Attached files

file filename
EX-32.2 - SECTION 906 CFO CERTIFICATION - Griffin Capital Essential Asset REIT, Inc.d338081dex322.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - Griffin Capital Essential Asset REIT, Inc.d338081dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Griffin Capital Essential Asset REIT, Inc.d338081dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Griffin Capital Essential Asset REIT, Inc.d338081dex312.htm
EXCEL - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.Financial_Report.xls
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R1.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R6.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R7.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R5.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R3.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R2.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R8.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R4.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R9.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R10.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R11.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R13.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R14.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R15.htm
XML - IDEA: XBRL DOCUMENT - Griffin Capital Essential Asset REIT, Inc.R12.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

March 31, 2012 For the quarterly period ended March 31, 2012

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number: 000-54377

 

 

Griffin Capital Net Lease REIT, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Maryland   26-3335705

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

2121 Rosecrans Avenue, Suite 3321

El Segundo, California 90245

(Address of principal executive offices)

(310) 469-6100

(Registrant’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer   ¨    Accelerated filer   ¨

Non-accelerated filer

  x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 8, 2012: 7,878,958, $0.001 par value per share.

 

 

 


Table of Contents

FORM 10-Q

GRIFFIN CAPITAL NET LEASE REIT, INC.

TABLE OF CONTENTS

 

          Page
No.
 

PART I.

   FINANCIAL INFORMATION   
  

Cautionary Note Regarding Forward-Looking Statements

     3   
Item 1.   

Financial Statements:

  
  

Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

     4   
  

Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2012 and 2011 (unaudited)

     5   
  

Consolidated Statements of Equity for the Year Ended December 31, 2011 and the Three Months Ended March 31, 2012 (unaudited)

     6   
  

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited)

     7   
  

Notes to Consolidated Financial Statements (unaudited)

     8   
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     30   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     39   
Item 4.   

Controls and Procedures

     40   
PART II.   

OTHER INFORMATION

  
Item 1.   

Legal Proceedings

     40   
Item 1A.   

Risk Factors

     40   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     41   
Item 3.   

Defaults Upon Senior Securities

     42   
Item 4.   

Mine Safety Disclosures

     42   
Item 5.   

Other Information

     42   
Item 6.   

Exhibits

     42   
SIGNATURES      44   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Griffin Capital Net Lease REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include, in particular, statements about our plans, strategies, and prospects and are subject to risks, uncertainties, and other factors. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, our ability to find suitable investment properties, and our ability to be in compliance with certain debt covenants, may be significantly hindered. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission. We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

See the risk factors identified in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission, and Part II Item 1A in this Form 10-Q for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.

 

3


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

CONSOLIDATED BALANCE SHEETS

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        
ASSETS     

Cash and cash equivalents

   $ 3,457,502      $ 5,429,440   

Restricted cash

     2,052,231        1,879,865   

Due from affiliates, net

     —          459,521   

Real estate:

    

Land

     36,424,019        27,003,796   

Building and improvements

     159,312,570        110,929,358   

Tenant origination and absorption cost

     47,534,398        34,400,671   
  

 

 

   

 

 

 

Total real estate

     243,270,987        172,333,825   

Less: accumulated depreciation and amortization

     (11,361,173     (9,471,264
  

 

 

   

 

 

 

Total real estate, net

     231,909,814        162,862,561   

Above market leases, net

     6,700,517        1,515,938   

Deferred rent

     1,755,555        1,483,686   

Deferred financing costs, net

     1,614,989        1,012,677   

Prepaid expenses and other assets

     1,050,198        1,301,414   
  

 

 

   

 

 

 

Total assets

   $ 248,540,806      $ 175,945,102   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Mortgage payable, plus unamortized premium of $336,345 and $357,815, respectively

   $ 59,717,310      $ 60,032,962   

Credit Facility

     86,220,000        35,395,985   

Mezzanine Loan

     10,936,783        —     

Restricted reserves

     933,413        761,047   

Accounts payable and other liabilities

     2,010,510        1,238,340   

Distributions payable

     448,731        412,221   

Due to affiliates, net

     2,356,882        —     

Below market leases, net

     9,066,991        9,289,407   
  

 

 

   

 

 

 

Total liabilities

     171,690,620        107,129,962   
  

 

 

   

 

 

 

Commitments and contingencies (Note 7)

    

Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of March 31, 2012 and December 31, 2011

     4,886,686        4,886,686   

Common stock subject to redemption

     1,511,339        1,070,490   

Stockholders’ equity:

    

Preferred Stock, $0.001 par value; 200,000,000 shares authorized; no shares outstanding, as of March 31, 2012 and December 31, 2011

     —          —     

Common Stock, $0.001 par value; 700,000,000 shares authorized; 7,143,670 and 5,667,551 shares outstanding, as of March 31, 2012 and December 31, 2011, respectively

     71,348        56,611   

Additional paid-in capital

     60,231,195        47,872,560   

Cumulative distributions

     (4,148,367     (3,085,438

Accumulated deficit

     (5,800,756     (3,772,346
  

 

 

   

 

 

 

Total stockholders’ equity

     50,353,420        41,071,387   

Noncontrolling interests

     20,098,741        21,786,577   
  

 

 

   

 

 

 

Total equity

     70,452,161        62,857,964   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 248,540,806      $ 175,945,102   
  

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

 

     Three Months Ended March 31,  
     2012     2011  

Revenue:

    

Rental income

   $ 4,396,478      $ 2,454,019   

Property expense recovery

     598,107        339,957   

Interest income

     197        350   
  

 

 

   

 

 

 

Total revenue

     4,994,782        2,794,326   
  

 

 

   

 

 

 

Expenses:

    

Asset management fees to affiliates

     367,319        204,212   

Property management fees to affiliates

     126,862        74,472   

Property operating expense

     25,128        —     

Property tax expense

     562,456        339,957   

Acquisition fees and expenses to non- affiliates

     681,555        262   

Acquisition fees and expenses to affiliates

     2,286,000        —     

General and administrative expenses

     494,410        370,135   

Depreciation and amortization

     1,889,909        1,034,076   

Interest expense

     1,607,160        1,182,542   
  

 

 

   

 

 

 

Total expenses

     8,040,799        3,205,656   
  

 

 

   

 

 

 

Net loss

     (3,046,017     (411,330

Distributions to redeemable noncontrolling interests attributable to common stockholders

     (57,637     —     
  

 

 

   

 

 

 

Net loss including distributions to redeemable noncontrolling interests attributable to common stockholders

     (3,103,654     (411,330
  

 

 

   

 

 

 

Net loss attributable to noncontrolling interests

     (1,075,244     (242,685
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (2,028,410   $ (168,645
  

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.32   $ (0.08
  

 

 

   

 

 

 

Weighted average number of common shares outstanding, basic and diluted

     6,333,828        2,197,250   
  

 

 

   

 

 

 

Comprehensive loss

   $ (3,046,017   $ (411,330
  

 

 

   

 

 

 

Distributions declared per common share

   $ 0.17      $ 0.17   
  

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

CONSOLIDATED STATEMENTS OF EQUITY

 

    Common Stock     Additional
Paid-In
Capital
    Cumulative
Distributions
    Accumulated
Deficit
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 
    Shares     Amount              

BALANCE December 31, 2010

    1,845,339      $ 18,438      $ 15,441,289      $ (713,332   $ (1,236,878   $ 13,509,517      $ 18,577,800      $ 32,087,317   

Gross proceeds from issuance of common stock

    3,738,535        37,384        37,347,981        —          —          37,385,365        —          37,385,365   

Discount on issuance of common stock

    —          —          (166,710     —          —          (166,710     —          (166,710

Offering costs including dealer manager fees to affiliates

    —          —          (4,636,711     —          —          (4,636,711     —          (4,636,711

Distributions to common stockholders

    —          —          —          (1,463,176     —          (1,463,176     —          (1,463,176

Issuance of shares for distribution reinvestment plan

    95,677        909        908,021        (908,930     —          —          —          —     

Repurchase of common stock

    (12,000     (120     (112,380     —          —          (112,500     —          (112,500

Additions to common stock subject to redemption

    —          —          (908,930     —          —          (908,930     —          (908,930

Contribution of noncontrolling interests

    —          —          —          —          —          —          7,788,990        7,788,990   

Distributions for noncontrolling interests

    —          —          —          —          —          —          (2,135,649     (2,135,649

Distributions for noncontrolling interests subject to redemption

    —          —          —          —          —          —          (169,775     (169,775

Net loss

    —          —          —          —          (2,535,468     (2,535,468     (2,274,789     (4,810,257
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE December 31, 2011

    5,667,551        56,611        47,872,560        (3,085,438     (3,772,346     41,071,387        21,786,577        62,857,964   

Gross proceeds from issuance of common stock

    1,428,530        14,285        14,270,988        —          —          14,285,273        —          14,285,273   

Discount on issuance of common stock

    —          —          (28,681     —          —          (28,681     —          (28,681

Offering costs including dealer manager fees to affiliates

    —          —          (1,873,970     —          —          (1,873,970     —          (1,873,970

Distributions to common stockholders

    —          —          —          (601,330     —          (601,330     —          (601,330

Issuance of shares for distribution reinvestment plan

    48,589        462        461,137        (461,599     —          —          —          —     

Repurchase of common stock

    (1,000     (10     (9,240     —          —          (9,250     —          (9,250

Additions to common stock subject to redemption

    —          —          (461,599     —          —          (461,599     —          (461,599

Contribution of noncontrolling interests

    —          —          —          —          —          —          —          —     

Distributions for noncontrolling interests

    —          —          —          —          —          —          (581,085     (581,085

Distributions for noncontrolling interests subject to redemption

    —          —          —          —          —          —          (31,507     (31,507

Net loss

    —          —          —          —          (2,028,410     (2,028,410     (1,075,244     (3,103,654
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE March 31, 2012

    7,143,670      $ 71,348      $ 60,231,195      $ (4,148,367   $ (5,800,756   $ 50,353,420      $ 20,098,741      $ 70,452,161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

6


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     Three Months Ended March 31,  
     2012     2011  

Operating Activities:

    

Net loss

   $ (3,046,017   $ (411,330

Adjustments to reconcile net loss to net cash provided by operations:

    

Depreciation of building and building improvements

     946,799        609,043   

Amortization of intangible assets

     943,110        425,033   

Amortization of above and below market leases

     (143,152     33,894   

Amortization of deferring financing costs

     190,195        172,323   

Amortization of debt premium

     (21,470     —     

Deferred rent

     (271,869     (140,324

Change in operating assets and liabilities:

    

Due from affiliates, net

     459,521        —     

Prepaid expenses and other assets

     251,216        (81,538

Accounts payable and other liabilities

     751,420        (58,079

Due to affiliates, net

     2,356,882        497,579   
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,416,635        1,046,601   
  

 

 

   

 

 

 

Investing Activities:

    

Acquisition of properties, including reserves

     (76,200,000     —     

Payments for construction-in-progress

     (1,005     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (76,201,005     —     
  

 

 

   

 

 

 

Financing Activities:

    

Proceeds from borrowings

     72,224,015        —     

Principal payoff of secured indebtedness

     (10,463,217     (6,588,797

Principal amortization payments on secured indebtedness

     (294,182     (138,065

Deferred financing costs

     (792,507     —     

Issuance of common stock, net

     12,382,622        6,253,730   

Repurchase of common stock

     (9,250     —     

Distributions to noncontrolling interests

     (672,065     (527,321

Distributions to common stockholders

     (562,984     (212,667
  

 

 

   

 

 

 

Net cash provided by financing activities

     71,812,432        (1,213,120
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,971,938     (166,519

Cash and cash equivalents at the beginning of the period

     5,429,440      $ 1,636,072   
  

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 3,457,502      $ 1,469,553   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Cash paid for interest

   $ 908,948      $ 675,929   

Supplemental Disclosures of Significant Non-cash Transactions:

    

Decrease in distributions payable to noncontrolling interests

   $ (1,836   $ —     

Increase in distributions payable to common stockholders

   $ 38,346      $ 21,494   

Distributions to redeemable noncontrolling interests attributable to common stockholders

   $ 57,637        —     

Common stock issued pursuant to the distribution reinvestment plan

   $ 461,599      $ 131,271   

Redeemable common stock payable

   $ 30,000        —     

See accompanying notes.

 

7


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

1. Organization

Griffin Capital Net Lease REIT, Inc. (formerly known as The GC Net Lease REIT, Inc.), a Maryland corporation (the “Company”), was formed on August 28, 2008 under the Maryland General Corporation Law. The Company was organized primarily with the purpose of acquiring single tenant net lease properties, and expects to use a substantial amount of the net proceeds from the Public Offering (as defined below) to invest in these properties. The Company satisfied requisite financial and non-financial requirements and elected to be taxed as a REIT for the taxable year ended December 31, 2011. The Company’s year end is December 31.

Griffin Capital Corporation, a California corporation (the “Sponsor”), is the sponsor of the Company’s Public Offering. The Company’s Sponsor was formed in 1995 to engage principally in acquiring and developing office and industrial properties.

The GC Net Lease REIT Advisor, LLC, a Delaware limited liability company (the “Advisor”), was formed on August 27, 2008. The Sponsor is the sole member of the Advisor. On November 6, 2009, the Company entered into its amended and restated advisory agreement for the Public Offering, as amended. On November 9, 2010, the Company entered into its second amended and restated advisory agreement for the Public Offering (the “Second Amended and Restated Advisory Agreement”), which states that the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company. The officers of the Advisor are also officers of the Sponsor. The Second Amended and Restated Advisory Agreement has a one-year term, and it may be renewed for an unlimited number of successive one-year periods.

