Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
OR | |
o | 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: 000-55197
American Finance Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 90-0929989 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
405 Park Ave., 14th Floor, New York, New York | 10022 | |
(Address of principal executive offices) | (Zip Code) | |
(212) 415-6500 | ||
(Registrant's telephone number, including area code) | ||
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 o
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 o
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 definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of July 31, 2015, the registrant had 66,455,212 shares of common stock outstanding.
AMERICAN FINANCE TRUST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN FINANCE TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, 2015 | December 31, 2014 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Real estate investments, at cost: | |||||||
Land | $ | 358,278 | $ | 358,278 | |||
Buildings, fixtures and improvements | 1,540,821 | 1,540,821 | |||||
Acquired intangible lease assets | 319,028 | 319,028 | |||||
Total real estate investments, at cost | 2,218,127 | 2,218,127 | |||||
Less: accumulated depreciation and amortization | (163,151 | ) | (110,875 | ) | |||
Total real estate investments, net | 2,054,976 | 2,107,252 | |||||
Cash and cash equivalents | 95,733 | 74,760 | |||||
Investment securities, at fair value | 10,100 | 18,991 | |||||
Prepaid expenses and other assets | 18,224 | 14,104 | |||||
Deferred costs, net | 13,315 | 13,923 | |||||
Total assets | $ | 2,192,348 | $ | 2,229,030 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Mortgage notes payable | $ | 469,601 | $ | 470,079 | |||
Mortgage premiums, net | 18,366 | 22,100 | |||||
Credit facility | 423,000 | 423,000 | |||||
Below-market lease liabilities, net | 18,803 | 19,473 | |||||
Accounts payable and accrued expenses (including $504 and $1,753 due to affiliates as of June 30, 2015 and December 31, 2014, respectively) | 8,839 | 12,799 | |||||
Deferred rent and other liabilities | 7,060 | 7,238 | |||||
Distributions payable | 8,987 | 9,176 | |||||
Total liabilities | 954,656 | 963,865 | |||||
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, none issued and outstanding | — | — | |||||
Common stock, $0.01 par value per share, 300,000,000 shares authorized, 66,251,118 and 65,257,954 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively | 662 | 653 | |||||
Additional paid-in capital | 1,460,480 | 1,437,147 | |||||
Accumulated other comprehensive income | 279 | 463 | |||||
Accumulated deficit | (223,729 | ) | (173,098 | ) | |||
Total stockholders' equity | 1,237,692 | 1,265,165 | |||||
Total liabilities and stockholders' equity | $ | 2,192,348 | $ | 2,229,030 | |||
The accompanying notes are an integral part of these statements.
3
AMERICAN FINANCE TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues: | |||||||||||||||
Rental income | $ | 40,216 | $ | 39,002 | $ | 80,431 | $ | 65,728 | |||||||
Operating expense reimbursements | 3,053 | 3,074 | 5,704 | 6,472 | |||||||||||
Total revenues | 43,269 | 42,076 | 86,135 | 72,200 | |||||||||||
Operating expenses: | |||||||||||||||
Asset management fees to affiliate | 4,096 | — | 4,096 | — | |||||||||||
Property operating | 3,439 | 3,432 | 6,526 | 6,959 | |||||||||||
Acquisition and transaction related | 377 | 4,087 | 506 | 18,619 | |||||||||||
General and administrative | 3,552 | 1,659 | 5,499 | 2,753 | |||||||||||
Depreciation and amortization | 25,386 | 24,921 | 50,773 | 42,809 | |||||||||||
Total operating expenses | 36,850 | 34,099 | 67,400 | 71,140 | |||||||||||
Operating income | 6,419 | 7,977 | 18,735 | 1,060 | |||||||||||
Other (expense) income: | |||||||||||||||
Interest expense | (8,239 | ) | (7,723 | ) | (16,399 | ) | (11,167 | ) | |||||||
Income from investment securities | 169 | 606 | 338 | 1,561 | |||||||||||
Gain (Loss) on sale of investment securities | — | 109 | 546 | (57 | ) | ||||||||||
Other income | 27 | 158 | 57 | 161 | |||||||||||
Total other expense, net | (8,043 | ) | (6,850 | ) | (15,458 | ) | (9,502 | ) | |||||||
Net income (loss) | $ | (1,624 | ) | $ | 1,127 | $ | 3,277 | $ | (8,442 | ) | |||||
Other comprehensive income (loss): | |||||||||||||||
Change in unrealized income on investment securities | (7 | ) | 2,073 | (184 | ) | 7,304 | |||||||||
Comprehensive income (loss) | $ | (1,631 | ) | $ | 3,200 | $ | 3,093 | $ | (1,138 | ) | |||||
Basic net income (loss) per share | $ | (0.02 | ) | $ | 0.02 | $ | 0.05 | $ | (0.13 | ) | |||||
Diluted net income (loss) per share | $ | (0.02 | ) | $ | 0.02 | $ | 0.05 | $ | (0.13 | ) | |||||
The accompanying notes are an integral part of these statements.
4
AMERICAN FINANCE TRUST, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2015
(In thousands, except share data)
(Unaudited)
Common Stock | ||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||
Balance, December 31, 2014 | 65,257,954 | $ | 653 | $ | 1,437,147 | $ | 463 | $ | (173,098 | ) | $ | 1,265,165 | ||||||||||
Common stock issued through distribution reinvestment plan | 1,266,452 | 12 | 29,890 | — | — | 29,902 | ||||||||||||||||
Common stock repurchases | (274,564 | ) | (3 | ) | (6,571 | ) | — | — | (6,574 | ) | ||||||||||||
Share-based compensation | 1,276 | — | 14 | — | — | 14 | ||||||||||||||||
Distributions declared | — | — | — | — | (53,908 | ) | (53,908 | ) | ||||||||||||||
Net income | — | — | — | — | 3,277 | 3,277 | ||||||||||||||||
Other comprehensive loss | — | — | — | (184 | ) | — | (184 | ) | ||||||||||||||
Balance, June 30, 2015 | 66,251,118 | $ | 662 | $ | 1,460,480 | $ | 279 | $ | (223,729 | ) | $ | 1,237,692 | ||||||||||
The accompanying notes are an integral part of this statement.
5
AMERICAN FINANCE TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | 3,277 | $ | (8,442 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Depreciation | 33,473 | 29,540 | |||||
Amortization of in-place lease assets | 17,300 | 13,269 | |||||
Amortization of deferred financing costs | 2,608 | 1,972 | |||||
Amortization of mortgage premiums | (3,734 | ) | (2,311 | ) | |||
Amortization of above-market lease assets and accretion of below-market lease liabilities, net | 833 | 593 | |||||
Share-based compensation | 14 | 11 | |||||
(Gain) Loss on sale of investment securities | (546 | ) | 57 | ||||
Changes in assets and liabilities: | |||||||
Prepaid expenses and other assets | (4,120 | ) | 2,613 | ||||
Accounts payable and accrued expenses | 1,115 | 929 | |||||
Deferred rent and other liabilities | (178 | ) | 4,400 | ||||
Net cash provided by operating activities | 50,042 | 42,631 | |||||
Cash flows from investing activities: | |||||||
Investments in real estate and other assets | — | (538,130 | ) | ||||
Proceeds from the sale of investment securities | 9,253 | 29,829 | |||||
Net cash provided by (used in) investing activities | 9,253 | (508,301 | ) | ||||
Cash flows from financing activities: | |||||||
Payments of mortgage notes payable | (478 | ) | (387 | ) | |||
Proceeds from credit facility | — | 423,000 | |||||
Payments of deferred financing costs | (2,000 | ) | (10,599 | ) | |||
Proceeds from issuances of common stock | — | 127 | |||||
Payments of offering costs and fees related to stock issuances, net | — | (31 | ) | ||||
Common stock repurchases | (11,649 | ) | (337 | ) | |||
Distributions paid | (24,195 | ) | (22,103 | ) | |||
Restricted cash | — | (167 | ) | ||||
Net cash (used in) provided by financing activities | (38,322 | ) | 389,503 | ||||
Net change in cash and cash equivalents | 20,973 | (76,167 | ) | ||||
Cash and cash equivalents, beginning of period | 74,760 | 101,176 | |||||
Cash and cash equivalents, end of period | $ | 95,733 | $ | 25,009 | |||
Supplemental Disclosures: | |||||||
Cash paid for interest | $ | 17,137 | $ | 9,024 | |||
Cash paid for income taxes | $ | 787 | $ | 361 | |||
Non-Cash Investing and Financing Activities: | |||||||
Mortgage notes payable assumed or used to acquire investments in real estate | $ | — | $ | 462,238 | |||
Premiums on assumed mortgage notes payable | $ | — | $ | 27,862 | |||
Common stock issued through distribution reinvestment plan | $ | 29,902 | $ | 30,127 | |||
The accompanying notes are an integral part of these statements.
6
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 1 — Organization
American Finance Trust, Inc. (the “Company”), formerly known as American Realty Capital Trust V, Inc., has acquired a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants. On April 15, 2015, upon recommendation by the Company’s advisor, American Finance Advisors, LLC (the "Advisor") and approval by the Company’s board of directors, the Company adopted new Investment Objectives and Acquisition and Investment Policies (the “New Strategy”). Under the New Strategy, the Company manages and optimizes its investments in its existing portfolio of net leased commercial real estate properties (the “Net Lease Portfolio”) and selectively invests in additional net lease properties. In addition, the Company invests in commercial real estate mortgage loans and other commercial real estate-related debt investments (such investments collectively, “CRE Debt Investments”). The Company intends to finance its CRE Debt Investments primarily through mortgage financing secured by its Net Lease Portfolio as well as mortgage specific repurchase agreement facilities and collateralized debt obligations.
On April 4, 2013, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 68.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11, as amended (File No. 333-187092) (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. The Registration Statement also covered up to 14.7 million shares of common stock at an initial price of $23.75 per share, which was 95.0% of the initial offering price of shares of common stock in the IPO, available pursuant to a distribution reinvestment plan (the "DRIP"), under which the Company's common stockholders could elect to have their distributions reinvested in additional shares of the Company's common stock. The IPO closed in October 2013.
On November 19, 2014, the Company's board of directors approved an estimated net asset value per share of the Company's common stock ("Estimated Per-Share NAV") of $23.50, calculated by the Advisor in accordance with the Company's valuation guidelines, as of September 30, 2014. Beginning with November 14, 2014 (the "Initial NAV Pricing Date") and ending with the suspension of the DRIP and the termination of the Company’s share repurchase plan (the “SRP”), the price per share for shares of common stock purchased under the DRIP and the price per share for shares of common stock repurchased by the Company pursuant to the SRP were each equal to the Estimated Per-Share NAV of the Company's common stock. On May 14, 2015, the board of directors approved an Estimated Per-Share NAV of the Company’s common stock equal to $24.17 per share as of March 31, 2015, calculated by the Advisor in accordance with the Company’s valuation guidelines, used in connection with the purchases of common stock under the DRIP following May 18, 2015 through the suspension of the DRIP, which became effective following the payment of the Company’s distribution on July 1, 2015. Following the suspension of the DRIP, the Company no longer publishes its Estimated Per-Share NAV.
The Company has applied to list its common stock on the New York Stock Exchange ("NYSE") under the symbol "AFIN" (the "Listing"). Completion of the Listing is subject to final approval by the NYSE. There can be no assurance that the Company’s shares of common stock will be listed on the NYSE.
The Company, incorporated on January 22, 2013, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ended December 31, 2013. Substantially all of the Company's business is conducted through American Finance Operating Partnership, L.P. (the "OP"), a Delaware limited partnership and its wholly-owned subsidiaries. The Company has no direct employees. The Company has retained the Advisor to manage the Company's affairs on a day-to-day basis. American Finance Properties, LLC (the "Property Manager") serves as the Company's property manager. Realty Capital Securities, LLC (the "Dealer Manager") served as the dealer manager of the IPO and continues to provide the Company with various strategic investment banking services. The Advisor and the Property Manager are wholly owned subsidiaries of, and the Dealer Manager is under common control with, AR Capital, LLC (the "Sponsor"), as a result of which, they are related parties of the Company. Each has received or may receive, as applicable, compensation, fees and other expense reimbursements for services related to the IPO and for the investment and management of the Company's assets. Such entities have received or may receive, as applicable, fees during the offering, acquisition, operational and liquidation stages. During the second quarter of 2014, the Company announced that it engaged J.P. Morgan Securities LLC and RCS Capital, the investment banking division of the Dealer Manager, as financial advisors to assist the Company in evaluating potential strategic alternatives. In connection with the Listing, the Company has also engaged UBS Securities LLC as a financial advisor.
7
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 2 — Summary of Significant Accounting Policies
The accompanying consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results for the entire year or any subsequent interim periods.
These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of, and for the year ended December 31, 2014, which are included in the Company's Annual Report on Form 10-K filed with the SEC on May 15, 2015. The Consolidated Statements of Operations and Comprehensive Income (Loss) and Cash Flows for the three and six months ended June 30, 2014, include adjustments, as previously disclosed in the Company’s Form 10-K, to reflect certain adjustments and final purchase price allocations to previously reported information associated with acquisitions completed during 2014. As a result, amortization and accretion of above-market lease assets and below-market lease liabilities decreased total revenue by $0.5 million and $0.6 million, depreciation and amortization expense decreased by $3.5 million and $4.6 million and net loss decreased $3.0 million and $4.0 million for the three and six months ended June 30, 2014, respectively. In addition, real estate investments, net increased $23.2 million, below market lease liabilities, net increased $19.2 million and total stockholders’ equity increased $4.0 million as of June 30, 2014. There have been no significant changes to the Company's significant accounting policies during the six months ended June 30, 2015, other than the updates described below.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The Company has not yet selected a transition method and is currently evaluating the impact of the new guidance.
In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company has adopted the provisions of this guidance for the fiscal year ending December 31, 2015 and determined that there is no impact to its financial position, results of operations and cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If the Company decides to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating the impact of the new guidance.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not previously been issued. If the Company decides to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating the impact of the new guidance.
8
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 3 — Real Estate Investments
The Company owned 463 properties as of June 30, 2015. The rentable square feet or annualized rental income on a straight-line basis of the four properties summarized below each represent 5.0% or more of the Company's total portfolio's rentable square feet or annualized rental income on a straight-line basis as of June 30, 2015.
Home Depot - Birmingham, AL
On September 24, 2013, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of Home Depot, a freestanding, single-tenant distribution facility located in Birmingham, Alabama ("Home Depot Birmingham"). The seller had no preexisting relationship with the Company. The purchase price of Home Depot Birmingham was $41.4 million, exclusive of closing costs. The acquisition of Home Depot Birmingham was funded with proceeds from the Company's IPO. The Company accounted for the purchase of Home Depot Birmingham as a business combination and incurred acquisition related costs of $0.5 million at the time of acquisition.
Home Depot - Valdosta, GA
On September 24, 2013, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of Home Depot, a freestanding, single-tenant distribution facility located in Valdosta, Georgia ("Home Depot Valdosta"). The sellers had no preexisting relationship with the Company. The purchase price of Home Depot Valdosta was $37.6 million, exclusive of closing costs. The acquisition of Home Depot Valdosta was funded with proceeds from the Company's IPO. The Company accounted for the purchase of Home Depot Valdosta as a business combination and incurred acquisition related costs of $0.4 million at the time of acquisition.
