Business Context and Reporting Period
American Realty Capital Global Trust, Inc. (now associated with Global Net Lease, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2012. The company commenced its IPO on April 20, 2012, broke escrow in October 2012 after exceeding the $2.0 million minimum offering, and acquired its first property in October 2012. It intended to elect REIT status beginning with the 2013 taxable year.
At year-end, the company owned one 9,094-square-foot property in Carlisle, United Kingdom. The property was 100% leased to McDonald's Property Company Limited with 11.2 years of remaining lease term and a March 2024 lease expiration.
Key Financial Metrics
| Metric | Fiscal 2012 | Prior comparable period |
|---|---|---|
| Revenue | $30,000 | $0 |
| Operating loss | $(403,000) | $(16,000) |
| Net loss | $(413,000) | $(16,000) |
| Net loss per share | $(6.43) | Not meaningful |
| Cash flow from operations | $(418,000) | $0 |
| Cash flow used in investing | $(1.357 million) | $0 |
| Cash flow from financing | $2.027 million | $0 |
| Cash balance | $262,000 | $0 |
| Total assets | $2.933 million | $559,000 |
| Mortgage note payable | $1.228 million | $0 |
| Total liabilities | $3.729 million | $375,000 |
| Stockholders' equity/(deficit) | $(796,000) | $184,000 |
Annualized net operating income for the property was approximately $225,000, with a base purchase price of $2.566 million and an 8.8% capitalization rate. The property generated annualized rental income of approximately $224,000, or $24.74 per square foot. Reported revenue and margins are not representative of stabilized operations because the property was acquired late in the year and the company remained in its start-up phase.
The company paid $1,000 of distributions in 2012. Cash flow from operations did not cover distributions; 100% of the distributions were funded from common-stock proceeds. The company reported fourth-quarter revenue of $30,000, net loss of $256,000, and cash used in operations of approximately $193,000. Fourth-quarter modified funds from operations, a non-GAAP measure, was $2,000.
Material Changes Versus the Prior Comparable Period
- The company moved from a pre-operating development stage to active real estate operations after acquiring its first property in October 2012.
- Real estate investments increased from $0 to $2.585 million, including $838,000 of net intangible lease assets.
- The company raised approximately $2.2 million of gross IPO proceeds and issued 256,500 shares at year-end, compared with 22,222 shares outstanding at December 31, 2011.
- The company incurred $228,000 of acquisition and transaction expenses, $183,000 of general and administrative expenses, and $21,000 of depreciation and amortization.
- The company added $1.228 million of fixed-rate mortgage debt maturing in October 2017. Secured debt was 47.9% of total real estate investments.
- Stockholders' equity declined to a deficit of $796,000, principally because offering costs and operating losses exceeded contributed capital.
- The company had $2.433 million of accounts payable and accrued expenses, including substantial amounts payable to affiliates and related to offering costs.
Guidance, Outlook, Risks and Unusual Items
Management planned to use additional equity proceeds and secured financing to acquire a diversified portfolio of single-tenant, net-leased commercial properties, primarily in the United States, with permitted allocations of up to 40% to Europe and up to 10% elsewhere internationally. Management expected future property operations and additional capital raising to support operating expenses, debt service, acquisitions and distributions.
The company had no public trading market for its shares and did not calculate NAV until acquiring at least $1.2 billion of portfolio assets. Share repurchases were subject to holding-period, pricing, capacity and board-approval restrictions. The company stated that it could amend, suspend or terminate the repurchase program and that distributions were not assured.
- Portfolio concentration was extreme: one property, one tenant and one geographic market accounted for 100% of rental income and leased square footage.
- Distribution funding was dependent on IPO proceeds, affiliate support and fee waivers because operating cash flow was negative.
- The company was dependent on its affiliated advisor, property manager, dealer manager and service providers, creating conflicts of interest and related-party fee exposure.
- The company had limited operating history, limited financing sources and a blind-pool offering, making future performance difficult to assess.
- The REIT election was prospective and not guaranteed. Failure to qualify could subject the company to corporate-level taxes and reduce funds available for distributions.
- The company used interest-rate and foreign-currency derivatives. Derivative liabilities totaled $53,000 at year-end, and accumulated other comprehensive loss included a $53,000 derivative fair-value adjustment.
- The mortgage was fixed through an interest-rate swap, but the company remained exposed to refinancing, tenant credit, foreign currency, interest-rate, liquidity, environmental and real-estate-market risks.
- As of December 31, 2012, the company reported no material pending legal proceedings and stated that it was in compliance with debt covenants.
Subsequent to year-end, through February 28, 2013, total gross capital raised increased to approximately $3.9 million, including $1.646 million raised in 2013, and shares outstanding increased to approximately 422,019. Effective January 1, 2013, the asset-management fee structure was modified to contemplate performance-based Class B operating-partnership units; none had been approved or issued as of the filing date.
Important Facts for Investors to Verify
- Confirm the company’s corporate name change and the relationship between this historical filing and Global Net Lease, Inc.
- Reconcile the significant year-end deficit in stockholders’ equity, negative operating cash flow and $2.433 million of accrued liabilities against cash of only $262,000.
- Review the source and sustainability of distributions, including the use of IPO proceeds and affiliate fee waivers.
- Assess the credit quality, lease terms, rent escalations and renewal prospects of McDonald's Property Company Limited, which provided 100% of rental income.
- Review the October 2017 mortgage maturity, debt covenants, refinancing requirements and derivative obligations.
- Evaluate offering costs, related-party fees, affiliate ownership and potential dilution from future equity or operating-partnership unit issuances.
- Verify the timing and continuing qualification of the company’s REIT election and the tax treatment of distributions.
- Consider the lack of a public market, NAV limitations and restrictions on share repurchases when assessing liquidity and valuation.