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, 2013. The filing describes a newly operating, externally managed non-traded REIT focused on single-tenant, net-leased commercial properties. The company intended to qualify as a REIT beginning with the taxable year ending December 31, 2013.
As of June 30, 2013, the company owned three properties in the United Kingdom totaling 103,605 rentable square feet. The properties were 100% leased, with a weighted remaining lease term of 12.9 years. The portfolio consisted of McDonald's, Wickes Building Supplies, and Everything Everywhere properties.
Financial Highlights
| Metric | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Total revenue | $0.2 million | $0.245 million |
| Operating loss | $(1.260) million | $(1.249) million |
| Net loss | $(1.294) million | $(1.296) million |
| Net loss per share | $(0.47) | $(0.81) |
| Net cash used in operating activities | Not separately presented | $(1.083) million |
- Revenue was primarily rental income of $0.2 million for the quarter and $0.242 million for the six-month period, plus $3,000 of operating expense reimbursements for the six-month period.
- Acquisition and transaction-related expenses were $1.320 million in both the quarter and six-month period, materially exceeding reported rental revenue.
- Depreciation and amortization was $124,000 for the quarter and $154,000 for the six-month period. Interest expense was $52,000 and $65,000, respectively.
- Six-month modified funds from operations, a non-GAAP measure, was $185,000, including adjustments for acquisition expenses, above-market lease amortization, and foreign-currency gains. The filing cautions that MFFO is not equivalent to GAAP earnings or operating cash flow.
Balance Sheet, Debt, Liquidity and Cash Flow
- Total assets were $50.861 million at June 30, 2013, compared with $2.933 million at December 31, 2012. Net real estate investments increased to $20.320 million from $2.555 million.
- Cash was $28.071 million, compared with $262,000 at year-end 2012. The company raised $45.932 million from common stock issuance during the six months, partially offset by $6.531 million of offering costs.
- Mortgage notes payable totaled $10.202 million, up from $1.228 million. The debt had a weighted effective interest rate of approximately 3.9%, was fixed through interest-rate swaps, and matured between October 2017 and June 2018.
- Management reported compliance with debt covenants. Scheduled mortgage principal payments were $1.157 million in 2017 and $9.045 million thereafter.
- Investing cash outflows were $9.546 million, including $9.046 million for real estate acquisitions and a $500,000 acquisition deposit.
- Financing cash inflows were $38.610 million. Cash increased by $27.981 million before a $172,000 unfavorable foreign-exchange effect.
- Six-month distributions totaled $338,000, including $233,000 paid in cash and $105,000 reinvested through the DRIP. The filing states that 100% of distributions for the six-month period was funded from common-stock issuance and DRIP proceeds rather than operating cash flow.
Material Changes Versus the Prior Comparable Period
- The company had no properties and no rental income in the three- or six-month periods ended June 30, 2012. It acquired three properties between October 2012 and June 2013 and began generating rental revenue.
- Total assets increased by approximately $47.9 million and common shares outstanding increased from 256,500 at December 31, 2012 to approximately 5.0 million at June 30, 2013.
- Mortgage debt increased by approximately $9.0 million to fund acquisitions.
- Reported losses increased substantially because of acquisition expenses, depreciation and amortization, and interest expense associated with the newly acquired portfolio.
- Offering activity expanded significantly: cumulative gross IPO proceeds reached $48.7 million at June 30, 2013, while cumulative offering costs were $8.2 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected to continue raising equity and using secured financing to acquire additional properties. The company stated that future portfolio cash flows were expected to cover operating expenses and monthly distributions as the portfolio matured.
- On July 25, 2013, the company entered into a JPMorgan credit facility permitting borrowings of up to $50.0 million, with an accordion feature potentially increasing commitments to $750.0 million. The initial maturity date was July 25, 2016, subject to two one-year extension options.
- From July 1 through July 31, 2013, the company raised an additional $14.269 million, increasing total gross capital raised to $63.002 million and shares outstanding to approximately 6.4 million.
- During the same subsequent period, the company acquired two additional properties, increasing the portfolio to five properties, 211,013 square feet, and a stated aggregate base purchase price of $44.276 million.
- Distributions were not assured and could be reduced or suspended. The company acknowledged that distributions funded from offering proceeds represent capital that otherwise could be invested in properties.
- Material risks included limited operating history, concentration in a small number of properties and tenants, tenant lease termination or non-renewal, dependence on affiliated managers, conflicts of interest, illiquidity of the shares, acquisition execution risk, interest-rate and foreign-currency exposure, and the risk of failing to qualify as a REIT.
- Everything Everywhere represented 61.7% of annualized rental income, while Wickes Building Supplies represented 26.6% and McDonald's represented 11.7%, creating significant tenant concentration.
- The company used interest-rate swaps and foreign-currency swaps for hedging. Derivative assets had a net fair value of $397,000 at June 30, 2013, with $450,000 of related gains recorded in other comprehensive income for the six-month period.
- No material litigation was pending, no material environmental claim was identified, and management concluded that disclosure controls and procedures were effective.
Most Important Facts to Verify
- Confirm the corporate-name continuity between the filing’s “American Realty Capital Global Trust, Inc.” and the requested company name, Global Net Lease, Inc.
- Verify whether distributions remain supported by operating cash flow rather than equity issuance, DRIP proceeds, borrowings, or fee waivers.
- Assess tenant concentration, particularly the reliance on Everything Everywhere and the United Kingdom portfolio.
- Review the terms, covenants, hedging arrangements, and refinancing requirements of the mortgage debt and subsequent JPMorgan credit facility.
- Reconcile acquisition costs, offering costs, related-party fees, and advisor expense absorptions when evaluating sustainable earnings and MFFO.
- Verify the company’s continued REIT qualification, future liquidity strategy, and ability to create a diversified portfolio without excessive leverage or dilution.