Attached files
| file | filename |
|---|---|
| EX-10.1 - AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY, DATED AS OF OCT 20, 2015 - American Realty Capital Daily Net Asset Value Trust, Inc. | exh101psafedex-chiliny.htm |
| EX-32 - WRITTEN STATEMENTS OF PRINCIPAL EXECUTIVE OFFICERS - American Realty Capital Daily Net Asset Value Trust, Inc. | arcdnavex32930201510-qss.htm |
| EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - American Realty Capital Daily Net Asset Value Trust, Inc. | arcdnavex311930201510-qss.htm |
| EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - American Realty Capital Daily Net Asset Value Trust, Inc. | arcdnavex312930201510-qss.htm |
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 September 30, 2015
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 333-169821
American Realty Capital Daily Net Asset Value Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 27-3441614 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
405 Park Ave., 14th Floor, New York, NY | 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 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 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). o Yes x No
On October 31, 2015, the registrant had 1,183,342 shares of retail common stock and 1,358,054 shares of institutional common stock outstanding.
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Consolidated Statement of Net Assets (Liquidation Basis) as of September 30, 2015 (Unaudited) | |
Consolidated Statement of Changes in Net Assets (Liquidation Basis) for the Period from September 1, 2015 through September 30, 2015 (Unaudited) | |
Consolidated Balance Sheets (Going Concern Basis) as of December 31, 2014 | |
Consolidated Statements of Operations and Comprehensive Loss (Going Concern Basis) for the Two and Eight Months Ended August 31, 2015 and Three and Nine Months Ended September 30, 2014 (Unaudited) | |
Consolidated Statement of Changes in Equity (Going Concern Basis) for the Eight Months Ended August 31, 2015 (Unaudited) | |
Consolidated Statements of Cash Flows (Going Concern Basis) for the Eight Months Ended August 31, 2015 and Nine Months Ended September 30, 2014 (Unaudited) | |
1
Part I. Financial Information
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
CONSOLIDATED STATEMENT OF NET ASSETS
(Liquidation Basis)
September 30. 2015
(Unaudited, in thousands)
ASSETS | ||||
Investments in real estate | $ | 35,882 | ||
Cash | 6,911 | |||
Restricted cash | 152 | |||
Accounts receivable | 107 | |||
Receivable from related party | 955 | |||
Total assets | 44,007 | |||
LIABILITIES | ||||
Mortgage notes payable | 11,246 | |||
Note payable | 5,000 | |||
Derivative settlement liability | 154 | |||
Accounts payable and accrued expenses | 347 | |||
Liability for estimated costs in excess of estimated receipts during liquidation | 1,947 | |||
Total liabilities | 18,694 | |||
Net assets in liquidation | $ | 25,313 | ||
The accompanying notes are an integral part of this unaudited statement.
2
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(Liquidation Basis)
Period from September 1, 2015 to September 30, 2015
(Unaudited, in thousands)
Net assets in liquidation, beginning of period | $ | 25,045 | ||
Changes in net assets in liquidation: | ||||
Change in liquidation value of investments in real estate | 375 | |||
Remeasurement of liability for costs in excess of receipts during liquidation | (96 | ) | ||
Change in derivative settlement liability | (11 | ) | ||
Net increase in liquidation value | 268 | |||
Liquidating distributions to holders of common stock | — | |||
Changes in net assets in liquidation | 268 | |||
Net assets in liquidation, end of period | $ | 25,313 | ||
The accompanying notes are an integral part of this unaudited statement.
3
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
CONSOLIDATED BALANCE SHEET
(Going Concern Basis)
December 31, 2014
(In thousands)
ASSETS | ||||
Real estate investments, at cost: | ||||
Land | $ | 3,072 | ||
Buildings, fixtures and improvements | 27,959 | |||
Acquired intangible lease assets | 4,133 | |||
Total real estate investments, at cost | 35,164 | |||
Less accumulated depreciation and amortization | (4,685 | ) | ||
Total real estate investments, net | 30,479 | |||
Cash | 825 | |||
Restricted cash | 151 | |||
Receivable from related party | 4,439 | |||
Prepaid expenses and other assets | 367 | |||
Deferred financing costs, net | 137 | |||
Total assets | $ | 36,398 | ||
LIABILITIES AND EQUITY | ||||
Mortgage notes payable | $ | 11,246 | ||
Note payable | 5,000 | |||
Below-market lease liability | 374 | |||
Derivatives, at fair value | 140 | |||
Accounts payable and accrued expenses | 1,486 | |||
Deferred rent and other liabilities | 137 | |||
Distributions payable | 133 | |||
Total liabilities | 18,516 | |||
Temporary equity: | ||||
Redeemable common stock | 1,246 | |||
Permanent equity: | ||||
Stockholders' equity: | ||||
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding at December 31, 2014 | — | |||
Common stock, $0.01 par value, 300,000,000 shares authorized, 2,493,286 shares issued and outstanding at December 31, 2014 | 25 | |||
Additional paid-in capital | 22,229 | |||
Accumulated other comprehensive loss | (140 | ) | ||
Accumulated deficit | (5,478 | ) | ||
Total stockholders' equity | 16,636 | |||
Total liabilities and equity | $ | 36,398 | ||
The accompanying notes are an integral part of this statement.
4
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Going Concern Basis)
(In thousands, except for share and per share data)
(Unaudited)
Two Months Ended August 31, | Three Months Ended September 30, | Eight Months Ended August 31, | Nine Months Ended September 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | 457 | $ | 682 | $ | 1,835 | $ | 1,969 | ||||||||
Operating expense reimbursements | 17 | 48 | 111 | 96 | ||||||||||||
Total revenues | 474 | 730 | 1,946 | 2,065 | ||||||||||||
Operating expenses: | ||||||||||||||||
Property operating | 32 | 72 | 142 | 130 | ||||||||||||
Acquisition and transaction related | — | — | — | 50 | ||||||||||||
General and administrative | 541 | 22 | 1,040 | 121 | ||||||||||||
Depreciation and amortization | 323 | 490 | 1,291 | 1,418 | ||||||||||||
Total operating expenses | 896 | 584 | 2,473 | 1,719 | ||||||||||||
Operating income | (422 | ) | 146 | (527 | ) | 346 | ||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (158 | ) | (235 | ) | (621 | ) | (698 | ) | ||||||||
Gain on sale of real estate | 212 | — | 212 | — | ||||||||||||
Other income | — | — | 1 | 1 | ||||||||||||
Total other expense | 54 | (235 | ) | (408 | ) | (697 | ) | |||||||||
Net loss | (368 | ) | (89 | ) | (935 | ) | (351 | ) | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Changes in unrealized gain on derivative | 9 | 56 | 11 | 52 | ||||||||||||
Comprehensive loss | $ | (359 | ) | $ | (33 | ) | $ | (924 | ) | $ | (299 | ) | ||||
Basic and diluted weighted average shares outstanding | 2,528,834 | 2,413,801 | 2,525,494 | 2,284,057 | ||||||||||||
Basic and diluted net loss per share | $ | (0.15 | ) | $ | (0.04 | ) | $ | (0.37 | ) | $ | (0.15 | ) | ||||
Distributions per share | $ | 0.107 | $ | 0.159 | $ | 0.419 | $ | 0.471 | ||||||||
The accompanying notes are an integral part of these unaudited statements.
5
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Going Concern Basis)
For the Eight Months Ended August 31, 2015
(In thousands, except for share data)
(Unaudited)
Permanent Equity | Temporary Equity | ||||||||||||||||||||||||||
Common Stock | |||||||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders' Equity | Redeemable Common Stock | |||||||||||||||||||||
Balance, December 31, 2014 | 2,493,286 | $ | 25 | $ | 22,229 | $ | (140 | ) | $ | (5,478 | ) | $ | 16,636 | $ | 1,246 | ||||||||||||
Issuance of common stock | 73,830 | 1 | 690 | — | — | 691 | — | ||||||||||||||||||||
Redeemable common stock | — | — | 1,246 | — | — | 1,246 | (1,246 | ) | |||||||||||||||||||
Common stock offering costs, commissions and dealer manager fees | — | — | (146 | ) | — | — | (146 | ) | — | ||||||||||||||||||
Reimbursement of common stock offering costs from Advisor | — | — | 113 | — | — | 113 | — | ||||||||||||||||||||
Common stock issued through dividend reinvestment plan | 54,316 | — | 546 | — | — | 546 | — | ||||||||||||||||||||
Common stock repurchases | (80,036 | ) | (1 | ) | (808 | ) | — | — | (809 | ) | — | ||||||||||||||||
Share-based compensation | — | — | 201 | — | — | 201 | — | ||||||||||||||||||||
Distributions declared | — | — | — | — | (932 | ) | (932 | ) | — | ||||||||||||||||||
Net loss | — | — | — | — | (935 | ) | (935 | ) | — | ||||||||||||||||||
Other comprehensive loss | — | — | — | 11 | — | 11 | — | ||||||||||||||||||||
Balance, August 31, 2015 | 2,541,396 | $ | 25 | $ | 24,071 | $ | (129 | ) | $ | (7,345 | ) | $ | 16,622 | $ | — | ||||||||||||
The accompanying notes are an integral part of this unaudited statement.
6
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Going Concern Basis)
(In thousands)
(Unaudited)
Eight Months Ended August 31, 2015 | Nine Months Ended September 30, 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (935 | ) | $ | (351 | ) | ||
Adjustment to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation | 1,079 | 1,195 | ||||||
Amortization of intangibles | 212 | 223 | ||||||
Amortization of deferred financing costs | 42 | 47 | ||||||
Accretion of below-market lease liability | (26 | ) | — | |||||
Share-based compensation | 201 | 29 | ||||||
Gain on sale of real estate | (212 | ) | — | |||||
Changes in assets and liabilities: | ||||||||
Prepaid expenses and other assets | 42 | 37 | ||||||
Accounts payable and accrued expenses | (955 | ) | 518 | |||||
Deferred rent and other liabilities | (6 | ) | (7 | ) | ||||
Net cash (used in) provided by operating activities | (558 | ) | 1,691 | |||||
Cash flows from investing activities: | ||||||||
Investment in real estate and other assets | — | (1,872 | ) | |||||
Proceeds from sale of real estate asset | 740 | — | ||||||
Net cash provided by (used in) investing activities | 740 | (1,872 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock | 691 | 4,189 | ||||||
Common stock repurchases | (809 | ) | (1,061 | ) | ||||
Payments of offering costs and fees related to stock issuance | (146 | ) | (1,236 | ) | ||||
Distributions paid | (516 | ) | (555 | ) | ||||
Decrease (increase) in receivable from related party | 3,597 | (473 | ) | |||||
Restricted cash | (1 | ) | — | |||||
Net cash provided by financing activities | 2,816 | 864 | ||||||
Net change in cash | 2,998 | 683 | ||||||
Cash, beginning of period | 825 | 178 | ||||||
Cash, end of period | $ | 3,823 | $ | 861 | ||||
Supplemental Disclosures | ||||||||
Cash paid for interest | $ | 582 | $ | 653 | ||||
Cash paid for income taxes | $ | 23 | $ | 8 | ||||
Non-cash Investing and Financing Activities: | ||||||||
Accrued offering costs | $ | — | $ | 2,354 | ||||
Receivable from related party for offering costs | $ | 113 | $ | — | ||||
Common stock issued through distribution reinvestment plan | $ | 546 | $ | 515 | ||||
The accompanying notes are an integral part of these unaudited statements.