On August 28, 2008, the Advisor purchased 100 shares of common stock for $1,000 and became the Company’s initial stockholder. The Company’s Third Articles of Amendment and Restatement, as amended, authorize 700,000,000 shares of common stock with a par value of $0.001 and 200,000,000 shares of preferred stock with a par value of $0.001. On February 20, 2009, the Company began to offer a maximum of 10,000,000 shares of common stock, which included shares for sale pursuant to the distribution reinvestment plan, pursuant to a private placement offering to accredited investors (collectively, the “Private Offering”). Simultaneously with the Private Offering, the Company undertook the process of registering an offering of a maximum of 82,500,000 shares of common stock, consisting of 75,000,000 shares for sale to the public at $10.00 per share (the “Primary Public Offering”) and 7,500,000 shares for sale pursuant to the distribution reinvestment plan at $9.50 per share (collectively, the “Public Offering”). On November 6, 2009, the Securities and Exchange Commission (the “SEC”) declared the Public Offering effective, and the Company terminated the Private Offering with the commencement of the Public Offering. The term of the Public Offering was two years with an initial termination date of November 6, 2011. The Company’s board of directors had the ability to extend the offering for one year. On September 14, 2011, the Company’s board of directors extended the termination date of the Public Offering from November 6, 2011 until November 6, 2012, which is three years after the effective date of the Public Offering. The Company’s board of directors reserves the right to terminate the Public Offering at any time prior to November 6, 2012. As of March 31, 2012 and December 31, 2011, the Company had 7,143,670 and 5,667,551 shares outstanding, respectively, under the Private Offering and the Public Offering, including shares issued pursuant to the distribution reinvestment plan. As of March 31, 2012 and December 31, 2011, the Company had $1.5 million and $1.1 million in shares classified as common stock subject to redemption, respectively. (See Note 7, Share Redemption Program).

Griffin Capital Securities, Inc. (the “Dealer Manager”) is one of the Company’s affiliates. The Dealer Manager is responsible for marketing the Company’s shares being offered pursuant to the Public Offering. On October 27, 2009, the Company and the Dealer Manager entered into a dealer manager agreement for the Public Offering. The dealer manager agreement may be terminated by either party upon prior written notice.

 

8


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

The GC Net Lease REIT Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”), was formed on August 29, 2008. On December 26, 2008, the Advisor purchased a 99% limited partnership interest in the Operating Partnership for $200,000, and on December 26, 2008, the Company contributed the initial $1,000 capital contribution, received from the Advisor, to the Operating Partnership in exchange for a 1% general partner interest. As of March 31, 2012, the Company owned approximately 64% of the limited partnership units of the Operating Partnership, and, as a result of the contribution of five properties to the Company, the Sponsor and certain of its affiliates, including the Company’s Chairman and President, Kevin A. Shields, the Company’s Vice President — Acquisitions, Don Pescara and David C. Rupert, the President of the Sponsor, owned approximately 24% of the limited partnership units of the Operating Partnership. The remaining approximately 12% of the limited partnership units were owned by third parties. It is anticipated that the Operating Partnership will own, directly or indirectly, all of the properties acquired. The Operating Partnership will conduct certain activities through the Company’s taxable REIT subsidiary, The GC Net Lease REIT TRS, Inc., a Delaware corporation (the “TRS”) formed on September 2, 2008, which is a wholly-owned subsidiary of the Operating Partnership.

The Company’s property manager is The GC Net Lease REIT Property Management, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on August 28, 2008 to manage the Company’s properties. The Property Manager derives substantially all of its income from the property management services it performs for the Company.

 

2. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with principles generally accepted in the United States (“GAAP”) for interim financial information as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the Securities Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of normal recurring nature and necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim period. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The unaudited consolidated financial statements include accounts of the Company and the Operating Partnership. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were no restrictions on the use of the Company’s operating cash balance as of March 31, 2012 and December 31, 2011.

The Company maintains cash accounts with major financial institutions. The cash balances consist of business checking accounts and money market accounts. These accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 at each institution. At times, the balances in these accounts may exceed the insured amounts. The Company has not experienced any losses with respect to cash balances in excess of government-provided insurance. Management believes there was no significant concentration of credit risk with respect to these cash balances as of March 31, 2012 and December 31, 2011.

 

9


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Restricted Cash

In conjunction with the acquisition and contribution of certain real estate assets (see Note 3, Real Estate), the Company assumed certain reserves to be used for specific property improvements, taxes and insurance. As of March 31, 2012 and December 31, 2011, the balance of these reserves, included on the consolidated balance sheets as restricted cash, was $2.1 million and $1.9 million, respectively.

Real Estate

Purchase Price Allocation

The Company applies the provisions in ASC 805-10, “Business Combinations,” to account for business combinations. In accordance with the provisions of ASC 805-10, the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their fair values as of the acquisition date, on an “as if vacant” basis. Further, the Company recognizes the fair value of assets acquired, liabilities assumed and any noncontrolling interest in acquisitions of less than a 100% interest when the acquisition constitutes a change in control of the acquired entity. The accounting provisions have also established that acquisition-related costs and restructuring costs are considered separate and not a component of a business combination and, therefore, are expensed as incurred. Acquisition-related costs for the three months ended March 31, 2012 totaled $3.0 million of which $0.03 million related to potential future acquisitions.

Acquired in-place leases are valued as above-market or below-market as of the date of acquisition. The valuation is measured based on the present value (using an interest rate, which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management’s estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases, taking into consideration below-market extension options for below-market leases. In addition, renewal options are considered and will be included in the valuation of in-place leases if (1) it is likely that the tenant will exercise the option, and (2) the renewal rent is considered to be sufficiently below a fair market rental rate at the time of renewal. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.

The aggregate fair value of in-place leases includes direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals, which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated using methods similar to those used in independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are considered intangible lease assets and are included with real estate assets on the consolidated balance sheets. The intangible lease assets are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, including real estate taxes, insurance, and other operating expenses, pursuant to the in-place leases over a market lease-up period for a similar lease. Customer relationships are valued based on management’s evaluation of certain characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extent of the Company’s existing business relationships with tenants, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. These intangibles will be included in intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining term of the respective leases.

The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.

 

10


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Depreciation

The purchase price of real estate acquired and costs related to development, construction, and property improvements will be capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of the real estate asset and will be expensed as incurred. The Company considers the period of future benefit of an asset to determine the appropriate useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:

 

Buildings    25-40 years
Building Improvements    5-20 years
Land Improvements    15-25 years
Tenant Improvements    Shorter of estimated useful life or remaining contractual lease term
Tenant origination and absorption cost    Remaining contractual lease term
In-place lease valuation    Remaining contractual lease term with consideration as to below-market extension options for below-market leases

Impairment of Real Estate and Related Intangible Assets and Liabilities

The Company will continually monitor events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of the assets and the eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment loss to the extent the carrying value exceeds the net present value of the estimated future cash flows of the asset.

Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of March 31, 2012 and December 31, 2011, there were no impairment indicators present that would have required the Company to record an impairment loss related to the real estate assets or intangible assets and liabilities.

Revenue Recognition

Leases associated with the acquisition and contribution of certain real estate assets (see Note 3, Real Estate), have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. As of March 31, 2012, there were no leases that provide for contingent rental income.

During the three months ended March 31, 2012 and 2011, the Company recognized deferred rent from tenants of $0.3 million and $0.1 million, respectively. As of March 31, 2012 and December 31, 2011, the cumulative deferred rent balance was $1.8 million and $1.5 million, respectively, and is included in deferred rent on the consolidated balance sheets.

Each month, the Company records an estimate for real estate tax reimbursement and, in certain cases, common area maintenance (“CAM”) for building costs that the Company pays on behalf of the tenant. At the end of the calendar year the Company reconciles the estimated real estate tax and CAM reimbursement to the actual amount incurred and adjusts the property tax and CAM recovery to reflect the actual amount incurred.

Organizational and Offering Costs

The initial organizational and offering costs of the Private Offering and the Public Offering were paid by the Sponsor, on behalf of the Advisor, for the Company and were reimbursed from the proceeds of the Private Offering and the Public Offering. Organizational and offering costs consist of all expenses (other than sales commissions and dealer manager fees) to be paid by the Company in connection with the Public Offering, including legal, accounting, printing, mailing and filing fees, charges from the escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse the Advisor for all marketing-related costs and expenses, such as salaries and direct expenses of employees of the

 

11


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Advisor and its affiliates in connection with registering and marketing the Company’s shares; (ii) technology costs associated with the offering of the Company’s shares; (iii) costs of conducting training and education meetings; (iv) costs of attending seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses.

The initial advisory agreement required the Company to pay directly or reimburse the Advisor for all organizational and offering expenses related to the Private Offering. Pursuant to the Second Amended and Restated Advisory Agreement, the Company will reimburse the Advisor for organizational and offering expenses incurred in connection with the Primary Public Offering in an amount not to exceed 3.5% of gross offering proceeds of the terminated or completed Primary Public Offering for issuer costs (excluding sales commissions and dealer manager fees). In addition, pursuant to the Second Amended and Restated Advisory Agreement, organization and offering expenses (including sales commissions and dealer manager fees and non-accountable due diligence expense allowance but excluding acquisition fees and expenses) may not exceed 15% of gross offering proceeds of the terminated or completed Public Offering. If the organization and offering expenses exceed such limits discussed above, within 60 days after the end of the month in which the Public Offering terminates or is completed, the Advisor must reimburse the Company for any excess amounts. As long as the Company is subject to the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (“NASAA REIT Guidelines”), such limitations discussed above will also apply to any future public offerings. The Company continues to monitor both the 3.5% and 15% limitations and expects to be liable to the Advisor for all organizational and offering costs advanced on its behalf as additional offering proceeds are raised. (See Note 6, Related Party Transactions.)

On May 6, 2009, the Company sold the minimum amount of shares and thereby became obligated to the Advisor for organizational and offering costs incurred on the Company’s behalf. Organizational and offering costs incurred, including those due to the Advisor, for the combined Private Offering and Public Offering are as follows:

 

     March 31, 2012     December 31, 2011  

Cumulative offering costs- Private and Public Offerings

   $ 9,486,933      $ 7,944,029   
  

 

 

   

 

 

 

Cumulative organizational costs- Private and Public Offerings

   $ 375,132      $ 373,953   
  

 

 

   

 

 

 

Organizational and offering costs previously advanced by the Advisor

   $ 162,191      $ 26,735   

Adjustment to organizational and offering costs pursuant to limitations the Advisor is subject to

     (355,130     (709,876
  

 

 

   

 

 

 

Net due from Advisor

   $ (192,939   $ (683,141
  

 

 

   

 

 

 

As of March 31, 2012, organizational and offering costs incurred exceeded the limitations for organizational and offering costs the Advisor is subject to, as set forth in the Second Amended and Restated Advisory Agreement discussed above, by $0.4 million. Therefore, if the Company terminated its Public Offering on March 31, 2012, based on the gross proceeds raised in the Public Offering to date of $67.2 million and organizational and offering costs incurred in excess of the limitations discussed above, the Company’s liability to the Advisor for advanced costs would be reduced by the excess. As a result, the amount of organizational and offering costs that exceeded the limitations was applied against the amount due from the Company to the Advisor, which is reflected in the “Due to Affiliates” balance on the consolidated balance sheets.

Deferred Financing Costs

Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized to, and included as a component of, interest expense over the terms of the respective financing agreements. The Company’s deferred financing costs balance as of March 31, 2012 related to the Credit Facility and Mezzanine Loan discussed in Note 4, Debt. As of March 31, 2012 and December 31, 2011, the Company’s deferred financing costs, net of amortization, were $1.6 million and $1.0 million, respectively.

Noncontrolling Interests

Due to the Company’s control through the general partner interest in the Operating Partnership and the limited rights of the limited partners, the Operating Partnership, including its wholly-owned subsidiary, is consolidated with the Company and the limited partners’ interests are reflected as noncontrolling interests on the accompanying consolidated balance sheets.

 

12


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

The Company reports noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from total stockholders’ equity. Also, any acquisitions or dispositions of noncontrolling interests that do not result in a change of control are accounted for as equity transactions. Further, the Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated upon a change in control. Net income (loss) allocated to noncontrolling interests is shown as a reduction to net income (loss) in calculating net income (loss) available to common stockholders. Any future purchase or sale of an interest in an entity that results in a change of control may have a material impact on the financial statements, as the interest in the entity will be recognized at fair value with gains and losses included in net income (loss).

If noncontrolling interests are determined to be redeemable, they are classified as temporary equity and reported at their redemption value as of the balance sheet date. Thus, noncontrolling interests determined to be redeemable were classified as temporary equity. (See Note 5, Noncontrolling Interests.)

Share-Based Compensation

On February 12, 2009, the Company adopted an Employee and Director Long-Term Incentive Plan (the “Plan”) pursuant to which the Company may issue stock-based awards to its directors and full-time employees (should the Company ever have employees), executive officers and full-time employees of the Advisor and its affiliate entities that provide services to the Company, and certain consultants who provide significant services to the Company. The term of the Plan is 10 years and the total number of shares of common stock reserved for issuance under the Plan is 10% of the outstanding shares of stock at any time. Awards granted under the Plan may consist of stock options, restricted stock, stock appreciation rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period. No awards have been granted under the Plan as of March 31, 2012.

Fair Value Measurements

The framework established by the FASB for measuring fair value in generally accepted accounting principles for both financial and nonfinancial assets and liabilities provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

 

   

Level 1. Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets;

 

   

Level 2. Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

   

Level 3. Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

When available, the Company utilizes quoted market prices for similar assets or liabilities from independent third-party sources to determine fair value. Financial instruments as of March 31, 2012, consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and other accrued expenses, mortgage payable, and the Credit Facility and the Mezzanine Loan, as defined in Note 4, Debt. Pursuant to the terms of the Credit Facility, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants, one of which is a varying interest rate covenant that would require the Operating Partnership to effect an interest rate hedge if the minimum varying debt to total debt requirement is not satisfied. The Company has an interest rate cap agreement in effect for a notional amount of $50.0 million, which expires on June 29, 2012. Subsequent to the acquisitions of the AT&T and Westinghouse properties, the Company purchased an interest rate cap agreement for a notional amount of $60.0 million, expiring on December 31, 2012. (See Note 4, Debt.)

