Business Context and Reporting Period
American Realty Capital Global Trust, Inc., now associated with Global Net Lease, Inc., filed this unaudited Form 10-Q for the three months ended March 31, 2013. The company was an externally managed, non-listed REIT in formation, conducting substantially all business through its operating partnership and intending to qualify as a REIT for the year ending December 31, 2013.
The company commenced its public offering in April 2012 and had acquired one property as of March 31, 2013: a 9,094-square-foot, fully leased McDonald’s property in Carlisle, United Kingdom, with approximately 11 years remaining on the lease. The property was acquired in October 2012 for approximately $2.6 million.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2013 | Comparable Period |
|---|---|---|
| Total revenues | $45,000 | $0 |
| Rental income | $42,000 | $0 |
| Operating income | $11,000 | $(1,000) |
| Net loss | $(2,000) | $(1,000) |
| Comprehensive income | $22,000 | $(1,000) |
| Cash flow from operations | $206,000 | $(17,000) |
| Cash flow from financing | $5.9 million | $17,000 |
| Cash balance at period end | $6.4 million | Not applicable |
| FFO | $28,000 | Not provided |
| MFFO | $40,000 | Not provided |
Depreciation and amortization was $30,000, general and administrative expense was $4,000, and interest expense was $13,000. The filing reports no meaningful basic or diluted loss per share because of the company’s early-stage capital structure and share count.
At March 31, 2013, total assets were $9.2 million, including $2.4 million of net real estate investments and $6.4 million of cash. Total liabilities were $3.7 million, including a $1.2 million mortgage note payable. Stockholders’ equity was $5.5 million, compared with a deficit of $796,000 at December 31, 2012.
The mortgage was fixed through an interest-rate swap, carried an effective interest rate of 4.1%, and matured in October 2017. The company reported compliance with its debt covenants. Secured debt represented approximately 45% of total real estate investments.
The company declared distributions at a rate of approximately $0.001945 per share per day based on a $10.00 share price. During the quarter, $49,000 of distributions were paid or reinvested, with $46,000 funded from operating cash flow and $3,000 through the distribution reinvestment plan.
Material Changes Versus the Prior Comparable Period
- The company owned no properties in the first quarter of 2012; therefore, 2013 rental revenue, operating expense reimbursements, depreciation, amortization, and interest expense primarily reflect the October 2012 acquisition.
- Operating cash flow improved from $(17,000) to $206,000, while financing cash flow increased to $5.9 million, primarily from common stock issuance.
- Common shares outstanding increased from 256,500 at December 31, 2012 to 1,028,161 at March 31, 2013. Gross IPO proceeds reached approximately $9.9 million.
- Stockholders’ equity improved from a deficit of $796,000 at December 31, 2012 to $5.5 million at March 31, 2013, principally because of equity issuance.
- The company incurred $1.3 million of offering costs during the quarter, including $763,000 of selling commissions and dealer-manager fees.
- Related-party strategic advisory fees of $36,000 were incurred. The Advisor absorbed approximately $157,000 of property operating and general and administrative expenses.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected to continue raising equity and using secured financings to acquire additional commercial properties, with an emphasis on single-tenant, net-leased assets. The company intended to begin pursuing a liquidity event, such as a listing, merger, sale, or similar transaction, within approximately three to five years after completion of the offering.
Subsequent to quarter-end, the company raised an additional $8.8 million from April 1 through April 30, 2013. On May 3, 2013, it acquired a 29,679-square-foot retail warehouse in Blackpool, United Kingdom, for $6.1 million. The property was fully leased to Wickes Building Supplies Limited, with approximately 11.4 years remaining on the lease, and was partially financed with a $3.0 million mortgage bearing fixed interest of 3.675%.
- The portfolio was highly concentrated: one tenant represented 100% of annualized rental income as of March 31, 2013. Tenant termination, delinquency, or non-renewal could materially reduce revenue.
- The company had a limited operating history, limited diversification, and a blind-pool offering, making future performance difficult to predict.
- Distributions were not assured and could be reduced or suspended. The company acknowledged that distributions may be funded from IPO proceeds, borrowings, or other sources if operating cash flow is insufficient.
- Although $46,000 of distributions was funded from operating cash flow, quarterly operating cash flow included a $63,000 increase in accounts payable and accrued expenses. Excluding that working-capital benefit, operating cash flow available for distributions would have been lower.
- The company was dependent on its Advisor and other affiliates for asset management, property management, financing, offering, accounting, and administrative services. Related-party compensation created potential conflicts of interest.
- The company faced interest-rate, foreign-currency, tenant-credit, real estate valuation, liquidity, financing, and REIT qualification risks.
- The company had no material pending litigation, no material off-balance-sheet arrangements, and no reported material environmental claims.
- Derivative positions included a foreign-currency swap with a $73,000 asset fair value and an interest-rate swap with a $22,000 liability fair value. The filing states that derivatives were used for hedging rather than speculation.
Most Important Facts for Investors to Verify
- Verify the transition from the company’s 2013 single-property, United Kingdom portfolio to its later diversified portfolio and current corporate identity.
- Assess tenant concentration, lease terms, rent escalations, tenant credit quality, and the performance of the McDonald’s and Wickes properties.
- Reconcile distributions with recurring operating cash flow, excluding temporary working-capital benefits and Advisor expense absorption.
- Review cumulative offering costs, related-party fees, capital-raising dilution, and the terms of the externally managed structure.
- Confirm debt maturities, interest-rate swaps, covenant compliance, leverage, and the financing of subsequent acquisitions.
- Evaluate whether the company qualified and continued to qualify as a REIT and whether its distribution policy was sustainable.