C&S Wholesale Grocers - Birmingham, AL
On February 21, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of C&S Wholesale Grocers, a freestanding, single-tenant distribution facility located in Birmingham, Alabama ("C&S Wholesale Grocers"). The seller had no preexisting relationship with the Company. The purchase price of C&S Wholesale Grocers was $54.4 million, exclusive of closing costs. The acquisition of C&S Wholesale Grocers was funded with proceeds from the Company's IPO and the assumption of existing mortgage debt secured by the property. The Company accounted for the purchase of C&S Wholesale Grocers as a business combination and incurred acquisition related costs of $0.8 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
Sanofi US - Bridgewater, NJ
On March 21, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of Sanofi US, a freestanding, single-tenant office facility located in Bridgewater, New Jersey ("Sanofi"). The seller had no preexisting relationship with the Company. The purchase price of Sanofi was $251.1 million, exclusive of closing costs. The acquisition of Sanofi was funded with proceeds from the Company's IPO and the assumption of existing mortgage debt secured by the property. The Company accounted for the purchase of Sanofi as a business combination and incurred acquisition related costs of $5.8 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
9
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
There were no real estate assets acquired or liabilities assumed during the six months ended June 30, 2015. The following table presents the allocation of real estate assets acquired and liabilities assumed during the six months ended June 30, 2014:
Six Months Ended | |||||
(Dollar amounts in thousands) | June 30, 2014 | ||||
Real estate investments, at cost: | |||||
Land | $ | 210,379 | |||
Buildings, fixtures and improvements | 672,121 | ||||
Total tangible assets | 882,500 | ||||
Acquired intangibles: | |||||
In-place leases | 175,152 | ||||
Above-market lease assets | 13,403 | ||||
Below-market lease liabilities | (19,692 | ) | |||
Total assets acquired | 1,051,363 | ||||
Mortgage notes payable assumed | (462,238 | ) | |||
Premiums on mortgage notes payable assumed | (27,862 | ) | |||
Deposits paid in prior periods | (33,035 | ) | |||
Cash paid for acquired real estate investments, at cost | $ | 528,228 | (1) | ||
Number of properties purchased | 224 | ||||
_____________________________________
(1) | Excludes cash paid for real estate investments financed through accounts payable in prior periods of $9.9 million. |
The following table presents future minimum base rent payments on a cash basis due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items:
(In thousands) | Future Minimum Base Rent Payments | |||
July 1, 2015 to December 31, 2015 | $ | 77,234 | ||
2016 | 157,026 | |||
2017 | 159,425 | |||
2018 | 130,992 | |||
2019 | 132,713 | |||
Thereafter | 836,249 | |||
$ | 1,493,639 | |||
The following table lists the tenants (including, for this purpose, all affiliates of such tenants) from which the Company derives annualized rental income on a straight-line basis constituting 10.0% or more of the Company’s consolidated annualized rental income on a straight-line basis for all portfolio properties as of the dates indicated:
June 30, | ||||
Tenant | 2015 | 2014 | ||
SunTrust Bank | 17.9% | 17.9% | ||
Sanofi US | 11.6% | 11.6% | ||
C&S Wholesale Grocer | 10.4% | 10.4% | ||
The termination, delinquency or non-renewal of leases by one or more of the above tenants may have a material adverse effect on revenues. No other tenant represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of June 30, 2015 and 2014.
10
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The following table lists the states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of June 30, 2015 and 2014:
June 30, | ||||
State | 2015 | 2014 | ||
New Jersey | 20.3% | 20.3% | ||
Georgia | 11.2% | 11.2% | ||
The Company did not own properties in any other state that in total represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of June 30, 2015 and 2014.
Note 4 — Investment Securities
As of June 30, 2015 and December 31, 2014, the Company had investments in debt securities consisting of redeemable preferred stock with an aggregate fair value of $10.1 million and $19.0 million respectively. These investments are considered available-for-sale securities and therefore increases or decreases in the fair value of these investments are recorded in accumulated other comprehensive income as a component of stockholders' equity on the consolidated balance sheets, unless the securities are considered to be other-than-temporarily impaired, at which time the losses would be reclassified to expense.
The following table details the unrealized gains and losses on investment securities as of June 30, 2015 and December 31, 2014:
(In thousands) | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
June 30, 2015 | ||||||||||||||||
Debt securities | $ | 9,821 | $ | 283 | $ | (4 | ) | $ | 10,100 | |||||||
December 31, 2014 | ||||||||||||||||
Debt securities | $ | 18,528 | $ | 463 | $ | — | $ | 18,991 | ||||||||
Unrealized losses as of June 30, 2015 were considered temporary and therefore no impairment was recorded during the three and six months ended June 30, 2015 and 2014.
During the six months ended June 30, 2015, the Company sold investments in redeemable preferred stock with an aggregate cost basis of $8.7 million for $9.2 million, resulting in a realized gain on sale of investment securities of $0.5 million. During three months ended June 30, 2014, the Company sold investments in redeemable preferred stock with an aggregate cost basis of $20.1 million for $20.2 million, resulting in a realized gain on sale of investment securities of $0.1 million. During the six months ended June 30, 2014, the Company sold investments in redeemable preferred stock and senior notes with an aggregate cost basis of $29.9 million for $29.8 million, resulting in a realized loss on sale of investment securities of $0.1 million. The Company had no sales of investments during the three months ended June 30, 2015.
The Company's preferred stock investments are redeemable at the respective issuer's option after five years from issuance.
Note 5 — Credit Facility
On September 23, 2013, the Company, through the OP, entered into a credit agreement (the "Credit Agreement") relating to a credit facility (the "Credit Facility") that provides for aggregate revolving loan borrowings of up to $200.0 million (subject to borrowing base availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility. Through amendments to the Credit Agreement, the OP increased commitments under the Credit Facility to $750.0 million as of June 30, 2015. As of June 30, 2015 and December 31, 2014, the outstanding balance under the Credit Facility was $423.0 million. The Company's unused borrowing capacity was $239.6 million and $234.6 million as of June 30, 2015 and December 31, 2014, respectively, based on the assets assigned to the Credit Facility. Availability of borrowings is based on a pool of eligible unencumbered real estate assets.
11
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Borrowings under the Credit Facility bear interest, at the OP's election, at either (i) the base rate (which is defined in the Credit Agreement as the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) LIBOR for a one month interest period plus 1.0%) plus an applicable spread ranging from 0.60% to 1.20%, depending on the Company's consolidated leverage ratio, or (ii) LIBOR plus an applicable spread ranging from 1.60% to 2.20%, depending on the Company's consolidated leverage ratio. The Credit Facility requires an unused fee per annum of 0.25% and 0.15%, if the unused balance of the Credit Facility exceeds, or is equal to or less than, 50.0% of the available facility, respectively.
The Credit Facility provides for monthly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Credit Facility will mature on September 23, 2017, provided that the OP, subject to certain conditions, may elect to extend the maturity date one year to September 23, 2018. The Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. Certain of the Company's subsidiaries and certain subsidiaries of the OP guarantee, and the equity of certain subsidiaries of the OP have been pledged as collateral for, the obligations under the Credit Facility.
The Credit Facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of June 30, 2015, the Company was in compliance with the financial covenants under the Credit Agreement.
In August 2015, the Company paid down in full the outstanding balance on the Credit Facility and concurrently terminated the Credit Facility in connection with the Loan Agreement described in Note 15 — Subsequent Events.
Note 6 — Mortgage Notes Payable
The Company's mortgage notes payable as of June 30, 2015 and December 31, 2014 consist of the following:
Outstanding Loan Amount as of | Effective Interest Rate as of | |||||||||||||||||||
Portfolio | Encumbered Properties | June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | Interest Rate | Maturity | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||
SAAB Sensis I | 1 | $ | 8,357 | $ | 8,519 | 6.01 | % | 6.01 | % | Fixed | Apr. 2025 | |||||||||
SunTrust Bank II | 30 | 25,000 | 25,000 | 5.50 | % | 5.50 | % | Fixed | Jul. 2021 | |||||||||||
C&S Wholesale Grocer I | 4 | 82,313 | 82,313 | 5.56 | % | 5.56 | % | Fixed | Apr. 2017 | |||||||||||
SunTrust Bank III | 121 | 99,677 | 99,677 | 5.50 | % | 5.50 | % | Fixed | Jul. 2021 | |||||||||||
SunTrust Bank IV | 30 | 25,000 | 25,000 | 5.50 | % | 5.50 | % | Fixed | Jul. 2021 | |||||||||||
Sanofi US I | 1 | 190,000 | 190,000 | 5.83 | % | 5.83 | % | Fixed | Dec. 2015 | |||||||||||
Stop & Shop I | 4 | 39,254 | 39,570 | 5.63 | % | 5.63 | % | Fixed | Jun. 2021 | |||||||||||
Total | 191 | $ | 469,601 | $ | 470,079 | 5.66 | % | (1) | 5.66 | % | (1) | |||||||||
_____________________________________
(1) | Calculated on a weighted-average basis for all mortgages outstanding as of the dates indicated. |
The following table summarizes the scheduled aggregate principal payments on mortgage notes payable for the five years subsequent to June 30, 2015:
(In thousands) | Future Principal Payments | |||
July 1, 2015 to December 31, 2015 | $ | 190,486 | ||
2016 | 1,014 | |||
2017 | 83,393 | |||
2018 | 1,143 | |||
2019 | 1,211 | |||
Thereafter | 192,354 | |||
$ | 469,601 | |||
12
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The Company's mortgage notes payable agreements require the compliance of certain property-level financial covenants including debt service coverage ratios. As of June 30, 2015, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
Note 7 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
The Company has investments in redeemable preferred stock that are traded in active markets and therefore, due to the availability of quoted prices in active markets, classified these investments as Level 1 in the fair value hierarchy.
The following table presents information about the Company's assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, aggregated by the level in the fair value hierarchy within which those instruments fall:
(In thousands) | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||||||
June 30, 2015 | ||||||||||||||||
Investment securities | $ | 10,100 | $ | — | $ | — | $ | 10,100 | ||||||||
December 31, 2014 | ||||||||||||||||
Investment securities | $ | 18,991 | $ | — | $ | — | $ | 18,991 | ||||||||
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets and liabilities. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2015.
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, prepaid expenses and other assets, accounts payable and accrued expenses and distributions payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets as of June 30, 2015 and December 31, 2014 are reported in the following table:
Carrying Amount at | Fair Value at | Carrying Amount at | Fair Value at | |||||||||||||||
(In thousands) | Level | June 30, 2015 | June 30, 2015 | December 31, 2014 | December 31, 2014 | |||||||||||||
Mortgage notes payable and premiums, net | 3 | $ | 487,967 | $ | 495,426 | $ | 492,179 | $ | 505,629 | |||||||||
Credit facility | 3 | $ | 423,000 | $ | 423,000 | $ | 423,000 | $ | 423,000 | |||||||||
13
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The fair value of mortgage notes payable is estimated by an independent third party using a discounted cash flow analysis, based on management’s estimates of market interest rates. Advances under the Credit Facility are considered to be reported at fair value, because its interest rate varies with changes in LIBOR.
Note 8 — Common Stock
As of June 30, 2015 and December 31, 2014, the Company had 66.3 million and 65.3 million shares of common stock outstanding, respectively, including unvested restricted shares and shares issued pursuant to the DRIP.
On April 9, 2013, the Company's board of directors authorized, and the Company declared a distribution payable to stockholders of record each day equal to $0.00452054795 per day, which is equivalent to $1.65 per annum, per share of common stock. Distributions began to accrue on May 13, 2013, 15 days following the Company's initial property acquisition. Distributions are payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month. Following the Listing, the Company expects to pay distributions on the 15th day of each month to stockholders of record as of close of business on the eighth day of such month. Distribution payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distributions payments are not assured.
Share Repurchase Program
The Company's board of directors previously adopted the SRP that enabled stockholders to sell their shares to the Company under limited circumstances. The SRP permitted stockholders to sell their shares back to the Company, subject to the significant conditions and limitations described below. In connection with the potential Listing, pursuant to the requirements of applicable tender offer rules, on April 15, 2015, the board of directors approved the termination of the SRP. The Company has processed all of the requests received under the SRP for the first and second quarters of 2015 and will not process further requests.
Only those stockholders who purchased their shares from the Company or received their shares from the Company (directly or indirectly) through one or more non-cash transactions were able to participate in the SRP. The repurchase of shares occurred on the last business day prior to the filing of each quarterly financial filing (and in all events on a date other than a dividend payment date).
Effective November 14, 2014 through the termination of the SRP, the repurchase price for shares under the SRP was based on the estimated net asset value ("NAV") per share of the Company's common stock ("Estimated Per-Share NAV") as determined by the Company's board of directors. Purchases under the SRP were limited in any calendar quarter to 1.25% of the Company's NAV as of the last day of the previous calendar quarter, or approximately 5.0% of the Company's NAV in any 12 month period.
Effective November 14, 2014 through the termination of the SRP, there was no minimum holding period for shares of the Company's common stock and stockholders could submit their shares for repurchase at any time through the SRP. Shares repurchased in connection with the death or disability of a stockholder were repurchased at a purchase price equal to the greater of the price paid for such shares and the then-current NAV (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the Company's common stock).
Subject to limited exceptions, stockholders who requested the repurchase of shares of the Company's common stock within the first four months from the date of purchase were subject to a short-term trading fee of 2.0%.
When a stockholder requested repurchases and the repurchases were approved, the Company reclassified such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP have the status of authorized but unissued shares. The following table summarizes the repurchases of shares under the SRP cumulatively through June 30, 2015:
Number of Requests | Number of Shares | Weighted-Average Price per Share | ||||||||
Cumulative repurchases as of December 31, 2014 | 158 | 303,907 | $ | 24.01 | ||||||
Six months ended June 30, 2015 | 93 | 274,564 | 23.83 | |||||||
Cumulative repurchases as of June 30, 2015 | 251 | 578,471 | $ | 23.98 | ||||||
14
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Distribution Reinvestment Plan
Pursuant to the DRIP, stockholders could elect to reinvest distributions by purchasing shares of common stock. In connection with the potential Listing, pursuant to the terms of the DRIP, on April 15, 2015, the Company's board of directors approved an amendment to the DRIP (the "DRIP Amendment") that enables the Company to suspend the DRIP. Subsequently, pursuant to the DRIP as amended by the DRIP Amendment, the Company's board of directors approved the suspension of the DRIP, effective immediately following the payment of the Company’s June 2015 monthly distribution. Accordingly, the final issuance of shares of common stock pursuant to the DRIP occurred in connection with the Company’s June 2015 distribution, paid on July 1, 2015. No dealer manager fees or selling commissions were paid with respect to shares purchased pursuant to the DRIP. Shares issued pursuant to the DRIP are recorded within stockholders' equity in the accompanying consolidated balance sheets in the period distributions were declared. Until November 14, 2014, the Company offered shares pursuant to the DRIP at $23.75, which was 95.0% of the initial offering price of shares of common stock in the IPO. Effective November 14, 2014 through the suspension of the DRIP, the Company offered shares pursuant to the DRIP at Estimated Per-Share NAV. During the six months ended June 30, 2015 and the year ended December 31, 2014, the Company issued 1.3 million and 2.6 million shares of common stock with a value of $29.9 million and $61.0 million, respectively, and a par value per share of $0.01, pursuant to the DRIP.