7
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Note 1 — Organization
American Realty Capital Daily Net Asset Value Trust, Inc. (the “Company”), incorporated on September 10, 2010, is a Maryland corporation that has elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes for the taxable year ended December 31, 2013. On August 15, 2011, the Company commenced its initial public offering (“IPO”) on a “reasonable best efforts” basis of up to a maximum of approximately 156.6 million shares of common stock, consisting of up to 101.0 million retail shares to be sold to the public through broker dealers and up to 55.6 million institutional shares to be sold through registered investment advisors and broker dealers that were managing wrap or fees-based accounts, pursuant to a registration statement on Form S-11 (File No. 333-169821) (as amended, 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 25.0 million shares of common stock pursuant to a distribution reinvestment plan (the “DRIP”) under which common stockholders may have elected to have their distributions reinvested in additional shares of common stock. The per share purchase price for the Company’s common stock varied daily and was based on the Company’s net asset value (“NAV”) per share. On August 11, 2014, the board of directors approved, and on August 14, 2014, the Company filed, a follow-on registration statement for the offering of the Company’s common stock, which, as permitted by Rule 415 of the Securities Act, provided for an automatic extension of the IPO until the earlier of February 11, 2015 or the date that the SEC declared the follow-on offering effective. On January 29, 2015, the board of directors made the determination to allow the IPO to terminate in accordance with its terms. Accordingly, the IPO terminated on February 11, 2015 and the Company will not seek to raise any additional capital through a follow-on offering. On April 29, 2015, the Company filed a registration statement on Form S-3D (File No. 333-203731) with the SEC under the Securities Act that covered up to 84,000 shares of common stock pursuant to an amended and restated distribution reinvestment plan (the “A&R DRIP”). On May 6, 2015, the Company filed a post-effective amendment to the Registration Statement to deregister the unsold shares registered under the Registration Statement.
On July 30, 2015, the board of directors of the Company approved a Plan of Liquidation (the “Plan”) to sell all or substantially all of the assets of the Company and its operating partnership, American Realty Capital Operating Partnership II, L.P, a Delaware partnership (the “OP”) and to liquidate and dissolve the Company and the OP. On September 1, 2015, at a special meeting of the stockholders, the stockholders approved the sale of all or substantially all of the Company’s assets, the Company’s liquidation, and the Company’s dissolution, pursuant to the Plan. The Company currently expects to complete the liquidation of its portfolio by the end of the second quarter of 2016.
On July 30, 2015, in anticipation of the implementation of the Plan, the board of directors of the Company suspended the monthly distributions and the DRIP (subject to any notice requirements contained therein), effective July 31, 2015. The final payment of distributions occurred on August 3, 2015 with respect to distributions payable for July. On the same day, the board of directors also terminated the Company’s Share Repurchase Program (“SRP”), Employee and Director Incentive Restricted Share Plan (the “RSP”), and the 2011 Stock Option Plan.
As of September 30, 2015, the Company had 2.5 million shares of common stock outstanding, including unvested restricted shares and shares issued under the DRIP and had received total gross proceeds, net of repurchases, from the IPO of $25.4 million, including shares issued under the DRIP.
The Company was formed primarily to acquire freestanding, single-tenant bank branches, convenience stores, and office, industrial and retail properties net leased to investment grade and other creditworthy tenants for investment purposes. The Company may also originate or acquire first mortgage loans secured by real estate. The Company purchased its first investment properties and commenced active operations in January 2012. As of September 30, 2015, the Company owned 11 investment properties comprising 0.2 million rentable square feet, which were 100% leased.
Substantially all of the Company’s business is conducted through the OP. The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP (“OP units”). American Realty Capital Trust II Special Limited Partner, LLC (the “Special Limited Partner”) is a limited partner and holds 222 units of limited partner interest in the OP, which represents a nominal percentage of the aggregate OP ownership. A holder of OP units has the right to convert OP units for the cash value of a corresponding number of shares of common stock or, at the option of the OP, a corresponding number of the Company’s common stock, in accordance with the limited partnership agreement of the OP. The remaining rights of the holders of OP units are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP’s assets.
8
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
The Company has no direct employees. The Company has retained American Realty Capital Advisors II, LLC (the “Advisor”) to manage its affairs on a day-to-day basis. American Realty Capital Properties II, 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 services. The Advisor and Property Manager are indirect wholly owned entities of, and the Dealer Manager is under common control with, the Company’s sponsor, AR Capital, LLC (the “Sponsor”). These related parties receive compensation and fees for services related to the IPO, the investment and management of the Company’s assets, and the disposition of the Company's assets. These entities have received and will receive fees during the offering, acquisition, operational and liquidation stages.
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 interim periods are not necessarily indicative of the results for the entire year or any subsequent interim period.
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 March 31, 2015. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2015 other than the updates described below.
Liquidation Basis Accounting
As a result of the approval of the Plan by the shareholders, the Company has adopted the liquidation basis of accounting as of September 1, 2015 and for the periods subsequent to September 1, 2015 in accordance with GAAP. Accordingly, on September 1, 2015, assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that the Company expects to collect on disposal of assets and cash to be expended for settlement of liabilities as it carries out its plan of liquidation.
The liquidation value of the Company’s operating properties are presented on an undiscounted basis. Liabilities are carried at their contractual amounts due or estimated settlement amounts. Estimated costs to dispose of assets and liabilities have been presented separately from the related assets or liabilities on the Company's consolidated statement of net assets under liability for estimated costs in excess of estimated receipts during liquidation.
The Company accrues costs and income that it expects to incur and earn through the end of liquidation to the extent it has a reasonable basis for estimation. These amounts are classified as liabilities for costs in excess of receipts during liquidation on the consolidated statement of net assets. The timing of the disposal of the Company's assets and liabilities, levels of operating expenses during liquidation, and costs to liquidate the company are estimates. Actual costs and income may differ from amounts reflected in the financial statements because of inherent uncertainty in estimating future events. These differences may be material. See Note 3 — Plan of Liquidation for further discussion. Actual costs incurred but unpaid as of September 30, 2015 are included in accounts payable and accrued expenses on the consolidated statement of net assets.
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 allows entities to apply either a 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 of December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the impact of the new guidance.
9
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
In August 2014, the FASB issued guidance relating to disclosure of uncertainties about an entity's ability to continue as a going concern. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. If conditions or events raise substantial doubt about the entity's ability to continue as a going concern, the guidance requires management to disclose information that enables users of the financial statements to understand the conditions or events that raised the substantial doubt, management's evaluation of the significance of the conditions or events that led to the doubt, the entity’s ability to continue as a going concern and management's plans that are intended to mitigate or that have mitigated the conditions or events that raised substantial doubt about the entity's ability to continue as a going concern. There is no disclosure required unless there are conditions or events that have raised substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. The Company elected to adopt the provisions of this guidance effective December 31, 2014, as early application was permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
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 elected to adopt the provisions of this revised guidance effective June 30, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or 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 amendment requires 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. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings.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. As of September 30, 2015, under the liquidation basis of accounting, the adoption of this guidance would have no impact on the Company's consolidated financial position, results of operations or cash flows.
In September 2015, the FASB issued an update that eliminates the requirement to adjust provisional amounts from a business combination and the related impact on earnings by restating prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of measurement period adjustments on current and prior periods, including the prior period impact on depreciation, amortization and other income statement items and their related tax effects, shall be recognized in the period the adjustment amount is determined. The cumulative adjustment would be reflected within the respective financial statement line items affected. 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. 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 elected to adopt the new guidance as of September 30, 2015. The adoption of this guidance had no impact on the Company's consolidated financial position, results of operation or cash flows.
10
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Note 3 — Plan of Liquidation
On September 1, 2015, the Company's stockholders approved the Plan, which provides for the sale of the Company's assets, settlement of the Company's liabilities and the ultimate dissolution of the Company. In accordance with GAAP and in conjunction with the stockholders' approval of the Plan, the Company's assets were adjusted to their estimated net realizable value and liabilities were recorded at their estimated settlement value, and estimated costs expected to be paid and receipts expected to be incurred or earned through the liquidation date were recorded. The Company will use the proceeds from the sale of its assets to settle its liabilities. The following is a reconciliation of stockholders' equity under the going concern basis of accounting to net assets under the liquidation basis of accounting as of September 1, 2015 (in thousands).
Stockholders' equity, August 31, 2015 (going concern basis) | $ | 16,622 | ||
Balance sheet adjustments: | ||||
Real estate, net realizable value | 10,602 | |||
Derivative, settlement value | (13 | ) | ||
Straight-line rent | (172 | ) | ||
Prepaid insurance | (34 | ) | ||
Deferred financing costs | (95 | ) | ||
Deferred rent | 130 | |||
Costs in excess of receipts in liquidation: | ||||
Rental income | 590 | |||
Operating expense reimbursements | (23 | ) | ||
Real estate taxes and other property operating expenses | 24 | |||
Commissions and fees for sale of real estate | (1,341 | ) | ||
General and administrative expenses | (950 | ) | ||
Interest and disposition fees on debt | (295 | ) | ||
Total adjustments | 8,423 | |||
Net assets in liquidation, September 1, 2015 | $ | 25,045 | ||
The following table shows the changes in the liability for estimated costs in excess of estimated receipts during liquidation on the consolidated statement of net assets from September 1, 2015 to September 30, 2015 (in thousands).