Other than the mortgage debt discussed in Note 4, Debt, the amounts of the financial instruments presented in the consolidated financial statements substantially approximate their fair value as of March 31, 2012 and December 31, 2011. The fair value of the Plainfield, Emporia Partners, and LTI mortgage debt is estimated using borrowing rates available to the Company for debt instruments with similar terms and maturities. The Company determined that the mortgage debt valuation in its entirety is classified in Level 3 of the fair value hierarchy and there were no transfers into and out of fair value measurement levels during the three months ended March 31, 2012 and the year ended December 31, 2011. As of March 31, 2012 and December 31, 2011, the fair value of the Plainfield mortgage debt was $21.9 million, compared to the carrying value of $20.5 million. As of March 31, 2012 and December 31, 2011 the fair value of the Emporia Partners mortgage debt was $5.2 million, compared to the carrying

 

13


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

value of $5.0 million and $5.1 million, respectively. As of December 31, 2011 the carrying value of the LTI mortgage debt of $34.8 million, which included a premium of $0.4 million, approximated fair value. As of March 31, 2012, the fair value of the LTI mortgage debt was $34.6 million, compared to the carrying value of $34.3 million, including the debt premium of $0.3 million.

Income Taxes

The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these requirements and maintain its REIT status for the current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxes on taxable income that is distributed to stockholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the IRS grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. As of March 31, 2012 the Company satisfied the REIT requirements and distributed all of its taxable income.

Pursuant to the Code, the Company has elected to treat its corporate subsidiary as a taxable REIT subsidiary (“TRS”). In general, the TRS may perform non-customary services for the Company’s tenants and may engage in any real estate or non real estate-related business. The TRS will be subject to corporate federal and state income tax. As of March 31, 2012 the TRS had not commenced operations.

Per Share Data

The Company reports earnings per share for the period as (1) basic earnings per share computed by dividing net income (loss) by the weighted average number of shares outstanding during the period, and (2) diluted earnings per share computed by dividing net income (loss) by the weighted average number of shares outstanding, including common stock equivalents. As of March 31, 2012 and December 31, 2011, there were no common stock equivalents that would have a dilutive effect on earnings per share for common stockholders.

Distributions declared and paid per common share assumes each share was issued and outstanding each day during the three months ended March 31, 2012. Distributions declared per common share was based on daily declaration and record dates selected by the Company’s board of directors of $0.00184426 per day per share on the outstanding shares of common stock.

Segment Information

ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. The Company internally evaluates all of the properties and interests therein as one reportable segment.

Recently Issued Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement, including derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in this update are effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The Company does not expect that the adoption of ASU 2011-01 will have a material impact on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of

 

14


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The amendments in this update are effective for the first interim or annual period beginning after December 15, 2011. In December 2011, the FASB issued ASU 2011-12 Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 to evaluate concerns raised by issuers and other stockholders regarding the extent of line items required to comply with the standard. The Company’s adoption of the provisions in ASC 2011-05 did not impact the Company’s financial position or results of operations but it did have an impact on the presentation of the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“ASU 2011-04”). This ASU updated and further clarifies requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. ASU 2011-04 has not had a material impact on the Company’s consolidated financial statements, nor does the Company expect it to.

 

3. Real Estate

Acquisition of Westinghouse Property

On March 22, 2012, the Company, through a wholly-owned subsidiary of the Operating Partnership, acquired a Class A office building located in Cranberry Township, Pennsylvania (the “Westinghouse property”) from an unaffiliated third party. The Westinghouse property is 100% leased to a single tenant, Westinghouse Electric Company (“Westinghouse”), on a net lease basis, obligating Westinghouse to all costs and expenses to operate and maintain the property, including capital expenditures. On the acquisition date the remaining term of the lease was approximately 14 years.

The purchase price of the Westinghouse property was $36.2 million. The purchase price was substantially financed with a draw from the amended and restated credit agreement with KeyBank as discussed in Note 4, Debt, in the amount of $27.1 million, and mezzanine debt pursuant to the mezzanine credit agreement with KeyBank, as discussed in Note 4, Debt, in the amount of $9.0 million. Additionally, good faith deposits in the amount of $0.7 million were applied at closing and offset by $0.6 million in related closing fees and expenses. The following table provides the purchase price allocation and related financing activity:

 

Land

   $ 2,650,000   

Building and improvements

   $ 22,024,952   

Tenant origination and absorption cost

   $ 7,070,642   

In-place lease valuation (above market)

   $ 4,454,406   

Credit Facility draw

   $ 27,095,000   

Mezzanine Loan

   $ 9,000,000   

Prepaid Rent

   $ 70,000   

Cash used to acquire property (deposits and closing costs, net)

   $ 35,000   

Acquisition of AT&T Property

On January 31, 2012, the Company, through the Operating Partnership, acquired a three-building, two-story office and data center facility located in Redmond, Washington (the “AT&T property”) from an unaffiliated third party. The AT&T property is 100% leased to a single tenant, AT&T Services, Inc., on behalf of AT&T Wireless Services, Inc., a wholly-owned subsidiary of AT&T, Inc., pursuant to three long-term, net leases, obligating AT&T Services, Inc. to all costs and expenses to operate and maintain the property, including capital expenditures. On the acquisition date the remaining term of the lease was approximately eight years.

The purchase price of the AT&T property was $40.0 million, which was substantially funded with a draw from the amended and restated credit agreement with KeyBank as discussed in Note 4, Debt, in the amount of $22.0 million, and mezzanine debt pursuant to the mezzanine credit agreement with KeyBank, as discussed in Note 4, Debt, in the amount of

 

15


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

$12.4 million. The remaining purchase price and related closing fees and expenses were funded with $5.6 million and $0.3 million, respectively, in cash raised in the Public Offering. The following table provides the purchase price allocation and related financing activity:

 

Land

   $ 6,770,223   

Building and improvements

   $ 26,357,255   

Tenant origination and absorption cost

   $ 6,063,085   

In-place lease valuation (above market)

   $ 809,437   

Credit Facility draw

   $ 22,000,000   

Mezzanine Loan

   $ 12,400,000   

Cash used to acquire property

   $ 5,600,000   

As of March 31, 2012, the Company owned nine properties, as shown in the table below:

 

Property

   Acquisition
Date
     Purchase
Price
    

Property Type

   Year of Lease
Expiration

Renfro- Clinton, SC

     6/18/2009       $ 21,700,000       Warehouse/ Distribution    2021

Plainfield- Plainfield, IL

     6/18/2009       $ 32,660,000       Office/ Laboratory    2022

Will Partners- Monee, IL

     6/4/2010       $ 26,305,000       Warehouse/ Distribution    2020

Emporia Partners- Emporia, KS

     8/27/2010       $ 8,360,000       Office/Industrial/ Distribution    2020

ITT- Los Angeles, CA

     9/23/2010       $ 7,800,000       Office    2016

Quad/Graphics- Loveland, CO

     12/30/2010       $ 11,850,000       Industrial/ Office    2022

LTI- Carlsbad, CA

     5/13/2011       $ 56,000,000       Office/Laboratory/ Manufacturing    2022

AT&T- Redmond, WA

     1/31/2012       $ 40,000,000       Office/Laboratory/ Manufacturing    2019

Westinghouse- Cranberry Township, PA

     3/22/2012       $ 36,200,000       Office/Laboratory/ Manufacturing    2025
     

 

 

       

Total

      $ 240,875,000         
     

 

 

       

Intangibles

The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation and tenant origination and absorption cost, as discussed above and as shown below. The leases were measured against comparable leasing information and the present value of the difference between the contractual, in-place rent and the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the value of the real estate at acquisition or contribution. The discount rate used to compute the present value of the intangible assets for the Westinghouse property was adjusted to consider the potential risk that the tenant would exercise the termination option as pursuant to the lease. The Emporia Partners property in-place lease was considered to be at market, therefore none of the purchase price was allocated to an in-place lease valuation intangible.

 

 

     Balance
March 31, 2012
    Balance
December 31, 2011
 

In-place lease valuation (above market)

   $ 7,101,746      $ 1,837,903   

In-place lease valuation (above market)- accumulated amortization

     (401,229     (321,965
  

 

 

   

 

 

 

In-place lease valuation (above market), net

   $ 6,700,517      $ 1,515,938   
  

 

 

   

 

 

 

In-place lease valuation (below market)

   $ (9,950,752   $ (9,950,752

In-place lease valuation (below market)- accumulated amortization

     883,761        661,345   
  

 

 

   

 

 

 

In-place lease valuation (below market), net

   $ (9,066,991   $ (9,289,407
  

 

 

   

 

 

 

Tenant origination and absorption cost

   $ 47,534,398      $ 34,400,671   

Tenant origination and absorption cost- accumulated amortization

   $ (4,867,992   $ (3,924,882

 

16


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

The intangible assets are amortized over the remaining lease term of each property, as shown in the table below. On a weighted-average basis, the remaining lease term of the properties was 9.9 years and 9.4 years as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012, amortization expense for in-place lease valuation and tenant origination and absorption cost is expected to be $0.2 million and $4.5 million, respectively, each year for the next five years. As of December 31, 2011, amortization expense for in-place lease valuation and tenant origination and absorption cost was expected to be $0.7 million and $3.2 million, respectively, each year for the succeeding five years.

 

     Amortization expense for the  
     Three Months Ended
March  31,
2012
     Year Ended
December 31,
2011
 

In-place lease valuation

   $ 143,152       $ 381,670   

Tenant origination and absorption cost

   $ 943,110       $ 2,636,137   

Reserves

As part of the real estate asset acquisitions and contributions, the Company assumed certain building and tenant improvement reserves, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:

 

     Balance
December 31, 2011
     Additions      Utilizations     Balance
March, 31, 2012
 

Plainfield (1)

   $ 408,333       $ 25,000       $ (11,786   $ 421,547   

Will Partners (1)

     152,319         26,258         —          178,577   

Emporia Partners (2)

     715,001         132,894         —          847,895   

ITT (3)

     344,212         —           —          344,212   

Quad/Graphics (3)

     260,000         —           —          260,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,879,865       $ 184,152       $ (11,786   $ 2,052,231   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Additions to the reserve balance are funded by the tenant.
(2) The balance at March 31, 2012 consisted of a replacement reserve of $0.5 million, which was funded by the contributing entity. Additionally, tax and insurance reserves totaling $0.3 million were funded by the tenant.
(3) Balance represents remaining reserves, which were initially funded by the Company at closing.

Rent

The following summarizes the future minimum net rent payments pursuant to the lease terms for the properties discussed above as of March 31, 2012:

 

2012

   $ 14,691,879   

2013

     19,793,383   

2014

     20,167,798   

2015

     20,368,880   

2016

     106,940,418   

Thereafter

     106,940,418   
  

 

 

 

Total

   $ 202,633,774   
  

 

 

 

 

17


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

For the three months ended March 31, 2012, the Company’s nine properties, based on rental income received from such properties as a percentage of aggregate rental income received by the Company, were as follows:

 

Property

   Location    Revenue as
a percentage
of total rent
 

LTI

   Carlsbad, CA      24.6

Plainfield

   Plainfield, IL      15.7   

Will Partners

   Monee, IL      14.0   

AT&T (1)

   Redmond, WA      12.4   

Renfro

   Clinton, SC      11.3   

Emporia Partners

   Emporia, KS      8.3   

Quad/Graphics

   Loveland, CO      7.4   

ITT

   Los Angeles, CA      4.6   

Westinghouse (2)

   Cranberry
Township, PA
     1.7   
     

 

 

 

Total

        100.0
     

 

 

 

 

(1) Total rental income for the AT&T property for the three months ended March 31, 2012 was $0.5 million, consisting of two months of rent based on an acquisition date of January 31, 2012.
(2) Total rental income for the Westinghouse property only includes nine days of rental income for the three months ended March 31, 2012, totaling $0.1 million, based on an acquisition date of March 22, 2012.

Approximately 30% and 29% of the Company’s rental income was concentrated in Illinois and California, respectively, as of March 31, 2012. Tenant security deposits as of March 31, 2012 and December 31, 2011, which were included in the accounts payable and other liabilities balance on the consolidated balance sheets, totaled $0.03 million, as required pursuant to the lease for the ITT property. No collateral was received for the other eight tenant leases and, therefore, the Company bears the full risk of tenant rent collections. There were no tenant receivables as of March 31, 2012 and December 31, 2011.

Pro Forma Financial Information (unaudited)

The following condensed pro forma operating information is presented as if the Company’s properties acquired in 2012 and 2011 had been included in operations as of January 1, 2011. The pro forma operating information includes certain nonrecurring adjustments, such as acquisition fees and expenses incurred as a result of the assets acquired in the acquisitions:

 

     Three Months Ended March 31,  
     2012      2011  

Revenue

   $ 5,946,688       $ 5,972,219   
  

 

 

    

 

 

 

Net income (loss)

   $ 67,031       $ (3,799,403
  

 

 

    

 

 

 

Net income (loss) attributable to common stockholders

   $ 43,369       $ (1,474,168
  

 

 

    

 

 

 

Net income (loss) per share

   $ 0.01       $ (0.67
  

 

 

    

 

 

 

 

18


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

4. Debt

As of March 31, 2012 and December 31, 2011, the Company’s debt consisted of the following:

 

     Balance as of
March 31, 2012
     Balance as of
December 31,
2011
     Contractual
Interest Rate
  Payment Type    Loan
Maturity

Plainfield Mortgage Loan

   $ 20,465,039       $ 20,534,269       6.65% (fixed)   Principal and
Interest
   November
2017

Emporia Partners Mortgage Loan

     4,980,347         5,053,094       5.88% (fixed)   Principal and
Interest
   September
2023

LTI Mortgage Loan

     33,935,579         34,087,784       5.80% (fixed)   Principal and
Interest
   March
2016

LTI Mortgage Loan Premium

     336,345         357,815       —       
  

 

 

    

 

 

         

Mortgage Loan Total

     59,717,310         60,032,962           
  

 

 

    

 

 

         

Credit Facility

     86,220,000         35,395,985       3.00% (1)   Interest Only    November
2014
(2)

Mezzanine Loan

     10,936,783         —         Daily

LIBO Rate
+ 6.50%

  Principal and
Interest
   July 2012
  

 

 

    

 

 

         

Total

   $ 156,874,093       $ 95,428,947           
  

 

 

    

 

 

         

 

(1) Prior to the amendment effective November 18, 2011, the interest rate on the Credit Facility was a one-month LIBO Rate + 3.75% subject to a minimum LIBO Rate of 2.0%. Under the terms of the amended credit agreement, the interest rate on the Credit Facility is a one-month LIBO Rate + 2.75%. As of March 31, 2012 the LIBO Rate-based rate was 0.25%.
(2) The Credit Facility agreement allows for a one-year extension, as long as an event of default does not occur. Maturity date assumes the one-year extension is exercised.

