTrust Bank III mortgage note payable of $68.1 million as of December 31, 2018. |
(4) | These properties collateralize the SunTrust Bank IV mortgage note payable of $18.1 million as of December 31, 2018. |
(5) | These properties collateralize the Stop & Shop I mortgage note payable of $36.8 million as of December 31, 2018. |
(6) | These properties collateralize the Bob Evans I mortgage note payable of $24.0 million as of December 31, 2018. |
(7) | These properties collateralize the Mortgage Loan II, which had $210.0 million outstanding as of December 31, 2018. |
(8) | These properties collateralize the Mortgage Loan III, which had $33.4 million outstanding as of December 31, 2018. |
(9) | These properties collateralize the Mortgage Loan IV which had $29.9 million outstanding as of December 31, 2018. |
(10) | These properties are encumbered by the Credit Facility borrowings in the amount of $324.7 million as of December 31, 2018 and such amount of borrowings is excluded from the table above. |
(11) | These properties were acquired as part of the Merger Transaction with American Realty Capital — Retail Centers of America, Inc. (RCA) on February 16, 2017. |
(12) | During the year ended December 31, 2018, the Company determined that the carrying value of certain properties exceeded their estimated fair values and recognized impairment charges of $1.1 million related to these assets which continue to be included in land and building and improvements as of December 31, 2018. The remaining balance pertains to previously recorded impairment charges and partial dispositions of assets. |
(13) | Acquired intangible lease assets allocated to individual properties in the amount of $413.9 million are not reflected in the table above. |
(14) | The tax basis of aggregate land, buildings and improvements as of December 31, 2018 is $2.9 billion. |
(15) | The accumulated depreciation column excludes $143.4 million of accumulated amortization associated with acquired intangible lease assets. |
(16) | 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 and five years for fixtures. |
F-62
AMERICAN FINANCE TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III — Part II
December 31, 2018
The following is a summary of activity for real estate and accumulated depreciation for the years ended December 31, 2018, 2017 and 2016:
Year Ended December 31, | ||||||||||||
(In thousands) | 2018 | 2017 | 2016 | |||||||||
Real estate investments, at cost: | ||||||||||||
Balance at beginning of year | $ | 3,056,695 | $ | 1,724,258 | $ | 1,899,099 | ||||||
Additions - acquisitions | 201,896 | 1,490,332 | 31,392 | |||||||||
Additions - improvements | 13,189 | — | — | |||||||||
Disposals | (146,109 | ) | (131,185 | ) | (31,547 | ) | ||||||
Impairment charges | (9,363 | ) | (20,580 | ) | (24,661 | ) | ||||||
Reclassified to assets held for sale | (45,456 | ) | (6,130 | ) | (150,025 | ) | ||||||
Balance at end of the year | $ | 3,070,852 | $ | 3,056,695 | $ | 1,724,258 | ||||||
Accumulated depreciation: | ||||||||||||
Balance at beginning of year | $ | 256,771 | $ | 183,437 | $ | 141,594 | ||||||
Depreciation expense | 84,482 | 85,175 | 66,831 | |||||||||
Disposals | (25,131 | ) | (10,415 | ) | (1,018 | ) | ||||||
Reclassified to assets held for sale | (4,908 | ) | (1,426 | ) | (23,970 | ) | ||||||
Balance at end of the year | $ | 311,214 | $ | 256,771 | $ | 183,437 | ||||||
F-63