Business Context and Reporting Period
American Realty Capital Global Trust, Inc. (the registrant identified in the filing; now associated with Global Net Lease, Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2014. The externally managed REIT acquires and operates primarily single-tenant, net-leased commercial properties in the United States and internationally.
- Portfolio at March 31, 2014: 50 properties, 3.6 million rentable square feet, 100% leased, with a 13.3-year weighted-average remaining lease term.
- Portfolio base purchase price: $495.8 million.
- Gross IPO proceeds through March 31, 2014: $685.4 million; 69.2 million common shares outstanding.
- The IPO was extended to April 20, 2015, subject to earlier termination if all offered shares are sold.
Financial Highlights
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenues | $7.5 million | $45,000 |
| Rental income | $7.3 million | $42,000 |
| Total expenses | $22.1 million | $34,000 |
| Operating loss | $14.6 million | $11,000 operating income |
| Net loss | $16.3 million | $2,000 |
| Net loss per share | $0.43 | Not meaningful |
| Cash flow from operations | $(16.9) million | $206,000 |
| Cash flow from investing | $(220.0) million | None reported |
| Cash flow from financing | $504.8 million | $5.9 million |
- Acquisition and transaction costs were $16.5 million, and depreciation and amortization was $4.4 million.
- Management reported FFO of $(12.0) million and modified FFO of $3.9 million. These are non-GAAP measures and exclude or adjust for acquisition costs and other items.
- Cash and cash equivalents increased to $280.4 million from $11.5 million at December 31, 2013.
- Total assets were $820.0 million, compared with $214.9 million at year-end 2013. Stockholders’ equity was $571.3 million.
- Distributions totaled approximately $4.0 million, including $2.0 million paid in cash and $1.9 million reinvested through the DRIP. The filing states that 100% of Q1 distributions were funded from common-stock issuance and DRIP proceeds, not operating cash flow.
Debt, Liquidity and Market Risk
- Mortgage notes payable were $171.0 million, with a 4.4% effective interest rate and a weighted-average maturity of January 2019.
- The revolving credit facility was increased from $50.0 million to $100.0 million in March 2014. Outstanding borrowings were $36.3 million, with reported unused borrowing capacity of $35.7 million. The facility matures in July 2016 and has two one-year extension options.
- Total liabilities were $248.7 million. The reported secured debt leverage ratio was 33.9% of real estate investments at acquisition.
- The company was in compliance with its credit-facility and mortgage covenants at March 31, 2014.
- Interest-rate and foreign-currency derivatives had a net liability fair value of approximately $4.8 million. A 100-basis-point increase in rates was estimated to reduce the fair value of fixed-rate debt by $3.0 million and increase annual interest expense on variable-rate debt by approximately $0.4 million.
Material Changes Versus the Prior Comparable Period
- The company acquired 13 properties during Q1 2014 for a base purchase price of approximately $311.0 million; no properties were acquired in Q1 2013.
- Revenue growth primarily reflects the expansion from one owned property during Q1 2013 to 50 properties at March 31, 2014.
- Net loss increased to $16.3 million from $2,000, principally because of $16.5 million of acquisition and transaction-related costs, higher depreciation and amortization, and increased interest expense.
- Common shares outstanding increased from 15.7 million at December 31, 2013 to 69.2 million at March 31, 2014. Subsequent to quarter-end, shares outstanding reached 90.0 million as of April 30, 2014, with total gross proceeds of $892.8 million.
- Mortgage debt increased from $76.9 million at December 31, 2013 to $171.0 million, and the credit facility had no outstanding balance at year-end 2013 compared with $36.3 million at quarter-end.
Outlook, Commentary, Risks and Unusual Items
- Management expected future acquisitions to be funded primarily with offering proceeds, mortgage or other debt, and additional equity or financing sources.
- Management stated that the portfolio is expected to cover operating expenses and monthly distributions as it matures, but distributions are not assured and may be reduced or suspended.
- The company’s limited operating history, externally managed structure, related-party fee arrangements, acquisition execution, tenant credit, interest rates, foreign exchange, credit-market conditions and REIT qualification were identified as material risks.
- Tenant and geographic concentration remained significant: the United Kingdom represented 56.6% of annualized rental income; Crown Crest Group Limited represented 14.8% and Aviva Life & Pensions UK Ltd. represented 10.3%.
- Future minimum base rent payments totaled $605.2 million, including $398.4 million after 2018, but lease termination, delinquency or non-renewal could materially affect revenue.
- The filing reported no material pending litigation, no material environmental claims known to the company, and no material off-balance-sheet arrangements.
- Related parties received or were entitled to acquisition, financing, property-management, strategic-advisory, offering and other fees. Q1 related-party operational fees and reimbursements incurred were $6.3 million.
- The filing does not provide formal earnings or distribution guidance beyond management’s general expectations regarding portfolio growth, liquidity and future operating cash flow.
Important Facts for Investors to Verify
- Whether operating cash flow becomes sufficient to fund distributions, given that Q1 distributions were funded entirely by equity issuance and DRIP proceeds.
- The sustainability of modified FFO after acquisition activity and related costs decline; MFFO is non-GAAP and not equivalent to cash available for distributions.
- Tenant concentration, United Kingdom exposure, lease expirations and the credit quality of major tenants.
- The impact of continued equity issuance, offering costs and dilution, including the increase to 90.0 million shares outstanding by April 30, 2014.
- Debt maturities, covenant compliance, variable-rate exposure and the company’s ability to refinance or extend the credit facility.
- Whether the company maintains REIT qualification and achieves its intended liquidity event or listing strategy.
- The filing’s subsequent-event acquisitions: 11 additional properties acquired or contracted through May 15, 2014, increasing the reported portfolio to 61 properties and approximately $577.7 million of base purchase price.