Mortgage Loans

The Plainfield and Emporia Partners mortgage loans are secured by a first mortgage and security agreement on the Company’s interest in the respective underlying property, a fixture filing, and an assignment of leases, rents, income and profits.

In connection with the acquisition of the LTI property, pursuant to the Note and Deed of Trust Assumption Agreement dated May 13, 2011 (the “Assumption Agreement”), the Company, through a wholly-owned subsidiary of the Operating Partnership, assumed the obligations of the contributors and sellers under the LTI mortgage debt. The LTI mortgage debt was securitized, and Wells Fargo Bank, N.A. acts as trustee related thereto. The LTI mortgage debt is secured by a deed of trust, security agreement and fixture filing, and an assignment of leases and rents. The LTI mortgage debt calls for monthly principal and interest payments. In connection with the Assumption Agreement, the Company, through a wholly-owned subsidiary of the Operating Partnership, became obligated as non-recourse carve-out guarantors of the LTI mortgage debt. “Non-recourse carve-outs,” or exceptions, to the non-recourse nature of the debt, represent acts committed by the single-purpose entity borrower controlled by the Company and the Operating Partnership, that would obligate the guarantors, depending on the nature of the default, for either (a) the entire amount of the loan; or (b) liability for the losses, if any, incurred by the lender in connection with the default.

Credit Facility

On November 18, 2011, the Company, through the Operating Partnership, entered into an amendment and restatement to the credit agreement with KeyBank (the “Restated KeyBank Credit Agreement”), as administrative agent, and Bank of America, as syndication agent (collectively the “Lenders”) thereby increasing the total amount of the Credit Facility to $70.0 million in a revised revolving credit facility, with each Lender committing $35.0 million. The revised credit facility has a term of two years, maturing on November 18, 2013, with an option to extend for one year. During the initial two-year term of the revised credit agreement, the Company, through the Operating Partnership, may request an increase in the total commitments under the Credit Facility up to $150.0 million, subject to certain conditions. The Company drew an additional $0.4 million for related financing costs from the revised credit facility. Under the terms of the Restated KeyBank Credit Agreement, the Operating Partnership has the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) LIBO Rate multiplied by the Statutory Reserve Rate (as defined in the Restated KeyBank Credit Agreement) to which the administrative agent is subject, with respect to this rate, for Eurocurrency funding, plus 2.75% (“LIBO Rate-based”), or (b) an alternate base rate, which is the greatest of the (i) Prime Rate, (ii) Federal Funds Rate plus 0.50%, or (iii) the adjusted LIBO Rate-based rate set forth in subsection (a) plus 1.00%. Once the applicable variable rate is selected, 1.75% is added to that rate. The Operating Partnership may change this election from time to time, as provided by the Credit Facility terms. As of March 31, 2012 the LIBO Rate-based rate was 0.25%.

 

19


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

On January 31, 2012, the Company, through the Operating Partnership and four wholly-owned special purpose entities (“SPEs”) entered into that certain Joinder Agreement (the “Joinder Agreement”) with KeyBank and North Shore Community Bank & Trust Company (the “Subsequent Lender”), pursuant to which the Subsequent Lender agreed to become a lender party to the Restated KeyBank Credit Agreement, and agreed to provide a financing commitment of up to $10.0 million. Pursuant to the Joinder Agreement, the total commitment under the Restated KeyBank Credit Agreement increased to an aggregate of $80.0 million, governed by and subject to the terms and conditions of the Restated KeyBank Credit Agreement.

On January 31, 2012, in connection with the acquisition of the AT&T property as discussed in Note 3, Real Estate, a draw of $22.0 million was made from the Restated KeyBank Credit Agreement to partially finance such acquisition and on February 8, 2012 the unused borrowing base availability on the revolver of $1.7 million was drawn upon and was used to pay down the Mezzanine Loan discussed below.

On March 16, 2012, the total commitment under the Restated KeyBank Credit Agreement increased to an aggregate of $115.0 million when Regions Bank agreed to become a lender party to the Restated KeyBank Credit Agreement, providing a financing commitment of up to $35.0 million, governed by and subject to the terms and conditions of the Restated KeyBank Credit Agreement.

On March 22, 2012, in connection with the acquisition of the Westinghouse property as discussed in Note 3, Real Estate, a draw of $27.1 million was made from the Restated KeyBank Credit Agreement to partially finance such acquisition.

As of March 31, 2012, $86.2 million of the revised revolver was utilized, which is secured by the Renfro, Will Partners, ITT, Quad/Graphics, AT&T and Westinghouse properties. Per the terms of the revised credit agreement, the maximum loan available is the lesser of the total commitments ($115.0 million) or the aggregate borrowing base availability ($86.2 million). Therefore, the borrowing base availability was fully utilized as of March 31, 2012.

Mezzanine Loan

On January 31, 2012, a property-owning SPE wholly-owned by the Company’s Operating Partnership (the “Property SPE”) entered into that certain Mezzanine Credit Agreement in which KeyBank serves as the initial lender (the “Mezzanine Credit Agreement”) with total commitments of $15.0 million (the “Mezzanine Loan”). Additional lenders may be added pursuant to the terms of the Mezzanine Credit Agreement. In connection with the acquisition of the AT&T property, on January 31, 2012, the Property SPE made a draw of $12.4 million on the Mezzanine Loan to partially finance such acquisition. The Property SPE and any other entities that become a Borrower (as defined therein) pursuant to the terms of the Mezzanine Credit Agreement may request additional borrowings up to the total loan amount committed. The Mezzanine Loan has a term of six months, and bears interest at a rate of daily LIBO Rate plus 650 basis points, with an initial rate of 6.77%. The terms of the Mezzanine Credit Agreement require that the proceeds of the Mezzanine Loan be used to acquire the AT&T property and other potential acquisitions through the maturity date, July 31, 2012. The terms also require periodic payments equal to the net equity raised in the Company’s Public Offering, subject to a monthly minimum amount of $4.0 million.

Through March 21, 2012, a total of $9.0 million in payments had been made on the Mezzanine Loan, resulting in a balance of $3.4 million. In connection with the acquisition of the Westinghouse property on March 22, 2012, as discussed in Note 3, Real Estate, the Property SPE made a draw of $9.0 million from the Mezzanine Loan to partially finance such acquisition, resulting in a balance of $12.4 million. Through May 8, 2012, a total of $8.7 million in payments had been made on the Mezzanine Loan, resulting in a $3.7 million balance.

Debt Covenant Compliance

Pursuant to the terms of the Credit Facility, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants. As part of the amendment effective November 18, 2011, beginning with the quarter ended December 31, 2011, the liquidity requirement will be $2.0 million through June 29, 2012 and $3.0 million from June 30, 2012 through the remainder of the term of the loans. Additional loan compliance covenants include, but are not limited to, a maximum total leverage ratio (65%), a minimum interest coverage ratio (1.85 to 1), a minimum fixed charge ratio (1.60 to 1), a maximum variable debt ratio (30%), and minimum tangible net worth of at least $50 million plus 80% of the net proceeds of any equity issuance after the effective date and 100% of the equity in any properties contributed after the effective date.

 

20


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Pursuant to the varying-interest rate debt limitations, the Company effected an interest rate cap agreement for a notional amount of $50.0 million, which expires on June 29, 2012. The cost of the interest rate cap agreement was $10,000. Subsequent to the acquisitions of the AT&T and Westinghouse properties, the Company purchased an interest rate cap agreement for a notional amount of $60.0 million, expiring on December 31, 2012. The cost of the interest rate cap agreement was $10,000.

The Mezzanine Credit Agreement contains a financial covenant requirement, which states that gross proceeds from equity raised are subject to a monthly minimum amount of $4.0 million for the first three months of the six-month term and $5.0 million thereafter.

The Company was in compliance with all of its debt covenants as of March 31, 2012.

The following summarizes the future principal repayments of all loans as of March 31, 2012 per the loan terms discussed above:

 

2012

   $ 11,826,463 (1) 

2013

     1,268,726   

2014

     87,568,383 (2) 

2015

     1,433,059   

2016

     32,131,710 (3) 

Thereafter

     22,309,407   
  

 

 

 

Total

   $ 156,537,748   
  

 

 

 

 

(1) Amount includes payment of the balance of the Mezzanine Loan, which expires on July 31, 2012.
(2) Amount includes payment of the balance of the Credit Facility upon expiration on November 18, 2014.
(3) Amount includes payment of the balance of the LTI mortgage loan which matures in 2016. Principal repayments on the LTI mortgage loan do not include the valuation premium of $0.4 million.

The weighted average interest rate of the Company’s fixed rate debt as of March 31, 2012 was approximately 6.10%.

 

5. Noncontrolling Interests

Noncontrolling interests represent limited partnership interests in the Operating Partnership in which the Company is the general partner. Units of limited partnership interest were issued as part of the initial capitalization of the Operating Partnership and in conjunction with the contribution of certain assets, as discussed in Note 1, Organization, and in Note 3, Real Estate, respectively. As of March 31, 2012, noncontrolling interests were approximately 33% of total shares outstanding (assuming limited partnership units were converted to common stock) and approximately 35% of weighted average shares outstanding (assuming limited partnership units were converted to common stock). The Company has evaluated the terms of the limited partnership interests in the Operating Partnership and as a result, has classified limited partnership interests issued as the initial capitalization and in conjunction with the contributed assets to noncontrolling interests and are presented as a component of permanent equity, except as discussed below.

The Company evaluates individual noncontrolling interests for the ability to recognize the noncontrolling interest as permanent equity on the consolidated balance sheets at the time such interests are issued and on a continual basis. Any noncontrolling interest that fails to qualify as permanent equity has been reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.

The limited partners of the Operating Partnership will have the right to cause the Operating Partnership to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, purchase their limited partnership units by issuing one share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. Furthermore, the limited partners may exercise their redemption rights only after their limited partnership units have been outstanding for one year.

The Operating Partnership has issued 4.0 million limited partnership units to affiliated parties and unaffiliated third parties in exchange for certain properties. To the extent the contributors should elect to redeem all or a portion of their Operating Partnership units, pursuant to the terms of the respective contribution agreement, such redemption shall be at a per unit value equivalent to the price at which the contributor acquired its limited partnership units in the respective transaction.

 

21


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Operating partnership units issued pursuant to the World Kitchen contribution are not included in equity. The partners holding these units can cause the general partner, the Company, to redeem the units for the cash value, as defined in the operating partnership agreement. As the general partner does not control these redemptions these units are presented on the consolidated balance sheet as noncontrolling interest subject to redemption.

The following summarizes the activity for noncontrolling interests for the three months ended March 31, 2012 and for the year ended December 31, 2011:

 

     Three Months
Ended

March 31, 2012
    Year Ended
December

31, 2011
 

Beginning balance

   $ 21,786,577      $ 18,577,800   

Contribution of noncontrolling interests

     —          7,788,990   

Distributions for noncontrolling interests

     (581,085     (2,135,649

Allocated distributions for noncontrolling interests subject to redemption

     (31,507     (169,775

Net loss

     (1,075,244     (2,274,789
  

 

 

   

 

 

 

Ending balance

   $ 20,098,741      $ 21,786,577   
  

 

 

   

 

 

 

 

6. Related Party Transactions

The following table summarizes the related party costs incurred, paid and due to affiliates as of December 31, 2011 and March 31, 2012:

 

     Year Ended December 31, 2011     Three Months Ended March 31, 2012  
     Incurred     Paid      Payable/
(Receivable)
    Incurred     Paid      Payable  

Advisor and Property Manager fees

              

Acquisition fees and expenses

   $ 1,680,000      $ 3,309,344       $ —        $ 2,286,000      $ —         $ 2,286,000   

Operating expenses

     339,203        299,288         84,801        80,778        84,801         80,778   

Asset management fees

     1,083,304        1,041,222         103,073        367,319        334,216         136,176   

Property management fees

     377,078        363,313         35,746        126,862        115,741         46,867   

Costs advanced by the Advisor

     50,193        667,399         26,735        135,456        —           162,191   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total amount payable to the Advisor

   $ 3,529,778      $ 5,680,566       $ 250,355      $ 2,996,415      $ 534,758       $ 2,712,012   

Allowable organizational and offering costs

     1,854,645        —           1,854,645        2,353,626        —           2,353,626   

Actual organizational and offering costs

     (2,564,521     —           (2,564,521     (2,708,756     —           (2,708,756
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 2,819,902      $ 5,680,566       $ (459,521   $ 2,641,285      $ 534,758       $ 2,356,882   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Dealer Manager fees

   $ 3,570,133      $ 3,570,133       $ —        $ 1,399,847      $ 1,399,847       $ —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

The Second Amended and Restated Advisory Agreement requires, upon termination of the Public Offering, that any organizational and offering costs, including sales commissions and dealer manager fees, incurred above 15% of gross proceeds and that any organizational and offering costs incurred above 3.5% of gross proceeds shall be reimbursed to the Company. As of March 31, 2012, organizational and offering costs exceeded the limitations for organizational and offering costs the Advisor is subject to, as discussed in Note 2, Organizational and Offering Costs, by $0.4 million. Therefore, if the

 

22


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Company terminated its Public Offering on March 31, 2012, based on the gross proceeds raised in the Public Offering to date of $67.2 million and organizational and offering costs incurred in excess of the limitations discussed above, the Company’s liability to the Advisor for advanced costs would be reduced by the excess. As a result, the amount of organizational and offering costs that exceeded the limitations was applied against the amount due from the Company to the Advisor, which is reflected in the “Due to Affiliates” balance on the consolidated balance sheets. The Company continues to monitor the limitations and expects to be liable to the Advisor for all costs advanced on its behalf as additional offering proceeds are raised. There is no guarantee that the Company will raise the amount necessary, through the dealer manager, to offset this overage, thereby making the Advisor liable for the overage. Payment of the overage would be due 60 days following the termination of the offering.