Note 9 — Commitments and Contingencies
Future Minimum Ground Lease Payments
The Company entered into ground lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter:
(In thousands) | Future Minimum Base Rent Payments | |||
July 1, 2015 to December 31, 2015 | $ | 445 | ||
2016 | 895 | |||
2017 | 900 | |||
2018 | 882 | |||
2019 | 882 | |||
Thereafter | 5,517 | |||
$ | 9,521 | |||
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company maintains environmental insurance for its properties that provides coverage for potential environmental liabilities, subject to the policy's coverage conditions and limitations. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on its financial position or results of operations.
Note 10 — Related Party Transactions and Arrangements
As of June 30, 2015 and December 31, 2014, American Finance Special Limited Partner, LLC (the “Special Limited Partner”), an entity controlled by the Sponsor, owned 8,888 shares of the Company's outstanding common stock and 90 OP Units.
15
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Fees Incurred in Connection with the IPO
The Dealer Manager was entitled to receive fees and compensation in connection with the sale of the Company's common stock in the IPO. The Dealer Manager received selling commissions of up to 7.0% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Dealer Manager received up to 3.0% of the gross proceeds from the sale of shares of common stock, before reallowance to participating broker-dealers, as a dealer manager fee. The Dealer Manager was permitted to reallow its dealer manager fee to such participating broker-dealers, based on such factors as the volume of shares sold by respective participating broker-dealers and marketing support incurred as compared to those of other participating broker-dealers. The following table details total selling commissions and dealer manager fees incurred from and due to the Dealer Manager as of and for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | Payable as of | ||||||||||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | June 30, 2015 | December 31, 2014 | ||||||||||||||||||
Total commissions and fees from the Dealer Manager | $ | — | $ | — | $ | — | $ | (3 | ) | (1) | $ | — | $ | (13 | ) | |||||||||
_________________________________
(1) | During the three months ended June 30, 2014, the Company was reimbursed for selling commissions and dealer manager fees as a result of share purchase cancellations related to common stock sales prior to the close of the IPO. |
The Advisor and its affiliates received fees and expense reimbursements for services relating to the IPO. The Company utilizes transfer agent services provided by an affiliate of the Dealer Manager. All offering costs related to the IPO incurred by the Company or its affiliated entities on behalf of the Company were charged to additional paid-in capital on the accompanying consolidated balance sheets. The following table details offering costs and reimbursements incurred from and due to the Advisor and Dealer Manager as of and for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | Payable as of | ||||||||||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | June 30, 2015 | December 31, 2014 | ||||||||||||||||||
Fees and expense reimbursements from the Advisor and Dealer Manager | $ | — | $ | — | $ | — | $ | (253 | ) | $ | — | $ | — | |||||||||||
Fees and Participations Incurred in Connection With the Operations of the Company
The Advisor is paid an acquisition fee equal to 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment. The Advisor is reimbursed for costs it incurs in providing services, or “insourced expenses.” Such insourced expenses may not exceed, 0.5% of the contract purchase price and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company pays third party acquisition expenses. The aggregate amount of acquisition fees and financing coordination fees (as described below) may not exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. As of June 30, 2015, aggregate acquisition fees and financing fees did not exceed the 1.5% threshold. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees payable with respect to a particular investment or reinvestment exceed 4.5% of the contract purchase price to be measured at the close of the acquisition phase or 4.5% of the amount advanced for a loan or other investment. As of June 30, 2015, the total of all acquisition fees, acquisition expenses and any financing coordination fees did not exceed the 4.5% threshold.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations.
On April 29, 2015, the independent directors of the board of directors unanimously approved certain amendments to the Amended and Restated Advisory Agreement, as amended (the “Advisory Agreement”), by and among the Company, the OP and the Advisor (the “Second A&R Advisory Agreement”). The Second A&R Advisory Agreement took effect on July 20, 2015, the date the Company filed certain changes to the Company’s Articles of Amendment and Restatement, which were approved by the Company’s stockholders on June 23, 2015. The initial term of the Second A&R Advisory Agreement is 20 years beginning on April 29, 2015, and automatically renewable for another 20-year term upon each 20-year anniversary unless terminated by the board of directors for cause.
16
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
In connection with asset management services provided by the Advisor, the Company issued to the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted, forfeitable partnership units of the OP designated as "Class B Units." The Class B Units are intended to be profit interests and will vest, and no longer be subject to forfeiture, at such time as: (a) the value of the OP's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pretax, non-compounded annual return thereon (the "economic hurdle"); (b) any one of the following events occurs concurrently with or subsequently to the achievement of the economic hurdle described above: (i) a listing; (ii) a transaction to which the Company or the OP, shall be a party, as a result of which OP Units or the Company's common stock shall be exchanged for, or converted into, the right, or the holders of such securities shall otherwise be entitled, to receive cash, securities or other property or any combination thereof; or (iii) the termination of the advisory agreement without cause; and (c) the Advisor pursuant to the advisory agreement is providing services to the Company immediately prior to the occurrence of an event of the type described in clause (b) above, unless the failure to provide such services is attributable to the termination without cause of the advisory agreement by an affirmative vote of a majority of the Company's independent directors after the economic hurdle described above has been met. Unvested Class B Units will be forfeited immediately if: (x) the advisory agreement is terminated for any reason other than a termination without cause; or (y) the advisory agreement is terminated without cause by an affirmative vote of a majority of the board of directors before the economic hurdle described above has been met.
The Class B Units were issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. The number of Class B Units issued in any quarter was equal to the cost of the Company's assets multiplied by 0.1875%, divided by the value of one share of common stock as of the last day of such calendar quarter, which was initially equal to $22.50 (the initial offering price in the IPO minus selling commissions and dealer manager fees) and, as of the Initial NAV Pricing Date, to Estimated Per-Share NAV. On April 15, 2015, the Company's board of directors approved an amendment (the "Amendment") to the Advisory Agreement, which, among other things, provides that, effective as of the date thereof:
(i) | for any period commencing on or after April 1, 2015, the Company pays the Advisor or its assignees as compensation for services rendered in connection with the management of the Company’s assets an Asset Management Fee (as defined in the Advisory Agreement) equal to 0.75% per annum of the Cost of Assets (as defined in the Advisory Agreement); |
(ii) | such Asset Management Fee is payable monthly in arrears in cash, in shares of common stock, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor; and |
(iii) | the Company shall not cause the OP to issue any Class B Units in respect of periods subsequent to March 31, 2015. |
As of June 30, 2015, in aggregate, the Company's board of directors had approved the issuance of 1,052,420 Class B Units to the Advisor in connection with this arrangement. As of June 30, 2015, the Company could not determine the probability of achieving the performance condition, as such, no expense was recognized in connection with this arrangement during the three and six months ended June 30, 2015 and 2014. The Advisor receives distributions on unvested Class B Units equal to the distribution amount received on the same number of shares of the Company's common stock. Such distributions on issued Class B Units are included in general and administrative expenses in the consolidated statements of operations and comprehensive income (loss). As stated above, pursuant to the Advisory Agreement, the OP will not issue any further Class B Units. The changes made pursuant to the Amendment were incorporated into the OP Agreement through a Third Amendment to the OP Agreement, which was approved by the board of directors and entered into on April 29, 2015.
17
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The Second A&R Advisory Agreement provides that the acquisition fee and financing coordination fee (both as defined in the Advisory Agreement) will terminate 180 days after July 20, 2015 (the “Fee Termination Date”), except for acquisition fees with respect to properties under contract, letter of intent, or under negotiation as of the Fee Termination Date. Such acquisition fees shall be paid quarterly in arrears. The Second A&R Advisory Agreement provides for a base management fee equal to $4.5 million per quarter plus 0.375% of the cumulative net proceeds of any equity raised subsequent to the Listing paid quarterly in arrears by the Company to the Advisor. In addition, the Second A&R Advisory Agreement provides for a variable management fee equal to (x) 15.0% of the applicable quarter’s Core Earnings per share in excess of $0.375 per share plus (y) 10.0% of the applicable quarter’s Core Earnings (as defined below) per share in excess of $0.50 per share, in each case as adjusted for changes in the number of shares of common stock outstanding. Core Earnings are defined as, for the applicable period, GAAP net income (loss) excluding non-cash equity compensation expense, the variable management fee, acquisition and transaction related fees and expenses, financing related fees and expenses, depreciation and amortization, realized gains and losses on the sale of assets, any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income, one-time events pursuant to changes in GAAP and certain non-cash charges, impairment losses on real estate related investments and other than temporary impairment of securities, amortization of deferred financing costs, amortization of tenant inducements, amortization of straight-line rent, amortization of market lease intangibles, provision for loss loans, and other non-recurring revenue and expenses.
In connection with providing strategic advisory services related to certain portfolio acquisitions, the Company has entered into arrangements in which the investment banking division of the Dealer Manager receives a transaction fee of 0.25% of the Transaction Value for certain portfolio acquisition transactions. Pursuant to such arrangements to date, "Transaction Value" has been defined as (i) the value of the consideration paid or to be paid for all the equity securities or assets in connection with the sale transaction or acquisition transaction (including consideration payable with respect to convertible or exchangeable securities and option, warrants or other exercisable securities and including dividends or distributions and equity security repurchases made in anticipation of or in connection with the sale transaction or acquisition transaction), or the implied value for all the equity securities or assets of the Company or acquisition target, as applicable, if a partial sale or purchase is undertaken, plus (ii) the aggregate value of any debt, capital lease and preferred equity security obligations (whether consolidated, off-balance sheet or otherwise) of the Company or acquisition target, as applicable, outstanding at the closing of the sale transaction or acquisition transaction), plus (iii) the amount of any fees, expenses and promote paid by the buyer(s) on behalf of the Company or the acquisition target, as applicable. Should the Dealer Manager provide strategic advisory services related to additional portfolio acquisition transactions, the Company will enter into new arrangements with the Dealer Manager on such terms as may be agreed upon between the two parties.
The following table details amounts incurred, forgiven and payable to related parties in connection with the operations-related services described above as of and for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | Payable as of | ||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||||
(In thousands) | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | June 30, 2015 | December 31, 2014 | ||||||||||||||||||||||||||||||
One-time fees and reimbursements: | ||||||||||||||||||||||||||||||||||||||||
Acquisition fees and related cost reimbursements | $ | — | $ | — | $ | 1,754 | $ | — | $ | — | $ | — | $ | 10,578 | $ | — | $ | — | $ | — | ||||||||||||||||||||
Financing coordination fees | — | — | 900 | — | — | — | 5,678 | — | — | — | ||||||||||||||||||||||||||||||
Ongoing fees: | ||||||||||||||||||||||||||||||||||||||||
Asset management fees | 4,096 | — | — | — | 4,096 | — | — | — | — | — | ||||||||||||||||||||||||||||||
Transfer agent and other professional services | 913 | — | 763 | — | 1,548 | — | 1,253 | — | 504 | 753 | ||||||||||||||||||||||||||||||
Distributions on Class B Units | 411 | — | 109 | — | 697 | — | 152 | — | — | — | ||||||||||||||||||||||||||||||
Total related party operation fees and reimbursements | $ | 5,420 | $ | — | $ | 3,526 | $ | — | $ | 6,341 | $ | — | $ | 17,661 | $ | — | $ | 504 | $ | 753 | ||||||||||||||||||||
18
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company's operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash expenses and excluding any gain from the sale of assets for that period, unless the Company's independent directors determine that such excess was justified based on unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the Advisor in subsequent periods. The Company may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions. No reimbursements were incurred from the Advisor for providing administrative services during the three and six months ended June 30, 2015 and 2014.
In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flows from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that are forgiven are not deferrals and, accordingly, will not be paid to the Advisor. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs or property operating costs. No such fees were waived or costs were absorbed by the Advisor during the three and six months ended June 30, 2015 and 2014.
Fees and Participations Incurred in Connection With Liquidation or Listing
In May 2014, the Company entered into a transaction management agreement with RCS Advisory Services, LLC, an entity under common control with the Dealer Manager, to provide strategic alternatives transaction management services through the occurrence of a liquidity event and a-la-carte services thereafter. The Company agreed to pay and has paid $3.0 million pursuant to this agreement. The Company did not incur expenses for services provided pursuant to this agreement during the three and six months ended June 30, 2015. During the three and six months ended June 30, 2014, the Company incurred an aggregate of $1.0 million of expenses for services provided pursuant to this agreement.
In May 2014, the Company entered into an information agent and advisory services agreement with the Dealer Manager and American National Stock Transfer, LLC, an entity under common control with the Dealer Manager, to provide in connection with a liquidity event, advisory services, educational services to external and internal wholesalers, communication support as well as proxy, tender offer or redemption and solicitation services. The Company agreed to pay $1.9 million in the aggregate pursuant to this agreement. The Company did not incur expenses for services provided pursuant to this agreement during the three and six months ended June 30, 2015. The Company incurred an aggregate of $0.6 million of expenses for services provided pursuant to this agreement during the three and six months ended June 30, 2014. During the three and six months ended June 30, 2015, the Company prepaid $0.3 million related to this agreement. As of June 30, 2015, $0.7 million of prepayments related to this agreement are included in prepaid expenses and other assets on the accompanying consolidated balance sheet.
The investment banking and capital markets division of the Dealer Manager provides the Company with strategic and financial advice and assistance in connection with (i) a possible sale transaction involving the Company (ii) the possible listing of the Company's securities on a national securities exchange, and (iii) a possible acquisition transaction involving the Company. The Dealer Manager will receive a listing advisory fee equal to the greatest of (i) an amount equal to 0.25% of Transaction Value (as defined above), (ii) $1.0 million and (iii) the highest fee payable to any co-bookrunner (or comparable person) in connection with the listing. If one of the above events does not occur, the Dealer Manager will receive a base advisory services fee of $1.0 million on the earlier of (a) the date the Dealer Manager resigns or is terminated for cause and (b) 18 months from the date of any other termination of this agreement by the Company. The Company did not incur expenses for services provided pursuant to this agreement during the three and six months ended June 30, 2015 and 2014.
The Company is required to pay the Advisor a subordinated performance fee calculated on the basis of the Company's total return to stockholders, payable annually in arrears, such that for any year in which the Company's total return on stockholders' capital exceeds 6.0% per annum, the Advisor will be entitled to 15.0% of the excess total return, provided that the annual subordinated performance fee paid to the Advisor does not exceed 10.0% of the aggregate total return for such year. This fee will be payable only upon the sale of assets, distributions or other event which results in the return on stockholders' capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the three and six months ended June 30, 2015 and 2014. Effective July 20, 2015, the Second A&R Advisory Agreement eliminated the subordinated performance fee.
19
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
In connection with the Listing, the Company, as the general partner of the OP, will cause the OP to issue a note (the “Listing Note”) to the Special Limited Partner to evidence the OP’s obligation to distribute to the Special Limited Partner an aggregate amount (the “Listing Amount”) equal to 15.0% of the difference (to the extent the result is a positive number) between:
• | the sum of (i) the “market value” (as defined in the Listing Note) of the Company’s Common Stock plus (ii) the sum of all distributions or dividends (from any source) paid by the Company to its stockholders prior to the Listing; and |
• | the sum of (i) the total raised in the Company’s initial public offering (“IPO”) and under the Company’s distribution reinvestment plan (“DRIP”) prior to the Listing (“Gross Proceeds”) plus (ii) the total amount of cash that, if distributed to those stockholders who purchased shares of Common Stock in the IPO and under the DRIP, would have provided those stockholders a 6.0% cumulative, non-compounded, pre-tax annual return (based on a 365-day year) on the Gross Proceeds. |
The “market value” used to calculate the Listing Amount will not be determinable until the end of a measurement period, the period of 30 consecutive trading days, commencing on the 180th calendar day following the Listing, unless another liquidity event, such as a merger, occurs prior to the end of the measurement period. If another liquidity event occurs prior to the end of the measurement period, the Listing Note provides for appropriate adjustment to the calculation of the Listing Amount.