Balance | Remeasurement | Balance | ||||||||||||||
September 1, 2015 | Cash Payments (Receipts) | of Assets and Liabilities | September 30, 2015 | |||||||||||||
Rental income | $ | 590 | $ | (200 | ) | $ | — | $ | 390 | |||||||
Operating expense reimbursements | (23 | ) | (1 | ) | — | (24 | ) | |||||||||
Real estate taxes and other property operating expenses | 24 | — | — | 24 | ||||||||||||
Commissions and fees for sale of real estate | (1,341 | ) | 172 | (96 | ) | (1,265 | ) | |||||||||
General and administrative expenses | (950 | ) | (5 | ) | 107 | (848 | ) | |||||||||
Interest and disposition fees on debt | (295 | ) | 71 | — | (224 | ) | ||||||||||
Costs in excess of receipts during liquidation | $ | (1,995 | ) | $ | 37 | $ | 11 | $ | (1,947 | ) | ||||||
11
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Note 4 — Real Estate Investments
During the three and nine months ended September 30, 2014, the Company acquired a 100% interest in one property from an unrelated third party seller, consistent with its investment objectives. The Company funded the purchase price of the property with funds from the sale of its common stock. There were no assets acquired or liabilities assumed during the three and nine months ended September 30, 2015. The following table presents the allocation of the assets acquired and liabilities assumed during the three and nine months ended September 30, 2014:
Three Months Ended | Nine Months Ended | ||||||||
(Dollar amounts in thousands) | September 30, 2014 | September 30, 2014 | |||||||
Real estate investments, at cost: | |||||||||
Land | $ | 21 | $ | 440 | |||||
Buildings, fixtures and improvements | 84 | 1,343 | |||||||
Total tangible assets | 105 | 1,783 | |||||||
Acquired intangibles: | |||||||||
In-place leases | 5 | 199 | |||||||
Total assets acquired for cash | $ | 110 | $ | 1,982 | |||||
Cash paid for acquired real estate investments | $ | — | (1 | ) | $ | 1,982 | |||
Number of properties purchased | — | 1 | |||||||
_____________
(1) Adjustments recorded during the three months ended September 30, 2014 were paid for with amounts that were maintained in and escrow account at December 31, 2013 for a previously purchased property.
Dispositions
In accordance with the Plan, the Company intends to sell its real estate assets. Through the nine months ending September 30, 2015, the following properties were sold:
On August 17, 2015, the Company sold a property in Sturgeon Bay, WI leased to Davita Dialysis for $0.8 million to an unrelated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property.
On September 3, 2015, the Company sold a property in Slidell, LA leased to O'Reilly Auto for $1.1 million to an unrelated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property prior to the net realizable value adjustment made on September 1, 2015. The adjusted value approximated the selling price.
On September 4, 2015, the Company sold a property in Evanston, WY leased to FedEx for $2.3 million to an unrelated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property prior to the net realizable value adjustment made on September 1, 2015. The adjusted value approximated the selling price.
The following dispositions were completed subsequent to September 30, 2015:
On October 2, 2015 , the Company sold a property in Converse, TX leased to Dollar General for $1.3 million to an unrelated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property prior to the net realizable value adjustment made on September 1, 2015. The adjusted value approximated the selling price.
On October 9, 2015 , the Company sold a property in Temple, TX leased to Dollar General for $1.2 million to an unreated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property prior to the net realizable value adjustment made on September 1, 2015. The adjusted value approximated the selling price.
12
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
The following table presents future minimum base rental cash payments due to the Company subsequent to September 30, 2015. 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. The following table excludes rents related to properties that were sold subsequent to September 30, 2015 but before the date of this report.
(In thousands) | Future Minimum Base Rent Payments (1) | |||
October 1, 2015 - December 31, 2015 | $ | 595 | ||
2016 | 2,373 | |||
2017 | 2,413 | |||
2018 | 2,418 | |||
2019 | 2,418 | |||
Thereafter | 14,698 | |||
$ | 24,915 | |||
_____________
(1) Since the Company is in liquidation and intends to sell its properties, there can be no assurance that these amounts will be collected.
The following table lists the tenants of the Company whose annualized rental income on a cash basis represented greater than 10% of total annualized rental income on a cash basis for all portfolio properties. The following table excludes rents related to properties that were sold subsequent to September 30, 2015 but before the date of this report. The following table is presented on a cash basis as under the liquidation basis of accounting straight-line rent is no longer recorded.
September 30, | ||||
Tenant | 2015 | 2014 | ||
FedEx | 66.7% | 61.4% | ||
Dollar General | * | 12.6% | ||
Family Dollar | 10.3% | * | ||
_____________
* The tenant's annualized rental income on a cash basis was not greater than 10% of total annualized rental income on a cash basis for all portfolio properties as of the period specified.
The termination, delinquency or non-renewal of leases by one or more of the above tenants may have a material adverse effect on cash collections. No other tenant represents more than 10% of annualized rental income for the periods presented.
The following table lists the states where the Company has concentrations of properties where annualized rental income on a cash basis represented greater than 10% of consolidated annualized rental income. The following table is presented on a cash basis as under the liquidation basis of accounting straight-line rent is no longer recorded.
September 30, | ||||
State | 2015 | 2014 | ||
New York | 66.7% | 55.9% | ||
13
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Note 5 — Mortgage Notes Payable
The Company's mortgage notes payable consist of the following:
(Dollar amounts in thousands) | Encumbered Properties (1) | Outstanding Loan Amount | Weighted Average Effective Interest Rate (2)(3) | Weighted Average Maturity (3) | |||||||
September 30, 2015 | 5 | $ | 11,246 | 4.12 | % | 1.46 | |||||
December 31, 2014 | 5 | $ | 11,246 | 4.12 | % | 2.20 | |||||
_____________________
(1) Carrying amount for these properties as of September 30, 2015 was $27.4 million under the liquidation basis of accounting and $19.4 million at December 31, 2014 under the going concern basis of accounting.
(2) Interest rates are fixed rates or fixed through the use of derivative instruments used for interest rate hedging purposes.
(3) Total calculated on a weighted average basis for all mortgages outstanding at September 30, 2015 and December 31, 2014.
The following table summarizes the scheduled aggregate principal payments subsequent to September 30, 2015:
(In thousands) | Future Principal Payments | |||
2015 | $ | — | ||
2016 | — | |||
2017 | 11,246 | |||
2018 | — | |||
2019 | — | |||
Thereafter | — | |||
$ | 11,246 | |||
A mortgage loan in the amount of $1.5 million is subject to a prepayment fee of 2.0% if paid prior to November 1, 2016. The prepayment fee is accrued in liability for estimated costs in excess of estimated receipts during liquidation on the consolidated statement of net assets at September 30, 2015.
The Company's sources of recourse financing generally include financial covenants, including restrictions on corporate guarantees, the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of minimum net worth. As of September 30, 2015, the Company was in compliance with the covenants under the loan agreements.
Note 6 — Note Payable
In March 2012, the Company entered into an unsecured $5.0 million note payable with an entity related to a principal stockholder. The note payable bears interest at a fixed rate of 8.0% per annum and was originally scheduled to mature on March 20, 2013. The note payable had two options for one-year extensions, which were both exercised. The note was subsequently amended to include two additional options for one-year extensions, one of which has been exercised. The note is now scheduled to mature on March 20, 2016. The note payable requires monthly interest payments with the principal balance due at maturity. The note payable may be repaid at any time, in whole or in part. The Company is also required to pay an exit fee equal to 1.0% of the original loan amount upon any payment of principal on the loan. The exit fee was accrued as interest expense over the initial one-year term of the note payable.
14
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
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. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. 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.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2015, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments, are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the counterparties.
The following table presents information about the Company’s liabilities (including derivatives that are presented net) measured at fair value on a recurring basis, 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 | ||||||||||||
December 31, 2014 | ||||||||||||||||
Interest rate swap | $ | — | $ | 140 | $ | — | $ | 140 | ||||||||
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. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2015 or 2014.
15
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
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, restricted cash, other receivables, due to related parties, accounts payable 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 are reported below.
Carrying Amount at | Fair Value at | Carrying Amount at | Fair Value at | |||||||||||||||
(In thousands) | Level | September 30, 2015 | September 30, 2015 | December 31, 2014 | December 31, 2014 | |||||||||||||
Mortgage notes payable | 3 | $ | 11,246 | $ | 11,363 | $ | 11,246 | $ | 11,364 | |||||||||
Note payable | 3 | $ | 5,000 | $ | 5,188 | $ | 5,000 | $ | 5,085 | |||||||||
Derivative instruments (1) | 2 | $ | 154 | $ | 141 | $ | — | $ | — | |||||||||
_______________
(1) Upon conversion to the liquidation basis of accounting as of September 1, 2015, the Company's derivative instrument was adjusted to its termination value.
The fair value of the mortgage notes and note payable are estimated using a discounted cash flow analysis based on the Company's experience with similar types of borrowing arrangements.
Note 8 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its related parties may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and collars as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.
Under the liquidation basis of accounting, at September 30, 2015, amounts payable or receivable for derivative instruments is accrued as the estimated liquidation value of derivative instruments in the consolidated statement of net assets.
Prior to the adoption of liquidation basis accounting, the effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges was recorded in accumulated other comprehensive income and was subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2015, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives was recognized directly in earnings.
16
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
The Company had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk (dollar amounts in thousands).
Interest Rate Derivative | Number of Instruments | Notional Amount | ||||
Interest rate swap as of September 30, 2015 | 1 | $ | 9,716 | |||
Interest rate swap as of December 31, 2014 | 1 | $ | 9,716 | |||
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheets:
(In thousands) | Balance Sheet Location | |||||||
Liquidation basis of accounting: | ||||||||
September 30, 2015 | Interest rate swap | Derivative settlement liability | $ | 154 | ||||
Derivatives designated as hedging instruments: | ||||||||
December 31, 2014 | Interest rate swap | Derivatives, at fair value | $ | 140 | ||||
Derivatives in Cash Flow Hedging Relationships
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges. There were no gains or losses from ineffective amounts excluded from effectiveness testing.