Advisory and Dealer Manager Agreements

The Company does not currently expect to have any employees. The Advisor will be primarily responsible for managing the business affairs and carrying out the directives of the Company’s board of directors. The Company executed an advisory agreement with the Advisor and a dealer manager agreement with the Dealer Manager for the Private Offering. The Company subsequently entered into an amended and restated advisory agreement, and later, the Second Amended and Restated Advisory Agreement with the Advisor and a new dealer manager agreement with the Dealer Manager for the Public Offering. Each of the agreements entitles the Advisor and the Dealer Manager to specified fees and incentives upon the provision of certain services with regard to the Private Offering and the Public Offering and investment of funds in real estate properties, among other services, as well as reimbursement for organizational and offering costs incurred by the Advisor on the Company’s behalf and reimbursement of certain costs and expenses incurred by the Advisor in providing services to the Company.

Management Compensation

The following table summarizes the compensation and fees the Company will pay to the Advisor, the Property Manager, the Dealer Manager and other affiliates, including amounts to reimburse costs for providing services. The sales commissions may vary for different categories of purchasers.

 

Type of Compensation

(Recipient)

  

Determination of Amount

Sales Commissions

(Participating Dealers)

   The Dealer Manager was entitled to receive a sales commission of up to 7% of gross proceeds from sales in the Private Offering, and, pursuant to the new agreement, which was executed on October 27, 2009, the Dealer Manager is entitled to the same sales commission from gross sales proceeds in the Primary Public Offering. The Dealer Manager has entered into participating dealer agreements with certain other broker-dealers to authorize them to sell shares of the Company in the Public Offering. Upon sale of shares of the Company by such broker-dealers, the Dealer Manager will re-allow all of the sales commissions paid in connection with sales made by these broker-dealers, except that no sales commission is payable on shares sold under the Company’s distribution reinvestment plan.
Dealer Manager Fee

(Dealer Manager)

   The Dealer Manager was entitled to receive a dealer manager fee of up to 3% of gross proceeds from sales in the Private Offering, and is entitled to the same fee from sales in the Primary Public Offering. The Dealer Manager has entered into participating dealer agreements with certain other broker-dealers as noted above. The Dealer Manager may re-allow to these broker-dealers a portion of the 3% dealer manager fee as marketing fees, reimbursement of certain costs and expenses of attending training and education meetings sponsored by the Dealer Manager, payment of attendance fees required for employees of the Dealer Manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. No dealer manager fee is payable on shares sold under the Company’s distribution reinvestment plan.
Reimbursement of

Organization and Offering
Expenses

(Advisor)

   The Company is required under the Second Amended and Restated Advisory Agreement to reimburse the Advisor for organization and offering costs (as defined in the Company’s prospectus and the Second Amended and Restated Advisory Agreement) up to 3.5% of gross proceeds from the Primary Public Offering, excluding sales commissions and dealer manager fees. The Second Amended and Restated Advisory Agreement also states that organization and offering expenses may not exceed 15% of gross offering proceeds of the Public Offering. If the organization and offering expenses exceed such limits, within 60 days after the end of the month in which the Public Offering terminates or is completed, the Advisor must reimburse the Company for any excess amounts.

 

23


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Type of Compensation

(Recipient)

  

Determination of Amount

Acquisition Fees and
Expenses

(Advisor)

   Under the Second Amended and Restated Advisory Agreement the Advisor receives acquisition fees equal to 2.5% of the Contract Purchase Price, as defined therein, of each property acquired by the Company, and reimbursement for actual acquisition expenses incurred as defined in the agreements. The acquisition fee and acquisition expenses paid by the Company shall be reasonable and in no event exceed an amount equal to 6.0% of the contract purchase price, unless approved by a majority of the independent directors.
Disposition Fee

(Advisor)

   Under the Second Amended and Restated Advisory Agreement, if the Advisor provides a substantial amount of the services in connection with the sale of one or more properties, the Advisor receives fees in an amount up to 3% of the contract sales price of such properties. However, the total disposition fees paid (including fees paid to third parties) may not exceed the lesser of a competitive real estate commission or an amount equal to 6.0% of the contract sale price of the property.
Asset Management Fee

(Advisor)

   The Advisor receives an annual asset management fee for managing the Company’s assets equal to 0.75% of the Average Invested Assets, defined as the aggregate carrying value of the assets invested before reserves for depreciation. The fee will be computed based on the average of these values at the end of each month. The asset management fees are earned monthly.
Operating Expenses

(Advisor)

   The Advisor and its affiliates are entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of the Company in connection with their provision of administrative services with regard to the Public Offering, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Company’s average invested assets for that 12 months then ended; or (ii) 25% of the Company’s net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the Company’s assets, for that fiscal year, unless the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. For the three months ended March 31, 2012 and 2011 $0.08 million of operating expenses incurred by the Advisor were allocated to the Company in each period. Such costs are allocated using methodologies meant to fairly allocate such costs based upon the related activities and in accordance with the agreement. The Company expects the Advisor’s direct and indirect allocated costs to increase as offering proceeds and acquisition activity increase.

 

24


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Type of Compensation

(Recipient)

  

Determination of Amount

Property Management
Fees

(Property Manager)

  

The Property Manager is entitled to receive a fee for its services in managing the Company’s properties up to 3% of the gross monthly revenues from the properties plus reimbursement of the costs of managing the properties. In the event that the Property Manager assists with the development or redevelopment of a property, the Company may pay a separate market-based fee for such services. In the event that the Company contracts directly with a non-affiliated third-party property manager with respect to a particular property, the Company will pay the Property Manager an oversight fee equal to 1% of the gross revenues of the property managed. In no event will the Company pay both a property management fee to the Property Manager and an oversight fee to the Property Manager with respect to a particular property.

 

In addition, the Company may pay the Property Manager or its designees a leasing fee in an amount equal to the fee customarily charged by others rendering similar services in the same geographic area. The Company may also pay the Property Manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which the Company is responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. The Property Manager shall also be entitled to a construction management fee of 5% of the cost of improvements.

 

25


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Type of Compensation

(Recipient)

  

Determination of Amount

1) Subordinated Share of
Net Sale Proceeds
(payable only if the
Company is not listed on
a national securities
exchange);

(Advisor)

 

2) Subordinated
Performance Fee Due
Upon Termination of the
Amended and Restated
Advisory Agreement
(payable only if the
Company is not listed on
a national securities
exchange); and

(Advisor)

 

3) Subordinated Incentive
Listing Fee

(payable only if the
Company is listed on a
national securities
exchange)

(Advisor)

  

Liquidation/Termination/Listing Stage

 

The Advisor is entitled to receive the following:

 

1)      A Subordinated Share of Net Sales Proceeds (as defined in the amended and restated advisory agreement) in the event of a sale transaction involving a property or an entity owning a property, if the Company’s stockholders are paid their return of capital plus an annual cumulative, non-compounding return;

 

2)      A Subordinated Performance Fee (as defined in the amended and restated advisory agreement) Due Upon Termination of the Second Amended and Restated Advisory Agreement if the Company terminates the Second Amended and Restated Advisory Agreement for any reason other than a material breach by the Advisor as a result of willful or intentional misconduct or bad faith on behalf of the Advisor. Such fee is reduced by any prior payment to the advisor of a subordinated share of net sale proceeds; and

 

3)      A Subordinated Incentive Listing Fee (as defined in the Second Amended and Restated Advisory Agreement) in the event the Company lists its stock for trading, which fee, in excess of capital invested in the Company, will be subordinated until each shareholder’s investment value is equal to their initial invested capital.

 

Each subordination compensation discussed above is calculated as follows:

 

•   5.0% if the stockholders are paid return of capital plus a 6.0% to 8.0% annual cumulative, non-compounding return; or

 

•   10.0% if the stockholders are paid return of capital plus an 8.0% to 10.0% annual cumulative, non-compounding return; or

 

•   15.0% if the stockholders are paid return of capital plus a 10.0% or more annual cumulative, non-compounding return.

 

The subordinated performance and incentive fees may be paid in the form of non-interest bearing promissory notes (the “Performance Fee Note” and “Listing Fee Note,” respectively, as defined in the Second Amended and Restated Advisory Agreement). Payment of the Performance Fee and Listing Fee notes will be deferred until the Company receives net proceeds from the sale or refinancing of properties held at the termination date or the valuation date, respectively. If either promissory note has not been paid in full within three years from the termination date or valuation date, then the Advisor may elect to convert the balance of the fee into shares of the Company’s common stock.

 

26


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

Conflicts of Interest

The Sponsor, Advisor, Property Manager and their officers and certain of their key personnel and their respective affiliates serve as key personnel, advisors, managers and sponsors to some or all of 16 other real estate programs affiliated with the Sponsor, including Griffin-American Healthcare REIT II, a publicly-registered, non-traded real estate investment trust. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between the Company’s business and these other activities.

In addition, the Dealer Manager has entered into a dealer manager agreement to serve as dealer manager for Griffin-American Healthcare REIT II. As a result, the Dealer Manager will have contractual duties to Griffin-American Healthcare REIT II, which contractual duties may conflict with the duties owed to the Company.

Some of the material conflicts that the Sponsor, Advisor, Property Manager and Dealer Manager and their key personnel and their respective affiliates will face are (1) competing demand for time of the Advisor’s executive officers and other key personnel from the Sponsor, the Dealer Manager and other affiliated entities; (2) determining if a certain investment opportunity should be recommended to the Company or another program of the Sponsor; and (3) influence of the fee structure under the Second Amended and Restated Advisory Agreement that could result in actions not necessarily in the long-term best interest of the Company’s stockholders.

Economic Dependency

The Company will be dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company’s shares of common stock available for issue, the identification, evaluation, negotiation, purchase and disposition of properties and other investments, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities. In the event that the Advisor and the Dealer Manager are unable to provide the respective services, the Company will be required to obtain such services from other resources.

 

7. Commitments and Contingencies

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

Distribution Reinvestment Plan

The Company has adopted a distribution reinvestment plan that allows stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of common stock. The Company has registered 7,500,000 shares of common stock pursuant to the distribution reinvestment plan for the Public Offering. The distribution reinvestment plan in the Public Offering became effective on November 6, 2009. The purchase price per share will be the higher of $9.50 per share or 95% of the fair market value of a share of the Company’s common stock as estimated by the Company’s board of directors or a firm chosen by the Company’s board of directors, until the earliest to occur of (A) the date that all distribution reinvestment plan shares have been issued or (B) all offerings terminate and the Company elects to deregister with the SEC any unsold public distribution reinvestment plan shares, if any. No sales commission or dealer manager fee will be paid on shares sold through the distribution reinvestment plan. The Company may amend or terminate the distribution reinvestment plan for any reason at any time upon 10 days’ prior written notice to stockholders. As of March 31, 2012 and December 31, 2011, $1.5 million and $1.1 million in shares, respectively, had been issued under the distribution reinvestment plan.

Share Redemption Program

The Company has adopted a share redemption program that will enable stockholders to sell their stock to the Company in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may, under certain circumstances, be able to have all or any portion of their shares of stock redeemed by the Company. The Company may redeem, on a quarterly basis, the shares of stock presented for redemption for cash to the extent that there are sufficient funds available to fund such redemptions. In no event shall the Company redeem more than 5.0% of the weighted average shares outstanding during the prior calendar year,

 

27


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

and the cash available for redemption will be limited to the proceeds from the sale of shares pursuant to the Company’s distribution reinvestment plan. The amount paid to redeem stock is expected to be the redemption price set forth in the following table which is based upon the number of years the stock is held:

 

Number of Years Held

  

Redemption Price

Less than one

   No redemption allowed

One or more but less than two

   92.5% of redemption amount

Two or more but less than three

   95.0% of redemption amount

Three or more but less than four

   97.5% of redemption amount

Four or more

   100.0% of redemption amount

For 18 months after the most recent offering of shares, the redemption amount shall be the per share price of the most recent offering. Thereafter, the per share redemption amount will be based on the then-current net asset value. The redemption amount is subject to adjustment as determined from time to time by the board of directors.

As the use of the proceeds from the distribution reinvestment plan for redemptions is outside the Company’s control, the net proceeds from the distribution reinvestment plan are considered to be temporary equity and are presented as common stock subject to redemption on the accompanying consolidated balance sheets. The cumulative proceeds from the distribution reinvestment plan, net of any redemptions, will be computed at each reporting date and will be classified as temporary equity on the Company’s consolidated balance sheets. As noted above, the redemption is limited to proceeds from new permanent equity from the sale of shares pursuant to the Company’s distribution reinvestment plan.

Redemption requests will be honored on the last business day of the month following the end of each quarter. Requests for redemption must be received on or prior to the end of the quarter in order for the Company to repurchase the shares as of the end of the following month. As of March 31, 2012 and December 31, 2011, $1.5 million and $1.1 million in shares of common stock, respectively, were eligible for redemption. During the three months ended March 31, 2012, the Company redeemed 1,000 shares of common stock for approximately $0.01 million at a price per share of $9.25. During the year ended December 31, 2011, the Company redeemed 12,000 shares of common stock for approximately $0.1 million at a weighted average price per share of $9.38. As of March 31, 2012, there were 3,000 shares related to redemption requests to be processed subsequent to March 31, 2012. The redemption of these shares totaled approximately $0.03 million and was reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets as of March 31, 2012. On April 30, 2012, the Company satisfied all of the eligible redemption requests at a price per share of $10.00. The Company’s board of directors may choose to amend, suspend or terminate the share redemption program upon 30 days’ written notice at any time.