The Listing Note evidences the Special Limited Partner’s right to receive distributions of “Net Sales Proceeds,” as defined in the Listing Note, until the Listing Note is paid in full; provided that, the Special Limited Partner has the right, but not the obligation, to convert the entire Listing Amount into OP Units. OP Units are convertible into shares of the Company’s Common Stock in accordance with the terms governing conversion of OP Units into shares of Common Stock and contained in the Second Amended and Restated Agreement of Limited Partnership of the OP (the “OP Agreement”), which will be entered into at Listing.
On April 29, 2015, the board of directors authorized the execution, in conjunction with the Listing, of an Amended and Restated Agreement of Limited Partnership of the OP (the “A&R OP Agreement”) by the Company, as general partner of its OP, with the limited partners party thereto to conform more closely with agreements of limited partnership of other operating partnerships controlled by real estate investment trusts whose securities are publicly traded and listed, and to add long term incentive plan units (“LTIP Units”) as a new class of units of limited partnership in the OP to the existing common units (“OP Units”). The Company may at any time cause the OP to issue LTIP Units pursuant to an outperformance agreement. On April 29, 2015, the board of directors approved the general terms of a Multi-Year Outperformance Agreement to be entered into with the Company, the OP and the Advisor in connection with the Listing. See Note 12 — Share-Based Compensation — Multi-Year Outperformance Agreement.
If the Company is not listed on a national securities exchange, the Company is required to pay a subordinated participation to the Special Limited Partner in the net sales proceeds of the sale of real estate assets of 15.0% of remaining net sales proceeds after return of capital contributions to investors plus payment to investors of an annual 6.0% cumulative, pre-tax, non-compounded annual return on the capital contributed by investors. There can be no assurance that the Company will provide this 6.0% annual return and the Special Limited Partner will not be entitled to the subordinated participation in net sale proceeds unless the Company's investors have received an annual 6.0% cumulative, pre-tax, non-compounded annual return on their capital contributions. No such participation in net sales proceeds became due and payable during the three and six months ended June 30, 2015 and 2014.
Upon termination or non-renewal of the advisory agreement, the Special Limited Partner will be entitled to receive distributions of net sales proceeds from the OP equal to 15.0% of the amount by which the sum of the Company's market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to a 6.0% annual cumulative, pre-tax, non-compounded annual return to investors. The Special Limited Partner may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.
Until 180 days after July 20, 2015, the Company will pay the Advisor a brokerage commission on any sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and one-half of the total brokerage commission paid, if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such fees were incurred during the three and six months ended June 30, 2015 and 2014.
20
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 11 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company's common stock available for issue, transfer agency services, as well as other administrative responsibilities for the Company including accounting services, transaction management services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 12 — Share-Based Compensation
Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the "Original RSP"), which provides for the automatic grant of 1,333 restricted shares of common stock to each of the independent directors, without any further action by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholders' meeting. Restricted stock issued to independent directors will vest over a five-year period following the date of grant in increments of 20.0% per annum. The Original RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to other entities that provide services to the Company. The total number of shares of common stock granted under the Original RSP may not exceed 5.0% of the Company's shares of common stock on a fully diluted basis at any time, and in any event will not exceed 3.4 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares.
The following table reflects restricted share award activity for the six months ended June 30, 2015:
Number of Shares of Common Stock | Weighted-Average Issue Price | |||||
Unvested, December 31, 2014 | 4,799 | $ | 22.50 | |||
Granted | 1,276 | 23.50 | ||||
Vested | (1,067 | ) | 22.50 | |||
Unvested, June 30, 2015 | 5,008 | $ | 22.75 | |||
The fair value of the restricted shares is being expensed on a straight-line basis over the service period of five years. Compensation expense related to restricted stock was approximately $7,000 and $6,000 for the three months ended June 30, 2015 and 2014, respectively. Compensation expense related to restricted stock was approximately $14,000 and $11,000 for the six months ended June 30, 2015 and 2014, respectively.
As of June 30, 2015, the Company had $0.1 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company's Original RSP. That cost is expected to be recognized over a weighted-average period of 3.8 years.
21
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
On April 29, 2015, the board of directors adopted an Amended and Restated RSP (the “A&R RSP”) that replaces in its entirety the Original RSP. The A&R RSP amends the terms of the Original RSP as follows:
• | it increases the number of shares of Company capital stock, par value $0.01 per share (the “Capital Stock”), available for awards thereunder from 5.0% of the Company’s outstanding shares of Capital Stock on a fully diluted basis at any time, not exceed 3.4 million shares of Capital Stock, to 10.0% of the Company’s outstanding shares of Capital Stock on a fully diluted basis at any time; |
• | it removes the fixed amount of shares that were automatically granted to the Company’s independent directors; and |
• | it adds restricted stock units (including dividend equivalent rights thereon) as a permitted form of award. |
Multi-Year Outperformance Plan Agreement
On April 29, 2015, the board of directors approved the general terms of a Multi-Year Outperformance Agreement (the “OPP”) to be entered into with the Company, the OP and the Advisor, in connection with the Listing.
Under the OPP, the Advisor will be issued LTIP Units in the OP with a maximum award value equal to 5.0% of the Company’s market capitalization (the “OPP Cap”) on the date of Listing (the “Effective Date”). The LTIP Units will be structured as profits interest in the OP. The Advisor will be eligible to earn a number of LTIP Units with a value up to the OPP Cap based on the Company’s achieving certain levels of total return to its stockholders (“Total Return”) on both an absolute basis and a relative basis measured against a peer group of companies, as set forth below, for a three-year period commencing on the Effective Date (the “Performance Period”). In addition, Advisor may “lock-in” a portion of the OPP Cap based on the attainment of pro-rata performance hurdles, as set forth below, during each 12-month period in the Performance Period (each such period, an “One-Year Period”) and during the initial 24-month period of the Performance Period (the “Two-Year Period”). Each of the relevant performance periods will be evaluated separately based on performance through the end of the relevant performance period.
Three-Year Period | Each One-Year Period | Two-Year Period | |||||||
Absolute Component: 4% of any excess Total Return attained above an absolute total stockholder return hurdle measured from the beginning of such period as follows: | 21% | 7% | 14% | ||||||
Relative Component: 4% of any excess Total Return attained above the Total Return for the performance period of the Peer Group*, subject to a ratable sliding scale factor as follows based on achieving cumulative Total Return measured from the beginning of the period: | |||||||||
• | 100% of the Relative Component will be earned if cumulative Total Return achieved is at least: | 18% | 6% | 12% | |||||
• | 50% of the Relative Component will be earned if cumulative Total Return achieved is: | —% | —% | —% | |||||
• | 0% of the Relative Component will be earned if cumulative Total Return achieved is less than: | —% | —% | —% | |||||
• | a percentage from 50% to 100% of the Relative Component calculated by linear interpolation will be earned if the cumulative Total Return achieved is between: | 0% - 18% | 0% - 6% | 0%- 12% | |||||
______________________
* | The “Peer Group” is comprised of Arbor Realty Trust, Inc., Ares Commercial Real Estate Corp., Colony Financial, Inc., and Starwood Property Trust, Inc. |
The maximum “lock-in” amount for any given One-Year Period is 25.0% of the OPP Cap. The maximum “lock-in” amount for the Two-Year Period is 60.0% of the OPP Cap. Accordingly, any “lock-in” amount for the Two-Year Period may supersede and negate any awards for the first two One-Year Periods. Any LTIP Units that are unearned at the end of the Performance Period will be forfeited.
Subject to Advisor’s continued service through each vesting date, one third of any earned LTIP Units will vest on each of the third, fourth and fifth anniversaries of the Effective Date. Any earned and vested LTIP Units may be converted into OP Units of the OP in accordance with the terms and conditions of the partnership agreement of the OP (as described above).
22
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
The OPP provides for early calculation of LTIP Units earned and for the accelerated vesting of any earned LTIP Units in the event Advisor is terminated by the Company or in the event the Company incurs a change in control, in either case prior to the end of the Performance Period. The OPP also provides for accelerated vesting of earned LTIP Units in the event Advisor is terminated or in the event of a change in control of the Company on or following the end of the Performance Period.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at each director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. There were no shares of common stock issued to directors in lieu of cash compensation during the three and six months ended June 30, 2015 and 2014.
Note 13 — Accumulated Other Comprehensive Income
The following tables illustrate the changes in accumulated other comprehensive income for the period presented below:
(In thousands) | Unrealized Gains on Available-for-sale Securities | ||||
Balance, January 1, 2015 | $ | 463 | |||
Other comprehensive loss, before reclassifications | (730 | ) | |||
Amounts reclassified from accumulated other comprehensive income | 546 | (1) | |||
Balance, June 30, 2015 | $ | 279 | |||
_________________________________
(1) | Amounts were reclassified to gain (loss) on sale of investment securities on the consolidated statements of operations and comprehensive income (loss). |
23
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 14 — Net Income (Loss) Per Share
The following table sets forth the basic and diluted net income (loss) per share computations for the three and six months ended June 30, 2015 and 2014:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(In thousands, except share and per share amounts) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Computation of Basic Net Income (Loss) Per Share: | ||||||||||||||||
Basic net income (loss) | $ | (1,624 | ) | $ | 1,127 | $ | 3,277 | $ | (8,442 | ) | ||||||
Basic weighted-average shares outstanding | 66,045,785 | 64,018,318 | 65,859,933 | 63,359,596 | ||||||||||||
Basic net income (loss) per share | $ | (0.02 | ) | $ | 0.02 | $ | 0.05 | $ | (0.13 | ) | ||||||
Computation of Diluted Net Income (Loss) Per Share: | ||||||||||||||||
Basic net income (loss) | $ | (1,624 | ) | $ | 1,127 | $ | 3,277 | $ | (8,442 | ) | ||||||
Adjustments to net income (loss) for common share equivalents | — | (156 | ) | (108 | ) | — | ||||||||||
Diluted net income (loss) | $ | (1,624 | ) | $ | 971 | $ | 3,169 | $ | (8,442 | ) | ||||||
Basic weighted-average shares outstanding | 66,045,785 | 64,018,318 | 65,859,933 | 63,359,596 | ||||||||||||
Shares of unvested restricted stock | — | 5,354 | (1) | 5,293 | (1) | — | ||||||||||
OP Units | — | 90 | 90 | — | ||||||||||||
Diluted weighted-average shares outstanding | 66,045,785 | 64,023,762 | 65,865,316 | 63,359,596 | ||||||||||||
Diluted net income (loss) per share | $ | (0.02 | ) | $ | 0.02 | $ | 0.05 | $ | (0.13 | ) | ||||||
_____________________________________
(1) | Weighted-average number of shares of unvested restricted stock outstanding for the periods presented. There were 5,008 and 7,199 shares of unvested restricted stock outstanding as of June 30, 2015 and 2014, respectively. |
Diluted net income (loss) per share assumes the conversion of all common share equivalents into an equivalent number of common shares, unless the effect is antidilutive. The Company considers unvested restricted stock, OP Units and Class B Units to be common share equivalents. The Company had the following weighted-average common share equivalents that were excluded from the calculation of diluted net loss per share as their effect would have been antidilutive for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||
2015 | 2014 | ||||||
Shares of unvested restricted stock | 5,485 | (1) | 4,681 | (1) | |||
OP Units | 90 | 90 | |||||
Class B Units | 998,786 | (2) | 185,116 | (2) | |||
Total weighted-average common share equivalents | 1,004,361 | 189,887 | |||||
_____________________________________
(1) | Weighted-average number of shares of unvested restricted stock outstanding for the periods presented. There were 5,008 and 7,199 shares of unvested restricted stock outstanding as of June 30, 2015 and 2014, respectively. |
(2) | Weighted-average number of issued and unvested Class B Units outstanding for the periods presented. The Company's board of directors had approved the issuance 1,052,420 and 339,678 Class B Units as of June 30, 2015 and 2014, respectively. |
24
AMERICAN FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 15 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to, or disclosures in, the consolidated financial statements except for the following disclosures:
Sponsor Transactions
On August 6, 2015, the Sponsor entered into a Transaction Agreement (the “Transaction Agreement”) with AMH Holdings (Cayman), L.P., a Cayman Islands exempted limited partnership (“AMH”), and an affiliate of Apollo Global Management, LLC (NYSE: APO) (together with its consolidated subsidiaries, “Apollo”), and a newly formed entity, AR Global Investments, LLC, a Delaware limited liability company (“AR Global”). The Transaction Agreement provides that the Sponsor will transfer to AR Global substantially all of the assets of its ongoing asset management business (including equity interests in its subsidiaries). AMH will contribute money and other assets to AR Global. Following the consummation of the transaction contemplated by the Transaction Agreement, AMH will hold a 60% interest in AR Global and the Sponsor will hold a 40% interest in AR Global. The business and affairs of AR Global will be overseen by a board of managers comprised of ten members, six of which will be appointed by AMH and four of which will be appointed by the Sponsor. The Advisor and the Property Manager are currently owned indirectly by the Sponsor and following the transaction will be owned indirectly by AR Global.
Also on August 6, 2015, RCS Capital Corporation (“RCS Capital”), the parent of the Dealer Manager and a company under common control with the Sponsor, announced that it has entered into an agreement with an affiliate of Apollo to sell RCS Capital’s Wholesale Distribution division, including the Dealer Manager, and certain related entities (collectively, the “Transactions”). Upon completion of the transaction, the Dealer Manager will continue to operate as a stand-alone entity within AR Global. The current management team of the Dealer Manager, which is led by William E. Dwyer III, will continue to operate the day-to-day functions of the business.
The Transactions are subject to customary closing conditions and are expected to close in 2015. Upon consummation of the Transactions, the Sponsor, Advisor and Property Manager are expected to continue to serve in their respective capacities to the Company. The Company’s independent directors unanimously endorsed the Transactions.
Term Loan Agreement
On August 7, 2015, certain subsidiaries of the Company entered into a $655.0 million term loan agreement (“Loan Agreement”) with Barclays Bank PLC, Column Financial Inc. and UBS Real Estate Securities Inc. The Loan Agreement has a stated maturity date of September 6, 2020 and a stated annual interest rate of 4.29625%; increasing up to 0.50% if, prior to the earlier of November 5, 2015 or full syndication or securitization of the loan, news or events regarding the Company, its sponsor, VEREIT, Inc. or their respective officers, directors, employees or affiliates becomes known or occurs which adversely affects the syndication or securitization of the loan. The loan is secured by mortgage interests in certain of the Company’s properties. In connection with the Loan Agreement, the Company entered into a Limited Recourse Guaranty, dated August 7, 2015, pursuant to which the Company has guaranteed payment of certain recourse obligations for which the borrowers may be personally liable.
