Business Context and Reporting Period
American Realty Capital Global Trust, Inc. (now known as Global Net Lease, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company was an externally managed, non-listed REIT in its initial acquisition and capital-raising phase and intended to qualify as a REIT for the year ending December 31, 2013.
The company acquired its first property in October 2012. At September 30, 2013, it owned nine single-tenant commercial properties totaling 458,523 rentable square feet. The portfolio was 100% leased, with a weighted remaining lease term of 10.7 years, and had a base purchase price of approximately $83.3 million. Six tenants each represented more than 10% of annualized rental income; the United Kingdom represented 71.7% of annualized rental income.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 |
|---|---|---|
| Total revenues | $1.232 million | $1.477 million |
| Rental income | $1.221 million | $1.463 million |
| Operating loss | $(2.759) million | $(4.008) million |
| Net loss | $(3.090) million | $(4.386) million |
| Net loss per share | $(0.44) | $(1.28) |
| Comprehensive loss | $(3.394) million | $(4.488) million |
| Net cash used in operating activities | Not separately provided | $(2.399) million |
| Net cash used in investing activities | Not separately provided | $(53.614) million |
| Net cash provided by financing activities | Not separately provided | $68.907 million |
- Significant nine-month expenses included $4.576 million of acquisition and transaction costs, $0.838 million of depreciation and amortization, and $0.413 million of interest expense.
- Cash and cash equivalents were $14.583 million at September 30, 2013, compared with $0.262 million at December 31, 2012.
- Total assets were $107.478 million, including $89.071 million of net real estate investments.
- Mortgage notes payable were $31.644 million, all associated with fixed-rate debt or interest-rate swaps. The secured debt leverage ratio was 38.0% of real estate investment cost.
- The company had no borrowings under its $50.0 million revolving credit facility at quarter-end. The facility included an accordion feature potentially increasing commitments to $750.0 million, subject to conditions.
- Stockholders’ equity was $67.276 million, compared with a deficit of $0.796 million at December 31, 2012, primarily reflecting substantial equity issuance.
- Management reported FFO of $(3.548) million and MFFO of $0.959 million for the nine months. These are non-GAAP measures and exclude or adjust for items including acquisition costs and depreciation.
Material Changes Versus the Prior Comparable Period
- The company had no properties, rental income, or acquisition activity during the comparable 2012 periods. The 2013 results therefore reflect the start-up of real estate operations and are not directly comparable.
- During the nine months ended September 30, 2013, the company acquired eight properties for a base purchase price of approximately $80.7 million, expanding the portfolio from one property at December 31, 2012 to nine properties at quarter-end.
- Shares outstanding increased from 256,500 at December 31, 2012 to 8.811 million at September 30, 2013. Gross IPO proceeds reached approximately $86.3 million.
- Total assets increased from $2.933 million to $107.478 million, while mortgage debt increased from $1.228 million to $31.644 million.
- Revenue increased from zero in the 2012 comparable periods to $1.232 million in the third quarter and $1.477 million for the nine-month period in 2013. The company nevertheless reported losses because acquisition costs and depreciation exceeded rental income.
- Operating cash flow was negative for the nine-month period. The company paid $1.373 million of distributions, including $0.546 million reinvested through the DRIP; management disclosed that 100% of the distributions were funded from common stock issuance and DRIP proceeds rather than operating cash flow.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected to continue raising equity and using secured financing to acquire additional properties. Subsequent to quarter-end, the company raised additional capital, acquired one property, and had 10 properties totaling 487,023 rentable square feet as of November 8, 2013.
- The company intended to pursue a diversified portfolio of single-tenant, net-leased commercial properties, primarily in the United States, with permitted international exposure. No formal earnings guidance was provided.
- Distributions were declared at a rate of $0.0019452055 per share per day based on a $10.00 share price, but distributions were not assured and could be reduced or suspended. The filing stated that the company could fund distributions from sources other than operations, including offering proceeds and borrowings.
- The company was dependent on continued equity issuance, property acquisitions, debt financing, tenant performance, and fee waivers or cost absorption by its Advisor while its portfolio matured.
- Material concentration risks included six tenants accounting for more than 10% each of annualized rental income and geographic concentration in the United Kingdom. The termination, delinquency, or non-renewal of leases could materially reduce revenue.
- The company was externally managed and had no employees. Affiliates received acquisition, financing, property-management, offering, strategic-advisory, and other fees, creating related-party and allocation conflicts.
- Foreign currency and interest-rate derivatives generated a net derivative liability of approximately $1.555 million at quarter-end. Other comprehensive loss included a $1.502 million unfavorable nine-month adjustment related to designated derivatives, partially offset by a $1.400 million cumulative translation gain.
- The company remained subject to risks associated with REIT qualification, illiquidity of its non-listed shares, limited operating history, blind-pool investing, tenant concentration, interest rates, credit-market disruptions, and potential dependence on capital markets.
- No material litigation or environmental claims were reported. Management stated that the company was in compliance with its debt and revolving-credit covenants, and disclosure controls were effective.
Facts Investors Should Verify
- Whether rental income and property-level cash flow become sufficient to fund distributions without relying on IPO proceeds, DRIP proceeds, additional debt, or Advisor support.
- The sustainability of tenant occupancy, lease expirations, tenant credit quality, and the high concentration of revenue in the United Kingdom and among six major tenants.
- The company’s ongoing acquisition costs, related-party fees, offering costs, and the effect of these items on GAAP earnings and cash available for distribution.
- Actual leverage after subsequent acquisitions, availability and covenant requirements under the revolving credit facility, and the timing of mortgage maturities.
- The economic impact of foreign currency exposure and derivative liabilities, including future amounts expected to be reclassified from accumulated other comprehensive income.
- Whether the company ultimately qualifies and remains qualified as a REIT and whether it achieves a future liquidity event or listing, given that its shares were not publicly traded.