 

8. Declaration of Distributions

On December 15, 2011 and March 19, 2012, the Company’s board of directors declared distributions for the first and second quarters of 2012 both in the amount of $0.00184426 per day per share on the outstanding shares of common stock (equivalent to an annual distribution rate of 6.75% assuming the share was purchased for $10.00) payable to stockholders of record of such shares as shown on the Company’s books at the close of business on each day during the period commencing on January 1, 2012 to March 31, 2012 and April 1, 2012 to June 30, 2012. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as the Company’s President may determine.

 

9. Subsequent Events

The Company has completed an evaluation of all transactions subsequent to the date of the financial statements. The following events happened subsequent to the date of the financial statements, up to the issuance date of this report:

Offering Status

As of May 8, 2012, in connection with the Public Offering, the Company had issued 7,646,980 shares of the Company’s common stock for gross proceeds of approximately $76.1 million. Through May 8, 2012, the Company had

 

28


Table of Contents

GRIFFIN CAPITAL NET LEASE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

 

received aggregate gross offering proceeds of approximately $78.5 million from the sale of shares in the Private Offering, which commenced on February 20, 2009 and terminated on November 6, 2009, and the Public Offering. During the three months ended March 31, 2012, the Company redeemed 1,000 shares of common stock for approximately $0.01 million at a price per share of $9.25 and during the year ended December 31, 2011 the Company redeemed 12,000 shares of common stock for approximately $0.1 million at a weighted average price per share of $9.38. Additionally, on April 30, 2012, the Company redeemed 3,000 shares of common stock for approximately $0.03 million at a price per share of $10.00.

Declaration of Distributions

On May 9, 2012, the Company’s board of directors declared distributions for the third quarter of 2012 in the amount of $0.00184426 per day per share on the outstanding shares of common stock (equivalent to an annual distribution rate of 6.75% assuming the share was purchased for $10.00) payable to stockholders of record of such shares as shown on the Company’s books at the close of business on each day during the period commencing on July 1, 2012 to September 30, 2012. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as the Company’s President may determine.

 

29


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. See also “Cautionary Note Regarding Forward Looking Statements” preceeding Part I. As used herein, “we,” “us,” and “our” refer to Griffin Capital Net Lease REIT, Inc.

Overview

We are a public, non-traded REIT that invests primarily in single tenant, net lease properties diversified by corporate credit, physical geography, product type and lease duration. We were formed as a corporation on August 28, 2008 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in single tenant net lease properties. We began operations on May 6, 2009 and are subject to the general risks associated with a start-up enterprise, including the risk of business failure. On July 12, 2011, we changed our name from The GC Net Lease REIT, Inc. to Griffin Capital Net Lease REIT, Inc. Our year end is December 31.

We have no paid employees and are externally advised and managed by an affiliate, The GC Net Lease REIT Advisor, LLC, which is our advisor. Griffin Capital Corporation, our sponsor, is the sole member of our advisor and an affiliate of the sole owner of The GC Net Lease REIT Property Management, LLC, our property manager. Our operating partnership is The GC Net Lease REIT Operating Partnership, L.P (“Operating Partnership”). We expect to own all of our properties directly or indirectly through our Operating Partnership or similar entities. See Note 1, Organization, to the consolidated financial statements for further details on our affiliates.

On February 20, 2009, we commenced a private offering to accredited investors only pursuant to a confidential private placement memorandum. On May 6, 2009 we satisfied our minimum offering requirement and commenced operations. We declared our first distribution to stockholders in the second quarter of 2009, which was paid on June 15, 2009.

We terminated our private offering on November 6, 2009, having raised approximately $2.4 million through the issuance of 247,978 shares, and began our offering to the public upon the SEC declaring our registration statement effective, which was scheduled to terminate on November 6, 2011 unless our board of directors extended our offering for one year. On September 14, 2011 our board of directors so extended our offering through November 6, 2012. We are currently offering a maximum of 82,500,000 shares of common stock to the public, consisting of 75,000,000 shares for sale to the public (our “Primary Public Offering”) and 7,500,000 shares for sale pursuant to our distribution reinvestment plan (collectively, our “Public Offering”).

As of March 31, 2012, we had issued 6,908,692 total shares of our common stock for gross proceeds of approximately $68.8 million in our Public Offering, of which 161,586 shares, or $1.5 million were issued pursuant to the distribution reinvestment plan. During the three months ended March 31, 2012, we redeemed 1,000 shares of common stock for approximately $0.01 million at a price per share of $9.25 and during the year ended December 31, 2011 we redeemed 12,000 shares for approximately $0.1 million at a weighted average price per share of $9.38.

As of March 31, 2012, we owned nine properties, as shown in the tables below, encompassing approximately 2.6 million rentable square feet with an effective capitalization rate of 8.4%:

 

Property

   Acquisition
Date
     Purchase Price      Property Type    Year Built/
Renovated
   Square
Feet
     Approximate
Acres
 

Renfro

                 

Clinton, SC

     6/18/2009       $ 21,700,000       Warehouse/Distribution    1986      566,500         42.2   

Plainfield

                 

Plainfield, IL

     6/18/2009         32,660,000       Office/Laboratory    1958-1991      176,000         29.1   

Will Partners

                 

Monee, IL

     6/4/2010         26,305,000       Warehouse/Distribution    2000      700,200         34.3   

Emporia Partners

                 

Emporia, KS

     8/27/2010         8,360,000       Office/Industrial/
Distribution
   1954/2000      320,800         16.6   

ITT

                 

Los Angeles, CA

     9/23/2010         7,800,000       Office    1996/2010      35,800         3.5   

 

30


Table of Contents

Property

   Acquisition
Date
     Purchase Price      Property Type    Year Built/
Renovated
   Square
Feet
     Approximate
Acres
 

Quad/Graphics

                 

Loveland, CO

     12/30/2010         11,850,000       Industrial/Office    1986/1996/2009      169,800         15.0   

LTI

                 

Carlsbad, CA

     5/13/2011         56,000,000       Office/Laboratory/
Manufacturing
   1999      328,700         17.6   

AT&T

                 

Redmond, WA

     1/13/12         40,000,000       Office/Data Center    1995      155,800         8.4   

Westinghouse

                 

Cranberry Township, PA

     3/22/12         36,200,000       Engineering Facility    2010      118,000         25.0   
     

 

 

          

 

 

    

 

 

 

Total

      $ 240,875,000               2,571,600         191.7   
     

 

 

          

 

 

    

 

 

 

The estimated going-in capitalization rate is determined by dividing the projected net rental payment for the first fiscal year we own the property by the acquisition price (exclusive of closing and offering costs). Generally, pursuant to each lease, if the tenant is directly responsible for the payment of all property operating expenses, insurance and taxes, the net rental payment by the tenant to the landlord is equivalent to the base rental payment. The projected net rental payment includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligations under its lease agreement during the next 12 months.

 

Property

   Tenant   Industry   Annualized
Gross Base Rent
(1)
    % of
Annualized
Gross Base
Rent
    2012
Annualized Net
Effective Rent
per Square
Foot (2)
    Year of
Lease
Expiration
 

Renfro

Clinton, SC

   Renfro Corp   Manufacturing (Hosiery
Products)
  $ 1,863,000        9.2   $ 3.29        2021   

Plainfield

Plainfield, IL

   Chicago Bridge & Iron

Company (Delaware)

  Construction Engineering
Services
    2,587,000        12.8     14.70        2022   

Will Partners

Monee, IL

   World Kitchen, LLC   Distribution (Kitchen
Accessories)
    2,311,000        11.5     3.30        2020   

Emporia Partners

Emporia, KS

   Hopkins Enterprises,
Inc.
  Manufacturing
(Automotive Parts)
    1,384,000        6.9     2.60        2020   

ITT

Los Angeles, CA

   ITT Educational
Services, Inc.
  Educational     762,000        3.8     21.28        2016   

Quad/Graphics

Loveland, CO

   World Color (USA),
LLC
  Printing     1,216,000        6.0     7.16        2022   

LTI

Carlsbad, CA

   Life Technologies
Corporation
  Research and Development
(Biotechnology Tools)
    4,114,000        20.4     12.52        2022   

AT&T

Redmond, WA

   AT&T Services, Inc.   Telecommunications     3,045,000        15.1     19.54        2019   

Westinghouse

Cranberry Township, PA

   Westinghouse Electric
Company, LLC
  Engineering (Nuclear Fuel
and Nuclear Services)
    2,887,000        14.3     24.47        2025   
      

 

 

   

 

 

   

 

 

   

Total

       $ 20,169,000        100.0   $ 7.84     
      

 

 

   

 

 

   

 

 

   

 

(1) The annualized gross base rents presented are forward-looking, based on contractual rent amounts for the period April 1, 2012 to March 31, 2013, which take into consideration any rent increases.
(2) The annualized net effective rent per square foot is calculated by dividing the annualized net effective rent by the square footage for each property listed in the table above. The annualized net effective rent equals the annualized gross base rent for all of our properties, except the Emporia Partners property. The annualized gross base rent is reduced by the annualized priority return due to Hopkins Enterprises, Inc. to arrive at the annualized net effective rent for the Emporia Partners property.

Significant Accounting Policies and Estimates

We have established accounting policies which conform to generally accepted accounting principles (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The

 

31


Table of Contents

preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.

We believe the accounting policies listed below are the most critical in the preparation of our consolidated financial statements. These policies are described in greater detail in Part I of this report and in our Annual Report on Form 10-K for the year ended December 31, 2011 and continue to include the following areas:

 

   

Real Estate- Valuation and purchase price allocation, depreciation;

 

   

Impairment of Real Estate and Related Intangible Assets and Liabilities;

 

   

Revenue Recognition;

 

   

Noncontrolling Interests in Consolidated Subsidiaries;

 

   

Common Stock and Noncontrolling Interests Subject to Redemption;

 

   

Fair Value Measurements;

 

   

Income Taxes- deferred tax assets and related valuation allowance, REIT qualification; and

 

   

Loss Contingencies.

Recently Issued Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement, including derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in this update are effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. We do not expect that the adoption of ASU 2011-01 will have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The amendments in this update are effective for the first interim or annual period beginning after December 15, 2011. In December 2011, the FASB issued ASU 2011-12 Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 to evaluate concerns raised by issuers and other stockholders regarding the extent of line items required to comply with the standard. Our adoption of the provisions in ASC 2011-05 did not impact our financial position or results of operations but it did have an impact on the presentation of our consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“ASU 2011-04”). This ASU updated and further clarifies requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. ASU 2011-04 has not had a material impact on our consolidated financial statements, nor do we expect it to.

Results of Operations

We owned six properties as of March 31, 2011. As of March 31, 2012, we owned nine properties, as shown in the tables above. Therefore, our results of operations for the three months ended March 31, 2012 are not directly comparable to those for the three months ended March 31, 2011. Our results of operations for the three months ended March 31, 2012 are not indicative of those expected in the future periods, and we expect that rental income, operating expenses, depreciation, and amortization expenses will each increase in future periods as we acquire additional properties.

 

32


Table of Contents

Comparison of the Three Months Ended March 31, 2012 and 2011

The following table provides summary information about our results of operations for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended March 31,      Increase      Percentage
Change
 
     2012      2011        

Rental income

   $ 4,396,478       $ 2,454,019       $ 1,942,459         79

Property expense recovery

   $ 598,107       $ 339,957       $ 258,150         76

Asset management fees

   $ 367,319       $ 204,212       $ 163,107         80

Property management fees

   $ 126,862       $ 74,472       $ 52,390         70

Property operating expense

   $ 25,128       $ —         $ 25,128         N/A   

Property tax expense

   $ 562,456       $ 339,957       $ 222,499         65

Acquisition fees and expenses to non-affiliates

   $ 681,555       $ 262       $ 681,293         260,035

Acquisition fees and expenses to affiliates

   $ 2,286,000       $ —         $ 2,286,000         N/A   

General and administrative expenses

   $ 494,410       $ 370,135       $ 124,275         34

Depreciation and amortization

   $ 1,889,909       $ 1,034,076       $ 855,833         83

Interest expense

   $ 1,607,160       $ 1,182,542       $ 424,618         36

Rental Income

Rental income for the three months ended March 31, 2012 is comprised of rental income of $4.0 million, adjustments to straight-line contractual rent of $0.3 million, and in-place lease valuation amortization of $0.1 million. Rental income for the three months ended March 31, 2012 increased by approximately $2.0 million compared to the same period a year ago as a result of (1) $1.6 million in additional rental income related to the real estate acquired subsequent to March 31, 2011; (2) an increase in adjustments to straight-line contractual rent of $0.2 million; and (3) an increase in in-place lease valuation amortization of $0.2 million. Also included as a component of revenue is the recovery of property operating expenses, which increased by $0.3 million compared to the same period a year ago as a result of the acquisition of additional real estate. We expect rental income to increase in future periods as we acquire additional properties.

