Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________
Commission file number: 000-55198
AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Maryland | 27-3279039 | |
(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) |
Securities registered pursuant to section 12(b) of the Act: None |
Securities registered pursuant to section 12(g) of the Act: Common Stock, $0.01 par value per share (Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
There is no established public market for the registrant's shares of common stock.
As of February 29, 2016, the registrant had 97,472,968 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's proxy statement to be delivered to stockholders in connection with the registrant's 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.
AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.
FORM 10-K
Year Ended December 31, 2015
Page | ||
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Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Realty Capital — Retail Centers of America, Inc. (the "Company," "we," "our" or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
• | All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in American Realty Capital Retail Advisor, LLC, (our "Advisor"), or other entities affiliated with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global" or the "Parent of our Sponsor"), the parent of our sponsor, American Realty Capital IV, LLC (our "Sponsor"). As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including conflicts created by our Advisor's and its affiliates' compensation arrangements with us and other investment programs advised by affiliates of the Parent of our Sponsor and conflicts in allocating time among these investment programs and us, which could negatively impact our operating results. |
• | Lincoln Retail REIT Services, LLC, a Delaware limited liability company ("Lincoln") and its affiliates have to allocate time between providing real estate-related services to our Advisor and other programs and activities in which they are presently involved or may be involved in the future. |
• | We depend on tenants for revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. |
• | Our tenants may not achieve the rental rate incentives in their lease agreements with us, which may impact our results of operations. |
• | Increases in interest rates could increase the amount of our interest payments associated with our credit facility, as amended, (our "Credit Facility") and limit our ability to pay distributions. |
• | We are permitted to pay distributions of unlimited amounts from any source. There are no established limits on the amount of borrowings that we may use to fund distribution payments. |
• | We have not generated, and in the future may not generate, operating cash flows sufficient to cover 100% of our distributions, and, as such, to maintain the level of distributions, we may need to fund some portion of distributions from borrowings, which may be at unfavorable rates, or depend on our Advisor to waive reimbursement of certain expenses or fees. There is no assurance that our Advisor will waive reimbursement of expenses or fees. |
• | We may be unable to maintain cash distributions at the current rate or increase distributions over time. |
• | We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates. |
• | No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid. |
• | We are subject to risks associated with any dislocation or liquidity disruptions that may exist or occur in the credit markets of the United States of America. |
• | We may fail to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT"), which would result in higher taxes, may adversely affect our operations and would reduce the value of an investment in our common stock and the 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 be subject to regulation under the Investment Company Act. |
In addition, we describe risks and uncertainties that could cause actual results and events to differ materially in "Risk Factors" (Part I, Item 1A of this Annual Report on Form 10-K), "Quantitative and Qualitative Disclosures about Market Risk" (Part II, Item 7A) and "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Part II, Item 7).
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PART I
Item 1. Business.
We have acquired and own anchored, stabilized core retail properties for investment purposes, including power centers and lifestyle centers, which are located in the United States and were at least 80.0% leased at the time of acquisition. We purchased our first property and commenced active operations in June 2012. As of December 31, 2015, we owned 35 properties with an aggregate purchase price of $1.2 billion, comprised of 7.5 million rentable square feet, which were 95.1% leased on a weighted-average basis.
We were incorporated on July 29, 2010 as a Maryland corporation and qualified as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2012. Substantially all of our business is conducted through American Realty Capital Retail Operating Partnership, L.P. (the "OP"), a Delaware limited partnership.
On March 17, 2011, we commenced our initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts. The IPO closed on September 12, 2014. On September 22, 2014, we registered an additional 25.0 million shares of common stock to be used under our distribution reinvestment plan (the "DRIP") pursuant to a registration statement on Form S-3D (File No. 333-198864). As of December 31, 2015, we had 96.9 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from the IPO and the DRIP of $961.7 million.
We intend to publish an estimate of net asset value per share of our common stock ("Estimated Per-Share NAV") as of December 31, 2015 shortly following the filing of this Annual Report on Form 10-K for the year ended December 31, 2015 (the "NAV Pricing Date"), and subsequent valuations will occur periodically at the discretion of our board of directors, provided that such calculations will be made at least once annually. In determining Estimated Per-Share NAV, we expect to obtain estimated values for all of our properties. Beginning with the NAV Pricing Date, we will offer shares pursuant to the DRIP and repurchase shares pursuant to our amended and restated share repurchase program (the "Amended and Restated SRP") at a price based on Estimated Per-Share NAV.
We have no direct employees. We have retained the Advisor to manage our affairs on a day-to-day basis. The Advisor has entered into a service agreement with Lincoln, an independent third party, pursuant to which Lincoln provides, subject to the Advisor's oversight, real estate-related services, including locating investments, negotiating financing, and providing property-level asset management services, property management services, leasing and construction oversight services and disposition services, as needed. Our Advisor has paid and will continue to pay Lincoln a substantial portion of the fees and/or other expense reimbursements payable to our Advisor for the performance of real estate-related services. Our Advisor is under common control with the Parent of our Sponsor, as a result of which it is a related party of ours.
Realty Capital Securities, LLC (our "Former Dealer Manager") served as the dealer manager of our IPO and, together with its affiliates, continued to provide us with various services through December 31, 2015. RCS Capital Corporation, the parent company of the Former Dealer Manager and certain of its affiliates that provided services to us, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was under common control with the Parent of our Sponsor.
Investment Objectives
Our investment objectives are:
• | Preserve and protect capital; |
• | Provide attractive and stable cash distributions; and |
• | Increase the value of our assets in order to generate capital appreciation. |
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We have implemented and intend to continue to implement our investment objectives as follows:
• | Large Retail Focus — Our investment strategy has focused on acquiring a diversified portfolio of anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers (with a purchase price in excess of $20 million), and other need-based shopping centers, or collectively, large retail assets, which are located in the United States and at least 80.0% leased at the time of acquisition. |
• | Necessity-Based Retail — Up to 20.0% of our portfolio may consist of existing grocery-anchored shopping centers with a purchase price of $20 million dollars or less, typically anchored by drug stores, grocery stores, convenience stores and discount stores, or collectively, necessity based retail assets. |
• | Real Estate Related Assets — Up to 15.0% of our portfolio may consist of real estate related assets, including loans and debt securities secured by our targeted assets. |
• | Discount to Replacement Cost — We purchase properties valued at a substantial discount to replacement cost using current market rents, and with significant potential for appreciation. |
• | Low Leverage — We finance our portfolio opportunistically at a target leverage level of not more than 50% loan-to-value, which ratio will be determined after the close of our IPO and once we have invested substantially all the proceeds of our IPO. |
• | Diversified Tenant Mix — We lease our properties to a diversified group of tenants with a bias toward national tenants. |
• | Lease Term — We aim to maintain an average lease term on leases on our properties with anchor tenants of five years or greater. |
• | Monthly Distributions — We intend to pay distributions monthly out of cash flows from operations. |
• | Maximize Total Returns — We intend to maximize total returns to our stockholders through a combination of realized appreciation and current income. |
• | Exit Strategy — We intend to maximize stockholder total returns through a highly disciplined acquisition strategy, with a constant view towards a seamless and profitable exit. |
Acquisition and Investment Policies
Primary Investment Focus
We have focused our investment activities on acquiring primarily existing anchored, stabilized core retail properties, including power centers and lifestyle centers.
There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net proceeds of our IPO that may be invested in a single property. The number and mix of properties will depend upon real estate market conditions and other circumstances existing at the time of acquisition of properties.
Investing in Real Property
We have invested primarily in existing anchored, stabilized core retail properties, including power centers and lifestyle centers. As of December 31, 2015, we owned 35 properties.
Our Advisor considers relevant real estate and financial factors, including the location of the property, the leases and other agreements affecting the property, the creditworthiness of major tenants, its income-producing capacity, its physical condition, its prospects for appreciation, its prospects for liquidity, tax considerations and other factors when evaluating prospective investments. In this regard, our Advisor has substantial discretion with respect to the selection of specific investments, subject to board approval.
As of December 31, 2015, we did not have any tenants whose annualized rental income on a straight-line basis represented 10.0% or greater of total portfolio annualized rental income on a straight-line basis.
Investing in Real Estate Securities
We may invest in securities of non-majority owned publicly traded and private companies primarily engaged in real estate businesses, including REITs and other real estate operating companies, and securities issued by pass-through entities of which substantially all the assets consist of qualifying assets or real estate-related assets. We may purchase the common stock, preferred stock, debt, or other securities of these entities or options to acquire such securities. We currently do not intend to invest in, or originate, as applicable, real estate-related debt or investments (including real estate securities), such as CMBS. Any investment in equity securities (including any preferred equity securities) that are not traded on a national securities exchange or included for quotation on an inter-dealer quotation system must be approved by a majority of directors, including a majority of independent directors, not otherwise interested in the transaction as fair, competitive and commercially reasonable.
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Acquisition Structure
To date, we have acquired fee interests (a "fee interest" is the absolute, legal possession and ownership of land, property, or rights) and leasehold interests (a "leasehold interest" is a right to enjoy the exclusive possession and use of an asset or property for a stated definite period as created by a written lease) in properties. We anticipate continuing to do so if we acquire properties in the future, although other methods of acquiring a property may be utilized if we deem it to be advantageous. For example, we may acquire properties through the acquisition of substantially all of the interests of an entity which in turn owns the real property.
International Investments
We do not intend to invest in real estate located outside of the United States or the Commonwealth of Puerto Rico or make other real estate investments related to assets located outside of the United States.
Development and Construction of Properties
We do not intend to acquire undeveloped land, develop new properties, or substantially redevelop existing properties, except for instances where we may invest in existing enclosed mall opportunities for de-malling and reconfiguration into an open air format, in an amount expected not to exceed 20.0% of our assets.
Joint Ventures
We may enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. Some of the potential reasons to enter into a joint venture would be to acquire assets we could not otherwise acquire, to reduce our capital commitment to a particular asset, or to benefit from certain expertise that a partner might have.
Our general policy is to invest in joint ventures only when we will have a right of first refusal to purchase the co-venturer's interest in the joint venture if the co-venturer elects to sell such interest. If the co-venturer elects to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer's interest in the property held by the joint venture. If any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specially allocated based upon the respective proportion of funds invested by each co-venturer in each such property.