One Month Ended September 30, | Two Months Ended August 31, | Three Months Ended September 30, | Eight Months Ended August 31, | Nine Months Ended September 30, | ||||||||||||||||
(In thousands) | 2015 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||
Amount of loss recognized in accumulated other comprehensive loss from interest rate derivatives (effective portion) | $ | — | $ | (13 | ) | $ | 22 | $ | (76 | ) | $ | (47 | ) | |||||||
Amount of loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion) | $ | — | $ | (22 | ) | $ | (34 | ) | $ | (87 | ) | $ | (99 | ) | ||||||
Amount of loss recognized as change in derivative settlement liability | $ | (11 | ) | $ | — | $ | — | $ | — | $ | — | |||||||||
The Company had no derivative assets. The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivative liabilities:
Offsetting of Derivative Liabilities | ||||||||||||||||||||||||
(In thousands) | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Consolidated Balance Sheet | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||
September 30, 2015 | $ | 154 | $ | — | $ | 154 | $ | — | $ | — | $ | 154 | ||||||||||||
December 31, 2014 | $ | 140 | $ | — | $ | 140 | $ | — | $ | — | $ | 140 | ||||||||||||
Credit-Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
As of September 30, 2015, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $0.1 million. As of September 30, 2015, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $0.2 million at September 30, 2015.
17
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Reclassifications out of Accumulated Other Comprehensive Income (“AOCI”)
The following table details reclassification adjustments out of AOCI and the corresponding effect on net income:
AOCI Component (in thousands) | Amount Reclassified from AOCI | Affected Line Items in the Consolidated Statements of Operations and Comprehensive Loss | ||||||||||||||||
Two Months Ended August 31, | Three Months Ended September 30, | Eight Months Ended August 31, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||
Designated derivatives, fair value adjustment | $ | (22 | ) | $ | (34 | ) | $ | (87 | ) | $ | (99 | ) | Interest expense | |||||
Note 9 — Common Stock
The following table details the Company's shares of common stock outstanding and NAV per share:
September 30, 2015 | December 31, 2014 | |||||||||||||
Class of common stock | Number | NAV per share (2) | Number | NAV per share | ||||||||||
Retail | 1,183,342 | $ | 10.10 | 1,173,028 | $ | 10.19 | ||||||||
Institutional | 1,358,054 | $ | 9.84 | 1,304,058 | $ | 9.94 | ||||||||
Total | 2,541,396 | (1) | 2,477,086 | (1) | ||||||||||
_____________________
(1) Excluding 16,200 shares at December 31, 2014 of unvested restricted shares of common stock issued to independent directors under the restricted share plan. There was no unvested restricted stock at September 30, 2015.
(2) Based on the liquidation basis of accounting. Because the timing of the disposal of the Company's assets and liabilities, levels of operating expenses during liquidation, and costs to liquidate the company are estimates, actual costs and income may differ from amounts reflected in the financial statements because of inherent uncertainty in estimating future events. These differences may be material.
On July 30, 2015, in connection with the Plan, the board of directors suspended the monthly distributions effective as of July 31, 2015. The final payment of distributions occurred on August 3, 2015 in connection with the Company's July distributions. Prior to that time, commencing on September 15, 2011, the Company's board of directors authorized, and the Company began declaring, a distribution, which was calculated based on stockholders of record each day during the applicable period at a rate of $0.0017260274 per share of common stock per day equivalent to $0.63 per annum based on a 365 day year. The Company's distributions were payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments were dependent on the availability of funds.
Share Repurchase Program
The Company’s board of directors adopted the SRP that enabled stockholders to sell their shares to the Company. Under the SRP, stockholders were able to request that the Company redeem all or any portion, subject to certain minimum amounts described below, of their shares on any business day, if such repurchase did not impair the Company’s capital or operations.
On July 30, 2015, in connection with the Plan, the board of directors approved the termination of the Company’s SRP. The Company has processed all of the requests properly submitted under the SRP to date and will not process further requests.
The price per share that the Company paid to repurchase shares of the Company’s retail and institutional shares on any business day was the Company’s NAV per share for the respective class of common stock for that day, calculated after the close of business on the repurchase request day, without giving effect to any share purchases or repurchases that were effected on such day. 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% of the aggregate NAV per share of the shares of common stock received.
Purchases under the SRP were limited in any calendar quarter to 5% of the Company’s NAV as of the last day of the previous calendar quarter, or approximately 20% of the Company’s NAV in any 12 month period. If the Company reached the 5% limit on repurchases during any quarter, the Company did not accept any additional repurchase requests for the remainder of such quarter.
When a stockholder requested redemption and the redemption was approved, the Company reclassified such obligation from temporary equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP had the status of authorized but unissued shares.
18
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
The following table summarizes the number of shares repurchased under the SRP cumulatively through September 30, 2015:
Number of Requests | Number of Shares | Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2014 | 27 | 178,032 | $ | 9.90 | ||||
Period from January 1, 2015 to September 30, 2015 | 21 | 80,036 | 10.10 | |||||
Cumulative repurchases as of September 30, 2015 | 48 | 258,068 | $ | 9.96 | ||||
Distribution Reinvestment Plan
Pursuant to the DRIP and A&R DRIP, stockholders were able to elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. On July 30, 2015, in connection with the Plan, the board of directors of the Company approved the suspension of the DRIP, effective on July 31, 2015, subject to a 10-day notice requirement. The final issuance of shares of common stock pursuant to the DRIP in connection with the Company’s July distribution was paid on August 3, 2015.
Prior to the termination of our IPO, pursuant to the DRIP or the A&R DRIP, stockholders could elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions were paid with respect to shares purchased pursuant to the DRIP or the A&R DRIP. Participants purchasing shares pursuant to the DRIP or the A&R DRIP had the same rights and were treated in the same manner as if such shares were issued pursuant to the IPO. Shares issued under the DRIP and the A&R DRIP were recorded to equity in the accompanying consolidated balance sheet in the period distributions were declared. During the three months ended September 30, 2015 and 2014, 13,708 and 18,804 shares of common stock with a value of $0.1 million and $0.2 million, respectively, and a par value of $0.01, were issued under the DRIP and A&R DRIP. During the nine months ended September 30, 2015 and 2014, 54,316 and 51,376 shares of common stock with a value of $0.5 million and a par value of $0.01 were issued under the DRIP and A&R DRIP.
Note 10 — Commitments and Contingencies
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 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 the results of operations.
Note 11 — Related Party Transactions and Arrangements
As of September 30, 2015 and December 31, 2014, the Sponsor and an entity under common control with the Sponsor owned, in the aggregate, 244,444 shares of retail common stock. The Advisor and its affiliates may incur and pay costs and fees on behalf of the Company. All offering costs incurred by the Company or its related parties on behalf of the Company are reflected in the accompanying consolidated balance sheet or consolidated statement of net assets.
Fees Paid in Connection with the IPO
On February 5, 2015, the Company announced that the IPO would close on February 11, 2015 in accordance with its terms and that the Company would not raise additional capital.
The Dealer Manager received fees and compensation in connection with the sale of the Company’s common stock. The Dealer Manager received a selling commission of up to 7.0% of the per share purchase price of retail shares 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 retail shares, before reallowance to participating broker-dealers, as a dealer-manager fee. The Dealer Manager may have reallowed its dealer-manager fee to such participating broker-dealers. A participating broker dealer may have elected to receive a fee equal to 7.5% of the gross proceeds from the sale of retail shares (not including selling commissions and dealer manager fees) by participating broker dealers, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option was elected, the dealer manager fee was reduced to 2.5% of gross proceeds (not including selling commissions and dealer manager fees).
19
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
For the institutional shares, the Dealer Manager received an asset-based platform fee, which is a deferred distribution fee that compensated the Dealer Manager and participating broker-dealers for services in connection with the distribution of the institutional shares, that was payable monthly in arrears and was deducted from the daily NAV on the institutional shares in an amount equal to (a) the number of shares of our common stock outstanding each day during such month, excluding shares issued under the DRIP, multiplied by (b) 1/365th of 0.70% of the NAV on the institutional shares during such day. The Dealer Manager may have reallowed a portion of this fee to participating broker dealers.
The Advisor and its affiliates received compensation and reimbursement for services relating to the IPO, including transfer agent services provided by an affiliate of the Dealer Manager. All offering costs incurred by the Company or its related parties on behalf of the Company were charged to additional paid-in capital on the accompanying balance sheet. The Company was responsible for offering and related costs from the ongoing offering, excluding commissions and dealer manager fees, up to a maximum of 1.5% of gross proceeds received from its ongoing offering of common stock, measured at the end of the offering. Offering costs in excess of the 1.5% cap as of the end of the offering are the Advisor’s responsibility. As of September 30, 2015, offering and related costs exceeded 1.5% of gross proceeds received from the IPO by $6.5 million, which is reimbursable from the Advisor. As of September 30, 2015, cumulative offering costs were $7.8 million.
No selling commission or dealer manager fees from the Dealer Manager have been forgiven. The table below reflects the selling commissions, dealer manager fees and offering costs incurred from the Advisor and Dealer Manager for the three and nine months ended September 30, 2015 and 2014, as well as the related payables as of September 30, 2015 and December 31, 2014:
Three Months Ended September 30, | Nine Months Ended September 30, | Payable (receivable) as of | ||||||||||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | September 30, 2015 | December 31, 2014 | ||||||||||||||||||
Selling commissions and dealer manager fees | $ | — | $ | 54 | $ | 23 | $ | 135 | $ | — | $ | 1 | ||||||||||||
Other organization and offering costs (1) | — | 242 | (105 | ) | 472 | (551 | ) | (4,057 | ) | |||||||||||||||
Total offering costs | $ | — | $ | 296 | $ | (82 | ) | $ | 607 | $ | (551 | ) | $ | (4,056 | ) | |||||||||
_____________________________
(1) Cumulative offering costs exceeding the 1.5% cap of $6.5 million are the responsibility of the Advisor.
Fees Paid in Connection With the Operations of the Company
The Advisor receives an acquisition fee of 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 also paid for services provided for which it incurs investment-related expenses.
The Company pays the Advisor a monthly asset management fee equal to one twelfth of 1.0% of the monthly average of our daily NAV, payable on the first business day of each month for the respective month. Such fee will be payable, at the discretion of our board of directors, in cash, common stock or restricted stock grants or any combination thereof. This fee will be allocated between the retail shares and institutional shares based on the relative NAV of each class. The amount of any asset management fee will be reduced to the extent that funds from operations, as adjusted, during the six months ending on the last day of the calendar quarter immediately preceding the date that such asset management fee is payable, is less than distributions declared with respect to such six month period. Asset management fees, if accrued, were recorded in operating fees to related parties in the consolidated statement of operations. As of September 1, 2015, upon the adoption of liquidation basis of accounting, these fees would be recorded as asset management fees on the consolidated statement of changes in net assets.