Property Expenses

Property expenses for the three months ended March 31, 2012 totaled $1.1 million consisting of asset management fees, property management fees, property operating expense and property taxes. The total increase of $0.5 million since the same period a year ago is a result of $0.2 million in asset management fees, $0.1 million in property management fees and $0.2 million in property taxes for the real estate acquired subsequent to March 31, 2011. We expect property operating expenses to increase in future periods as we acquire additional properties.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2012 increased by $0.1 million due mainly to an increase in professional fees, transfer agent fees, which included termination fees, and bank fees, which included an unused commitment fee on the Credit Facility. General and administrative expenses for the three months ended March 31, 2012 totaled $0.5 million consisting mostly of accounting and legal fees of $0.2 million and other expenses totaling $0.3 million. The total of $0.3 million in other expenses consisted mainly of allocated personnel and rent costs incurred by our advisor ($0.1 million in total) and a total of $0.2 million for Board of Directors’ fees, transfer agent fees, directors’ and officers’ insurance, filing fees, printing costs, bank fees, and adjustments to organizational costs. Organizational costs were adjusted as a result of the amount of organizational costs incurred, which exceeded certain limitations applied to the total equity raised in our Public Offering, as discussed in our Second Amended and Restated Advisory Agreement, Note 6, and in the Organizational and Offering Costs section of Note 2 to the consolidated financial statements. The adjustments to organizational and offering costs are reflected as a reduction of the “Due to Affiliates” balance on the consolidated balance sheets. We expect general and administrative expenses to increase in future periods as we make additional investments, but to decrease as a percentage of total revenues.

Depreciation and Amortization Expense

Depreciation and amortization expense for the three months ended March 31, 2012 consisted of depreciation of building and building improvements of our properties of $1.0 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $0.9 million. The increase of $0.9 million as compared to the same period in 2011 is a result of depreciation and amortization for the real estate acquired subsequent to March 31, 2011. We expect depreciation and amortization expense to increase in future periods as we acquire additional properties.

 

33


Table of Contents

Interest Expense

Interest expense for the three months ended March 31, 2012 increased by $0.4 million compared to the same period in 2011. The net increase is due primarily to interest expense related to the real estate acquired subsequent to March 31, 2011: (1) $0.5 million in interest expense related to the assumption of the LTI mortgage debt; and (2) $0.1 million in additional interest expense related to the Credit Facility (as discussed below) as a result of the acquisition of the AT&T and Westinghouse properties. These increases are offset by a $0.2 million decrease in interest expense on the Credit Facility as a result of lowered interest rates pursuant to the amended and restated credit agreement with KeyBank effective November 18, 2011 discussed below. Interest expense for the three months ended March 31, 2012 also includes the amortization of deferred financing costs of $0.2 million, which did not significantly change compared to the same period a year ago. We expect interest expense to increase in future periods as we acquire additional real estate and assume any related debt.

Funds from Operations and Modified Funds from Operations

Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.

In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as funds from operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful.

The Investment Program Association (“IPA”) issued Practice Guideline 2010-01 (the “IPA MFFO Guideline”) on November 2, 2010, which extended financial measures to include modified funds from operations (“MFFO”). In computing MFFO, FFO is adjusted for certain non-cash items such as straight-line rent, amortization of in-place lease valuations, accretion/amortization of debt discounts/premiums, nonrecurring impairments of real estate-related investments, and certain non-operating cash items such as acquisitions fees and expenses. Management believes that MFFO is a beneficial indicator of our on-going portfolio performance. More specifically, MFFO isolates the financial results of the REIT’s operations. MFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, MFFO for the period presented may not be indicative of future results or our future ability to pay our dividends.

By providing FFO and MFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities. MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes. As explained below, management’s evaluation of our operating performance excludes items considered in the calculation of MFFO based on the following economic considerations:

 

   

Straight line rent, amortization of in-place lease valuation and amortization of debt premiums. These items are GAAP non-cash adjustments and are included in historical earnings. These items are deducted from FFO to arrive at MFFO as a means of determining operating results of our portfolio.

 

34


Table of Contents
   

Acquisition-related costs. In accordance with GAAP, acquisition-related costs are required to be expensed as incurred. These costs have been and we expect will continue to be funded with cash proceeds from our public offering. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses. By excluding acquisition-related costs that affect our operations only in periods in which properties are acquired, MFFO can provide an indication of operating performance after we cease to acquire properties on a regular basis. Management believes that excluding these costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management.

For all of these reasons, we believe the non-GAAP measures of FFO and MFFO, in addition to net income and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and MFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and MFFO. Additionally, MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. However, MFFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining MFFO. Therefore, FFO and MFFO should not be considered as alternatives to net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.

Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.

Our calculation of FFO and MFFO is presented in the following table for the three months ended March 31, 2012 and 2011.

 

     Three Months Ended
March 31,
 
     2012     2011  

Net Loss

   $ (3,046,017   $ (411,330

Adjustments:

    

Depreciation of building and improvements

     946,799        609,043   

Amortization of intangible assets

     943,110        425,033   
  

 

 

   

 

 

 

(FFO deficit)/FFO

   $ (1,156,108   $ 622,746   
  

 

 

   

 

 

 

Reconciliation of FFO to MFFO

    

(FFO deficit)/FFO

   $ (1,156,108   $ 622,746   

Adjustments:

    

Acquisition fees and expenses to non-affiliates

     681,555        262   

Acquisition fees and expenses to affiliates

     2,286,000        —     

Revenues in excess of cash received (straight-line rents)

     (271,869     (140,324

Amortization of above/(below) market rent

     (143,152     33,894   

Amortization of debt premium

     (21,470     —     
  

 

 

   

 

 

 

MFFO

   $ 1,374,956      $ 516,578   
  

 

 

   

 

 

 

Liquidity and Capital Resources

Long-Term Liquidity and Capital Resources

On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of debt service on our outstanding indebtedness, including repayment of the Credit Facility and Mezzanine Loan discussed below, and other investments. Generally, cash needs for items, other than property acquisitions, will be met from operations and proceeds received from offerings. However, there may be a delay between the sale of our shares and our purchase of properties that could result in a delay in the benefits to our stockholders, if any, of returns generated from our investments. Our advisor will evaluate potential

 

35


Table of Contents

additional property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to temporarily invest any unused proceeds from offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.

On November 18, 2011, we, through our Operating Partnership, entered into an amendment and restatement to the credit agreement with KeyBank (the “Restated KeyBank Credit Agreement”), as administrative agent, and Bank of America, as syndication agent (collectively the “Lenders”), thereby increasing the total amount of the Credit Facility to $70.0 million in a revised revolving credit facility, with each Lender committing $35 million. We drew an additional $0.4 million for related financing costs from the revised credit facility, which has a term of two years, maturing on November 18, 2013, with an option to extend for one year. During the initial two-year term of the revised credit agreement, we, through our Operating Partnership, may request an increase in the total commitments under the Credit Facility up to $150 million, subject to certain conditions.

As part of the amendment effective November 18, 2011, beginning with the quarter ended December 31, 2011, the liquidity requirement was $2.0 million through June 29, 2012 and $3.0 million from June 30, 2012 through the remainder of the term of the loans. Additional loan compliance covenants include, but are not limited to, a maximum total leverage ratio (65%), a minimum interest coverage ratio (1.85 to 1), a minimum fixed charge ratio (1.60 to 1), a maximum variable debt ratio (30%), and minimum tangible net worth of at least $50 million plus 80% of the net proceeds of any equity issuance after the effective date (as defined) and 100% of the equity in any properties contributed after the effective date. We were in compliance with all of our debt covenants as of March 31, 2012.

On January 31, 2012, we, through our Operating Partnership and four wholly-owned special purpose entities (“SPEs”) entered into that certain Joinder Agreement (the “Joinder Agreement”) with KeyBank and North Shore Community Bank & Trust Company (the “Subsequent Lender”), pursuant to which the Subsequent Lender agreed to become a lender party to the Restated KeyBank Credit Agreement, and agreed to provide a financing commitment of up to $10.0 million. Pursuant to the Joinder Agreement, the total commitment under the Restated KeyBank Credit Agreement increased to an aggregate of $80.0 million, governed by and subject to the terms and conditions of the Restated KeyBank Credit Agreement.

On March 16, 2012, the total commitment under the Restated KeyBank Credit Agreement increased to an aggregate of $115.0 million when Regions Bank agreed to become a lender party to the Restated KeyBank Credit Agreement, providing a financing commitment of up to $35.0 million, governed by and subject to the terms and conditions of the Restated KeyBank Credit Agreement.

In connection with the acquisition of the AT&T property as discussed in Note 3, Real Estate, on January 31, 2012, we drew $22.0 million from the revised Credit Facility to partially finance such acquisition, and on February 8, 2012, the unused borrowing base availability on the revolver of $1.7 million was drawn upon and was used to pay down the Mezzanine Loan discussed below. Additionally, on March 22, 2012, we drew $27.1 million from the Credit Facility to partially finance the acquisition of the Westinghouse property discussed in Note 3, Real Estate. As of March 22, 2012, approximately $86.2 million of the revised revolver was utilized, which is secured by the Renfro, Will Partners, ITT, Quad/Graphics, AT&T and Westinghouse properties. Per the terms of the revised Credit Facility, the maximum loan available is the lesser of the total commitments ($115.0 million) or the aggregate borrowing base availability ($86.2 million). Therefore, the borrowing base availability was fully utilized as of March 31, 2012.

On January 31, 2012, a property-owning special purpose entity wholly-owned by our Operating Partnership (the “Property SPE”) entered into a mezzanine loan agreement in which KeyBank serves as the initial lender with a total commitment of $15.0 million (the “Mezzanine Loan”). In connection with the acquisition of the AT&T property, on January 31, 2012, as discussed in Note 3, Real Estate, the Property SPE made a draw of $12.4 million from the Mezzanine Loan to partially finance such acquisition. The terms of the Mezzanine Loan require that the proceeds of the Mezzanine Loan be used to acquire the AT&T property and other potential acquisitions through the maturity date, July 31, 2012. The terms also require periodic payments equal to the net equity raised in our public offering, subject to a monthly minimum amount of $4.0 million. Pursuant to a financial covenant requirement in the Mezzanine Loan, gross proceeds from equity raised are subject to a monthly minimum amount of $4.0 million for the first three months of the six-month term and $5.0 million thereafter.

Through March 21, 2012, a total of $9.0 million in payments were made on the Mezzanine Loan, resulting in a balance of $3.4 million. In connection with the acquisition of the Westinghouse property on March 22, 2012, as discussed in Note 3, Real Estate, the Property SPE made a draw of $9.0 million from the Mezzanine Loan partially to finance such acquisition, resulting in a balance of $12.4 million. Through May 8, 2012, a total of $8.7 million in payments had been made on the Mezzanine Loan, resulting in a $3.7 million balance.

 

36


Table of Contents

Other potential future sources of capital include proceeds from our Public Offering, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility (other than the current Credit Facility) or other third party source of liquidity, we will be heavily dependent upon the proceeds of our Public Offering and income from operations in order to meet our long-term liquidity requirements and to fund our distributions.

Short-Term Liquidity and Capital Resources

We expect to meet our short-term operating liquidity requirements with proceeds received in our Public Offering and operating cash flows generated from our properties and other properties we acquire in the future. All advances from our advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in the “Management Compensation” section of our prospectus.

Our cash and cash equivalent balances decreased by $2.0 million during the three months ended March 31, 2012 and were used in or provided by the following:

Operating Activities. During the three months ended March 31, 2012, we generated $2.4 million of net cash from operating activities, compared to $1.0 million generated during the same period in 2011. The net loss in the current period is offset by (1) non-cash adjustments of $1.6 million (consisting of depreciation and amortization of $1.9 million less deferred rent of $0.3 million), which increased compared to the same period in 2011 in which non-cash adjustments totaled $1.1 million, as a result of the increase in depreciation and amortization and deferred rent related to the properties acquired subsequent to March 31, 2011; and (2) cash provided by working capital of $3.8 million compared to cash provided by working capital of $0.4 million for the three months ended March 31, 2012 and 2011, respectively. The increase in working capital is primarily due to the acquisition fees and expenses totaling $2.3 million related to the acquisitions made in the current period that were payable as of March 31, 2012.

Investing Activities. During the three months ended March 31, 2012, we used $76.2 million in cash for investing activities, specifically for the acquisition of the AT&T and Westinghouse properties. During the same period a year ago, there were no acquisitions made.

Financing Activities. During the three months ended March 31, 2012, we generated $71.8 million in financing activities as compared to $1.2 million used during the same period a year ago, an increase in cash provided by financing activities of $73.0 million. The increase in cash generated is the net result of $78.3 million of increased financing activity and a $5.3 million utilization of cash generated from financing activities. The $78.3 million increase is comprised of: (1) an increase of $72.2 million in proceeds from borrowing on the Credit Facility and Mezzanine Loan and (2) an increase of $6.1 million in the issuance of common stock during the three months ended March 31, 2012, compared to the same period a year ago. The $5.3 million utilization consists of the following: (1) an increase of $3.9 million in loan principal payments; (2) a $0.1 million increase in loan amortization compared to the same period a year ago due to the amortization of the LTI mortgage debt; (4) a $0.5 million increase in distribution payments; and (5) an increase in deferred financing costs of $0.8 million related to the borrowings on the Credit Facility and Mezzanine Loan as a result of the AT&T and Westinghouse property acquisitions.

Distributions and Our Distribution Policy

Distributions will be paid to our stockholders as of the record date selected by our board of directors. We expect to continue to pay distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares. We expect to pay distributions regularly unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our board of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Internal Revenue Code of 1986, as amended (the “Code”). The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:

 

   

the amount of time required for us to invest the funds received in our Public Offering;

 

   

our operating and interest expenses;

 

   

the amount of distributions or dividends received by us from our indirect real estate investments;

 

   

our ability to keep our properties occupied;

 

   

our ability to maintain or increase rental rates;

 

   

tenant improvements, capital expenditures and reserves for such expenditures;

 

37


Table of Contents
   

the issuance of additional shares; and

 

   

financings and refinancings.

We have funded distributions with operating cash flow from our properties and offering proceeds raised in our private offering and our Public Offering. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders.