Financing Strategies and Policies
We may obtain financing for acquisitions and investments at the time an asset is acquired or an investment is made or at a later time. In addition, debt financing may be used from time to time for property improvements, tenant improvements, leasing commissions and other working capital needs. The form of our indebtedness will vary and could be long-term or short-term, secured or unsecured, or fixed-rate or floating rate. We will not enter into interest rate swaps or caps, or similar hedging transactions or derivative arrangements for speculative purposes but may do so in order to manage or mitigate our interest rate risks on variable rate debt. Our borrowings are also governed by limits in our charter and restricted by covenants in our existing indebtedness.
We will not borrow from our Sponsor, our Advisor, any of our directors or any of their respective affiliates unless a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties.
Except with respect to the borrowing limits contained in our charter, we may reevaluate and change our financing policies without a stockholder vote. The covenants in our existing indebtedness may not be changed without consent of our lenders. Factors that we would consider when reevaluating or changing our debt policy include: then-current economic conditions, the relative cost and availability of debt and equity capital, our expected investment opportunities, the ability of our investments to generate sufficient cash flows to cover debt service requirements and other similar factors.
Tax Status
We qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2012. Commencing with such taxable year, we have been organized and operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT. In order to 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 generally accepted accounting principles ("GAAP")), determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties, as well as federal income and excise taxes on our undistributed income. Further, we have taxable REIT subsidiaries, which are set up to conduct activities that cannot otherwise be conducted by a REIT, and are subject to corporate income tax.
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Competition
The retail real estate market is highly competitive. We compete for tenants in all of our markets with other owners and operators of retail real estate. We compete based on a number of factors that include location, rental rates, security, suitability of the property's design to prospective tenants' needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire, tenants to occupy our properties and purchasers to buy our properties. These competitors include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There are also other REITs with asset acquisition objectives similar to ours and others may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities may seek financing through similar channels to us. Therefore, we compete for institutional investors in a market where funds for real estate investment may decrease.
Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It also may result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.
Regulations
Our investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our investments.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future. We hire third parties to conduct Phase I environmental reviews of the real property that we intend to purchase.
We did not make any material capital expenditures in connection with environmental, health and safety laws, ordinances and regulations in 2015 and do not expect that we will be required to make any such material capital expenditures during 2016.
Employees
As of December 31, 2015, we had no direct employees. Instead, the employees of the Advisor, Lincoln and their respective affiliates perform a full range of real estate services for us, including acquisitions, property management, accounting, legal, asset management, wholesale brokerage, transfer agent and investor relations services. We are dependent on these affiliates for services that are essential to us, including asset acquisition decisions, property management and other general administrative responsibilities. In the event that any of these companies were unable to provide these services to us, we would be required to provide such services ourselves or obtain such services from other sources at potentially higher cost.
Financial Information About Industry Segments
Our current business consists of owning, managing, operating, leasing, acquiring, investing in and disposing of real estate assets. All of our consolidated revenues are from our consolidated real estate properties. We internally evaluate operating performance on an individual property level and view all of our real estate assets as one industry segment, and, accordingly, all of our properties are aggregated into one reportable segment. See our consolidated financial statements beginning on page F-1 for our revenues from tenants, net loss, total assets and other financial information.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to those filings with the Securities and Exchange Commission (the "SEC"). We also filed our registration statement on Form S-3D (File No. 333-198864) with the SEC in connection with our DRIP. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet address at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC may be obtained at www.retailcentersofamerica.com. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Form 10-K.
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Item 1A. Risk Factors.
Set forth below are the risk factors that we believe are material to our investors. The occurrence of any of the risks discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results of operations, our ability to pay distributions and the value of an investment in our common stock. This section contains references to our "stockholders." Unless expressly stated otherwise, the references to our "stockholders" represent holders of our common stock and any class or series of our preferred stock.
Risks Related to an Investment in American Realty Capital - Retail Centers of America, Inc.
We have a history of operating losses and cannot assure you that we will achieve profitability.
During the fiscal years ended December 31, 2013, 2014 and 2015, we have incurred net losses (calculated in accordance with GAAP) equal to $4.7 million, $12.6 million and $1.4 million, respectively. The extent of our future operating losses and the timing of the profitability are highly uncertain, and we may never achieve or sustain profitability.
There is no established trading market for our shares and there may never be one and stockholders are limited in their ability to sell their shares pursuant to our SRP; therefore, it will be difficult for our stockholders to sell their shares.
There is no regular established trading market for our shares of common stock and there may never be one. Our charter does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading on a national securities exchange by a specified date. We currently have no plans to list our shares on a national securities exchange. Until our shares are listed, if ever, stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase standards and the sale does not violate securities law requirements. In addition, our charter prohibits the ownership of more than 9.8% in value of the aggregate of outstanding shares of capital stock or more than 9.8% in value or number of shares, whichever is more restrictive, of any class or series of our stock, unless exempted (prospectively or retroactively) by our board of directors, which may inhibit large investors from purchasing our stockholders' shares.
We have established our SRP, but it includes numerous restrictions that limit our stockholders' ability to sell their shares, including limits on the total number of shares that may be repurchased in a given year, and our board of directors has the right to reject any request for repurchase. Moreover, in its sole discretion, our board of directors could amend, suspend or terminate our SRP upon 30 days' notice. Generally, a stockholder must have held shares for at least one year in order to participate in our SRP. Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. These limits might prevent us from accommodating all repurchase requests made in any year and there can be no assurance any shares will be repurchased under our SRP. In January 2016, our board of directors amended our SRP. See Note 15 — Subsequent Events to our consolidated financial statements accompanying this report for additional details. There can be no assurance that our SRP will not be further limited or amended.
Therefore, it is difficult for our stockholders to sell their shares promptly or at all. If a stockholder is able to sell his or her shares, it would likely be at a substantial discount to the price the shares were acquired in our IPO or pursuant to the DRIP.
We may be unable to maintain distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders, including the amount of cash flow from operations and FFO. In the past, we have not generated, and may not in the future generate, operating cash flows sufficient to continue to pay distributions to our stockholders at the current rate. Our cash flows provided by operations for the year ended December 31, 2015 were $29.9 million. During the year ended December 31, 2015, we paid distributions of $61.4 million, of which $29.9 million, or 48.6%, was funded from cash flows provided by operations, $2.5 million, or 4.1%, was funded from proceeds from disposition of land, $27.7 million, or 45.2%, was funded from proceeds reinvested from common stock under the DRIP and $1.3 million, or 2.1%, was funded from proceeds from draws under our Credit Facility.
We may not generate sufficient cash flow from operations in 2016 to pay distributions at our current level and we may not generate sufficient cash flows from operations to pay future distributions. The amount of cash available for distributions is affected by many factors, such as rental income from acquired properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. With limited operating history, we cannot assure our stockholders that we will be able to continue to pay distributions or that distributions will increase over time. We cannot give any assurance that rents from the properties we have acquired will increase, or that future acquisitions of real properties will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing a distribution rate to stockholders.
If we do not generate sufficient cash flows from our operations, we expect to use a portion of our cash on hand and the proceeds from our DRIP to pay distributions. A decrease in the level of stockholder participation in our DRIP could have an adverse impact on our ability to meet these expectations. If these sources are insufficient, we may use other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, as to which it has no obligation, to fund distributions.
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Funding distributions from any of these sources may reduce the amount of capital we ultimately invest in properties and other permitted investments, have available for other purposes and may negatively impact the value of an investment in our common stock. There is no guarantee that we will pay any particular amount of distributions, if at all. There is no assurance that we will be able to obtain funds from such sources, or pay or maintain our current level of distributions.
Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate additional operating cash flows. Funding distributions from the sale of additional securities could dilute each stockholder's interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third-party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the distributions payable to stockholders upon a liquidity event, any or all of which may have an adverse effect on an investment in our shares.
We may not have sufficient cash from operations to make a distribution required to qualify for or maintain our REIT status, which may materially adversely affect an investment in our common stock.
Moreover, our board of directors may change our distribution policy, in its sole discretion and, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to qualify as a REIT.
Our properties may be adversely affected by an economic downturn.
The capital and credit markets could experience volatility and disruption. A protracted economic downturn could have a negative impact on our portfolio. If real property or other real estate related asset values decline, we could have a difficult time funding new acquisitions and we may need to modify our investment strategy.
We depend on Lincoln and its affiliates, acting on behalf of and under the oversight of our Advisor, to achieve our investment objectives.
Our ability to achieve our investment objectives depends on our Advisor and upon the ability of Lincoln and its affiliates, acting on behalf of and under the oversight of our Advisor, to locate suitable investments, select tenants for our properties and secure independent financing arrangements. There can be no assurance that our Advisor or Lincoln or their respective affiliates will be successful in locating suitable investments on financially attractive terms or that, to the extent we have made investments and may make further investments, our objectives will be achieved. In addition, since the services agreement between our Advisor and Lincoln will be automatically renewed unless terminated by our Advisor or Lincoln for cause, or by our Advisor in the event that the advisory agreement is terminated, it may be difficult and costly to terminate and replace Lincoln. If we are unable to locate suitable investments, then we may not be able to achieve our investment objectives and our ability to pay distributions to our stockholders would be adversely affected.
We depend on our Advisor and Lincoln to provide us with executive officers and key personnel to conduct our operations.
We have no employees. Personnel and services that we require are provided to us under contracts with our Advisor. We depend on our Advisor to manage our operations and acquire and manage our portfolio of real estate assets. Personnel of our Advisor do not have significant experience in connection with the types of properties in which we have invested in and, as a result, have engaged Lincoln and its affiliates to perform some of the services for which our Advisor is responsible under the advisory agreement on its behalf. Our Advisor relies primarily on Lincoln and its affiliates, subject to the oversight of our Advisor, to identify, structure and negotiate our investments, manage and lease our properties, secure independent financing arrangements and provide asset management and disposition services in connection with our investments.