For services in overseeing property management and leasing services provided by any person or entity that is not an affiliate of the Property Manager, the Company will pay the Property Manager an oversight fee equal to 1.0% of the gross revenues of the property managed. Oversight fees, if accrued, are recorded in operating fees to related parties in the consolidated statement of operations. No such services have been provided by any person or entity that is not an affiliate of the Property Manager during the three and nine months ended September 30, 2015 and 2014. There have been no oversight fees incurred during the three and nine months ended September 30, 2015 and 2014.
20
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
The following table reflects related party fees incurred and forgiven.
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | ||||||||||||||||||||||||||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | September 30, 2015 | December 31, 2014 | ||||||||||||||||||||||||||||||||||
Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | |||||||||||||||||||||||||||||||||
One-time fees: | ||||||||||||||||||||||||||||||||||||||||
Acquisition fees and related cost reimbursements | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 28 | $ | — | $ | — | $ | — | ||||||||||||||||||||
Other expense reimbursements | 133 | — | — | — | 364 | — | — | — | 17 | — | ||||||||||||||||||||||||||||||
Ongoing fees: | ||||||||||||||||||||||||||||||||||||||||
Asset management fees (1) | 64 | 64 | 61 | 61 | 191 | 191 | 172 | 172 | — | — | ||||||||||||||||||||||||||||||
Transfer agent fees | 69 | — | 70 | — | 209 | — | 211 | — | 23 | 97 | ||||||||||||||||||||||||||||||
Total related party operation fees and reimbursements | $ | 266 | $ | 64 | $ | 131 | $ | 61 | $ | 764 | $ | 191 | $ | 411 | $ | 172 | $ | 40 | $ | 97 | ||||||||||||||||||||
_____________________________
(1) | These cash fees have been waived. The Company’s board of directors may elect, subject to the Advisor’s approval, on a prospective basis, to pay asset management fees in the form of performance-based restricted shares. |
The Company will reimburse 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 (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of (a) 2% of average invested assets or (b) 25% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Additionally, the Company will reimburse the Advisor for personnel costs in connection with other services during the operational stage, in addition to paying an asset management fee; however, the Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or real estate commissions. The Company incurred $0.1 million and $0.4 million from the Advisor for providing services during the three and nine months ended September 30, 2015, respectively, which were recorded in general and administrative expenses in the accompanying consolidated statements of operations. As of September 1, 2015, upon the adoption of liquidation basis of accounting, $0.6 million in estimates for these expenses were recorded as liability for costs in excess of estimated receipts during liquidation on the consolidated statement of changes in net assets. There were no reimbursements incurred from the Advisor for providing services during the three and nine months ended September 30, 2014.
The Company will pay the Advisor an annual 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% per annum, the Advisor will be entitled to 15% of the excess total return but not to exceed 10% of the aggregate total return for such year (which will take into account distributions and realized appreciation). This fee will be payable only upon the sale of assets, distributions or other event which results in our return on stockholders’ capital exceeding 6% per annum. There were no such fees incurred from the Advisor for providing services during the three and nine months ended September 30, 2015 or 2014.
In order to improve operating cash flows and the ability to pay prior distributions from operating cash flows, the Advisor waived certain fees, including asset management and property management fees. Because the Advisor waived certain fees, cash flow from operations that would have been paid to the Advisor were available to pay distributions to stockholders. The fees that were forgiven are not deferrals and accordingly, will not be paid to the Advisor in cash. 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 expenses.
The Advisor elected to absorb $0.2 million of general and administrative expenses during the three months ended September 30, 2014. During the nine months ended September 30, 2015 and 2014, the Advisor elected to absorb $0.4 million and $0.5 million of general and administrative expenses, respectively. These costs were presented net in the accompanying consolidated statements of operations and comprehensive loss.
The Advisor may, at its discretion, forgive fees or may charge the full fee owed to it in accordance with the Company’s agreements with the Advisor.
21
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Fees Paid in Connection with the Liquidation or Listing of the Company’s Real Estate Assets
The Company will pay the Advisor a brokerage commission on the sale of property, not to exceed the lesser of 2% 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 unrelated third parties exceed the lesser of 6% 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. During the three and nine months ended September 30, 2015, fees of approximately $0.1 million were paid for broker commissions, which were recorded in the accompanying consolidated statements of operations and comprehensive loss and as of September 30, 2015, under the liquidation basis of accounting, $0.4 million in estimates for these fees were recorded in the consolidated statement of changes in net assets. There were no fees paid for broker commissions during the three and nine months ended September 30, 2014.
If the Company is not simultaneously listed on an exchange, the OP will distribute to the Special Limited Partner a subordinated participation in the net sales proceeds of the sale of real estate assets of 15% of remaining net sale proceeds after return of capital contributions to investors, plus payment to investors of an annual 6% cumulative, pre-tax non-compounded return on the capital contributed by investors. The Company cannot assure that it will provide this 6% return but the Special Limited Partner will not be entitled to the subordinated participation in net sale proceeds unless the Company’s investors have received a 6% cumulative non-compounded return on their capital contributions. There were no such amounts incurred during the three and nine months ended September 30, 2015 or 2014.
If the Company is listed on an exchange, the OP will distribute to the Special Limited Partner a subordinated incentive listing distribution of 15% of the amount by which the market value of the Company’s issued and outstanding common stock, as adjusted, plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6% cumulative, pre-tax non-compounded annual return to investors, which amount would be evidenced by a non-interest bearing promissory note. The Company cannot assure that it will provide this 6% return but the Special Limited Partner will not be entitled to the subordinated incentive listing distribution unless investors have received a 6% cumulative, pre-tax non-compounded return on their capital contributions. There were no such fees incurred during the three and nine months ended September 30, 2015 or 2014.
Neither the Special Limited Partner nor any of its affiliates can earn both the subordination participation in the net proceeds and the subordinated listing distribution.
Upon termination or non-renewal of the advisory agreement, the Special Limited Partner will be entitled to receive distributions from the OP the payment of which would be evidenced by a promissory note. In addition, 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.
Receivable from Advisor
The table below reflects activity related to amounts that are receivable from the Advisor:
(In thousands) | ||||
Cumulative offering costs | $ | 7,832 | ||
less: Cumulative commissions, dealer manager fees and platform fees | (901 | ) | ||
Cumulative offering costs, excluding commissions, dealer manager fees and platform fees | 6,931 | |||
1.5% cap for Company responsibility of offering costs | (390 | ) | ||
Advisor’s responsibility for offering costs | 6,541 | |||
less: Payable to Advisor for offering costs | (3,568 | ) | ||
Offering cost receivable | 2,973 | |||
Expense reimbursement receivable | 1,982 | |||
less: Collected as of September 30, 2015 | (4,000 | ) | ||
Net receivable from Advisor as of September 30, 2015 | $ | 955 | ||
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AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Note 12 — 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 and maintenance 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, its affiliates and entities under common control. If 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 13 — Share-Based Compensation
Stock Option Plan
The Company had a stock option plan (the “Stock Option Plan”) which authorized the grant of nonqualified stock options to the Company’s independent directors, officers, advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Stock Option Plan. A total of 0.5 million shares had been authorized and reserved for issuance under the Stock Option Plan. On July 30, 2015, in connection with the Plan, the board of directors of the Company approved the termination of the Stock Option Plan. As of September 30, 2015 and December 31, 2014, no stock options were issued under the Stock Option Plan.
Restricted Share Plan
The Company had an RSP, which provided for the automatic grant of 3,000 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, after initial election to the board of directors and after each annual stockholder’s meeting with such shares vesting annually beginning with one year anniversary of initial election to the board of directors and the date of the next annual meeting, respectively. Restricted stock issued to independent directors would vest over a five-year period in increments of 20% per annum. The RSP provided the Company with the ability to grant awards of restricted shares to the Company’s directors and officers, employees of the Advisor and its affiliates, employees of entities that provided services to the Company, directors of the Advisor or of entities that provided services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provided services to the Company. On July 30, 2015, in connection with the Plan, the board of directors of the Company approved the termination of the RSP. Upon termination, the 12,600 unvested restricted shares became fully vested and all remaining compensation expense was recognized.
Restricted share awards entitled the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. 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 could not, in general, be sold or otherwise transferred until restrictions were removed and the shares had vested. Holders of restricted shares received cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock were subject to the same restrictions as the underlying restricted shares.
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AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
The following tables display restricted share award activity during the nine months ended September 30, 2015:
Restricted Share Awards | Number of Restricted Common Shares | Weighted-Average Issue Price | |||||
December 31, 2014 | 24,000 | $ | 9.78 | ||||
Granted | 6,000 | 10.21 | |||||
Forfeited | — | — | |||||
September 30, 2015 | 30,000 | $ | 9.87 | ||||
Unvested Restricted Shares | Number of Restricted Common Shares | Weighted-Average Issue Price | |||||
December 31, 2014 | 16,200 | $ | 9.81 | ||||
Granted | 6,000 | 10.21 | |||||
Vested | (22,200 | ) | 9.96 | ||||
Forfeited | — | — | |||||
September 30, 2015 | — | $ | — | ||||
The fair value of the shares, which was based on the NAV of the Company’s common stock on the grant date, was expensed on a straight-line basis over the service period of five years until the termination of the RSP in July 2015 when all remaining compensation expense was recognized and the remaining shares became fully vested. Adjusted for the timing of board members’ resignations, admissions and the termination of the RSP, compensation expense related to restricted stock was approximately $180,000 and $11,000 for the two months ended August 31, 2015 and three months ended September 30, 2014, respectively. For the eight months ended August 31, 2015 and the nine months ended September 30, 2014, compensation expense related to restricted stock was $201,000 and $29,000, respectively. All expenses related to restricted stock were fully recognized as of August 31, 2015.
As of September 30, 2015, the Company had no unrecognized compensation expense related to restricted stock.
Note 14 — Net Loss Per Share
The following is a summary of the basic and diluted net loss per share computation prior to the adoption of the Plan:
Two Months Ended August 31, | Three Months Ended September 30, | Eight Months Ended August 31, | Nine Months Ended September 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net loss (in thousands) | $ | (368 | ) | $ | (89 | ) | $ | (935 | ) | $ | (351 | ) | ||||
Basic and diluted weighted average shares of common stock outstanding | 2,528,834 | 2,413,801 | 2,525,494 | 2,284,057 | ||||||||||||
Basic and diluted net loss per share | $ | (0.15 | ) | $ | (0.04 | ) | $ | (0.37 | ) | $ | (0.15 | ) | ||||
As of September 30, 2015 and 2014, the Company had no shares and 22,800 shares, respectively, of unvested restricted stock outstanding, and 222 OP units, which were excluded from the calculation of diluted loss per share attributable to stockholders as the effect would have been antidilutive.
