Business Context and Reporting Period
American Realty Capital Global Trust, Inc. (now identified in the request as Global Net Lease, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The externally managed REIT acquires primarily single-tenant, net-leased commercial properties in the United States and Europe. At quarter-end, it owned 96 properties totaling 6.2 million rentable square feet, 100% leased, with a 12.1-year average remaining lease term.
The company remained in its acquisition and capital-raising phase. During the first six months of 2014, it acquired 59 properties for an aggregate base purchase price of $609.7 million.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 | Comparable Period |
|---|---|---|---|
| Total revenues | $13.6 million | $21.2 million | $0.2 million and $0.2 million, respectively |
| Net loss | $7.5 million | $23.8 million | $1.3 million and $1.3 million, respectively |
| Net loss per share | $0.07 | $0.32 | $0.47 and $0.81, respectively |
| Operating loss | $4.7 million | $19.3 million | $1.3 million and $1.2 million, respectively |
| Net cash used in operating activities | Not separately provided | $0.8 million | $1.1 million used |
| FFO | $0.2 million | Not provided | Not provided |
| MFFO | $7.9 million | Not provided | Not provided |
Revenue growth primarily reflected the 93 properties acquired since June 30, 2013. Expenses increased substantially because of acquisition activity, depreciation and amortization, general and administrative costs, and interest expense. Six-month acquisition and transaction-related costs were $24.8 million, while depreciation and amortization was $12.0 million.
At June 30, 2014, total assets were $1.76 billion, including $802.6 million of net real estate investments and $936.5 million of cash and cash equivalents. Total liabilities were $293.6 million and stockholders’ equity was $1.47 billion.
Debt, Liquidity and Capital Resources
- Mortgage notes payable were $179.6 million, with a 4.3% effective interest rate and a weighted-average maturity of approximately January 2019.
- The revolving credit facility was expanded to $330.0 million in June 2014. Outstanding borrowings were $71.6 million, with reported unused borrowing capacity of $37.8 million based on the borrowing base.
- Total secured debt leverage was 22.6% of real estate investments at acquisition.
- Cash provided by financing activities was $1.44 billion for the six months, including $1.55 billion of common-stock proceeds and $91.2 million of credit-facility borrowings. Financing uses included $159.3 million of offering-cost payments, $8.0 million of deferred financing costs, and $8.6 million of cash distributions.
- As of June 30, 2014, the company was in compliance with its debt covenants and had no material off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased to $21.2 million from $0.2 million as the portfolio expanded from 37 properties at December 31, 2013 to 96 properties at June 30, 2014.
- Six-month net loss increased to $23.8 million from $1.3 million, largely due to $24.8 million of acquisition and transaction-related expenses and higher depreciation, amortization, and interest expense.
- Weighted-average shares outstanding increased to 74.9 million for the six-month period from 1.6 million, reflecting substantial equity issuance. Shares outstanding at June 30, 2014 were 172.3 million.
- Real estate investments, net, increased to $802.6 million from $194.6 million at December 31, 2013.
- Cash and cash equivalents increased to $936.5 million from $11.5 million, primarily from the equity offering.
- Mortgage debt increased to $179.6 million from $76.9 million, and the company initiated use of its revolving credit facility.
- Distributions declared for the six months were $27.0 million. Total distributions to common stockholders were $18.8 million, of which $10.2 million was reinvested through the DRIP. Only $6.5 million, or 34.7%, was funded by operating cash flow; the remainder was funded through equity issuance and DRIP proceeds.
Guidance, Outlook, Commentary and Risks
Management expected rental income from the maturing portfolio to cover operating expenses and the monthly distribution, but stated that distributions are not assured and may be reduced or suspended. The company intended to continue acquiring properties using a combination of equity, cash, mortgage debt, and its revolving facility.
The company expected its IPO to remain open through April 20, 2015, unless all offered shares were sold earlier. After the company acquired at least $1.2 billion of portfolio assets and filed the required subsequent quarterly report, share purchase and DRIP pricing were expected to transition from fixed offering prices to NAV-based pricing.
- Operating history was limited, and future performance was difficult to predict.
- The company was dependent on its external advisor, property manager, dealer manager, and other affiliates, creating conflicts of interest and related-party fee exposure.
- The company’s shares were not listed on an exchange and could remain illiquid; no public market existed at the reporting date.
- Distributions were funded in significant part from offering proceeds and DRIP proceeds rather than operating cash flow. Management disclosed that operating cash flow included a $5.9 million increase in accounts payable and accrued expenses; excluding that increase, operating cash flow would have been lower.
- Tenant concentration, lease renewals, tenant credit quality, interest-rate changes, foreign exchange exposure, European property concentration, and disruptions in U.S. and European credit markets were material risks.
- The company needed to continue qualifying as a REIT and was required generally to distribute at least 90% of its REIT taxable income.
- Derivative liabilities had a net fair value of approximately $7.0 million, and derivative agreements contained cross-default provisions. The company was not in breach of those provisions at quarter-end.
Subsequent to quarter-end, through July 31, 2014, the company raised an additional $25.3 million, acquired 13 properties for $346.9 million, and increased the revolving credit facility commitment to $415.0 million.
Investor Verification Items
- Verify the issuer-name continuity between American Realty Capital Global Trust, Inc. in this filing and Global Net Lease, Inc.
- Assess whether distributions are sustainable from recurring operating cash flow rather than equity or DRIP proceeds.
- Reconcile the reported $936.5 million cash balance with committed acquisitions, offering costs, distributions, and debt obligations.
- Review the quality, geographic concentration, and renewal terms of the 96-property portfolio, particularly the United Kingdom’s 40.3% share of annualized rental income.
- Monitor leverage, borrowing-base availability, covenant compliance, and the July 2016 credit-facility maturity, including extension conditions.
- Evaluate related-party acquisition, financing, management, and offering fees, including $180.3 million of cumulative offering costs through June 30, 2014.
- Review the transition to NAV-based share pricing and the absence of a public trading market.
- Confirm subsequent acquisitions, capital raises, and the increased credit-facility commitment disclosed through July 31, 2014.