Our success also depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our Advisor, including Mr. Weil and Ms. Kurtz, and key personnel of Lincoln and its affiliates. Competition for such skilled personnel is intense, and we cannot assure you that our Advisor or Lincoln will be successful in attracting and retaining such skilled personnel capable of meeting the needs of our business. We cannot guarantee that all, or any particular one of these key personnel, will continue to provide services to us or our Advisor or Lincoln. Further, we have not and do not intend to separately maintain key person life insurance on any of the key personnel of our Advisor or Lincoln. Moreover, any adverse changes in the financial health of our Advisor or Lincoln could negatively impact their ability to supply us with the key personnel necessary for successful operations.
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Our Advisor and Lincoln depend upon the fees and other compensation that each receives from us in connection with the management of our business and sale of our properties to conduct its operations. Any adverse changes in the financial condition of, or our relationship with, our Advisor or Lincoln or the relationship between our Advisor and Lincoln could hinder their ability to successfully manage our operations and our portfolio of investments. Additionally, changes in ownership or management practices, the occurrence of adverse events affecting our Advisor or its affiliates or other companies advised by our Advisor and its affiliates or Lincoln could create adverse publicity and adversely affect us and our relationship with lenders, tenants or counterparties.
If we internalize our management functions, we may be unable to obtain key personnel, and our ability to achieve our investment objectives could be delayed or hindered.
We may engage in an internalization transaction and become self-managed in the future. If we internalize our management functions, certain key employees may not become our employees but may instead remain employees of our Advisor or its affiliates. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management's attention could be diverted from most effectively managing our investments, which could result in us being sued and incurring litigation-associated costs in connection with the internalization transaction.
Our rights and the rights of our stockholders to recover claims against our officers, directors, our Advisor and Lincoln are limited, which could reduce our stockholders' and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation's best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for monetary damages and requires us to indemnify our directors, our officers, our Advisor and our Advisor's affiliates and Lincoln and Lincoln's affiliates and permits us to indemnify our employees and agents. However, as required by our charter, we may not indemnify a director, our Advisor or an affiliate of our Advisor for any loss or liability suffered by any of them or hold harmless such indemnitee for any loss or liability suffered by us unless: (1) the indemnitee determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests, (2) the indemnitee was acting on behalf of or performing services for us, (3) the liability or loss was not the result of (A) negligence or misconduct, in the case of a director (other than an independent director), the Advisor or an affiliate of the Advisor, or (B) gross negligence or willful misconduct, in the case of an independent director, and (4) the indemnification or agreement to hold harmless is recoverable only out of our net assets and not from our stockholders. We have entered into indemnification agreements with each of our directors and officers, and certain former directors and officers, providing for indemnification of such directors and officers consistent with the provisions of our charter.
We and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor, Lincoln and their respective affiliates, than might otherwise exist under common law, which could reduce our stockholders' and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor, Lincoln and their respective affiliates in some cases which would decrease the cash otherwise available for distribution to our stockholders.
We may change our targeted investments without stockholder consent.
We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments we have made to date. A change in our targeted investments or investment guidelines may increase our exposure to interest rate risk, default risk and real estate market fluctuations.
Our business could suffer in the event our Advisor, Lincoln or any other party that provides us with services essential to our operations experiences system failures or cyber-incidents or a deficiency in cybersecurity.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for the internal information technology systems of our Advisor, Lincoln and other parties that provide us with services essential to our operations are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business.
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A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of information resources. More specifically, a cyber-incident is an intentional attack or an unintentional event that can result in third parties gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. As reliance on technology in our industry has increased, so have the risks posed to the systems of our Advisor, Lincoln and other parties that provide us with services essential to our operations, both internal and those that have been outsourced. In addition, the risk of a cyber-incident, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted attacks and intrusions evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.
The remediation costs and lost revenues experienced by a victim of a cyber-incident may be significant and significant resources may be required to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches. In addition, a security breach or other significant disruption involving the IT networks and related systems of our Advisor or any other party that provides us with services essential to our operations could:
• | result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines; |
• | affect our ability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT; |
• | result in the unauthorized access to, and destruction, loss. theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes; |
• | result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space; |
• | require significant management attention and resources to remedy any damages that result; |
• | subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or |
• | adversely impact our reputation among our tenants and investors generally. |
Although our Advisor, Lincoln and other parties that provide us with services essential to our operations intend to continue to implement industry-standard security measures, there can be no assurance that those measures will be sufficient, and any material adverse effect experienced by our Advisor, Lincoln and other parties that provide us with services essential to our operations could, in turn, have an adverse impact on us.
Risks Related to Conflicts of Interest
We are subject to conflicts of interest, including conflicts arising out of our relationships with our Advisor and its affiliates, including the material conflicts discussed below.
Our Advisor faces conflicts of interest relating to the acquisition of assets and leasing of properties and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets.
We rely on our Sponsor and the executive officers and other key real estate professionals at our Advisor and Lincoln, acting on behalf of and under the oversight of our Advisor, to identify suitable investment opportunities for us. Several of the other key real estate professionals of our Advisor are also the key real estate professionals at the Parent of our Sponsor and their other public programs. Many investment opportunities that are suitable for us may also be suitable for other programs sponsored directly or indirectly by the Parent of our Sponsor. Thus, the executive officers and real estate professionals of our Advisor could direct attractive investment opportunities to other entities or investors. Such events could result in us investing in properties that provide less attractive returns, which may reduce our ability to make distributions.
We and other programs sponsored directly or indirectly by the Parent of our Sponsor also rely on these real estate professionals to supervise the property management and leasing of properties. Our executive officers and key real estate professionals are not prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition, development, ownership, leasing or sale of real estate investments.
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Lincoln and its affiliates face conflicts of interest relating to the selection, purchase, leasing and management of properties, and these conflicts may not be resolved in our favor.
Lincoln and its affiliates are responsible for, and may in the future be responsible for, the selection, acquisition, leasing and management of one or more real estate investment programs in addition to our company (including persons or entities with contractual arrangements with Lincoln and its affiliates). We may buy properties at the same time as one or more of these other real estate investment programs. As a result, there may be a conflict between our interests and the interests of Lincoln and its affiliates in connection with acquisitions of investments, which result may have an adverse impact on us. We cannot be sure that officers and key personnel acting on behalf of Lincoln and its affiliates will act in our best interests when deciding whether to allocate any particular investment to us. In addition, we may acquire properties in geographic areas where other real estate investment programs or properties managed by Lincoln and its affiliates own properties. If one of the other real estate investment programs managed by Lincoln and its affiliates attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. Similar conflicts of interest may apply to Lincoln's determination of whether to recommend to our Advisor the making or purchase of mortgage, bridge or mezzanine loans or participations therein, since other real estate investment programs Lincoln may manage may be competing with us for these investments.
Because our Advisor is wholly owned by our Sponsor through American Realty Capital Retail Special Limited Partnership, LLC (the "Special Limited Partner"), the interests of the Advisor and the Sponsor are not separate and as a result the Advisor may act in a way that is not necessarily in the investors' interest.
Our Advisor is indirectly wholly owned by our Sponsor through the Special Limited Partner. Therefore, the interests of our Advisor and our Sponsor are not separate and the Advisor's decisions may not be independent from the Sponsor and may result in the Advisor making decisions to act in ways that are not in the investors' interests.
Stockholders may be more likely to sustain a loss on their investment because our Sponsor does not have as strong an economic incentive to avoid losses as it would if it had made significant equity investments in us.
Our Sponsor has invested only $2.4 million in us through the purchase of 242,222 shares of our common stock at $10.00 per share. Our Sponsor will have little exposure to loss in the value of our shares. Without this exposure, our investors may be at a greater risk of loss because our Sponsor may have less to lose from a decrease in the value of our shares as does a sponsor that makes more significant equity investments in the company it sponsors.
Our Advisor and Lincoln face conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to the other venture partners at our expense.
We may enter into joint ventures with other programs sponsored by the Parent of our Sponsor for which our Advisor, Lincoln and/or their affiliates provide services for the acquisition, development or improvement of properties. Our Advisor and Lincoln and their affiliates may have conflicts of interest in determining which program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor and/or Lincoln and their affiliates may face a conflict in structuring the terms of the relationship between our interests and the interest of the co-venturer and in managing the joint venture. Because our Advisor and its affiliates, or Lincoln and its affiliates, as applicable, will control or have a services relationship with both the co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to that joint venture will not have the benefit of arm's-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceeds the percentage of our investment in the joint venture.
Our officers and directors face conflicts of interest related to the positions they hold with our Advisor and other affiliated entities, which could hinder our ability to successfully implement our business strategy.
Certain of our executive officers, including Edward M. Weil, Jr., chairman of our board of directors, chief executive officer and president and Katie P. Kurtz, our chief financial officer, treasurer and secretary, also are officers of our Advisor and other affiliated entities, including the advisors of other direct investment programs sponsored by the Parent of our Sponsor some of which have investment objectives and legal and financial obligations similar to ours, and may own real properties or provide services with respect to other real properties, some of which compete with us, as well as owning other business interests. These individuals owe fiduciary duties to these other entities and their stockholders, which may result in them taking actions or making decisions that conflict with the duties that they owe to us and our stockholders.
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These conflicts could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (a) allocation of investments and management time and services between us and the other entities, (b) our purchase of properties from, or sale of properties to, entities sponsored by affiliates of our Advisor, (c) the timing and terms of the investment in or sale of an asset, (d) investments with entities sponsored by affiliates of our Advisor, and (e) compensation to our Advisor. If we do not successfully implement our business strategy, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets. If these individuals act or fail to act in a manner that is detrimental to our business or favor one entity over another, they may be subject to liability for breach of fiduciary duty.
Moreover, because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities.
We disclose funds from operations ("FFO") and modified funds from operations ("MFFO"), each a non-GAAP financial measure, in communications with investors, including documents filed with the SEC; however, FFO and MFFO are not equivalent to our net income or loss as determined under accounting principles generally accepted in the United States of America ("GAAP"), and our stockholders should consider GAAP measures to be more relevant to our operating performance.