24
AMERICAN REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 disclosures in the consolidated financial statements except for the following transaction:
Sale of Properties
In October 2015, the Company entered into a purchase and sale agreement (“PSA”) for its FedEx property in Chili, NY. The sale price per the PSA is approximately $23.7 million. The carrying value for the property approximates the PSA value. The sale of the property is contingent upon the completion of full due diligence procedures by the buyer and other conditions. The property sale is projected to close during the fourth quarter of 2015, however, there can be no assurance that the property sale will be completed under the terms of the PSA or at all.
Administrative Complaint
On November 12, 2015, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against the Dealer Manager, Realty Capital Securities, LLC (“RCS”), an entity under common control with the Sponsor. Neither the Company nor the Advisor is a named party in the administrative complaint. RCS served as the dealer manager of the Company’s IPO and, together with its affiliates, has continued to provide certain services to the Company and the Company’s Advisor. The administrative complaint alleges fraudulent behavior in connection with proxy services provided by RCS to another program sponsored by the Sponsor. RCS has previously solicited proxies on behalf of the Company, although the Company’s Advisor has determined at this time that RCS will no longer provide such services to the Company. The administrative complaint alleges that employees of RCS fabricated numerous shareholder proxy votes across multiple entities sponsored by the Company’s Sponsor but does not specifically refer to any actions taken in connection with any of the Company’s proxy solicitations.
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 financial statements of American Realty Capital Daily Net Asset Value Trust, Inc. and the notes thereto. As used herein, the terms the “Company,” “we,” “our” and “us” refer to American Realty Capital Daily Net Asset Value Trust, Inc., a Maryland corporation, including, as required by context, American Realty Capital Operating Partnership II, L.P., a Delaware limited partnership, which we refer to as the “OP,” and to its subsidiaries. The Company is externally managed by American Realty Capital Advisors II, LLC (our “Advisor”), a Delaware limited liability company.
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 the Company 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 and/or holders of a direct or indirect controlling interest in 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 investors advised by American Realty Capital affiliates and conflicts in allocating time among these investors and us. These conflicts could result in unanticipated actions. |
• | We only owned 11 properties as of September 30, 2015, which exposes us to risks due to a lack of tenant and geographic diversity. |
• | We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates, including fees payable upon the sale of properties. Our Advisor and its affiliates will 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 interests are not wholly aligned with those of our stockholders. |
• | We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. |
• | Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders. |
• | We may fail to continue to qualify to be treated as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, which would result in higher taxes, may adversely affect 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. |
• | We may be unable to execute our Plan of Liquidation (the “Plan”) on a timely basis, costs of executing the Plan may be in excess of those currently anticipated or we may not get favorable terms for our assets sales. Any of these items could adversely affect amounts available for distribution to stockholders. |
26
Overview
We were incorporated on September 10, 2010 as a Maryland corporation and we have elected and qualified to be taxed as a REIT for our taxable year ended December 31, 2013. On August 15, 2011, we commenced our initial public offering (“IPO”) on a “reasonable best efforts” basis of up to a maximum of 156.6 million shares of common stock, par value $0.01 per share, consisting of up to 101.0 million retail shares to be sold to the public through broker dealers and up to 55.6 million institutional shares to be sold through registered investment advisors and broker dealers that were managing wrap or fees-based accounts, pursuant to a registration statement on Form S-11 (File No. 333-169821) (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 25.0 million shares of common stock pursuant to a distribution reinvestment plan (the “DRIP”) under which common stockholders may have elected to have their distributions reinvested in additional shares of common stock. The per share purchase price for common stock varied daily and was based on net asset value per share. On August 11, 2014, the board of directors approved, and on August 14, 2014, we filed, a follow-on registration statement for the offering of our common stock, which, as permitted by Rule 415 of the Securities Act, provided for an automatic extension of the IPO until the earlier of February 11, 2015 or the date that the SEC declared the follow-on offering effective. On January 29, 2015, the board of directors made the determination to allow the IPO to terminate in accordance with its terms. Accordingly, the IPO terminated on February 11, 2015 and we will not seek to raise any additional capital through a follow-on offering. On April 29, 2015, we filed a registration statement on Form S-3D (File No. 333-203731) with the SEC under the Securities Act that covered up to 84,000 shares of our common stock pursuant to an amended and restated dividend reinvestment plan. On May 6, 2015, we filed a post-effective amendment to the Registration Statement to deregister the unsold shares under the Registration Statement.
On July 30, 2015, our board of directors approved the Plan to sell all or substantially all of the assets owned by us and our OP and to liquidate and dissolve the Company and the OP. On September 1, 2015, at a special meeting of the stockholders, the stockholders approved the sale of all or substantially all of the our assets, our liquidation, and our dissolution, pursuant to the Plan. We currently expect to complete the liquidation of our portfolio by the end of the second quarter of 2016.
On July 30, 2015, in anticipation of the implementation of the Plan, our board of directors suspended the monthly distributions and the DRIP (subject to any notice requirements contained therein), effective July 31, 2015. The final payment of distributions occurred on August 3, 2015 with respect to distributions payable for July. On the same day, our board of directors also terminated our Share Repurchase Program (“SRP”), Employee and Director Incentive Restricted Share Plan (the “RSP”), and the 2011 Stock Option Plan.
On January 5, 2012, we received and accepted subscriptions in excess of the minimum offering amount of $2.0 million in shares, broke escrow and issued shares of common stock to our initial investors who were admitted as stockholders. As of September 30, 2015, we had 2.5 million shares of common stock outstanding, including unvested restricted shares and shares issued under the DRIP, and had received total gross proceeds, net of repurchases, from the IPO, including shares issued under the DRIP of $25.4 million.
We were formed primarily to acquire freestanding, single-tenant bank branches, convenience stores, office, industrial and retail properties net leased to investment grade and other creditworthy tenants for investment purposes. We may also originate or acquire first mortgage loans secured by real estate. We purchased our first investment properties and commenced active investment operations in January 2012. As of September 30, 2015, we owned 11 investment properties comprising 0.2 million rentable square feet, which were 100% leased. As of September 30, 2015, rental revenues derived from investment grade tenants, as rated by a major rating agency, represented 100% of rental income.
Substantially all of our business is conducted through the OP. We are the sole general partner and hold substantially all of the units of limited partner interests in the OP (“OP units”). American Realty Capital Trust II Special Limited Partner, LLC holds 222 OP units, which represent a nominal percentage of the aggregate ownership of the OP. A holder of OP units has the right to convert OP units for the cash value of a corresponding number of shares of common stock or, at the option of the OP, a corresponding number of shares of common stock, as allowed by the limited partnership agreement of the OP. The remaining rights of the holders of OP units are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP’s assets.
We have no direct employees. We have retained the Advisor to manage our affairs on a day-to-day basis. American Realty Capital Properties II, LLC (the “Property Manager”) serves as our property manager. Our Dealer Manager served as the dealer manager of the IPO. The Advisor and Property Manager are indirect wholly owned entities of, and the Dealer Manager is under common control with, our Sponsor. These related parties receive compensation and fees for services related to the IPO and the investment and management of our assets. These entities have received and will receive fees during the offering, acquisition, operational and liquidation stages.
27
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:
Liquidation Basis Accounting
As a result of the approval of the Plan by the shareholders, we have adopted the liquidation basis of accounting as of September 1, 2015 and for the periods subsequent to September 1, 2015 in accordance with GAAP. Accordingly, on September 1, 2015 assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that we expect to collect on disposal of assets and we expect to spend for settlement of our liabilities as we carry out our plan of liquidation.
The liquidation value of our operating properties and loan assets are presented on an undiscounted basis. Liabilities are carried at their contractual amounts due or estimated settlement amounts. Estimated costs to dispose of assets and liabilities have been presented separately from the related assets or liabilities in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
We accrue costs and income that we expect to incur and earn through the end of liquidation to the extent we have a reasonable basis for estimation. These amounts are classified as a liabilities for costs in excess of receipts during liquidation on the consolidated statement of net assets. The timing of the disposal of our assets and liabilities, levels of operating expenses during liquidation, and costs to liquidate the company are estimates. Actual costs and income may differ from amounts reflected in the financial statements because of inherent uncertainty in estimating future events. These differences may be material. See Note 3 — Plan of Liquidation to our consolidated financial statements for further discussion. Actual costs incurred but unpaid as of September 30, 2015 are included in accounts payable and accrued expenses on the consolidated statement of net assets.
Offering and Related Costs
Offering and related costs included all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the dealer manager fees) included costs that may have been paid by the Advisor, the Dealer Manager or their affiliates on our behalf. These costs included but are not limited to: (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Dealer Manager for amounts it may have paid to reimburse itemized and detailed due diligence expenses of broker-dealers; and, (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities.
Revenue Recognition
Prior to our adoption of the liquidation basis of accounting, our revenues, which are derived primarily from rental income, included 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 required us to record a receivable, and include in revenues, unbilled rent receivables that we will only receive if the tenant made all rent payments required through the expiration of the initial term of the lease. We deferred the revenue related to lease payments received from tenants in advance of their due dates.
We continually review receivables related to rent and unbilled rent receivables that were recorded prior to our adoption of the liquidation basis of accounting 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. In the event that the collectability of a receivable is in doubt, 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 or consolidated statement of changes in net assets.
Real Estate Investments
Prior to our adoption of the liquidation basis of accounting, investments in real estate were recorded at cost. Improvements and replacements were capitalized when they extended the useful life of the asset. Costs of repairs and maintenance were expensed as incurred.
We evaluated the inputs, processes and outputs of each asset acquired to determine if the transaction was a business combination or asset acquisition. If an acquisition qualified as a business combination, the related transaction costs were recorded as an expense in the consolidated statement of operations. If an acquisition qualified as an asset acquisition, the related transaction costs were generally capitalized and subsequently amortized over the useful life of the acquired assets.
28
In business combinations, we allocated the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may have included land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may have included 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 were recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease was determined by valuing the property as if it were vacant, and the “as-if-vacant” value was then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases were 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 were 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 were recorded to debt premiums or discounts based on the present value of the estimated cash flows, which were calculated to account for either above or below-market interest rates.
In allocating non-controlling interests, amounts were 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 utilized a number of sources, including real estate valuations, prepared by independent valuation firms. We also considered 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.