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of American Finance Trust, Inc. and the notes thereto. As used herein, the terms "Company," "we," "our" and "us" refer to American Finance Trust, Inc., a Maryland corporation, including, as required by context, American Finance Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and its subsidiaries. The Company is externally managed by American Finance Advisors, LLC (our "Advisor"), a Delaware limited liability company. Capitalized terms used herein but not otherwise defined have the meaning ascribed to those terms in "Part I — Financial Information" included in the notes to the consolidated financial statements contained herein.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Finance Trust, Inc. (the "Company," "we" "our" or "us"), our Advisor and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
• | All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in American Finance Advisors, LLC (our "Advisor"), our dealer manager, Realty Capital Securities, LLC (the "Dealer Manager") or other entities under common control with AR Capital, LLC (our "Sponsor"). As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by American Realty Capital affiliates and conflicts in allocating time among these entities and us, which could negatively impact our operating results. |
• | Although we intend to list our shares of common stock on the New York Stock Exchange ("NYSE"), there can be no assurance that our shares of common stock will be listed. No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid. |
• | We depend on tenants for our rental revenue and, accordingly, our rental revenue is dependent upon the success and economic viability of our tenants. |
• | Our tenants may not achieve our rental rate incentives and our expenses could be greater, which may impact our results of operations. |
• | Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders. |
• | We may not generate cash flows sufficient to pay distributions to our stockholders, as such, we may be forced to borrow at unfavorable rates or depend on our Advisor to waive reimbursement of certain expenses and fees to fund our operations. There is no assurance that our Advisor will waive reimbursement of expenses or fees. |
• | We may be unable to pay or maintain cash distributions or increase distributions over time. |
• | We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates, including fees upon the sale of properties. Our Advisor and its affiliates receive fees in connection with transactions involving the purchase, financing, management and sale of our investments, and, because our Advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our Advisor’s interest are not wholly aligned with those of our stockholders. |
• | We are subject to risks associated with any dislocation or liquidity disruptions that may exist or occur in the credit markets of the United States of America from time to time. |
• | We may fail to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT"), which would result in higher taxes, may adversely affect our operations and would reduce the value of an investment in our common stock and our cash available for distributions. |
• | We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus subject to regulation under the Investment Company Act. |
26
• | Changes in general economic, business and political conditions, including the possibility of intensified international hostilities, acts of terrorism, and changes in conditions of United States or international lending, capital and financing markets. |
Overview
We have acquired a diversified portfolio of commercial properties comprised primarily of freestanding single-tenant properties that are net leased to investment grade and other creditworthy tenants. On April 15, 2015, upon recommendation by our advisor, American Finance Advisors, LLC (the "Advisor") and approval by our board of directors, we adopted new Investment Objectives and Acquisition and Investment Policies (the “New Strategy”). Under the New Strategy, we manage and optimize our investments in our existing portfolio of net leased commercial real estate properties (the “Net Lease Portfolio”) and selectively invest in additional net lease properties. In addition, we invest in commercial real estate mortgage loans and other commercial real estate-related debt investments (such investments collectively, “CRE Debt Investments”). We intend to finance our CRE Debt Investments primarily through mortgage financing secured by our Net Lease Portfolio as well as mortgage specific repurchase agreement facilities and collateralized debt obligations.
On April 4, 2013, we commenced our initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 68.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11, as amended (File No. 333-187092) (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement also covered up to 14.7 million shares of common stock at an initial price of $23.75 per share, which was 95.0% of the initial offering price of shares of common stock in the IPO, available pursuant to the DRIP, under which our common stockholders could elect to have their distributions reinvested in additional shares of our common stock. The IPO closed in October 2013.
On November 19, 2014, our board of directors approved an estimated net asset value per share of our common stock ("Estimated Per-Share NAV") of $23.50, calculated by our Advisor in accordance with our valuation guidelines, as of September 30, 2014. Beginning with November 14, 2014 (the "Initial NAV Pricing Date") and ending with the suspension of the DRIP and the termination of our share repurchase plan (the “SRP”), the price per share for shares of common stock purchased under the DRIP and the price per share for shares of common stock repurchased by us pursuant to our SRP were each equal to the Estimated Per-Share NAV of our common stock. On May 14, 2015, our board of directors approved an Estimated Per-Share NAV of our common stock equal to $24.17 per share as of March 31, 2015, calculated by our Advisor in accordance with our valuation guidelines, used in connection with the purchases of common stock under the DRIP following May 18, 2015 through the suspension of the DRIP, which became effective following the payment of our distribution on July 1, 2015. Following the suspension of the DRIP, we no longer publishes its Estimated Per-Share NAV.
We have applied to list our common stock on the NYSE under the symbol "AFIN" (the "Listing"). Completion of the Listing is subject to final approval by the NYSE. There can be no assurance that our shares of common stock will be listed on the NYSE.
Incorporated on January 22, 2013, we are a Maryland corporation that elected and qualified to be taxed as a REIT beginning with the taxable year ended December 31, 2013. Substantially all of our business is conducted through American Finance Operating Partnership, L.P. (the “OP”), a Delaware limited partnership and its wholly-owned subsidiaries. We have no direct employees. We have retained the Advisor to manage our affairs on a day-to-day basis. American Finance Properties, LLC (the "Property Manager") serves as our property manager. The Dealer Manager served as the dealer manager of the IPO and continues to provide us with various strategic investment banking services. The Advisor and the Property Manager are wholly owned subsidiaries of, and the Dealer Manager is under common control with, the Sponsor, as a result of which, they are related parties of ours. Each has received or may receive, as applicable, compensation, fees and other expense reimbursements for services related to the IPO and for the investment and management of our assets. Such entities have received or may receive, as applicable, fees during the offering, acquisition, operational and liquidation stages. During the second quarter of 2014, we announced that we engaged J.P. Morgan Securities LLC and RCS Capital, the investment banking division of the Dealer Manager, as financial advisors to assist us in evaluating potential strategic alternatives. In connection with the Listing, we have also engaged UBS Securities LLC as a financial advisor.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
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Offering and Related Costs
Offering and related costs include all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the dealer manager fee) include costs that may be paid by the Advisor, the Dealer Manager or their affiliates on our behalf. These costs include but are not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow related fees; (iii) reimbursement of the Dealer Manager for amounts it may pay to reimburse itemized and detailed due diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for the salaries of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. We are obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor is obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by us in its offering exceed 2.0% of gross offering proceeds from the IPO. As a result, these costs are only our liability to the extent selling commissions, the dealer manager fees and other organization and offering costs do not exceed 12.0% of the gross proceeds determined at the end of the IPO. As of the end of our IPO, offering costs were less than 12.0% of the gross proceeds received in the IPO.
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rents receivable that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. We defer the revenue related to lease payments received from tenants in advance of their due dates.
We own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, we defer the recognition of contingent rental income, until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. Contingent rental income is included in rental income on the consolidated statements of operations and comprehensive income (loss).
We continually review receivables related to rent and unbilled rents receivable and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. If a receivable is deemed uncollectible, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations and comprehensive income (loss).
Cost recoveries from tenants are included in operating expense reimbursements in our consolidated statements of operations and comprehensive income (loss) in the period the related costs are incurred, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive income (loss). If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates.
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In allocating non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations, prepared by independent valuation firms. We also consider information and other factors including: market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental rates, tenant credit profile, store profitability and the importance of the location of the real estate to the operations of the tenant’s business.
We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the consolidated statements of operations and comprehensive income (loss) at the lesser of carrying amount or fair value less estimated selling costs for all periods presented to the extent the disposal of a component represents a strategic shift that has or will have a major effect on our operations and financial results. Properties that are intended to be sold are to be designated as "held for sale" on the consolidated balance sheets when they meet specific criteria to be presented as held for sale. Properties are no longer depreciated when they are classified as held for sale.
Depreciation and Amortization
We are required to make subjective assessments as to the useful lives of the components of our real estate investments for purposes of determining the amount of depreciation to record on an annual basis. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our real estate investments, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. We have not yet selected a transition method and is currently evaluating the impact of the new guidance.
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In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We have adopted the provisions of this guidance for the fiscal year ending December 31, 2015 and determined that there is no impact to our financial position, results of operations and cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If we decide to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. We are currently evaluating the impact of the new guidance.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not previously been issued. If we decide to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. We are currently evaluating the impact of the new guidance.
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Properties
As of June 30, 2015, we owned 463 properties located in 37 states. All of these properties are freestanding, single-tenant properties, 100.0% leased with a weighted-average remaining lease term of 9.1 years as of June 30, 2015. In the aggregate, these properties represent 13.1 million rentable square feet.
The following table represents certain additional information about the properties we own at June 30, 2015:
Portfolio | Acquisition Date | Number of Properties | Rentable Square Feet | Remaining Lease Term (1) | |||||
Dollar General I | Apr. & May 2013 | 2 | 18,126 | 12.8 | |||||
Walgreens I | Jul. 2013 | 1 | 10,500 | 22.3 | |||||
Dollar General II | Jul. 2013 | 2 | 18,052 | 12.9 | |||||
Auto Zone I | Jul. 2013 | 1 | 7,370 | 12.1 | |||||
Dollar General III | Jul. 2013 | 5 | 45,989 | 12.9 | |||||
BSFS I | Jul. 2013 | 1 | 8,934 | 8.6 | |||||
Dollar General IV | Jul. 2013 | 2 | 18,126 | 10.7 | |||||
Tractor Supply I | Aug. 2013 | 1 | 19,097 | 12.4 | |||||
Dollar General V | Aug. 2013 | 1 | 12,480 | 12.6 | |||||
Mattress Firm I | Aug. & Nov. 2013; Feb., Mar. & Apr. 2014 | 5 | 23,612 | 10.2 | |||||
Family Dollar I | Aug. 2013 | 1 | 8,050 | 6.0 | |||||
Lowe's I | Aug. 2013 | 5 | 671,313 | 14.0 | |||||
O'Reilly Auto Parts I | Aug. 2013 | 1 | 10,692 | 15.0 | |||||
Food Lion I | Aug. 2013 | 1 | 44,549 | 14.3 | |||||
Family Dollar II | Aug. 2013 | 1 | 8,028 | 8.0 | |||||
Walgreens II | Aug. 2013 | 1 | 14,490 | 17.8 | |||||
Dollar General VI | Aug. 2013 | 1 | 9,014 | 10.7 | |||||
Dollar General VII | Aug. 2013 | 1 | 9,100 | 12.8 | |||||
Family Dollar III | Aug. 2013 | 1 | 8,000 | 7.3 | |||||
Chili's I | Aug. 2013 | 2 | 12,700 | 10.4 | |||||
CVS I | Aug. 2013 | 1 | 10,055 | 10.6 | |||||
Joe's Crab Shack I | Aug. 2013 | 2 | 16,012 | 11.8 | |||||
Dollar General VIII | Sep. 2013 | 1 | 9,100 | 13.1 | |||||
Tire Kingdom I | Sep. 2013 | 1 | 6,635 | 9.8 | |||||
Auto Zone II | Sep. 2013 | 1 | 7,370 | 7.9 | |||||
Family Dollar IV | Sep. 2013 | 1 | 8,320 | 8.0 | |||||
Fresenius I | Sep. 2013 | 1 | 5,800 | 10.0 | |||||
Dollar General IX | Sep. 2013 | 1 | 9,014 | 9.8 | |||||
Advance Auto I | Sep. 2013 | 1 | 10,500 | 8.0 | |||||
Walgreens III | Sep. 2013 | 1 | 15,120 | 10.8 | |||||
Walgreens IV | Sep. 2013 | 1 | 13,500 | 9.3 | |||||
CVS II | Sep. 2013 | 1 | 13,905 | 21.6 | |||||
Arby's I | Sep. 2013 | 1 | 3,000 | 13.0 | |||||
Dollar General X | Sep. 2013 | 1 | 9,100 | 12.8 | |||||
AmeriCold I | Sep. 2013 | 9 | 1,407,166 | 12.3 | |||||
Home Depot I | Sep. 2013 | 2 | 1,315,200 | 11.6 | |||||
New Breed Logistics I | Sep. 2013 | 1 | 390,486 | 6.4 | |||||
American Express Travel Related Services I | Sep. 2013 | 2 | 785,164 | 4.6 | |||||
L.A. Fitness I | Sep. 2013 | 1 | 45,000 | 8.7 | |||||
SunTrust Bank I | Sep. 2013 | 32 | 182,400 | 2.5 | |||||
National Tire & Battery I | Sep. 2013 | 1 | 10,795 | 8.4 | |||||
Circle K I | Sep. 2013 | 19 | 54,521 | 13.4 | |||||
Walgreens V | Sep. 2013 | 1 | 14,490 | 12.2 | |||||
Walgreens VI | Sep. 2013 | 1 | 14,560 | 13.8 | |||||
FedEx Ground I | Sep. 2013 | 1 | 21,662 | 7.9 | |||||
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Portfolio | Acquisition Date | Number of Properties | Rentable Square Feet | Remaining Lease Term (1) | |||||
Walgreens VII | Sep. 2013 | 10 | 142,140 | 14.3 | |||||
O'Charley's I | Sep. 2013 | 20 | 135,973 | 16.4 | |||||
Krystal Burgers Corporation I | Sep. 2013 | 6 | 12,730 | 14.2 | |||||
Merrill Lynch I | Sep. 2013 | 3 | 553,841 | 9.4 | |||||
1st Constitution Bancorp I | Sep. 2013 | 1 | 4,500 | 8.6 | |||||
American Tire Distributors I | Sep. 2013 | 1 | 125,060 | 8.6 | |||||
Tractor Supply II | Oct. 2013 | 1 | 23,500 | 8.3 | |||||
United Healthcare I | Oct. 2013 | 1 | 400,000 | 6.0 | |||||
National Tire & Battery II | Oct. 2013 | 1 | 7,368 | 16.9 | |||||
Tractor Supply III | Oct. 2013 | 1 | 19,097 | 12.8 | |||||
Mattress Firm II | Oct. 2013 | 1 | 4,304 | 8.2 | |||||
Dollar General XI | Oct. 2013 | 1 | 9,026 | 11.8 | |||||
Academy Sports I | Oct. 2013 | 1 | 71,640 | 13.0 | |||||
Talecris Plasma Resources I | Oct. 2013 | 1 | 22,262 | 7.8 | |||||
Amazon I | Oct. 2013 | 1 | 79,105 | 8.1 | |||||
Fresenius II | Oct. 2013 | 2 | 16,047 | 12.1 | |||||
Dollar General XII | Nov. 2013 & Jan. 2014 | 2 | 18,126 | 13.5 | |||||
Dollar General XIII | Nov. 2013 | 1 | 9,169 | 10.8 | |||||
Advance Auto II | Nov. 2013 | 2 | 13,887 | 7.9 | |||||
FedEx Ground II | Nov. 2013 | 1 | 48,897 | 8.1 | |||||
Burger King I | Nov. 2013 | 41 | 168,192 | 18.4 | |||||
Dollar General XIV | Nov. 2013 | 3 | 27,078 | 12.9 | |||||
Dollar General XV | Nov. 2013 | 1 | 9,026 | 13.4 | |||||
FedEx Ground III | Nov. 2013 | 1 | 24,310 | 8.2 | |||||
Dollar General XVI | Nov. 2013 | 1 | 9,014 | 10.4 | |||||
Family Dollar V | Nov. 2013 | 1 | 8,400 | 7.8 | |||||
Walgreens VIII | Dec. 2013 | 1 | 14,490 | 8.5 | |||||
CVS III | Dec. 2013 | 1 | 10,880 | 8.6 | |||||
Mattress Firm III | Dec. 2013 | 1 | 5,057 | 8.0 | |||||
Arby's II | Dec. 2013 | 1 | 3,494 | 12.8 | |||||
Family Dollar VI | Dec. 2013 | 2 | 17,484 | 8.6 | |||||
SAAB Sensis I | Dec. 2013 | 1 | 90,822 | 9.8 | |||||
Citizens Bank I | Dec. 2013 | 9 | 34,777 | 8.5 | |||||
Walgreens IX | Jan. 2014 | 1 | 14,490 | 7.6 | |||||
SunTrust Bank II | Jan. 2014 | 30 | 148,233 | 2.5 | |||||
Mattress Firm IV | Jan. 2014 | 1 | 5,040 | 9.2 | |||||
FedEx Ground IV | Jan. 2014 | 1 | 59,167 | 8.0 | |||||
Mattress Firm V | Jan. 2014 | 1 | 5,548 | 8.3 | |||||
Family Dollar VII | Feb. 2014 | 1 | 8,320 | 9.0 | |||||
Aaron's I | Feb. 2014 | 1 | 7,964 | 8.2 | |||||
Auto Zone III | Feb. 2014 | 1 | 6,786 | 7.8 | |||||
C&S Wholesale Grocer I | Feb. 2014 | 5 | 3,044,685 | 7.3 | |||||
Advance Auto III | Feb. 2014 | 1 | 6,124 | 9.2 | |||||
Family Dollar VIII | Mar. 2014 | 3 | 24,960 | 8.1 | |||||
Dollar General XVII | Mar. & May 2014 | 3 | 27,078 | 12.8 | |||||
SunTrust Bank III | Mar. 2014 | 121 | 646,535 | 2.5 | |||||
SunTrust Bank IV | Mar. 2014 | 30 | 171,209 | 2.5 | |||||
Dollar General XVIII | Mar. 2014 | 1 | 9,026 | 12.8 | |||||
Sanofi US I | Mar. 2014 | 1 | 736,572 | 11.0 | |||||
Family Dollar IX | Apr. 2014 | 1 | 8,320 | 8.8 | |||||
Stop & Shop I | May 2014 | 8 | 544,112 | 11.4 | |||||
Bi-Lo I | May 2014 | 1 | 55,718 | 10.5 | |||||
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Portfolio | Acquisition Date | Number of Properties | Rentable Square Feet | Remaining Lease Term (1) | |||||
Dollar General XIX | May 2014 | 1 | 12,480 | 13.2 | |||||
Dollar General XX | May 2014 | 5 | 48,584 | 11.8 | |||||
Dollar General XXI | May 2014 | 1 | 9,238 | 13.2 | |||||
Dollar General XXII | May 2014 | 1 | 10,566 | 11.8 | |||||
463 | 13,107,548 | 9.1 | |||||||
(1) | Remaining lease term in years as of June 30, 2015. If the portfolio has multiple properties with varying lease expirations, remaining lease term is calculated on a weighted-average basis. |
Results of Operations
We were incorporated on January 22, 2013 and purchased our first property and commenced active operations on April 29, 2013. As of June 30, 2015 and 2014, we owned 463 properties with an aggregate base purchase price of $2.2 billion, comprised of 13.1 million rentable square feet that were 100.0% leased on a weighted-average basis.