We use and disclose to investors, FFO and MFFO, which are non-GAAP financial measures. See ''Management's Discussion and Analysis of Financial Condition and Results of Operations - Funds from Operations and Modified Funds from Operations.'' FFO and MFFO are not equivalent to our net income or loss or cash flows from operations as determined in accordance with GAAP, and investors should consider GAAP measures to be more relevant to evaluating our operating performance and ability to pay distributions. FFO and MFFO and GAAP net income differ because FFO and MFFO exclude gains or losses from sales of property and asset impairment write-downs, and add back depreciation and amortization and adjust for unconsolidated partnerships and joint ventures. MFFO further excludes acquisition-related expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to non-controlling interests.
Because of these differences, FFO and MFFO may not be accurate indicators of our operating performance. In addition, FFO and MFFO are not indicative of cash flows available to fund cash needs and investors should not consider FFO and MFFO as alternatives to cash flows from operations, as an indication of our liquidity, or as indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders.
Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO and MFFO. Also, because not all companies calculate FFO and MFFO the same way, comparisons with other companies may not be meaningful.
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Our Advisor and its affiliates and Lincoln face conflicts of interest relating to the incentive fee structure under our advisory agreement.
Under our advisory agreement, our Advisor and its affiliates are entitled to fees, a substantial portion of which will be paid to Lincoln and its affiliates, that are structured in a manner intended to provide incentives to perform in our best interests and in the best interests of our stockholders. However, because our Advisor and Lincoln do not maintain a significant equity interest in us and are entitled to receive substantial minimum compensation regardless of performance, our Advisor's and Lincoln's interests are not wholly aligned with those of our stockholders. In that regard, our Advisor could be motivated to recommend to our board of directors, or Lincoln could be motivated to recommend to our Advisor, riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our Advisor to fees. In addition, our Advisor's or affiliates' entitlement to fees and distributions upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending to our board or directors, sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle our Advisor to compensation relating to those sales, even if continued ownership of those investments might be in our best long-term interest. In addition, our Advisor is entitled to receive certain fees in connection with selling and reinvesting assets, a substantial portion of which will be paid to Lincoln and its affiliates. As a result, our Advisor could be motivated to recommend to our board of directors, or Lincoln could be motivated to recommend to our Advisor, selling and reinvesting assets because they would be entitled to receive fees, regardless of the quality of the investment. Our advisory agreement requires us to pay a performance-based termination distribution to our Advisor or its affiliates (a substantial portion of which will be paid by our Advisor to Lincoln or its affiliates) if we terminate the advisory agreement prior to the listing of our shares for trading on an exchange or, absent a listing, in respect of its participation in net sales proceeds. To avoid paying this fee, our independent directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination distribution, termination of the advisory agreement would be in our best interest. In addition, the requirement to pay the distribution to our Advisor or its affiliates at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the distribution to the terminated Advisor. Moreover, our Advisor has the right to terminate the advisory agreement upon a change of control of our company and thereby trigger the payment of the performance distribution, which could have the effect of delaying, deferring or preventing the change of control. In addition, our agreements with our Advisor and its affiliates include covenants and conditions that are subject to interpretation and could result in disagreements.
Risks Related to Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or number, whichever is more restrictive) of any class or series of the outstanding shares of our stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 350.0 million shares of stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of any class or series of stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
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Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit our stockholders' ability to exit the investment.
Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
• | any person who beneficially owns 10% or more of the voting power of the corporation's outstanding voting stock; or |
• | an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation. |
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
•80.0% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
• | two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. |
These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving our Advisor or any affiliate of our Advisor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any of its affiliates. As a result, our Advisor and any of its affiliates may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
The Maryland Control Share Acquisition Act provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by the affirmative vote of stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are excluded from shares entitled to vote on the matter. "Control shares" are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
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Our stockholders' investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
We are not registered, and do not intend to register ourself or any of our subsidiaries, as an investment company under the Investment Company Act. If we become obligated to register ourself or any of our subsidiaries as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
•limitations on capital structure;
•restrictions on specified investments;
•prohibitions on transactions with affiliates; and
• | compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations. |
We conduct, and intend to continue conducting, our operations, directly and through wholly or majority-owned subsidiaries, so that we and each of our subsidiaries are exempt from registration as an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an "investment company" if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an "investment company" if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, which we refer to as the "40% test." "Investment securities" excludes (A) government securities, (B) securities issued by employees' securities companies, and (C) securities issued by majority-owned subsidiaries which (i) are not investment companies, and (ii) are not relying on the exception from the definition of investment company under Section 3(c)(1) or 3(c)(7) of the Investment Company Act.
Because we are primarily engaged in the business of acquiring real estate, we believe that we and most, if not all, of our wholly and majority-owned subsidiaries will not be considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If we or any of our wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of "investment company," we intend to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act.
Under Section 3(c)(5)(C), the SEC staff generally requires an entity to maintain at least 55% of its assets directly in qualifying assets and at least 80.0% of the entity's assets in qualifying assets and in a broader category of real estate related assets to qualify for this exception. Mortgage-related securities may or may not constitute qualifying assets, depending on the characteristics of the mortgage-related securities, including the rights that the entity has with respect to the underlying loans. Our ownership of mortgage-related securities, therefore, is limited by provisions of the Investment Company Act and SEC staff interpretations.
The method we use to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than 20 years ago. No assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for an exclusion from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exclusion from the definition of an "investment company" provided by Section 3(c)(5)(C) of the Investment Company Act.
A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of "investment company" and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register the Company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.
If we were required to register the Company as an investment company but failed to do so, we would be prohibited from engaging in our business, and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
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The purchase price per share for shares issued pursuant to the DRIP and shares repurchased under the SRP will be based on the Estimated Per-Share NAV, which is based upon subjective judgments, assumptions and opinions about future events, and may not reflect the price our stockholders would receive for their shares in a market transaction.
We intend to publish an Estimated Per-Share NAV as of December 31, 2015 shortly following the filing of this Annual Report on Form 10-K for the year ended December 31, 2015. Our Advisor engaged an independent valuer to perform appraisals of our real estate assets in accordance with the valuation guidelines established by our board of directors. As with any methodology used to estimate value, the valuation methodologies that will be used by any independent valuer to value our properties involve subjective judgments concerning factors such as comparable sales, rental and operating expense data, capitalization or discount rate, and projections of future rent and expenses.
Under our valuation guidelines, our independent valuer estimates the market value of our principal real estate and real estate-related assets, and our Advisor determines the net value of our real estate and real estate related assets and liabilities taking into consideration such estimate provided by the independent valuer. Our Advisor reviews the valuation provided by the independent valuer for consistency with its determinations of value and our valuation guidelines and the reasonableness of the independent valuer's conclusions. Our board of directors reviews the appraisals and valuations and makes a final determination of the Estimated Per-Share NAV. Although the valuations of our real estate assets by the independent valuer are reviewed by our Advisor and approved by our board of directors, neither our Advisor nor our board of directors will independently verify the appraised value of our properties and valuations do not necessarily represent the price at which we would be able to sell an asset. As a result, the appraised value of a particular property may be greater or less than its potential realizable value, which would cause our Estimated Per-Share NAV to be greater or less than the potential realizable NAV.
Because they are based on Estimated Per-Share NAV, the price our shares may be sold under the DRIP and the price at which our shares may be repurchased by us pursuant to the SRP may not reflect the price that our stockholders would receive for their shares in a market transaction.
Because valuations will only occur periodically, Estimated Per-Share NAV may not accurately reflect material events that would impact our NAV and may suddenly change materially if the appraised values of our properties change materially or the actual operating results differ from what we originally budgeted.
Following the initial valuation of Estimated Per-Share NAV, subsequent valuations will occur periodically, at the discretion of our board of directors, provided that such calculations will be made at least once annually. In connection with any periodic valuation, which are generally expected to be conducted annually, our Advisor's estimate of the value of our real estate and real estate-related assets will be partly based on appraisals of our properties, which we expect will only be appraised in connection with any periodic valuation. Any changes in value that may have occurred since the most recent periodic valuation will not be reflected in Estimated Per-Share NAV, and there may be a sudden change in the Estimated Per-Share NAV when new appraisals and other material events are reflected. To the extent actual operating results differ from our original estimates, Estimated Per-Share NAV may be affected, but we will not retroactively or proactively adjust Estimated Per-Share NAV because our actual results from operations may be better or worse than what we previously budgeted for any period. If our actual operating results cause our NAV to change, such change will only be reflected in our Estimated Per-Share NAV when a periodic valuation is completed.
Because valuations will only occur periodically, our Estimated Per-Share NAV may differ significantly from our actual NAV at any given time.
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Our stockholders' interest in us will be diluted if we issue additional shares.
Our stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently has authorized 350.0 million shares of stock, of which 300.0 million shares are classified as common stock and 50.0 million are classified as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock, or the number of authorized shares of any class or series of stock, or may classify or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of our shares may be issued in the discretion of our board of directors, except that the issuance of preferred stock must be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. Our stockholders likely will suffer dilution of their equity investment in us, if we: (a) sell additional shares in the future, including those issued pursuant to our DRIP; (b) sell securities that are convertible into shares of our common stock; (c) issue shares of our common stock in a private offering of securities to institutional investors; (d) issue restricted share awards to our directors; (e) issue shares to our Advisor or its successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory agreement; or (f) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our OP. In addition, the partnership agreement for our OP contains provisions that would allow, under certain circumstances, other entities, including other AR Global-sponsored programs, to merge into or cause the exchange or conversion of their interest for OP units. Because the OP units may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between our OP and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. Because of these reasons, among others, our stockholders should not expect to be able to own a significant percentage of our shares.
Future offerings of equity securities may be senior to our common stock for purposes of dividend distributions or upon liquidation.
In the future, we may attempt to increase our capital resources by making additional offerings of equity securities. Under our charter, we may issue, without stockholder approval, preferred stock or other classes of common stock with rights that could dilute the value of an investment in shares of common stock. Any issuance of preferred stock must be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. Upon liquidation, holders of our shares of preferred stock will be entitled to receive our available assets prior to distribution to the holders of our common stock. Additionally, any convertible, exercisable or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the per share value of our common stock and diluting their interest in us.