Depreciation and Amortization
Prior to our adoption of the liquidation basis of accounting, we were 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 had a direct impact on our net income because if we were to shorten the expected useful lives of our real estate investments, we would have depreciated these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Depreciation was 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 were amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values were 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 were amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values were 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, was amortized to expense over the remaining periods of the respective leases.
The assumed mortgage premiums or discounts were amortized as an increase or reduction to interest expense over the remaining term of the respective mortgages.
Impairment of Long Lived Assets
Prior to our adoption of the liquidation basis of accounting, when circumstances indicated the carrying value of a property may not be recoverable, we reviewed the asset for impairment. This review was 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 considered 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 existed due to the inability to recover the carrying value of a property, an impairment loss was recorded to the extent that the carrying value exceeded the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss was the adjustment to fair value less estimated cost to dispose of the asset. These assessments would have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
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Derivative Instruments
We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.
Prior to our adoption of the liquidation basis of accounting, we recorded all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depended on the intended use of the derivative, whether we had elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, were considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, were considered cash flow hedges. Derivatives may also have been designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provided for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are described in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements.
Properties
Our portfolio of real estate investment properties is comprised of the following 11 investment properties, which were all 100% leased as of September 30, 2015 (dollar amounts in thousands):
Portfolio Property | Acquisition Date | Number of Properties | Square Feet | Remaining Lease Term (1) | |||||
Family Dollar | Jan. 2012 | 2 | 16,000 | 6.25 | |||||
Dollar General | Jan. 2012 | 1 | 9,013 | 11.2 | |||||
Family Dollar II | Jan. 2012 | 1 | 8,320 | 5.8 | |||||
FedEx | Mar. 2012 | 1 | 111,865 | 11.3 | |||||
Circle K | May 2012 | 1 | 3,050 | 8.6 | |||||
Dollar General II | Oct. 2012 | 1 | 9,002 | 12.0 | |||||
Dollar General III (2) | Dec. 2012 | 1 | 9,014 | 12.2 | |||||
Dollar General IV (2) | Mar. 2013 | 1 | 9,026 | 12.6 | |||||
Advance Auto | Sep. 2013 | 1 | 7,000 | 8.3 | |||||
Goodyear Tire | Jun. 2014 | 1 | 6,948 | 8.8 | |||||
11 | 189,238 | 10.5 | |||||||
_____________________
(1) | Remaining lease term in years as of September 30, 2015, calculated on a weighted-average basis. |
(2) | These properties were sold subsequent to September 30, 2015. |
Dispositions
In accordance with the Plan, we intend to sell our real estate assets. As of September 30, 2015, the following properties were sold:
On August 17, 2015, we sold a property in Sturgeon Bay, WI leased to Davita Dialysis for $0.8 million to an unrelated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property.
On September 3, 2015, we sold a property in Slidell, LA leased to O'Reilly Auto for $1.1 million to an unrelated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property prior to the net realizable value adjustment made on September 1, 2015. The adjusted value approximated the selling price.
On September 4, 2015, we sold a property in Evanston, WY leased to FedEx for $2.3 million to an unrelated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property prior to the net realizable value adjustment made on September 1, 2015. The adjusted value approximated the selling price.
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The following dispositions were completed subsequent to September 30, 2015:
On October 2, 2015, we sold a property in Converse, TX leased to Dollar General for $1.3 million to an unrelated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property prior to the net realizable value adjustment made on September 1, 2015. The adjusted value approximated the selling price.
On October 9, 2015, we sold a property in Temple, TX leased to Dollar General for $1.2 million to an unreated third party. After expenses, the sale resulted in a gain of $0.2 million to the book value of the property prior to the net realizable value adjustment made on September 1, 2015. The adjusted value approximated the selling price.
In addition, we have executed a Purchase and Sale Agreement (“PSA”) on a property in Chili, NY leased to FedEx for a purchase price of approximately $23.7 million. The sale of the property is contingent upon the completion of full due diligence procedures by the buyer and other conditions. The property sale is projected to close during the fourth quarter of 2015, however, there can be no assurance that the property sale will be completed under the terms of the PSA or at all.
Results of Operations
In light of the adoption of the liquidation basis of accounting as of September 1, 2015, the results of operations in the current period are not comparable to prior periods accounted for under the going concern basis of accounting. As of September 30, 2015, we have sold three properties for total proceeds of $4.2 million, with an additional $2.5 million sold subsequent to September 30, 2015. Our remaining properties continue to perform consistently with prior reporting periods. We have had no significant changes in rental rates and all of the remaining properties continue to be 100% leased.
In addition, as we are executing a plan to liquidate our assets and settle our liabilities in order to distribute the remaining balances to stockholders, we are no longer presenting funds from operations or modified funds from operations as we no longer consider these to be a key performance measure.
Liquidity and Capital Resources
Our principal demands for funds will be for the payment of operating expenses, the payment of principal and interest on our outstanding indebtedness and liquidation distributions to our stockholders. Expenditures are expected to be met from cash flows from operations. Other potential future sources of capital include proceeds from the sale of real estate properties, potential financing arrangements and undistributed funds from operations.
Our board of directors adopted the SRP that enabled our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requested a repurchase, we were able to, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we had sufficient funds available to fund such repurchase.
On July 30, 2015, in connection with the Plan, our board of directors approved the termination of our SRP. We have processed all of the requests properly submitted under the SRP to date and will not process further requests.
The following table summarizes the number of shares repurchased under the SRP cumulatively through September 30, 2015:
Number of Requests | Number of Shares | Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2014 | 27 | 178,032 | $ | 9.90 | ||||
Period from January 1, 2015 to September 30, 2015 | 21 | 80,036 | 10.10 | |||||
Cumulative repurchases of September 30, 2015 | 48 | 258,068 | $ | 9.96 | ||||
As of September 30, 2015, we had cash of approximately $6.9 million.
Distributions
As we execute the Plan, we will make liquidating distributions in one or more payments. We expect to make a final distribution after we sell all of our real estate assets, collect our receivables and settle all of our known liabilities. We currently expect to complete the liquidation of our portfolio by the end of the second quarter of 2016.
On July 30, 2015, in connection with the Plan, our board of directors suspended the monthly distributions effective as of July 31, 2015. The final payment of distributions occurred on August 3, 2015 with respect to distributions payable for July. Prior to that time, commencing on September 15, 2011, our board of directors authorized, and we began declaring, a distribution, which was calculated based on stockholders of record each day during the applicable period at a rate of $0.0017260274 per share of common stock per day equivalent to $0.63 per annum based on a 365 day year. Our distributions were payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month.
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The amount of distributions payable to our stockholders was determined by our board of directors and was dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to qualify and maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).
The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock, for the period presented:
Three Months Ended | Two Months Ended | Eight Months Ended | ||||||||||||||||||||||||||
March 31, 2015 | June 30, 2015 | August 31, 2015 | August 31, 2015 | |||||||||||||||||||||||||
(Dollar amounts in thousands) | Dividends | Percentage of Distributions | Dividends | Percentage of Distributions | Dividends | Percentage of Distributions | Dividends | Percentage of Distributions | ||||||||||||||||||||
Distributions: | ||||||||||||||||||||||||||||
Total distributions to common stockholders | $ | 391 | $ | 404 | $ | 267 | $ | 1,062 | ||||||||||||||||||||
Source of distribution coverage: | ||||||||||||||||||||||||||||
Cash flows provided by operations | $ | 391 | 100.0 | % | $ | — | — | % | $ | — | — | % | $ | 391 | 36.8 | % | ||||||||||||
Repayment of receivable from related party | — | — | % | 404 | 100.0 | % | 267 | 100.0 | % | 671 | 63.2 | % | ||||||||||||||||
Total sources of distribution coverage | $ | 391 | 100.0 | % | $ | 404 | 100.0 | % | $ | 267 | 100.0 | % | $ | 1,062 | 100.0 | % | ||||||||||||
Cash flows provided by (used in) operations (GAAP basis) | $ | 712 | $ | (1,261 | ) | $ | (9 | ) | $ | (558 | ) | |||||||||||||||||
Net loss (in accordance with GAAP) | $ | (68 | ) | $ | (499 | ) | $ | (368 | ) | $ | (935 | ) | ||||||||||||||||
_____________________
(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.
Loan Obligations
The payment terms of our loan obligations require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. Our loan agreements stipulate that we comply with specific covenants, including the maintenance of certain financial ratios. As of September 30, 2015, we were in compliance with the debt covenants under our loan agreements.
In conjunction with the Plan, we are in the process of liquidating our real estate assets. Outstanding debt will be repaid with the proceeds from the sale of our real estate assets.
Contractual Obligations
The following is a summary of our contractual obligations as of September 30, 2015:
October 1, 2015 - December 31, 2015 | ||||||||||||||||||||
(In thousands) | Total | 2016-2017 | 2018-2019 | Thereafter | ||||||||||||||||
Principal payments due on mortgage notes payable | $ | 11,246 | $ | — | $ | 11,246 | $ | — | $ | — | ||||||||||
Interest payments due on mortgage notes payable | 712 | 116 | 596 | — | — | |||||||||||||||
Principal payments due on notes payable | 5,000 | — | 5,000 | — | — | |||||||||||||||
Interest payments due on notes payable | 252 | 102 | 150 | — | — | |||||||||||||||
$ | 17,210 | $ | 218 | $ | 16,992 | $ | — | $ | — | |||||||||||
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Election as a REIT
We qualified to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 2013. Commencing with such taxable year, we were 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 as a REIT. In order to qualify and continue to qualify for taxation as a REIT, we must 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 requirements. Even if we qualify for taxation as a REIT, we may be subject to certain federal, state, local and foreign taxes on our income and assets, including alternative minimum taxes, taxes on any undistributed income and state, local or foreign income, franchise, property and transfer taxes. Any of these taxes decrease our earnings and our available cash.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties, which may adversely impact our results of operations due to potential 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, whereby 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 acquisition and financing activities, sales and maintenance of common stock in our IPO, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 11 — Related Party Transactions and Arrangements to our consolidated financial statements included in this report for a discussion of the various related party transactions, agreements and fees.
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 unsecured notes payable, bears interest at fixed 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 we are not exposed to foreign currency fluctuations.
As of September 30, 2015, our debt included fixed-rate secured mortgage financings and secured mortgage financing with rates fixed through the use of derivative instruments and a note payable, with a carrying value of $16.2 million and a fair value of $16.6 million. Changes in market interest rates on our fixed-rate debt impact the fair value of the notes, but it has no impact on interest 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 September 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 approximately $53,000. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by approximately $27,000.