Comparison of the Three Months Ended June 30, 2015 to the Three Months Ended June 30, 2014
As of April 1, 2014, we owned 443 properties (our "Same Store") with an aggregate base purchase price of $2.0 billion, comprised of 12.4 million rentable square feet that were 100.0% leased on a weighted-average basis. We have acquired 20 properties since April 1, 2014 for an aggregate base purchase price of $168.0 million, comprised of 0.7 million rentable square feet that were 100.0% leased on a weighted-average basis as of June 30, 2015 (our "Three Month Acquisitions").
Rental Income
Rental income increased $1.2 million to $40.2 million for the three months ended June 30, 2015, compared to $39.0 million for the three months ended June 30, 2014. This increase in rental income was primarily due to our Three Month Acquisitions.
Operating Expense Reimbursements
Operating expense reimbursement revenue remained constant at $3.1 million for the three months ended June 30, 2015 and 2014. We operated 463 properties as of June 30, 2015 and 2014. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties.
Asset Management Fees to Affiliate
Asset management fees to affiliate for the three months ended June 30, 2015 of $4.1 million were related to services that we received from our Advisor in connection with the management of our assets. From March 31, 2015 through July 20, 2015, we paid this fee to our Advisor on a monthly basis, pursuant to the Advisory Agreement. Subsequent to July 20, 2015, pursuant to the Second A&R Advisory Agreement, we will no longer pay an asset management fee. Please see Note 10 — Related Party Transactions and Arrangements for more information on fees payable to our Advisor pursuant to the Second A&R Advisory Agreement. There were no asset management fees to affiliate incurred during the three months ended June 30, 2014.
Property Operating Expense
Property operating expense remained constant at $3.4 million for the three months ended June 30, 2015 and 2014. These costs primarily related to ground lease rent, real estate taxes, insurance and other property operating costs on our properties. We operated 463 properties as of June 30, 2015 and 2014.
Acquisition and Transaction Related Expense
Acquisition and transaction related expense decreased $3.7 million to $0.4 million for the three months ended June 30, 2015, compared to $4.1 million for the three months ended June 30, 2014. We did not acquire any properties during the three months ended June 30, 2015; the $0.4 million of acquisition and transaction related expense primarily related to third party appraisal costs incurred in connection with our purchase price allocation procedures. For the three months ended June 30, 2014, acquisition and transaction related expense related to acquisition fees, legal fees, strategic advisory fees and other closing costs associated with our Three Month Acquisitions.
General and Administrative Expense
General and administrative expense increased $1.9 million to $3.6 million for the three months ended June 30, 2015, compared to $1.7 million for the three months ended June 30, 2014. The increase in general and administrative expense for the three months ended June 30, 2015 was primarily due to increases in professional fees relating to stockholder services, legal fees and distributions on Class B Units. At the time the IPO closed in October 2013, we began to expense, as incurred, professional fees relating to stockholder services, because these costs no longer related to fulfilling subscriptions and offering costs.
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Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.5 million to $25.4 million for the three months ended June 30, 2015, compared to $24.9 million for the three months ended June 30, 2014. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.
Interest Expense
Interest expense increased $0.5 million to $8.2 million for the three months ended June 30, 2015, compared to approximately $7.7 million for the three months ended June 30, 2014. This increase is primarily related to interest, unused fees and amortization of deferred financing costs associated with our credit facility and mortgage notes payable, partially offset by amortization of mortgage premiums. The following table presents the weighted-average balances of our mortgage notes payable and credit facility borrowings outstanding, associated interest expense and corresponding weighted-average interest rates for the three months ended June 30, 2015 and 2014, as well as the amortization of deferred financing costs and mortgage premiums for such periods:
Three Months Ended June 30, | ||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||
Weighted-Average Carrying Value | Interest Expense | Weighted-Average Interest Rate | Weighted-Average Carrying Value | Interest Expense | Weighted-Average Interest Rate | |||||||||||||||||
Mortgage Notes Payable | $ | 469,719 | $ | 6,614 | 5.66 | % | $ | 450,849 | $ | 6,401 | 5.66 | % | ||||||||||
Credit Facility | $ | 423,000 | 2,194 | 1.94 | % | $ | 381,750 | 1,931 | 2.22 | % | ||||||||||||
Amortization of deferred financing costs | 1,306 | 1,217 | ||||||||||||||||||||
Amortization of mortgage premiums | (1,875 | ) | (1,826 | ) | ||||||||||||||||||
Interest Expense | $ | 8,239 | $ | 7,723 | ||||||||||||||||||
Income from Investment Securities
Income from investment securities decreased $0.4 million to $0.2 million for the three months ended June 30, 2015, compared to $0.6 million for the three months ended June 30, 2014. This decrease resulted primarily from the sale of several investment securities between June 30, 2014 and June 30, 2015. We held investment securities, at fair value, of $10.1 million as of June 30, 2015, compared to $36.0 million as of June 30, 2014.
Gain on Sale of Investment Securities
Gain on sale of investment securities of $0.1 million for the three months ended June 30, 2014 resulted from the sale of investments in redeemable preferred stock with an aggregate cost basis of $20.1 million for $20.2 million. There were no sales of investment securities, and thus no gains on sale of investment securities, during the three months ended June 30, 2015.
Comparison of the Six Months Ended June 30, 2015 to the Six Months Ended June 30, 2014
As of January 1, 2014, we owned 239 properties (our "Same Store") with an aggregate base purchase price of $1.1 billion, comprised of 7.5 million rentable square feet that were 100.0% leased on a weighted-average basis. We have acquired 224 properties since January 1, 2014 for an aggregate base purchase price of $1.0 billion, comprised of 5.6 million rentable square feet that were 100.0% leased on a weighted-average basis as of June 30, 2015 (our "Six Month Acquisitions").
Rental Income
Rental income increased $14.7 million to $80.4 million for the six months ended June 30, 2015, compared to $65.7 million for the six months ended June 30, 2014. This increase in rental income was due to our Six Month Acquisitions.
Operating Expense Reimbursements
Operating expense reimbursement revenue decreased $0.8 million to $5.7 million for the six months ended June 30, 2015, compared to $6.5 million for the six months ended June 30, 2014. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. This decrease in operating expense reimbursements was due to decreased reimbursement of common area maintenance expenses at our Merrill Lynch properties as a result of revisions to the properties’ operating budget.
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Asset Management Fees to Affiliate
Asset management fees to affiliate for the six months ended June 30, 2015 of $4.1 million were related to services that we received from our Advisor in connection with the management of our assets. From March 31, 2015 through July 20, 2015, we paid this fee to our Advisor on a monthly basis, pursuant to the Advisory Agreement. Subsequent to July 20, 2015, pursuant to the Second A&R Advisory Agreement, we will no longer pay an asset management fee. Please see Note 10 — Related Party Transactions and Arrangements for more information on fees payable to our Advisor pursuant to the Second A&R Advisory Agreement. There were no asset management fees to affiliate incurred during the six months ended June 30, 2014.
Property Operating Expense
Property operating expense decreased $0.5 million to $6.5 million for the six months ended June 30, 2015, compared to $7.0 million for the six months ended June 30, 2014. These costs primarily related to ground lease rent, real estate taxes, insurance and other property operating costs on our properties. The decrease in property operating expense was due to decreased common area maintenance expenses at our Merrill Lynch properties as a result of a revisions to the properties’ operating budget.
Acquisition and Transaction Related Expense
Acquisition and transaction related expense decreased $18.1 million to $0.5 million for the six months ended June 30, 2015, compared to $18.6 million for the six months ended June 30, 2014. We did not acquire any properties during the six months ended June 30, 2015; the $0.5 million of acquisition and transaction related expense primarily related to third party appraisal costs incurred in connection with our purchase price allocation procedures. For the six months ended June 30, 2014, acquisition and transaction related expense related to acquisition fees, legal fees and other closing costs associated with our Six Month Acquisitions.
General and Administrative Expense
General and administrative expense increased $2.7 million to $5.5 million for the six months ended June 30, 2015, compared to $2.8 million for six months ended June 30, 2014. This increase is primarily due to higher professional fees, legal fees, local income taxes and distributions on Class B Units compared to the six months ended June 30, 2014.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $8.0 million to $50.8 million for the six months ended June 30, 2015, compared to $42.8 million for the six months ended June 30, 2014. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.
Interest Expense
Interest expense increased $5.2 million to $16.4 million for the six months ended June 30, 2015, compared to $11.2 million for the six months ended June 30, 2014. This increase is due primarily to an increase in interest, unused fees and amortization of deferred financing costs associated with our mortgage notes payable and credit facility, partially offset by amortization of mortgage premiums. The following table presents the weighted-average balances of our mortgage notes payable and credit facility borrowings outstanding, associated interest expense and corresponding weighted-average interest rates for the six months ended June 30, 2015 and 2014, as well as the amortization of deferred financing costs and mortgage premiums for such periods:
Six Months Ended June 30, | ||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||
Weighted-Average Carrying Value | Interest Expense | Weighted-Average Interest Rate | Weighted-Average Carrying Value | Interest Expense | Weighted-Average Interest Rate | |||||||||||||||||
Mortgage Notes Payable | $ | 469,841 | $ | 13,172 | 5.66 | % | $ | 280,303 | $ | 8,093 | 5.66 | % | ||||||||||
Credit Facility | $ | 423,000 | 4,352 | 1.93 | % | $ | 265,714 | 3,414 | 2.51 | % | ||||||||||||
Amortization of deferred financing costs | 2,608 | 1,971 | ||||||||||||||||||||
Amortization of mortgage premiums | (3,733 | ) | (2,311 | ) | ||||||||||||||||||
Interest Expense | $ | 16,399 | $ | 11,167 | ||||||||||||||||||
Income from Investment Securities
Income from investment securities decreased $1.3 million to $0.3 million for the six months ended June 30, 2015, compared to $1.6 million for the six months ended June 30, 2014. This decrease resulted primarily from our sale of several investment securities between June 30, 2014 and June 30, 2015. We held investment securities, at fair value, of $10.1 million as of June 30, 2015, compared to $36.0 million as of June 30, 2014.
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Gain on Sale of Investment Securities
Gain on sale of investment securities of $0.5 million for the six months ended June 30, 2015 resulted from the sale of investments in redeemable preferred stock with an aggregate cost basis of $8.7 million for $9.2 million. Loss on sale of investment securities of $0.1 million for the six months ended June 30, 2014 resulted from the sale of investments in redeemable preferred stock and senior notes with an aggregate cost basis of $29.9 million for $29.8 million.
Cash Flows for the Six Months Ended June 30, 2015
During the six months ended June 30, 2015, we had cash flows provided by operating activities of $50.0 million. The level of cash flows used in or provided by operating activities is affected by, among other things, receipt of rental revenue and the amount of acquisition and transaction related costs incurred. Cash flows from operating activities during the six months ended June 30, 2015 include $0.5 million of acquisition and transaction related costs. Cash inflows during the six months ended June 30, 2015 included a net income adjusted for non-cash items of $53.2 million (net income of $3.3 million adjusted for non-cash items, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs and share-based compensation, partially offset by a gain on sale of investments and amortization of mortgage premiums, of $49.9 million) and an increase in accounts payable and accrued expenses of $1.1 million. These cash inflows were partially offset by an increase in prepaid expenses and other assets of $4.1 million and a decrease in deferred rent and other liabilities of $0.2 million.
The net cash provided by investing activities during the six months ended June 30, 2015 of $9.3 million related to proceeds from the sale of investment securities.
The net cash used in financing activities of $38.3 million during the six months ended June 30, 2015 consisted primarily of cash distributions of $24.2 million, common stock repurchases of $11.6 million, payments of deferred financing costs of $2.0 million and payments of mortgage notes payable of $0.5 million.