Payment of fees to our Advisor and its affiliates reduces cash available for investment and distribution.
Our Advisor and its affiliates will perform services for us in connection with conducting our operations and managing the portfolio of real estate and real estate-related debt and investments. Our Advisor has entered into agreements with Lincoln, pursuant to which Lincoln and its affiliates will perform some of the services for which the Advisor is responsible under the advisory agreement. Our Advisor is paid fees for these services (a substantial portion of which will be paid to Lincoln), which reduces the amount of cash available for investment in properties or distribution to stockholders.
We depend on our OP and its subsidiaries for cash flows and we are structurally subordinated in right of payment to the obligations of our OP and its subsidiaries.
We have no business operations of our own. Our only significant asset is and will be the general partnership interests of our OP. We conduct, and intend to conduct, all of our business operations through our OP. Accordingly, our only source of cash to pay our obligations is distributions from our OP and its subsidiaries of their net earnings and cash flows. There is no assurance that our OP or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations. Each of our OP's subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from these entities. In addition, because we are a holding company, our stockholders' claims as stockholders are structurally subordinated to all existing and future liabilities and obligations of our OP and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our OP and its subsidiaries will be able to satisfy our stockholders' claims as stockholders only after all of our and our OPs and its subsidiaries liabilities and obligations have been paid in full.
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General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
•changes in general, economic or local conditions;
•changes in supply of or demand for similar or competing properties in an area;
• | changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive; |
•changes in tax, real estate, environmental and zoning laws; and
•periods of high interest rates and tight money supply.
These and other risks may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
We are subject to tenant geographic concentrations that make us more susceptible to adverse events with respect to certain geographic areas.
As of December 31, 2015, the following states had concentrations of properties where annualized rental income on a straight-line basis represented 5.0% or greater of our consolidated annualized rental income on a straight-line basis:
State | December 31, 2015 | |
Texas | 12.4% | |
North Carolina | 11.6% | |
Florida | 9.9% | |
Minnesota | 8.6% | |
Oklahoma | 8.1% | |
Alabama | 7.5% | |
Nevada | 6.9% | |
Ohio | 6.4% | |
Pennsylvania | 5.8% | |
Kentucky | 5.7% | |
South Carolina | 5.4% | |
88.3% | ||
Any adverse situation that disproportionately affects the states listed above may have a magnified adverse effect on our portfolio. Factors that may negatively affect economic conditions in these states include:
•business layoffs or downsizing;
•industry slowdowns;
•relocations of businesses;
•changing demographics;
•a shift to e-commerce;
•infrastructure quality;
•any oversupply of, or reduced demand for, real estate;
•concessions or reduced rental rates under new leases for properties where tenants defaulted; and
•increased insurance premiums.
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If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which could adversely affect our financial condition and ability to make distributions to our stockholders.
Any of our tenants, or any guarantor of a tenant's lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. A bankruptcy filing of our tenants or any guarantor of a tenant's lease obligations would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. A tenant or lease guarantor bankruptcy could cause a decrease or cessation of rental payments, which could adversely affect our financial condition and ability to pay distributions to our stockholders. In the event of a bankruptcy, we cannot assure our stockholders that the tenant or its trustee will assume our lease.
Our properties may be subject to impairment charges.
We periodically evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and legal structure. For example, the early termination of, or default under, a lease by a major tenant may lead to an impairment charge. If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property. Impairment charges also indicate a potential permanent adverse change in the fundamental operating characteristics of the impaired property. There is no assurance that these adverse changes will be reversed in the future and the decline in the impaired property's value could be permanent.
If a sale-leaseback transaction is re-characterized in a tenant's bankruptcy proceeding, our financial condition and ability to make distributions to our stockholders could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant, in which case, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
If we enter into sale-leaseback transactions, we will use commercially reasonable efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a "true lease" for tax purposes, thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. However, we cannot assure our stockholders that the Internal Revenue Service (the "IRS") will not challenge such characterization. In the event that any such sale-leaseback is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification "asset tests" or "income tests" and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year.
Properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return on our stockholders' investment.
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash to be distributed to stockholders. In addition, because properties' market values depend principally upon the value of the properties' leases, the resale value of properties with prolonged vacancies could suffer.
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We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property, which could adversely affect our financial condition and ability to make distributions to our stockholders.
The seller of a property often sells its property in its "as is" condition on a "where is" basis and "with all faults," without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some of or all our invested capital in the property as well as the loss of rental income from that property.
We may be unable to secure funds for future tenant improvements or capital needs, which could adversely impact our ability to make distributions to our stockholders.
If tenants do not renew their leases or otherwise vacate their space, we may be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. In addition, we will likely be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops, even if our leases with tenants require tenants to pay routine property maintenance costs. If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flow from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.
We may not be able to sell a property when we desire to do so or on favorable terms.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct these defects or to make these improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties, which could have an adverse effect on our stockholders' investment.
Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing that indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to those properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in our interests. Lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
Rising expenses could reduce cash flows and could adversely affect our ability to make future acquisitions and to pay cash distributions.
Any properties that we own now or buy in the future are and will be subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. We expect that many of our properties will require the tenants to pay all or a portion of these costs and expenses and, accordingly, if the tenants are unable to pay these costs and expenses, we will have to pay these costs and expenses. We may, however, enter into leases or renewals of leases that do not require tenants to pay these costs and expenses. If we are unable to lease properties on a basis requiring the tenants to pay all or some of these costs and expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs, which could, among other things, adversely affect funds available for future acquisitions or cash available for distributions.
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Uninsured losses relating to real property or excessively expensive premiums for insurance coverage could reduce our cash flows and the return on our stockholders' investments.
Our general liability coverage, property insurance coverage and umbrella liability coverage on all our properties may not be adequate to insure against liability claims and provide for the costs of defense. Similarly, we may not have adequate coverage against the risk of direct physical damage or to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property. Moreover, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with such catastrophic events could sharply increase the premiums we pay for coverage against property and casualty claims.
This risk is particularly relevant with respect to potential acts of terrorism. The Terrorism Risk Insurance Act of 2002 (the "TRIA"), under which the U.S. federal government bears a significant portion of insured losses caused by terrorism, will expire on December 31, 2020, and there can be no assurance that Congress will act to renew or replace the TRIA following its expiration. In the event that the TRIA is not renewed or replaced, terrorism insurance may become difficult or impossible to obtain at reasonable costs or at all, which may result in adverse impacts and additional costs to us.
Changes in the cost or availability of insurance due to the non-renewal of the TRIA or for other reasons could expose us to uninsured casualty losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss, which may reduce the value of our stockholders' investments. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders.
Additionally, mortgage lenders insist in some cases that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Accordingly, to the extent terrorism risk insurance policies are not available at reasonable costs, if at all, our ability to finance or refinance our properties could be impaired. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses.
Real estate-related taxes may increase and if these increases are not passed on to tenants, our income will be reduced, which could adversely affect our ability to make distributions to our stockholders.
Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. Generally, from time to time our property taxes increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. There is no assurance that leases will be negotiated on a basis that passes such taxes on to the tenant. Increases not passed through to tenants will adversely affect our income, cash available for distributions, and the amount of distributions to our stockholders.
Properties may be subject to restrictions on their use that affect our ability to operate a property, which may adversely affect our operating costs and reduce the amount of funds available to pay distributions to our stockholders.
Some of our properties may be contiguous to other parcels of real property, comprising part of the same commercial center. In connection with these properties, there are significant covenants, conditions and restrictions, known as "CC&Rs," restricting the operation of these properties and any improvements on these properties, and related to granting easements on these properties. Moreover, the operation and management of the contiguous properties may impact these properties. Compliance with CC&Rs may adversely affect our operating costs.
Our operating results may be negatively affected by potential construction delays and resultant increased costs and risks.
If we construct improvements on acquired properties, we will be subject to uncertainties associated with re-zoning, environmental concerns of governmental entities and/or community groups, and our builder's ability to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder's performance also may be affected or delayed by conditions beyond the builder's control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
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We face competition with third parties in acquiring properties and other investments.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. Larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties and other investments, then our return on investment will decline or be lower than expected.
Our properties face competition that may affect tenants' ability to pay rent.
Our properties typically are, and we expect properties we acquire in the future will be, located in developed areas. In these cases, there are and will be numerous other properties within the market area of each of our properties that will compete with us for tenants. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents charged. We could be adversely affected if additional competitive properties are built in locations competitive with our properties, causing increased competition for customer traffic and creditworthy tenants. This could result in decreased cash flows from tenants and may require us to make capital improvements to properties that we would not have otherwise made, thus affecting cash available for distributions, and the amount available for distributions to our stockholders.
Also, to the extent we are unable to renew leases or re-let space as leases expire, it would result in decreased cash flows from tenants and reduce the income produced by our properties. Excessive vacancies (and related reduced shopper traffic) at one of our properties may hurt sales of other tenants at that property and may discourage them from renewing leases.
Costs of complying with governmental laws and regulations, including those relating to environmental matters and discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances.
In addition, when excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our projects could require us to undertake a costly remediation program to contain or remove the mold from the affected property or development project, which would adversely affect our operating results.
The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders. Environmental laws also may impose liens on property or restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us or our property manager and its assignees from operating such properties. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability.
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If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows and our ability to make distributions to our stockholders.
If we decide to sell any of our properties, in some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact the cash available to pay distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We may enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.
Our costs associated with complying with the Americans with Disabilities Act of 1990 (the "Disabilities Act") may affect cash available for distributions.
Our properties are subject to the Disabilities Act. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for "public accommodations" and "commercial facilities" that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act's requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We cannot assure our stockholders that we will be able to acquire properties that comply with the Disabilities Act or that allocate the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act.
Retail Industry Risks
Retail conditions may adversely affect our income and our ability to make distributions to our stockholders.
A retail property's revenues and value may be adversely affected by a number of factors, many of which apply to real estate investment generally, but which also include trends in the retail industry and perceptions by retailers or shoppers of the safety, convenience and attractiveness of the retail property. Our properties are located in public places such as shopping centers and malls, and any incidents of crime or violence would result in a reduction of business traffic to tenant stores in our properties. Any such incidents may also expose us to civil liability. In addition, to the extent that the investing public has a negative perception of the retail sector, the value of our common stock may be negatively impacted.