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. As the information presented above includes only those exposures that existed as of September 30, 2015, it 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.
Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.
Internal Control Over Financial Reporting
Changes in Internal Control Over Financial Reporting
During the three months ended September 30, 2015, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 previously discussed in the Annual Report on Form 10-K for the year ended December 31, 2014 except as amended and supplemented from time to time, including by the risk factors set forth on pages 9 to 13 in the Company’s Proxy Statement for the Special Meeting of Stockholders filed on August 5, 2015 (File No. 333-169821), which are incorporated herein by reference, except as set forth below:
There can be no assurance that our Plan will result in greater returns to stockholders than would have been achieved through other alternatives.
There are a number of risks associated with our Plan, any of which could adversely affect the returns we are able to provide to our stockholders. Among others, these risks include:
• | there can be no assurance that we will be successful in disposing our assets for values equal to or exceeding the low range of our estimated net asset value or that the dispositions would occur in the time frame expected; |
• | unforeseen expenses may be incurred in connection with the sale of our assets and the continued operation of the company as the Plan is carried out; |
• | the inability to take advantage of future changes in market conditions which could provide for presently unforeseen opportunistic investments that satisfy our investment strategy and minimum return parameters; |
• | depending on their tax basis in their shares, stockholders may recognize taxable gain in connection with the completion of the Plan; |
• | we may determine to transfer unsold assets to a liquidating trust, which may cause our stockholders to recognize taxable gain at the time of such transfer and may have adverse tax consequences on tax-exempt and foreign stockholders; |
• | stockholders will no longer participate in any future earnings or growth of our assets or benefit from any increases in their value once our assets are sold; and |
• | as opposed to a business combination with a relatively short time frame during which a third party would acquire the company, the liquidation process will involve a longer distribution process and will require us to incur potentially larger administrative and other costs. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities.
We did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, during the nine months ended September 30, 2015.
On August 15, 2011, we commenced our initial public offering (“IPO”) on a “reasonable best efforts” basis of up to a maximum of 156.6 million shares of common stock, consisting of up to 101.0 million retail shares to be sold to the public through broker dealers and up to 55.6 million institutional shares to be sold through registered investment advisors and broker dealers that are managing wrap or fees-based accounts, pursuant to a registration statement on Form S-11 (File No. 333-169821) (the “Registration Statement”). The Registration Statement also covered up to 25.0 million shares of common stock pursuant to a distribution reinvestment plan (the “DRIP”), under which common stock holders would elect to have their distributions reinvested in additional shares of common stock. As of September 30, 2015, we had sold 2,541,396 shares of our common stock, including unvested restricted shares and shares issued pursuant to the DRIP, and received total gross proceeds, net of repurchases, from the IPO of $25.4 million, including shares issued under the DRIP. On January 29, 2015, the board of directors made the determination to allow the IPO to terminate in accordance with its terms. Accordingly, the IPO terminated on February 11, 2015 and we will not seek to raise any additional capital through a follow-on offering. On April 29, 2015, we filed a registration statement on Form S-3D that covered up to 84,000 shares of our common stock pursuant to an amended and restated dividend reinvestment plan. On May 6, 2015, we filed a post-effective amendment to the Registration Statement to deregister the unsold shares under the Registration Statement.
On July 30, 2015, our board of directors approved a Plan of Liquidation (the “Plan”) to sell all or substantially all of the assets owned by us and our OP and to liquidate and dissolve the Company and the OP. Implementation of the Plan is contingent upon stockholder approval.
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On July 30, 2015, in anticipation of the implementation of the Plan, our board of directors suspended the monthly distributions and the DRIP (subject to any notice requirements contained therein), effective July 31, 2015. The final payment of distributions occurred on August 3, 2015 with respect to distributions payable for July. On the same day, our board of directors also terminated our Share Repurchase Program (“SRP”), Employee and Director Incentive Restricted Share Plan (the “RSP”), and the 2011 Stock Option Plan.
The following table reflects the offering costs associated with the issuance of common stock:
Nine Months Ended | ||||
(Amounts in thousands) | September 30, 2015 | |||
Selling commissions and dealer manager fees | $ | 23 | ||
Other organization and offering costs | (105 | ) | ||
Total offering costs | $ | (82 | ) | |
Our dealer manager, Realty Capital Securities, LLC (the “Dealer Manager”), reallowed the selling commissions and a portion of the dealer manager fees to participating broker-dealers. The following table details the selling commissions incurred and reallowed related to the sale of common shares:
Nine Months Ended | ||||
(Amounts in thousands) | September 30, 2015 | |||
Total commissions incurred from the Dealer Manager | $ | 23 | ||
Less: | ||||
Commissions to participating brokers | (9 | ) | ||
Reallowance to participating broker dealers | (2 | ) | ||
Net to the Dealer Manager | $ | 12 | ||
We were responsible for offering and related costs from the ongoing offering, excluding commissions, dealer manager fees and platform fees, up to a maximum of 1.5% of gross proceeds received from its ongoing offering of common stock, measured at the end of the offering. Offering costs in excess of the 1.5% cap, excluding commissions, dealer manager fees and platform fees, as of the end of the offering are our advisor's, American Realty Capital Advisors II, LLC (the “Advisor”), responsibility. As of September 30, 2015, offering and related costs exceeded the cap by $6.5 million. As of September 30, 2015, the Company has recorded a receivable of $1.0 million from the Advisor for all previously paid cumulative offering costs above the cap and reimbursements of expenses.
We have used substantially all of the net proceeds from our IPO to acquire a diversified portfolio of income producing real estate properties, focusing primarily on acquiring freestanding, single-tenant bank branches, convenience stores, office, industrial and retail properties net leased to investment grade and other creditworthy tenants. We may also originate or acquire first mortgage loans secured by real estate. As of September 30, 2015, we have used $18.6 million of net proceeds from our IPO and $16.2 million of debt financing to purchase 14 properties with an aggregate purchase price of $34.8 million (three of which had subsequently been sold by September 30, 2015) and paid acquisition fees and expenses of $0.9 million, including $0.6 million to our Advisor and its affiliates, and financing coordination fees of $0.4 million, none of which was paid to our Advisor and its affiliates. As of September 30, 2015, we had paid disposition fees of approximately $0.1 million to our Advisor pertaining to the sale of three properties.
Share Repurchase Program
Our board of directors adopted the SRP that enabled our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requested a repurchase, we were able to, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we had sufficient funds available to fund such repurchase.
On July 30, 2015, in connection with the Plan, our board of directors approved the termination of our SRP. We have processed all of the requests properly submitted under the SRP to date and will not process further requests.
The following table summarizes the number of shares repurchased under the SRP cumulatively through September 30, 2015:
Number of Requests | Number of Shares | Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2014 | 27 | 178,032 | $ | 9.90 | ||||
Period from January 1, 2015 to September 30, 2015 | 21 | 80,036 | 10.10 | |||||
Cumulative repurchases as of September 30, 2015 | 48 | 258,068 | $ | 9.96 | ||||
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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Status of Liquidation
As of November 12, 2015, the Company has sold five properties for gross proceeds of approximately $6.7 million and has entered into a purchase and sale agreement in connection with one property for a contract purchase price of approximately $23.7 million. The Company currently expects to complete the liquidation of its portfolio by the end of the second quarter of 2016. Promptly following the completion of the liquidation, the Company will make a liquidating distribution to shareholders.
Purchase and Sale Agreement
On October 19, 2015, the board of directors of the Company approved the sale of one build-to-suit FedEx Freight distribution facility for a contract purchase price of approximately $23.7 million, exclusive of closing costs.
On October 20, 2015, the Company, through the Sponsor, entered into a purchase and sale agreement (“PSA”) to sell a fee simple interest in one build-to-suit FedEx Freight distribution facility located in Chili, New York. The purchaser of the property is Allegra Tribeca, Inc. The purchaser has no material relationship with the Company and the sale is not an affiliated transaction. Pursuant to the terms of the PSA, the purchasers obligation to close upon the acquisition is subject to the satisfactory completion of a due diligence review of the property, which period expires on November 20, 2015, among other conditions. The PSA contains customary representations and warranties by the Company as seller. Although the Company believes that the sale of the property is probable, there can be no assurance that the sale will be consummated.
The property contains 111,865 rentable square feet and is 100% leased to FedEx Freight, Inc., which is a wholly-owned subsidiary of FedEx Corp. (NYSE: FDX). The lease is guaranteed by FedEx Corp., which has an investment grade credit rating as determined by major credit rating agencies. The original lease term is 15 years with 11.2 years currently remaining on the lease. The lease contains fixed rental escalations of 2.5% every five years. The current expiration date of the lease is January 27, 2027, with two renewal options of five years each. The contract purchase price of approximately $23.7 million is based on a capitalization rate of 6.25% and an annual base rent of $1,480,509.60 per annum. If the annual base rent on the closing date is not the same, the purchase price will be adjusted accordingly.
Administrative Complaint
On November 12, 2015, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against Realty Capital Securities, LLC (the “RCS”), an entity under common control with the Company's Sponsor. Neither the Company nor the Advisor is a named party in the administrative complaint. RCS served as the dealer manager of the Company’s initial public offering and, together with its affiliates, has continued to provide certain services to the Company and the Company’s Advisor. The administrative complaint alleges fraudulent behavior in connection with proxy services provided by RCS to another program sponsored by the Company’s Sponsor. RCS has previously solicited proxies on behalf of the Company, although the Company’s Avisor has determined at this time that RCS will no longer provide such services to the Company. The administrative complaint alleges that employees of RCS fabricated numerous shareholder proxy votes across multiple entities sponsored by the Company’s Sponsor but does not specifically refer to any actions taken in connection with any of the Company’s proxy solicitations.
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 REALTY CAPITAL DAILY NET ASSET VALUE TRUST, INC. | ||
By: | /s/ William M. Kahane | |
William M. Kahane | ||
Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) | ||
By: | /s/ Nicholas Radesca | |
Nicholas Radesca | ||
Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) | ||
Date: November 16, 2015
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EXHIBITS INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | |
10.1 * | Agreement for Purchase and Sale of Real Property, dated as of October 20, 2015, between ARC FECHLNY001, LLC and Allegra Tribeca, 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 Realty Capital Daily Net Asset Value Trust, Inc.'s Quarterly Report on Form 10-Q for the three months ended September 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 Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this information in furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 | |
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* Filed herewith.
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