The following table shows distributions paid during each of the last four quarters:

 

    March 31,
2012
          December 31,
2011
          September 30,
2011
          June 30,
2011
       

Distributions paid in cash- noncontrolling interests

  $ 582,838        $ 582,676        $ 589,080        $ 477,667     

Distributions paid in cash- redeemable noncontrolling interests (1)

    89,227          89,388          90,370          90,370     

Distributions paid in cash- common stockholders

    562,984          468,000          378,282          287,409     

Distributions reinvested (shares issued)

    461,599          340,387          244,294          192,978     
 

 

 

     

 

 

     

 

 

     

 

 

   

Total distributions

  $ 1,696,648 (2)      $ 1,480,451 (2)      $ 1,302,026 (2)      $ 1,048,424 (2)   
 

 

 

     

 

 

     

 

 

     

 

 

   

Source of distributions:

               

Cash flows provided by operations (3)

  $ 1,235,049        73 %    $ —          0 %    $ 1,057,732        81 %    $ 855,446        82 % 

Proceeds from issuance of common stock (including distributions reinvested pursuant to distribution reinvestment plan) (4)

    461,599        27     1,480,451        100     244,294        19     192,978        18
 

 

 

     

 

 

     

 

 

     

 

 

   

Total sources

  $ 1,696,648        100   $ 1,480,451        100   $ 1,302,026        100   $ 1,048,424        100
 

 

 

     

 

 

     

 

 

     

 

 

   

 

(1) Distributions represent the actual payments made to redeemable noncontrolling interests. These distributions are allocated to common stockholders (see consolidated statements of operations and comprehensive loss for the three months ended March 31, 2012) and noncontrolling interests (see consolidated statements of equity for the three months ended March 31, 2012) based on their respective ownership percentages as of March 31, 2012.
(2) Total distributions declared but not paid as of March 31, 2012 for noncontrolling interests (including our advisor), and common stockholders were $0.2 million, respectively.
(3) Percentages were calculated by dividing the respective source amount by the total sources of distributions.
(4) The terms of the Bridge Loan and Mezzanine Loan require periodic payments throughout the month equal to the net equity raised in our public offering, subject to a monthly minimum, as discussed in Note 4, Debt. During most of the three months ended March 31, 2012, proceeds from the issuance of common stock were used to pay down the principal balance of the Mezzanine Loan totaling $10.5 million. Additionally, during most of the year ended December 31, 2011, proceeds from the issuance of common stock were used to pay down the principal balance of the Bridge Loan totaling $20.2 million.

For the three months ended March 31, 2012, we paid and declared distributions of approximately $1.0 million to common stockholders and approximately $0.7 million to the limited partners of our Operating Partnership, as compared to negative FFO of approximately $(1.2) million. The payment of distributions from sources other than funds from operations may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.

 

38


Table of Contents

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of March 31, 2012:

 

     Payments Due During the Years Ending December 31,  
     Total      2012      2013-2014      2015-2016      Thereafter  

Outstanding debt obligations (1)

   $ 156,537,748       $ 11,826,463       $ 88,837,109       $ 33,564,769       $ 22,309,407   

Interest on outstanding debt obligations (2)

     24,746,042         4,797,689         12,330,931         5,691,766         1,925,656   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 181,283,790       $ 16,624,152       $ 101,168,040       $ 39,256,535       $ 24,235,063   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts include principal payments only. As of March 31, 2012, the total Credit Facility was $86.2 million and is due on November 18, 2014, assuming the one-year extension is exercised, and the total Mezzanine Loan was $10.9 million, maturing on July 31, 2012. The payments on the LTI mortgage debt do not include the premium of $0.4 million.
(2) Projected interest payments are based on the outstanding principal amounts and interest rates in effect at March 31, 2012.

Subsequent Events

See Note 9, Subsequent Events, to the consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. We expect that the primary market risk to which we will be exposed is interest rate risk, including the risk of changes in the underlying rates on our variable rate debt.

As of March 31, 2012, our debt consisted of the property-specific mortgage loans of $59.4 million, $86.2 million in draws from the Credit Facility and $10.9 million pursuant to the Mezzanine Credit Agreement. During the three months ended March 31, 2012, we obtained $50.8 million from the Credit Facility and $21.4 million pursuant to the Mezzanine Credit Agreement to partially finance certain acquisitions. A total of $10.5 million in payments were made on the mezzanine debt, resulting in a $10.9 million balance as of March 31, 2012.

In the future, we may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund acquisition, expansion, and financing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. In order to mitigate our interest rate risk on certain financial instruments, we have entered into interest rate cap agreements and in order to mitigate our risk to foreign currency exposure we may enter into foreign currency hedges. We will not enter into derivative or interest rate transactions for speculative purposes.

LTI Mortgage Debt

In conjunction with the contribution of the LTI property, we assumed $34.4 million in debt. See Note 4, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.

Emporia Partners Mortgage Debt

In conjunction with the contribution of the Emporia Partners property, we assumed $5.4 million in debt. See Note 4, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.

Credit Facility

On November 18, 2011, we increased the total amount of the Credit Facility to $70.0 million with the participation of another bank, upon which we drew an additional $0.4 million for related financing costs. On January 31, 2012, we increased the total amount of the Credit Facility to $80.0 million, upon which we drew an additional $22.0 million to partially finance the acquisition of the AT&T property, and on February 8, 2012, the unused borrowing base availability on the revolver of $1.7 million was drawn upon and was used to pay down the Mezzanine Loan discussed below. On March 16, 2012, we further increased the total Credit Facility to $115.0 million and on March 22, 2012, in order to partially finance the Westinghouse property acquisition, we made a draw of $27.1 million. As of March 31, 2012, $86.2 million of the revised revolver was utilized, which is secured by the Renfro, Will Partners, ITT, Quad/Graphics, AT&T and Westinghouse properties. See Note 4, Debt, to the consolidated financial statements, for a detailed description of the Credit Facility, which is subject to certain debt covenant requirements. An increase in the LIBO Rate of 1.00% may have an impact on our future earnings or cash flows as the current interest rate on the Credit Facility is tied to this index. We have secured a hedge against an increase in the LIBO Rate in excess of 1.00%.

 

39


Table of Contents

Mezzanine Loan

On January 31, 2012, we obtained $12.4 million to partially finance the acquisition of the AT&T property pursuant to the Mezzanine Loan with total commitments of $15.0 million. Through March 21, 2012, a total of $9.0 million in payments had been made on the Mezzanine Loan, resulting in a balance of $3.4 million. In connection with the acquisition of the Westinghouse property on March 22, 2012, we made a draw of $9.0 million from the Mezzanine Loan to partially finance such acquisition, resulting in a balance of $12.4 million. Through May 8, 2012, a total of $8.7 million in payments had been made on the Mezzanine Loan, resulting in a $3.7 million balance.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, with the participation of our principal executive and principal financial officers, including our president and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our president and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our president and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 other than the additional disclosure of the risk factor listed below.

In 2012 we paid a portion of our distributions from sources other than cash flow from operations; therefore, we will have fewer funds available for the acquisition of properties, and our stockholders’ overall return may be reduced.

In the event we do not have enough cash from operations to fund our distributions, we may borrow, issue additional securities or sell assets in order to fund the distributions or make the distributions out of net proceeds from this offering. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and we may use an unlimited amount from any source to pay our distributions. For the three months ended March 31, 2012, we funded 73% of our distributions (including reinvested distributions) using cash flow from operations and 27% using proceeds from our initial public offering. If we continue to pay distributions from sources other than cash flow from operations, we will have fewer funds available for acquiring properties, which may reduce our stockholders’ overall returns. Additionally, to the extent distributions exceed cash flow from operations, a stockholder’s basis in our stock may be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize a capital gain.

 

40


Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a) None.

 

(b) We registered 82,500,000 shares of our common stock in our Public Offering (SEC File No. 333-159167, effective November 6, 2009), of which we registered 75,000,000 shares to be offered to the public in our primary offering at an aggregate offering price of up to $750,000,000, or $10.00 per share, and 7,500,000 shares to be offered to investors pursuant to our distribution reinvestment plan at an aggregate offering price of $71,250,000, or $9.50 per share. Our equity raise as of March 31, 2012 resulted in the following:

 

Common shares issued in our Public Offering

     6,747,106   

Common shares issued in our Public Offering pursuant to the distribution reinvestment plan

     161,586   

Common shares redeemed in our share redemption program

     13,000   

Gross Public Offering proceeds

   $ 67,246,496   

Gross Public Offering proceeds from shares issued pursuant to our distribution reinvestment plan

     1,535,079   
  

 

 

 

Total Gross Public Offering proceeds

     68,751,575   

Redemption of common shares pursuant to our share redemption program

     130,000   

Selling commissions and dealer manager fees paid

     6,520,855   

Reimbursement to our advisor of O&O costs paid

     858,093   

Reimbursement to our advisor of O&O and other costs payable

     162,191   
  

 

 

 

Net Public Offering proceeds

   $ 61,110,436   
  

 

 

 

The net offering proceeds raised in the Public Offering were used to fund (1) Bridge Loan payments and Mezzanine Loan payments of $20.2 million and $10.5 million, respectively, used to acquire properties; (2) $14.4 million for certain property acquisitions; (3) $6.9 million of various fees paid to affiliates; (4) distributions of $1.6 million; (5) deferred financing costs of $2.6 million paid to non-affiliates; (6) other offering costs of $1.4 million paid to non-affiliates; (7) $0.8 million to pay real estate deposits to unaffiliated parties for potential future acquisitions, which is included in the prepaid expenses and other assets balance on the consolidated balance sheets; and (8) $2.7 million paid to non-affiliates for other acquisition expenses.

 

(c) As noted in Note 7, Commitments and Contingencies – Share Redemption Program, in the notes to the financial statements contained in this report, our board of directors adopted a share redemption program on February 20, 2009, which enables our stockholders to have their shares redeemed by us, subject to the significant conditions and limitations described in our prospectus. Our share redemption program has no set termination date, but our ability to redeem shares under the program is limited as described in the prospectus. As of March 31, 2012 and December 31, 2011, $1.5 million and $1.1 million in shares of common stock, respectively, were eligible for redemption. During the three months ended March 31, 2012, we redeemed 1,000 shares of common stock for approximately $0.01 million at a price per share of $9.25. During the year ended December 31, 2011, we redeemed 12,000 shares of common stock for approximately $0.1 million at a weighted average price per share of $9.38. As of March 31, 2012, there were 3,000 shares related to redemption requests to be processed subsequent to March 31, 2012. The redemption of these shares totaled approximately $0.03 million and was reclassified from redeemable common stock to accounts payable and accrued liabilities in the consolidated balance sheets as of March 31, 2012. On April 30, 2012, we satisfied all of the eligible redemption requests at a price per share of $10.00. Our board of directors may choose to amend, suspend or terminate our share redemption program upon 30 days’ written notice at any time.

During the quarter ended March 31, 2012, we redeemed shares as follows:

 

For the Month Ended

   Total
Number of
Shares
Redeemed
     Average
Price Paid
per Share
     Total Number of
Shares Redeemed as
Part of Publicly
Announced Plans or
Programs
     Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
 

January 31, 2012

     1,000       $ 9.25         1,000         (1

February 29, 2012

     —           N/A         —           —     

March 31, 2012

     —           N/A         —           —     

 

(1) A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table.

 

41


Table of Contents

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

 

(a) During the quarter ended March 31, 2012, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.

 

(b) During the quarter ended March 31, 2012, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS

The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.

EXHIBIT INDEX

The following exhibits are included in this Quarterly Report on Form 10-Q for the period ended March 31, 2012 (and are numbered in accordance with Item 601 of Regulation S-K).

 

Exhibit No.

  

Description

    3.1    Third Articles of Amendment and Restatement of Griffin Capital Net Lease REIT, Inc., incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form S-11, filed on October 29, 2009, Commission File No. 333-159167
    3.2    Bylaws of Griffin Capital Net Lease REIT, Inc., incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11, filed on May 12, 2009, Commission File No. 333-159167
    3.3    Articles of Amendment to Third Articles of Amendment and Restatement of Griffin Capital Net Lease REIT, Inc., incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 6 to the Registrant’s Registration Statement on Form S-11, filed on July 12, 2011, Commission File No. 333-159167
    4.1    Form of Subscription Agreement and Subscription Agreement Signature Page (included as Appendix B to prospectus, incorporated by reference to the Registrant’s final prospectus filed pursuant to Rule 424(b)(3), filed on July 22, 2011, Commission File No. 333-159167)
  10.1    Mezzanine Credit Agreement dated January 31, 2012, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, filed on February 2, 2012, Commission File No. 000-54377
  10.2    Equity Proceeds Pledge dated January 31, 2012, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, filed on February 2, 2012, Commission File No. 000-54377
  10.3    Ownership Interests Pledge dated January 31, 2012, incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K, filed on February 2, 2012, Commission File No. 000-54377
  10.4    Guaranty Agreement for Mezzanine Loan dated January 31, 2012, incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K, filed on February 2, 2012, Commission File No. 000-54377
  10.5    First Amendment to the Restated KeyBank Credit Agreement dated March 16, 2012, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 22, 2012, Commission File No. 000-54377
  10.6    Westinghouse Purchase Agreement dated August 18, 2011, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 22, 2012, Commission File No. 000-54377
  10.7    Westinghouse Lease dated September 2, 2009, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 22, 2012, Commission File No. 000-54377

 

42


Table of Contents

Exhibit No.

  

Description

  10.8    Second Amendment to Westinghouse Lease dated November 10, 2010, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, filed on March 22, 2012, Commission File No. 000-54377
  10.9    Third Amendment to Westinghouse Lease dated March 22, 2012, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, filed on March 22, 2012, Commission File No. 000-54377
  10.10    Guaranty dated March 22, 2012 incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K, filed on March 22, 2012, Commission File No. 000-54377
  31.1*    Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2*    Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1*    Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
  32.2*    Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
101*    The following Griffin Capital Net Lease REIT, Inc. financial information for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Comprehensive Income (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited) and (v) Notes to Consolidated Financial Statements (unaudited).

 

* Filed herewith.

 

43


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

GRIFFIN CAPITAL NET LEASE REIT, INC.

(Registrant)

Dated: May 9, 2012   By:  

/s/ Joseph E. Miller

   

Joseph E. Miller

On behalf of the Registrant and as Chief Financial Officer and Treasurer (Principal Financial Officer)

 

44