Some of our leases may provide for base rent plus contractual base rent increases. A number of our retail leases also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases which contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue which we may derive from percentage rent leases could be adversely affected by a general economic downturn.
Our properties consist primarily of retail properties. Our performance, therefore, is linked to the market for retail space generally and a downturn in the retail market could have an adverse effect on the value of our stockholders' investment.
The market for retail space has been and could be adversely affected by weaknesses in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, excess amounts of retail space in a number of markets and competition for tenants with other shopping centers in our markets. Customer traffic to these shopping areas may be adversely affected by the closing of stores in the same shopping center, or by a reduction in traffic to these stores resulting from a regional economic downturn, a general downturn in the local area where our store is located, or a decline in the desirability of the shopping environment of a particular shopping center.
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Our revenue will be impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space.
In the retail sector, any tenant occupying a large portion of the gross leasable area of a retail center, a tenant of any of the triple-net single-user retail properties outside the primary geographical area of investment, commonly referred to as an anchor tenant, or a tenant that is our anchor tenant at more than one retail center, may become insolvent, may suffer a downturn in business, or may decide not to renew its lease. Any of these events would result in a reduction or cessation in rental payments to us and would adversely affect our financial condition. A lease termination by an anchor tenant could result in lease terminations or reductions in rent by other tenants whose leases permit cancellation or rent reduction if another tenant's lease is terminated. We own properties where the tenants may have rights to terminate their leases if certain other tenants are no longer open for business. These "co-tenancy" provisions also may exist in some leases where we own a portion of a retail property and one or more of the anchor tenants leases space in that portion of the center not owned or controlled by us. If these tenants were to vacate their space, tenants with co-tenancy provisions would have the right to terminate their leases with us or seek a rent reduction from us. In such event, we may be unable to re-lease the vacated space. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases at the retail center. If we are unable to re-lease the vacated space to a new anchor tenant, we may incur additional expenses in order to remodel the space to be able to re-lease the space to more than one tenant.
Competition with other retail channels may reduce our profitability and the return on our stockholders' investment.
Our retail tenants will face potentially changing consumer preferences and increasing competition from other forms of retailing, such as e-commerce, discount shopping centers, outlet centers, upscale neighborhood strip centers, catalogues and other forms of direct marketing, discount shopping clubs and telemarketing. Other retail centers within the market area of our properties will compete with our properties for customers, affecting their tenants' cash flows and thus affecting their ability to pay rent. In addition, some of our tenants' rent payments may be based on the amount of sales revenue that they generate. If these tenants experience competition, the amount of their rent may decrease and our cash flows will decrease.
E-commerce can have an impact on our business.
The use of the internet by consumers continues to gain popularity. The migration towards e-commerce is expected to continue. This increase in internet sales could result in a downturn in the business of our current tenants in their "brick and mortar" locations and could affect the way future tenants lease space.
While we devote considerable effort and resources to analyze and respond to tenant trends, preferences and consumer spending patterns, we cannot predict with certainty what future tenants will want, what future retail spaces will look like and how much revenue will be generated at traditional "brick and mortar" locations. If we are unable to anticipate and respond promptly to trends in the market, our occupancy levels and rental amounts may decline.
Most of our assets are located in public places such as shopping centers. Because these assets are located in public places, acts of terror, crimes, mass shootings and other incidents beyond our control may occur, which could result in a reduction of business traffic at our properties and could expose us to civil liability.
Because most of our assets are open to the public, they will be exposed to a number of incidents that may take place within their premises and that are beyond our control or our ability to prevent, which may harm our consumers and visitors. If an act of terror, a mass shooting or other violence were to occur, we may lose tenants or be forced to close our assets for some time. If any of these incidents were to occur, the relevant asset could face material damage to its image and the property could experience a reduction of business traffic due to lack of confidence in the premises' security. In addition, we may be exposed to civil liability and be required to indemnify the victims, and our insurance premiums could rise, any of which could adversely affect us.
Risks Associated with Debt Financing
We have incurred substantial indebtedness and have broad authority to incur additional indebtedness.
As of December 31, 2015, we had approximately $128.9 million in mortgage debt and $304.0 million in draws outstanding under our Credit Facility. In addition, we may make additional draws under our Credit Facility or incur mortgage debt and may pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. In addition, we may borrow if we need additional funds to satisfy the REIT tax qualification requirement that we generally distribute annually to our stockholders 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 gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT for U.S. federal income tax purposes.
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We may be unable to obtain debt financing or refinance existing indebtedness upon maturity. Our substantial indebtedness and the cash flow associated with serving our indebtedness could have important consequences, including the risks that:
• | our cash flow could be insufficient to pay required payments of principal and interest; |
• | we might be required to use a substantial portion of our cash flow from operations to pay our indebtedness, thereby reducing the availability of our cash flow to fund our business, including distributions, acquisitions, capital expenditures and other general corporate purposes; |
• | our ability to obtain additional financing for working capital, capital expenditures, satisfaction of debt service requirements, acquisitions and general corporate or other purposes could be limited; |
• | our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business or market conditions and place us at a competitive disadvantage compared to our competitors who may be better positioned to take advantage of opportunities; |
• | we may not be able to refinance existing indebtedness (which requires substantial principal payments at maturity) and, if we can, the terms of such refinancing might not be as favorable as the terms of existing indebtedness; |
• | if principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, we will be in default under our indebtedness; and |
• | prevailing interest rates or other factors at the time of refinancing (such as the possible reluctance of lenders to make commercial real estate loans) may result in higher interest rates. |
We may suffer a shortfall between the cash flows from a property and the cash flows needed to service our indebtedness. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. If we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected which could result in our losing our REIT status and would result in a decrease in the value of our stockholders' investment.
Disruptions in the financial markets and challenging economic conditions could adversely affect our ability to secure debt financing on attractive terms, our ability to service any future indebtedness that we may incur and the values of our investments.
If liquidity in the global credit market were to contract due to market disruptions, it might become costly to obtain new lines of credit. We rely on debt financing to finance our properties and possibly other real estate-related investments. In the event of credit market turmoil, we may not be able to obtain debt financing on attractive terms. As such, we may be forced to dispose of some of our assets or otherwise modify our investment strategy. Our options would include limiting or eliminating the use of debt and focusing on those higher yielding investments that do not require the use of leverage to meet our portfolio goals.
Disruptions in the financial markets and challenging economic conditions could adversely affect the values of our investments. Turmoil in the capital markets could constrain equity and debt capital available for investment in commercial real estate, resulting in fewer buyers seeking to acquire commercial properties and increases in capitalization rates and lower property values. Furthermore, these challenging economic conditions could further negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values of our real estate investments which could decrease the value of an investment in us.
Our Credit Facility contains certain financial and operating covenants that limit our financial and operational flexibility, including our ability to make distributions.
Our Credit Facility contains certain financial and operating covenants that limit our financial and operational flexibility. The operating covenants limit our ability to incur secured and unsecured debt, make investments, sell all or substantially all of our assets, make restricted payments (including distributions to our stockholders ), engage in mergers and consolidations, enter into transactions with affiliates and take certain other actions. Our Credit Facility requires us to meet certain financial covenants, including the maintenance of certain financial ratios (such as consolidated leverage, minimum fixed charge coverage and consolidated secured leverage ratio) as well as the maintenance of a minimum net worth. The mortgage loans we have, or may in the future enter into, include, and may include, other financial and operating covenants, including transfer restrictions.
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These covenants may restrict our ability to pursue certain business initiatives or certain acquisition transactions that would otherwise be in our best interest and adversely affect our ability to complete sales of our assets. In the event that we fail to satisfy our covenants, we would be in default under our unsecured Credit Facility and may be required to repay our indebtedness with capital from other sources, which may not be available to us, or may be available only on unattractive terms.
Availability of borrowings under our Credit Facility for any period may be based on the value and financial results of pool of eligible unencumbered real estate assets that comprises our borrowing base. If the financial results of the borrowing base properties deteriorate, or if their values decline, the maximum availability under the Credit Facility may decline and we may be required to make mandatory repayments of principal outstanding to avoid a default under the Credit Facility, absent an amendment or waiver. Dispositions of borrowing base properties could have a similar effect. If we are unable to borrow under our Credit Facility due to a decrease in the available capacity or for any other reason, other sources of debt or equity capital may not be available to us, or may be available only on unattractive terms.
High mortgage rates may make it difficult for us to finance or refinance properties.
As of December 31, 2015, we had approximately $128.9 million in mortgage debt bearing interest at fixed rates, and we run the risk of being unable to refinance these loans at maturity. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
As of December 31, 2015, approximately $304.0 million outstanding under our Credit Facility bears interest at variable interest rates. Accordingly, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on these investments.
Any hedging strategies we utilize may not be successful in mitigating our risks.
We have entered into hedging transactions to manage risk of interest rate changes or price changes with respect to borrowings made or to be made to acquire or own real estate assets. To the extent that we use derivative financial instruments in connection with these risks, we are exposed to credit, basis and legal enforceability risks. Derivative financial instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. We may not be able to manage these risks effectively.
U.S. Federal Income Tax Risks
Our failure to remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock.
We have qualified to be taxed as a REIT commencing with the taxable year ended December 31, 2012 and intend to operate in a manner that would allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification if our board of directors determines that not qualifying as a REIT is in our best interests, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. We have structured our activities in a manner designed to satisfy all requirements for qualification as a REIT. However, the REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion of our counsel, including tax counsel, as to our eligibility to remain qualified as a REIT is not binding on the IRS and is not a guarantee that we will continue to qualify as a REIT. Accordingly, we cannot be certain that we will be successful in operating so we can remain qualified as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
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If we fail to continue to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even with our REIT qualification, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to our stockholders.
Even with our REIT qualification, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are "dealer" properties sold by a REIT (a "prohibited transaction" under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable cause and not willful neglect) we would be subject to tax on the income that does not meet the income test requirements. We also may decide to retain net capital gain we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of our OP or at the level of the other companies through which we indirectly own our assets, such as our taxable REIT subsidiaries, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes.
To qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce our stockholders' overall return.
In order to qualify as a REIT, we must distribute to our stockholders at least 90% of our annual 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 any net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders' investment.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including our OP, but generally excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary (but such taxable REIT subsidiary will incur corporate rate income taxes with respect to any income or gain recognized by it), (2) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary, will be treated as a prohibited transaction or (3) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements, have been held for at least two years. Despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our OP, but generally excluding our taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
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Our taxable REIT subsidiaries are subject to corporate-level taxes and our dealings with our taxable REIT subsidiaries may be subject to 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REIT's assets may consist of stock or securities of one or more taxable REIT subsidiaries.
A taxable REIT subsidiary may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. We may use taxable REIT subsidiaries generally to hold properties for sale in the ordinary course of business or to hold assets or conduct activities that we cannot conduct directly as a REIT. A taxable REIT subsidiary will be subject to applicable U.S. federal, state, local and foreign income tax on its taxable income. In addition, the taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The rules which are applicable to us as a REIT also impose a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm's-length basis.
If our OP failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT.
We intend to maintain the status of the OP as a partnership or a disregarded entity for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of the OP as a partnership or disregarded entity for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the OP could make to us. This also would result in our failing to qualify as a REIT, and becoming subject to a corporate level tax on our income. This substantially would reduce our cash available to pay distributions and the yield on our stockholders' investment. In addition, if any of the partnerships or limited liability companies through which the OP owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the OP. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
Our investments in certain debt instruments may cause us to recognize income for U.S. federal income tax purposes even though no cash payments have been received on the debt instruments, and certain modifications of such debt by us could cause the modified debt to not qualify as a good REIT asset, thereby jeopardizing our REIT qualification.
Our taxable income may substantially exceed our net income as determined based on GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may acquire assets, including debt securities requiring us to accrue original issue discount or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flows from the assets. In addition, in the event a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income with the effect that we will recognize income but will not receive a corresponding amount of cash.
As a result of the foregoing, we may generate less cash flows than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to (1) sell assets in adverse market conditions, (2) borrow on unfavorable terms, (3) distribute amounts that would otherwise be used for future acquisitions or used to repay debt, or (4) make a taxable distribution of our shares of common stock as part of a distribution in which stockholders may elect to receive shares of common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
Moreover, we may acquire distressed debt investments that require subsequent modification by agreement with the borrower. If the amendments to the outstanding debt are "significant modifications" under the applicable Treasury Regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt taxable exchange with the borrower. This deemed reissuance may prevent the modified debt from qualifying as a good REIT asset if the underlying security has declined in value and would cause us to recognize income to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt.
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The failure of a mezzanine loan to qualify as a real estate asset would adversely affect our ability to qualify as a REIT.
In general, in order for a loan to be treated as a qualifying real estate asset producing qualifying income for purposes of the REIT asset and income tests, the loan must be secured by real property or an interest in real property. We may acquire mezzanine loans that are not directly secured by real property or an interest in real property, but instead secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property or an interest in real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan that is not secured by real estate would, if it meets each of the requirements contained in the Revenue Procedure, be treated by the IRS as a qualifying real estate asset. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law and in many cases it may not be possible for us to meet all of the requirements of the safe harbor. We cannot provide assurance that any mezzanine loan in which we invest would be treated as a qualifying asset producing qualifying income for REIT qualification purposes. If any such loan fails either the REIT income or asset tests, we may be disqualified as a REIT.
We may choose to make distributions in our own stock, in which case our stockholders may be required to pay income taxes in excess of the cash dividends they receive.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders 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 gain. In order to satisfy this requirement, we may make distributions that are payable in cash and/or shares of our common stock (which could account for up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock. Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.
The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. However, a portion of our distributions may (1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us as qualified dividend income generally to the extent they are attributable to dividends we receive from our taxable REIT subsidiaries, or (3) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder's investment in our common stock.
Our stockholders may have tax liability on distributions that they elect to reinvest in common stock, but they would not receive the cash from such distributions to pay such tax liability.
If our stockholders participate in our DRIP, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the value of the shares of common stock received.
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Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20.0%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, or in certain cases to hedge previously acquired hedges entered into to manage risks associated with property that has been disposed of or liabilities that have been extinguished, if properly identified under applicable Treasury Regulations, does not constitute "gross income" for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary. This could increase the cost of our hedging activities because our taxable REIT subsidiaries would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a taxable REIT subsidiary generally will not provide any tax benefit, except for being carried forward against future taxable income of such taxable REIT subsidiary.
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. While we elected to be taxed as a REIT, we may terminate our REIT election if we determine that qualifying as a REIT is no longer in the best interests of our stockholders. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common stock.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders.
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The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of a taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by our board of directors (prospectively or retroactively), for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with such restrictions is no longer necessary in order for us to continue to qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.
Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as "effectively connected" with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), Capital gain distributions attributable to sales or exchanges of "U.S. real property interests" ("USRPIs") generally will be taxed to a non-U.S. stockholder (other than a qualified foreign pension plan, entities wholly owned by a qualified foreign pension plan and certain publicly traded foreign entities) as if such gain were effectively connected with a U.S. trade or business. However, a capital gain distribution will not be treated as effectively connected income if (1) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States and (2) the non-U.S. stockholder does not own more than 10% of the class of our stock at any time during the one-year period ending on the date the distribution is received. We do not anticipate that our shares will be "regularly traded" on an established securities market for the foreseeable future, and therefore, this exception is not expected to apply.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI within the meaning of FIRPTA. Our common stock will not constitute a USRPI so long as we are a "domestically-controlled qualified investment entity." A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT's stock is held directly or indirectly by non-U.S. stockholders. We believe, but cannot assure our stockholders, that we will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a -USRPI if: (1) our common stock is "regularly traded," as defined by applicable Treasury regulations, on an established securities market, and (2) such non-U.S. stockholder owned, actually and constructively, 10% or less of our common stock at any time during the five-year period ending on the date of the sale. However, it is not anticipated that our common stock will be "regularly traded" on an established market.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (1) we are a "pension-held REIT," (2) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock or (3) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
29
Item 1B. Unresolved Staff Comments.
None.
30
Item 2. Properties.
As of December 31, 2015, we owned 35 properties, comprised of 7.5 million rentable square feet that were 95.1% leased on a weighted-average basis with a weighted-average remaining lease term of 5.5 years.
The following table represents certain additional information about the properties we own at December 31, 2015:
Property | Acquisition Date | Property Type | Rentable Square Feet | Occupancy | Remaining Lease Term (1) | ||||||