Cash Flows for the Six Months Ended June 30, 2014
During the six months ended June 30, 2014, we had cash flows provided by operating activities of $42.6 million. The level of cash flows used in or provided by operating activities is affected by the amount of acquisition and transaction related costs incurred, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the six months ended June 30, 2014 include $18.6 million of acquisition and transaction related costs. Cash inflows during the six months ended June 30, 2014 included a net loss adjusted for non-cash items of $34.7 million (net loss of $8.4 million adjusted for non-cash items, including depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs, share-based compensation and loss on sale of investments, partially offset by amortization of mortgage premiums, of $43.1 million). Cash inflows also included an increase in deferred rent and other liabilities of $4.4 million, a decrease in prepaid expenses and other assets of $2.6 million primarily due to a decrease in accounts receivable based on the timing of receipt of payments and an increase in accounts payable and accrued expenses of $0.9 million.
The net cash used in investing activities during the six months ended June 30, 2014 of $508.3 million related to our investments in real estate and other assets of $538.1 million, partially offset by proceeds from the sale of investment securities of $29.8 million.
The net cash provided by financing activities of $389.5 million during the six months ended June 30, 2014 consisted primarily of proceeds from our credit facility of $423.0 million and proceeds from issuances of common stock of $0.1 million. These cash inflows were partially offset by cash distributions of $22.1 million, payments of deferred financing costs of $10.6 million, payments of mortgage notes payable of $0.4 million, common stock repurchases of $0.3 million and an increase in our restricted cash balance of $0.2 million.
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Liquidity and Capital Resources
On April 25, 2013, we received and accepted aggregate subscriptions in excess of the minimum of $2.0 million in shares of common stock, broke escrow and issued shares of common stock to our initial investors who were admitted as stockholders. As permitted under our Registration Statement, we reallocated the remaining 14.5 million DRIP shares available under the Registration Statement to the primary offering. Concurrent with such reallocation, we registered an additional 14.7 million shares to be issued under the DRIP pursuant to a registration statement on Form S-11, as amended (File No. 333-191255), which became effective on October 5, 2013. Our IPO closed on October 31, 2013. As of June 30, 2015, we had 66.3 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO and the DRIP of $1.6 billion. On November 19, 2014, our board of directors approved an Estimated Per-Share NAV of $23.50, calculated by the Advisor in accordance with our valuation guidelines, as of September 30, 2014. Beginning with the Initial NAV Pricing Date and ending with the suspension of the DRIP and the termination of our SRP, the price per share for shares of common stock purchased under the DRIP and the price per share for shares of common stock repurchased by us pursuant to our SRP were each equal to our Estimated Per-Share NAV. On May 14, 2015, our board of directors approved an Estimated Per-Share NAV of our common stock equal to $24.17 per share, calculated by the Advisor in accordance with our valuation guidelines, as of March 31, 2015, used in connection with the purchases of common stock under the DRIP following May 18, 2015 through the suspension of the DRIP, which became effective following the payment of our distribution on July 1, 2015. Following the suspension of the DRIP, we no longer publish our Estimated Per-Share NAV.
As of June 30, 2015, we had cash and cash equivalents of $95.7 million. Our principal demands for funds are for payment of our operating and administrative expenses, debt service obligations and cash distributions to our stockholders.
We expect to fund our future short-term operating liquidity requirements through net cash provided by our current property operations. Management expects that our properties will continue to generate sufficient cash flow to fund operating expenses and the payment of our monthly distributions. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from private offerings and undistributed funds from operations.
We have used debt financing as a source of capital. Prior to filing an amended and restated charter on July 20, 2015, our previous charter did not permit the maximum amount of our total indebtedness to exceed 300% of our total "net assets" (as defined by such charter), as of the date of any borrowing. As of June 30, 2015, we had $469.6 million of mortgage notes payable outstanding and the outstanding balance under our Credit Facility (as described below) was $423.0 million. Our amended and restated charter does not have such a restriction.
On September 23, 2013, we, through the OP, entered into a credit agreement (the "Credit Agreement") relating to a credit facility (the "Credit Facility") that provides for aggregate revolving loan borrowings of up to $200.0 million (subject to borrowing base availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility. Through amendments to the Credit Agreement, the OP increased commitments under our Credit Facility to $750.0 million as of June 30, 2015. During the six months ended June 30, 2015, we drew $423.0 million on our Credit Facility to partially fund acquisition activity. As of June 30, 2015, the outstanding balance under our Credit Facility was $423.0 million and our unused borrowing capacity was $239.6 million, based on the assets assigned to the Credit Facility.
The Credit Facility provides for monthly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Credit Facility will mature on September 23, 2017, provided that the OP, subject to certain conditions, may elect to extend the maturity date one year to September 23, 2018. The Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. Certain of our subsidiaries and certain subsidiaries of the OP guarantee, and the equity of certain subsidiaries of the OP have been pledged as collateral for, the obligations under the Credit Facility.
In August 2015, we paid down in full the outstanding balance on the Credit Facility and concurrently terminated the Credit Facility in connection with the Loan Agreement described below.
On August 7, 2015, certain subsidiaries of ours entered into a $655.0 million term loan agreement (“Loan Agreement”) with Barclays Bank PLC, Column Financial Inc. and UBS Real Estate Securities Inc. The Loan Agreement has a stated maturity date of September 6, 2020 and a stated annual interest rate of 4.29625%. The loan is secured by mortgage interests in certain of our properties. In connection with the Loan Agreement, we entered into a Limited Recourse Guaranty, dated August 7, 2015, pursuant to which we have guaranteed payment of certain recourse obligations for which the borrowers may be personally liable.
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Our board of directors adopted our SRP that enabled our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requested a repurchase, we, subject to certain conditions, repurchased the shares presented for repurchase for cash to the extent we had sufficient funds available to fund such repurchase. There were limits on the number of shares we were permitted to repurchase under this program during any 12-month period. Further, we were only authorized to repurchase shares using the proceeds received from the DRIP in any given quarter. Our board of directors terminated our SRP on April 15, 2015.
The following table summarizes the repurchases of shares under the SRP cumulatively through June 30, 2015:
Number of Requests | Number of Shares | Weighted-Average Price per Share | ||||||||
Cumulative repurchases as of December 31, 2014 | 158 | 303,907 | $ | 24.01 | ||||||
Six months ended June 30, 2015 | 93 | 274,564 | 23.83 | |||||||
Cumulative repurchases as of June 30, 2015 | 251 | 578,471 | $ | 23.98 | ||||||
In connection with the potential Listing, on April 15, 2015, the board of directors approved the termination of the SRP. We have processed all of the requests received under the SRP for the first and second quarters of 2015 and will not process further requests.
Further, in connection with the potential Listing, pursuant to the terms of the DRIP, on April 15, 2015, our board of directors approved an amendment to the DRIP (the "DRIP Amendment") that enables us to suspend the DRIP. Subsequently, pursuant to the DRIP as amended by the DRIP Amendment, our board of directors approved the suspension of the DRIP, effective immediately following the payment of our June 2015 monthly distribution. Accordingly, the final issuance of shares of common stock pursuant to the DRIP occurred in connection with our June 2015 distribution, paid on July 1, 2015.
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment writedowns, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT's policy described above.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may not be fully informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book, value exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, because impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.
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Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and modified funds from operations ("MFFO"), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
There have been changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations. Management believes these fees and expenses do not affect our overall long-term operating performance. 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, but have a limited and defined acquisition period. We are using the proceeds raised in our offering to, among other things, acquire properties. We intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national stock exchange, a merger or sale or another similar transaction) within three to five years of the completion of the offering. Thus, unless we raise, or recycle, a significant amount of capital after we complete our offering, we will not be continuing to purchase assets at the same rate as during our offering. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association ("IPA"), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we continue to purchase a significant amount of new assets after we complete our offering. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is stabilized. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our IPO has been completed and our portfolio has been stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition and transaction-related fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.
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Our MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, we exclude acquisition and transaction-related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to non-controlling interests. Under GAAP, acquisition and transaction-related fees and expenses are characterized as operating expenses in determining operating net income during the period in which the asset is acquired. These expenses are paid in cash by us, and therefore such funds will not be available to invest in other assets, pay operating expenses or fund distributions. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. While we are responsible for managing interest rate, hedge and foreign exchange risk, we will retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to our investors.
We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, which have defined acquisition periods and targeted exit strategies, and allow us to evaluate our performance against other non-listed REITs. By excluding expensed acquisition and transaction-related costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure while an offering is ongoing such as our IPO where the price of a share of common stock is a stated value and there is no NAV determination during the offering stage and for a period thereafter.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.
The table below reflects the items deducted or added to net loss in our calculation of FFO and MFFO for the periods indicated:
Three Months Ended | Six Months Ended June 30, 2015 | |||||||||||
(In thousands) | March 31, 2015 | June 30, 2015 | ||||||||||
Net income (loss) (in accordance with GAAP) | $ | 4,901 | $ | (1,624 | ) | $ | 3,277 | |||||
Depreciation and amortization | 25,387 | 25,386 | 50,773 | |||||||||
FFO | 30,288 | 23,762 | 54,050 | |||||||||
Acquisition fees and expenses | 129 | 377 | 506 | |||||||||
Amortization of above-market lease assets and accretion of below-market lease liabilities, net | 416 | 417 | 833 | |||||||||
Straight-line rent | (2,088 | ) | (2,067 | ) | (4,155 | ) | ||||||
Amortization of mortgage premiums | (1,859 | ) | (1,875 | ) | (3,734 | ) | ||||||
Gain on sale of investments | (546 | ) | — | (546 | ) | |||||||
MFFO | $ | 26,340 | $ | 20,614 | $ | 46,954 | ||||||
Distributions
On April 9, 2013, our board of directors authorized, and we declared, distributions which are payable based on stockholders of record each day during the applicable period equal to $0.00452054795 per day, which is equivalent to $1.65 per annum, per share of common stock. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Following the Listing, we expect to pay distributions on the 15th day of each month to stockholders of record as of close of business on the eighth day of such month.
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The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
Distributions began to accrue on May 13, 2013, 15 days following our initial property acquisition. The first distribution was paid in June 2013. During the six months ended June 30, 2015, distributions paid to common stockholders totaled $54.1 million, inclusive of $29.9 million of distributions for shares of common stock that were reinvested in shares issued pursuant the DRIP. During the six months ended June 30, 2015, cash used to pay distributions was generated from cash flows provided by operations and proceeds received from common stock issued under the DRIP.
The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock, for the periods indicated:
Three Months Ended | Six Months Ended June 30, 2015 | ||||||||||||||||||||
March 31, 2015 | June 30, 2015 | ||||||||||||||||||||
(In thousands) | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | ||||||||||||||||||
Distributions to stockholders | $ | 26,663 | $ | 27,434 | $ | 54,097 | |||||||||||||||
Source of distribution coverage: | |||||||||||||||||||||
Cash flows provided by operations (1) | $ | 16,946 | 63.6 | % | $ | 18,898 | 68.9 | % | $ | 35,844 | 66.3 | % | |||||||||
Offering proceeds from issuances of common stock | — | — | % | — | — | % | — | — | % | ||||||||||||
Proceeds received from common stock issued under the DRIP | 9,717 | 36.4 | % | 8,536 | 31.1 | % | 18,253 | 33.7 | % | ||||||||||||
Proceeds from financings | — | — | % | — | — | % | — | — | % | ||||||||||||
Total source of distribution coverage | $ | 26,663 | 100.0 | % | $ | 27,434 | 100.0 | % | $ | 54,097 | 100.0 | % | |||||||||
Cash flows provided by operations (GAAP basis) (1) | $ | 27,807 | $ | 22,235 | $ | 50,042 | |||||||||||||||
Net income (in accordance with GAAP) | $ | 4,901 | $ | (1,624 | ) | $ | 3,277 | ||||||||||||||
_____________________
(1) | Cash flows provided by operations for the three months ended March 31, 2015 and June 30, 2015 and for the six months ended June 30, 2015 include acquisition and transaction related expenses of $0.1 million, $0.4 million and $0.5 million, respectively. |
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The following table compares cumulative distributions paid to cumulative net loss and cumulative cash flows provided by operations (in accordance with GAAP) and our cumulative FFO for the period from January 22, 2013 (date of inception) to June 30, 2015:
(In thousands) | Period from January 22, 2013 (date of inception) to June 30, 2015 | |||
Total distributions paid | $ | 195,225 | ||
Reconciliation of net loss: | ||||
Revenues | $ | 268,804 | ||
Asset management fees | 4,096 | |||
Acquisition and transaction related expenses | (50,035 | ) | ||
Depreciation and amortization | (159,099 | ) | ||
Other operating expenses | (40,848 | ) | ||
Other non-operating income, net | (38,339 | ) | ||
Net loss (in accordance with GAAP) (1) | $ | (15,421 | ) | |
Cash flows provided by operations | $ | 136,236 | ||
FFO | $ | 139,582 | ||
(1) | Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions. |
For the six months ended June 30, 2015, cash flows provided by operations were $50.0 million. As shown in the table above, we funded distributions with cash flows provided by operations as well as proceeds from our IPO which were reinvested in common stock issued under our DRIP. To the extent we pay distributions in excess of cash flows provided by operations, your investment may be adversely impacted. Since inception, our cumulative distributions have exceeded our cumulative FFO. See “Risk Factors - Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute our stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect our stockholders' overall return.” under Item 1A in this Quarterly Report on Form 10-Q.
Loan Obligations
The payment terms of certain of our mortgage loan obligations require principal and interest payments monthly, with all unpaid principal and interest due at maturity. Our loan agreements stipulate that we comply with specific reporting covenants. As of June 30, 2015, we were in compliance with the debt covenants under our loan agreements.
As of June 30, 2015, our secured debt leverage ratio (total secured debt divided by the base purchase price of acquired real estate investments) and leverage ratio (total debt divided by total assets) approximated 21.6% and 40.7%, respectively.
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Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable and Credit Facility as well as minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of June 30, 2015. These minimum base rental cash payments due for leasehold interests amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items:
July 1, 2015 to December 31, 2015 | Years Ended December 31, | |||||||||||||||||||
(In thousands) | Total | 2016-2017 | 2018-2019 | Thereafter | ||||||||||||||||
Principal on mortgage notes payable | $ | 469,601 | $ | 190,486 | $ | 84,407 | $ | 2,354 | $ | 192,354 | ||||||||||
Interest on mortgage notes payable | 80,177 | 13,279 | 27,734 | 21,437 | 17,727 | |||||||||||||||
Credit Facility | 423,000 | — | 423,000 | — | — | |||||||||||||||
Interest on Credit Facility | 20,173 | 4,905 | 15,268 | — | — | |||||||||||||||
Ground lease rental payments due | 9,521 | 445 | 1,795 | 1,764 | 5,517 | |||||||||||||||
$ | 1,002,472 | $ | 209,115 | $ | 552,204 | $ | 25,555 | $ | 215,598 | |||||||||||
Election as a REIT
We elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2013. We believe that, commencing with such taxable year, we are organized and operate in such a manner as to qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified for taxation as a REIT. In order to qualify and continue to qualify for taxation as a REIT, we must, among other things, distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational acquirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties, as well as federal income and excise taxes on our undistributed income.
Inflation
Some of our leases with our tenants contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions. However, our net leases require the tenant to pay its allocable share of operating expenses, which may include common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
We have entered into agreements with entities under common control with our Sponsor, under which we have paid or may in the future pay certain fees or reimbursements to our Advisor, its affiliates and entities under common control with our Advisor in connection with items such as acquisition and financing activities, sales and maintenance of common stock under our IPO, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. In addition, during the second quarter of 2014, we announced that we engaged RCS Capital, the investment banking division of our Dealer Manager, as a financial advisor to assist us in evaluating potential strategic alternatives. See Note 10 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related party transactions, agreements and fees.
In addition, the limited partnership agreement of the OP provides for a special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to our Advisor, a limited partner of the OP. In connection with this special allocation, our Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP. Our Advisor is directly or indirectly controlled by certain of our officers and directors.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings and our Credit Facility, bears interest at fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus are not exposed to foreign currency fluctuations.
As of June 30, 2015, our debt consisted of both fixed- and variable-rate debt. As of June 30, 2015, we had fixed-rate secured mortgage financings with a carrying value of $488.0 million and a fair value of $495.4 million. Changes in market interest rates on our fixed-rate debt impact the fair value of the debt, but it has no impact on interest expense incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed-rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their June 30, 2015 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $13.1 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $12.2 million.
As of June 30, 2015 our variable-rate Credit Facility had a carrying and fair value of $423.0 million. Interest rate volatility associated with this variable-rate Credit Facility affects interest expense incurred and cash flow. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from their June 30, 2015 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate Credit Facility would increase or decrease our interest expense by $4.2 million annually.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and, assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of June 30, 2015 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 promulgated under the Exchange Act, we are required to establish and maintain disclosure controls and procedures as defined in subparagraph (e) of that rule. We are required to evaluate, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of each fiscal quarter. Management previously concluded that our disclosure controls and procedures were not effective as of December 31, 2014 or March 31, 2015 due to the material weakness in internal control over financial reporting described in our Annual Report on Form 10-K filed with the SEC on May 15, 2015. As described below, a remediation plan has been implemented and, as of June 30, 2015, management deems the material weaknesses previously identified to be remediated and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
During our most recent fiscal quarter, we executed our remediation plan, as further described below. In connection with the evaluation required by Rule 13a-15(d), we identified the execution of this remediation plan as having materially affected, or reasonably likely to materially affect, our internal control over financial reporting. Other than the execution of the remediation plan, there were no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Remediation of Material Weaknesses
We, with the concurrence and oversight of the Audit Committee of our Board of Directors, executed our remediation plan described in our Annual Report on Form 10-K filed with the SEC on May 15, 2015, during the quarter ended June 30, 2015. As part of the remediation plan, management:
• | Enhanced information technology system access controls supporting the general ledger and accounts payable system applications to address appropriate segregation of duties and to restrict IT and financial users’ access to the underlying entities and IT functions and data commensurate with their job responsibilities; |
• | Implemented appropriate end-user controls over the use of significant Excel spreadsheets supporting the financial reporting process; |
• | Implemented appropriate controls over the authorization of manual journal entries made to the general ledger; and |
• | Implemented controls over the review of results provided by valuation experts related to the allocation of the purchase price for acquisitions in accordance with ASC 805 - Business Combinations. |
Management verified that the aforementioned controls were appropriately designed and implemented as of June 30, 2015, and will continue to monitor and test, as applicable, the ongoing operating effectiveness of its’ new and enhanced controls.
Our internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. We recognize that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to, and none of our properties are subject to, any material pending legal proceedings.
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, 2014, except as set forth below:
Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute your interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect your overall return.
Our cash flows provided by operations were $50.0 million for the six months ended June 30, 2015. During the six months ended June 30, 2015, we paid distributions of $54.1 million, of which $35.8 million, or 66.3%, was funded from cash flows from operations and $18.3 million, or 33.7%, was from proceeds received from common stock issued under the DRIP.
We may not continue to generate sufficient cash flows from operations to pay future distributions. If we do not generate sufficient cash flows from our operations we may have to reduce our distribution rate or fund distributions from other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements. Funding distributions from borrowings could restrict the amount we can borrow for investments. Funding distributions with the sale of assets or the proceeds from sales of common stock may affect our ability to generate additional operating cash flows. Funding distributions from the sale of additional securities could dilute each stockholder's interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third-party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the distributions payable to stockholders upon a liquidity event, any or all of which may have an adverse effect on an investment in our shares.
We rely significantly on six major tenants (including, for this purpose, all affiliates of such tenants) and therefore, are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants.
As of June 30, 2015, the following six major tenants had annualized rental income on a straight-line basis, which represented 5.0% or more of our consolidated annualized rental income on a straight-line basis including, for this purpose, all affiliates of such tenants:
Tenant | June 30, 2015 | |
SunTrust Bank | 17.9% | |
Sanofi US | 11.6% | |
C&S Wholesale Grocer | 10.4% | |
AmeriCold | 7.8% | |
Merrill Lynch | 7.8% | |
Stop & Shop | 6.1% | |
Therefore, the financial failure of any of these tenants could have a material adverse effect on our results of operations and our financial condition. In addition, the value of our investment is historically driven by the credit quality of the underlying tenant, and an adverse change in either the tenant's financial condition or a decline in the credit rating of such tenant may result in a decline in the value of our investments.
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We are subject to geographic concentrations that make us more susceptible to adverse events with respect to certain geographic areas.
As of June 30, 2015, the following states had concentrations of properties where annualized rental income on a straight-line basis represented 5.0% or greater of our consolidated annualized rental income on a straight-line basis:
State | June 30, 2015 | |
New Jersey | 20.3% | |
Georgia | 11.2% | |
Massachusetts | 8.2% | |
Florida | 7.4% | |
North Carolina | 6.7% | |
Alabama | 5.5% | |
As of June 30, 2015, our tenants operated in 37 states. Any adverse situation that disproportionately affects the states listed above may have a magnified adverse effect on our portfolio. Factors that may negatively affect economic conditions in these states include:
• | business layoffs or downsizing; |
• | industry slowdowns; |
• | relocations of businesses; |
• | changing demographics; |
• | increased telecommuting and use of alternative work places; |
• | infrastructure quality; |
• | any oversupply of, or reduced demand for, real estate; |
• | concessions or reduced rental rates under new leases for properties where tenants defaulted; and |
• | increased insurance premiums. |
We may be unable to terminate our advisory agreement, even for poor performance by our Advisor.
On April 29, 2015, we entered into a Second Amended and Restated Advisory Agreement with our advisor. The agreement has a twenty year term, which is automatically extended for successive 20 year terms, and may only be terminated under limited circumstances. This will make it difficult for us to renegotiate the terms of our advisory agreement or replace our advisor even if the terms of our agreement are no longer consistent with the terms offered to other REITs as the market for advisory services changes in the future.
The conflicts of interest inherent in the incentive fee structure of our arrangements with our Advisor and its affiliates could result in actions that are not necessarily in the long-term best interests of our stockholders.
Under our advisory agreement and the limited partnership agreement of our operating partnership, or the partnership agreement, the special limited partner and its affiliates will be entitled to fees, distributions and other amounts that are structured in a manner intended to provide incentives to our Advisor to perform in our best interests. However, because our Advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, its interests may not be wholly aligned with those of our stockholders. In addition, the advisory agreement provides for payment of incentive compensation based on exceeding certain Core Earnings thresholds in any period. Losses in one period do not this affect incentive compensation in subsequent periods. As a result, our Advisor could be motivated to recommend riskier or more speculative investments in order to increase Core Earnings and thus its fees. In addition, the special limited partner and its affiliates’ entitlement to fees and distributions upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle our Advisor and its affiliates, including the special limited partner, to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest.
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Moreover, the partnership agreement requires our operating partnership to pay a performance-based termination distribution to the special limited partner or its assignees if we terminate the advisory agreement, even for poor performance by our Advisor, prior to the listing of our shares for trading on an exchange or, absent such listing, in respect of its participation in net sales proceeds. To avoid paying this distribution, our independent directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination distribution, termination of the advisory agreement would be in our best interest. Similarly, because this distribution would still be due even if we terminate the advisory agreement for poor performance, our Advisor may be incentivized to focus its resources and attention on other matters or otherwise fail to use its best efforts on our behalf. Upon Listing, we expect to enter into the Listing Note, which will provide for a distribution to the Special Limited Partner calculated based on the market price of common stock during a 30-day trading period 180 days after Listing, which may incentivize the Advisor to pursue short-term goals that may not be beneficial to us in the long term.
In addition, the requirement to pay the distribution to the special limited partner or its assignees at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the distribution to the special limited partner or its assignees. Moreover, our Advisor will have the right to terminate the advisory agreement upon a change of control of our company and thereby trigger the payment of the termination distribution, which could have the effect of delaying, deferring or preventing the change of control. Further, pursuant to our Outperformance Plan Agreement, our Advisor will be issued LTIP Units which will be eligible to be earned based on the achievement of certain total stockholder return thresholds, which could encourage our Advisor to recommend riskier or more speculative investments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sale of Unregistered Equity Securities
On March 11, 2015, we issued 1,276 shares of restricted stock that vest over a period of five years to one of our independent directors, pursuant to our employee and director incentive restricted share plan. No selling commissions or other consideration will be paid in connection with such issuances, which were made without registration under the Securities Act in reliance upon the exemption from registration in Section 4(a)(2) of the Securities Act as transactions not involving any public offering.
Use of Proceeds from Sales of Registered Securities
We used substantially all of the net proceeds from our IPO, net of cumulative offering costs of $173.7 million, to acquire a diversified portfolio of income producing real estate properties, focusing primarily on acquiring freestanding, single-tenant retail properties net leased to investment grade and other creditworthy tenants. As of June 30, 2015, we have used the net proceeds from our IPO, secured debt financing and the Credit Facility to purchase 463 properties with an aggregate base purchase price of $2.2 billion.
Issuer Purchases of Equity Securities
Although we have announced our intent to list on NYSE, our common stock is currently not listed on a national securities exchange. In order to provide stockholders with interim liquidity, our board of directors adopted the SRP, which enabled our stockholders to sell their shares back to us, subject to significant conditions and limitations.
Effective November 14, 2014, the repurchase price for shares under the SRP was based on the Estimated Per-Share NAV as determined by our board of directors. Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions were able to participate in the SRP. The repurchase of shares occurred on the last business day prior to the filing of each quarterly financial filing (and in all events on a date other than a dividend payment date). Purchases under the SRP were limited during any 12-month period to approximately 5.0% of the Company's NAV in any 12 month period.
Effective November 14, 2014, there was no minimum holding period for shares of the Company's common stock and stockholders could have submitted their shares for repurchase at any time through the SRP. Shares repurchased in connection with the death or disability of a stockholder would have been repurchased at a purchase price equal to the greater of the price paid for such shares and the then-current NAV (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the Company's common stock).
Subject to limited exceptions, stockholders who requested the repurchase of shares of our common stock within the first four months from the date of purchase were subject to a short-term trading fee of 2.0%.
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When a stockholder requested redemption and the redemption was approved, we reclassified such obligation from equity to a liability based on the settlement value of the obligation. Funding for the SRP was derived from proceeds we maintain from the sale of shares pursuant to the DRIP. Shares purchased under the SRP have the status of authorized but unissued shares. The following table summarizes the repurchases of shares under the SRP cumulatively through June 30, 2015:
Number of Requests | Number of Shares | Weighted-Average Price per Share | ||||||||
Cumulative repurchases as of December 31, 2014 | 158 | 303,907 | $ | 24.01 | ||||||
Six months ended June 30, 2015 | 93 | 274,564 | 23.83 | |||||||
Cumulative repurchases as of June 30, 2015 | 251 | 578,471 | $ | 23.98 | ||||||
In connection with the potential Listing, on April 15, 2015, the board of directors approved the termination of the SRP. We have processed all of the requests received under the SRP for the first and second quarters of 2015 and will not process further requests.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
On August 7, 2015, certain subsidiaries of the Company entered into a $655.0 million term loan agreement (“Loan Agreement”) with Barclays Bank PLC, Column Financial Inc. and UBS Real Estate Securities Inc. The Loan Agreement has a stated maturity date of September 6, 2020 and a stated annual interest rate of 4.29625%; increasing up to 0.50% if, prior to the earlier of November 5, 2015 or full syndication or securitization of the loan, news or events regarding the Company, its sponsor, VEREIT, Inc. or their respective officers, directors, employees or affiliates becomes known or occurs which adversely affects the syndication or securitization of the loan. The loan is secured by mortgage interests in certain of the Company’s properties. In connection with the Loan Agreement, the Company entered into a Limited Recourse Guaranty, dated August 7, 2015, pursuant to which the Company has guaranteed payment of certain recourse obligations for which the borrowers may be personally liable.
The description of the Loan Agreement and the Limited Recourse Guaranty in this Quarterly Report on Form 10-Q is a summary and is qualified in its entirety by the terms of the Loan Agreement attached as Exhibit 10.32 and the Limited Recourse Guaranty attached as Exhibit 10.33 to this Quarterly Report on Form 10-Q and incorporated herein by reference.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN FINANCE TRUST, INC. | ||
By: | /s/ Donald MacKinnon | |
Donald MacKinnon | ||
Chief Executive Officer and President (Principal Executive Officer) | ||
By: | /s/ Donald M. Ramon | |
Donald M. Ramon | ||
Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) | ||
Dated: August 11, 2015
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EXHIBITS INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | |
3.1 * | Articles of Amendment and Restatement for American Finance Trust, Inc. | |
3.2 (1) | Third Amended and Restated Bylaws | |
4.1 (1) | Second Amendment to Agreement of Limited Partnership of American Realty Capital Operating Partnership V, L.P., dated as of April 15, 2015 | |
4.2 (1) | Third Amendment to Agreement of Limited Partnership of American Realty Capital Operating Partnership V, L.P., dated as of April 29, 2015 | |
10.4 (1) | Amended and Restated Employee and Director Incentive Restricted Share Plan of the Company | |
10.25 (1) | First Amendment to the Amended and Restated Advisory Agreement, dated as of April 15, 2015 by and among the Company, American Realty Capital Operating Partnership V, L.P. and American Realty Capital Advisors V, LLC | |
10.26 (1) | First Amendment to the Distribution Reinvestment Plan of the Company, dated as of April 15, 2015 | |
10.28 * | Second Amended and Restated Advisory Agreement, dated as of April 29, 2015 by and among the Company, American Realty Capital Operating Partnership V, L.P. and American Realty Capital Advisors V, LLC | |
10.29 (1) | Indemnification Agreement by and between the Company and Herbert Vederman, dated May 14, 2015 | |
10.30 * | Indemnification Agreement by and between the Company, Donald MacKinnon, Donald R. Ramon and Andrew Winer, dated May 26, 2015 | |
10.31 * | Indemnification Agreement by and between the Company and Lisa D. Kabnick, dated August 3, 2015 | |
10.32 * | Loan Agreement dated as of August 7, 2015 among Barclays Bank PLC, Column Financial, Inc. and UBS Real Estate Securities, Inc. as Lenders and certain subsidiaries of American Finance Operating Partnership, LP, as Borrowers | |
10.33 * | Limited Recourse Guaranty dated as of August 7, 2015 by American Finance Trust, Inc. in favor of Barclays Bank PLC, Column Financial, Inc. and UBS Real Estate Securities, Inc. | |
31.1 * | Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 * | Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 * | Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 * | XBRL (eXtensible Business Reporting Language). The following materials from American Finance Trust, Inc.'s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2015, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Stockholders' Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. | |
____________________
* Filed herewith.
(1) | Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on May 15, 2015. |
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