Liberty Crossing | Jun. 2012 | Power Center | 105,970 | 93.8% | 3.5 | ||||||
San Pedro Crossing | Dec. 2012 | Power Center | 201,965 | 100.0% | 4.6 | ||||||
Tiffany Springs MarketCenter | Sep. 2013 | Power Center | 246,419 | 90.5% | 4.8 | ||||||
The Streets of West Chester | Apr. 2014 | Lifestyle Center | 236,830 | 93.2% | 5.7 | ||||||
Prairie Towne Center | Jun. 2014 | Power Center | 289,277 | 95.3% | 8.3 | ||||||
Southway Shopping Center | Jun. 2014 | Power Center | 181,809 | 95.1% | 3.8 | ||||||
Stirling Slidell Centre | Aug. 2014 | Power Center | 134,276 | 77.2% | 4.6 | ||||||
Northwoods Marketplace | Aug. 2014 | Power Center | 236,078 | 97.1% | 4.0 | ||||||
Centennial Plaza | Aug. 2014 | Power Center | 233,797 | 100.0% | 3.4 | ||||||
Northlake Commons | Sep. 2014 | Lifestyle Center | 109,112 | 96.2% | 4.5 | ||||||
Shops at Shelby Crossing | Sep. 2014 | Power Center | 236,081 | 97.9% | 3.2 | ||||||
Shoppes of West Melbourne | Sep. 2014 | Power Center | 144,484 | 95.8% | 5.2 | ||||||
The Centrum | Sep. 2014 | Power Center | 270,747 | 93.5% | 3.8 | ||||||
Shoppes at Wyomissing | Oct. 2014 | Lifestyle Center | 103,064 | 100.0% | 3.5 | ||||||
Southroads Shopping Center | Oct. 2014 | Power Center | 436,936 | 93.1% | 4.8 | ||||||
Parkside Shopping Center | Nov. 2014 & Dec. 2015 (2) | Power Center | 181,612 | 93.8% | 6.8 | ||||||
West Lake Crossing | Nov. 2014 | Power Center | 75,928 | 100.0% | 5.3 | ||||||
Colonial Landing | Dec. 2014 | Power Center | 263,559 | 98.5% | 4.3 | ||||||
The Shops at West End | Dec. 2014 | Lifestyle Center | 381,831 | 76.8% | 9.0 | ||||||
Township Marketplace | Dec. 2014 | Power Center | 298,630 | 96.8% | 3.4 | ||||||
Cross Pointe Centre | Mar. 2015 | Power Center | 226,089 | 98.7% | 9.8 | ||||||
Towne Center Plaza | Apr. 2015 | Power Center | 94,096 | 100.0% | 7.1 | ||||||
Harlingen Corners | May 2015 | Power Center | 217,772 | 94.8% | 5.5 | ||||||
Village at Quail Springs | Jun. 2015 | Power Center | 100,404 | 100.0% | 3.2 | ||||||
Pine Ridge Plaza | Jun. 2015 | Power Center | 239,492 | 95.2% | 3.8 | ||||||
Bison Hollow | Jun. 2015 | Power Center | 134,798 | 100.0% | 6.8 | ||||||
Jefferson Commons | Jun. 2015 | Power Center | 205,918 | 96.9% | 10.0 | ||||||
Northpark Center | Jun. 2015 | Power Center | 318,327 | 99.2% | 4.5 | ||||||
Anderson Station | Jul. 2015 | Power Center | 243,550 | 98.8% | 2.8 | ||||||
Patton Creek | Aug. 2015 | Power Center | 491,294 | 94.5% | 5.4 | ||||||
North Lakeland Plaza | Sep. 2015 | Power Center | 171,397 | 100.0% | 4.5 | ||||||
Riverbend Marketplace | Sep. 2015 | Power Center | 142,617 | 98.3% | 7.0 | ||||||
Montecito Crossing | Sep. 2015 | Power Center | 179,721 | 96.6% | 5.7 | ||||||
Best on the Boulevard | Sep. 2015 | Power Center | 204,568 | 100.0% | 5.3 | ||||||
Shops at RiverGate South | Sep. 2015 | Power Center | 140,703 | 97.8% | 9.8 | ||||||
Portfolio, December 31, 2015 | 7,479,151 | 95.1% | 5.5 | ||||||||
_____________________
(1) | Remaining lease term in years as of December 31, 2015, calculated on a weighted-average basis. |
(2) | Parkside Shopping Center was purchased in November 2014 with two additional parcels purchased in December 2015. |
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The following table details the geographic distribution, by state, of our portfolio as of December 31, 2015:
State | Number of Properties | Rentable Square Feet | Rentable Square Foot % | Annualized Rental Income (1) | Annualized Rental Income % | ||||||||||
(In thousands) | |||||||||||||||
Alabama | 1 | 491,294 | 6.6 | % | $ | 7,341 | 7.5 | % | |||||||
Florida | 4 | 815,521 | 10.9 | % | 9,708 | 9.9 | % | ||||||||
Illinois | 1 | 289,277 | 3.9 | % | 2,178 | 2.2 | % | ||||||||
Kansas | 1 | 239,492 | 3.2 | % | 2,288 | 2.3 | % | ||||||||
Kentucky | 2 | 387,530 | 5.2 | % | 5,646 | 5.7 | % | ||||||||
Louisiana | 1 | 134,276 | 1.8 | % | 1,303 | 1.3 | % | ||||||||
Michigan | 1 | 134,798 | 1.8 | % | 1,493 | 1.5 | % | ||||||||
Minnesota | 1 | 381,831 | 5.1 | % | 8,421 | 8.6 | % | ||||||||
Missouri | 1 | 246,419 | 3.3 | % | 4,333 | 4.4 | % | ||||||||
Nevada | 2 | 384,289 | 5.1 | % | 6,755 | 6.9 | % | ||||||||
North Carolina | 5 | 889,268 | 11.9 | % | 11,453 | 11.6 | % | ||||||||
Ohio | 2 | 555,157 | 7.4 | % | 6,325 | 6.4 | % | ||||||||
Oklahoma | 3 | 771,137 | 10.3 | % | 8,002 | 8.1 | % | ||||||||
Pennsylvania | 2 | 401,694 | 5.4 | % | 5,719 | 5.8 | % | ||||||||
South Carolina | 2 | 479,628 | 6.4 | % | 5,311 | 5.4 | % | ||||||||
Texas | 6 | 877,540 | 11.7 | % | 12,228 | 12.4 | % | ||||||||
35 | 7,479,151 | 100.0 | % | $ | 98,504 | 100.0 | % | ||||||||
_____________________
(1) | Annualized rental income as of December 31, 2015 for the in-place leases in the portfolio on a straight-line basis, which includes tenant concessions such as free rent, as applicable. |
Future Minimum Lease Payments
The following table presents future minimum base rent payments, on a cash basis, due to us over the next ten years and thereafter as of December 31, 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:
(In thousands) | Future Minimum Base Rent Payments | |||
2016 | $ | 94,274 | ||
2017 | 89,042 | |||
2018 | 75,672 | |||
2019 | 59,137 | |||
2020 | 47,601 | |||
2021 | 38,849 | |||
2022 | 35,288 | |||
2023 | 31,142 | |||
2024 | 24,489 | |||
2025 | 14,274 | |||
Thereafter | 40,750 | |||
$ | 550,518 | |||
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Future Lease Expirations
The following is a summary of lease expirations for the next ten years as of December 31, 2015:
Year of Expiration | Number of Leases Expiring | Annualized Rental Income (1) Expiring | Percent of Portfolio Annualized Rental Income Expiring | Leased Rentable Square Feet Expiring | Percent of Portfolio Rentable Square Feet Expiring (2) | |||||||||||
(In thousands) | ||||||||||||||||
2016 | 53 | $ | 3,805 | 3.9 | % | 286,756 | 4.0 | % | ||||||||
2017 | 81 | 8,246 | 8.4 | % | 667,195 | 9.4 | % | |||||||||
2018 | 113 | 15,438 | 15.7 | % | 1,051,826 | 14.8 | % | |||||||||
2019 | 117 | 17,048 | 17.3 | % | 1,266,890 | 17.8 | % | |||||||||
2020 | 98 | 10,170 | 10.3 | % | 757,323 | 10.6 | % | |||||||||
2021 | 47 | 7,485 | 7.6 | % | 508,077 | 7.1 | % | |||||||||
2022 | 19 | 2,947 | 3.0 | % | 252,049 | 3.5 | % | |||||||||
2023 | 24 | 3,959 | 4.0 | % | 273,382 | 3.9 | % | |||||||||
2024 | 35 | 8,527 | 8.7 | % | 536,816 | 7.5 | % | |||||||||
2025 | 43 | 10,680 | 10.8 | % | 812,371 | 11.4 | % | |||||||||
Total | 630 | $ | 88,305 | 89.7 | % | 6,412,685 | 90.0 | % | ||||||||
_____________________
(1) | Annualized rental income as of December 31, 2015 for the in-place leases in the portfolio on a straight-line basis, which includes tenant concessions such as free rent, as applicable. |
(2) | Excludes the rentable square feet associated with our fee simple interest in a ground lease. |
Tenant Concentration
As of December 31, 2015, we did not have any tenants whose rentable square feet or annualized rental income on a straight-line basis represented greater than 10.0% of total portfolio rentable square feet or annualized rental income on a straight-line basis.
Significant Portfolio Properties
The rentable square feet or annualized rental income on a straight-line basis of Southroads Shopping Center, The Shops at West End and Patton Creek each represent 5.0% or more or our total portfolio's rentable square feet or annualized rental income on a straight-line basis. The tenant concentration for each of these properties is summarized below.
Southroads Shopping Center
The following table lists tenants at Southroads Shopping Center whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Southroads Shopping Center as of December 31, 2015, respectively:
Tenant | Number of Units Occupied by Tenant | Rentable Square Feet | Rentable Square Feet as a % of Southroads Shopping Center Total | Lease Expiration | Remaining Lease Term | Renewal Options | Annualized Rental Income (1) | Annualized Rental Income as a % of Southroads Shopping Center Total | ||||||||||
(In years) | (In thousands) | |||||||||||||||||
Reasor LLC | 1 | 75,000 | 17.2% | August 2018 | 2.7 | 4 five-year options | $ | 636 | 13.0% | |||||||||
AMC Entertainment, Inc. | 1 | 74,182 | 17.0% | December 2025 | 10.0 | 4 five-year options | $ | 1,067 | 21.8% | |||||||||
TSA Stores, Inc. | 1 | 59,451 | 13.6% | March 2016 | 0.2 | N/A | $ | 386 | 7.9% | |||||||||
_____________________
(1) | Annualized rental income as of December 31, 2015 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable. |
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The Shops at West End
The following table lists tenants at The Shops at West End whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of The Shops at West End as of December 31, 2015, respectively:
Tenant | Number of Units Occupied by Tenant | Rentable Square Feet | Rentable Square Feet as a % of The Shops at West End Total | Lease Expiration | Remaining Lease Term | Renewal Options | Annualized Rental Income (1) | Annualized Rental Income as a % of The Shops at West End Total | ||||||||||
(In years) | (In thousands) | |||||||||||||||||
Kerasotes Showplace Theatres, LLC | 1 | 59,500 | 15.6% | November 2029 | 13.9 | 2 five-year options | $ | 2,116 | 25.1% | |||||||||
SUPERVALU Inc. | 1 | 55,288 | 14.5% | December 2029 | 14.0 | 4 five-year options | $ | 1,354 | 16.1% | |||||||||
_____________________
(1) | Annualized rental income as of December 31, 2015 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable. |
Patton Creek
The following table lists tenants at Patton Creek whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Patton Creek as of December 31, 2015, respectively:
Tenant | Number of Units Occupied by Tenant | Rentable Square Feet | Rentable Square Feet as a % of Patton Creek Total | Lease Expiration | Remaining Lease Term | Renewal Options | Annualized Rental Income (1) | Annualized Rental Income as a % of Patton Creek Total | ||||||||||
(In years) | (In thousands) | |||||||||||||||||
Dick's Sporting Goods, Inc. | 1 | 84,000 | 17.1% | January 2026 | 10.1 | 6 five-year options | $ | 688 | 9.4% | |||||||||
Carmike Cinemas, Inc. | 1 | 67,950 | 13.8% | April 2024 | 8.3 | 4 five-year options | $ | 2,039 | 27.8% | |||||||||
_____________________
(1) | Annualized rental income as of December 31, 2015 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable. |
Property Financing
Our mortgage notes payable as of December 31, 2015 consist of the following:
Property | Encumbered Properties | Outstanding Loan Amount | Effective Interest Rate | Interest Rate | Maturity Date | ||||||||
(In thousands) | |||||||||||||
Liberty Crossing - Refinanced Loan | 1 | $ | 11,000 | 4.66 | % | Fixed | Jul. 2018 | ||||||
San Pedro Crossing - Senior Loan | 1 | 17,985 | 3.79 | % | Fixed | Jan. 2018 | |||||||
Tiffany Springs MarketCenter | 1 | 33,802 | 3.92 | % | Fixed | (1) | Oct. 2018 | ||||||
Shops at Shelby Crossing | 1 | 23,781 | 4.97 | % | Fixed | Mar. 2024 | |||||||
Patton Creek | 1 | 42,377 | 5.76 | % | Fixed | Dec. 2020 | |||||||
Total | 5 | $ | 128,945 | 4.76 | % | (2) | |||||||
_________________________________
(1) | Fixed through an interest rate swap agreement. |
(2) | Calculated on a weighted-average basis for all mortgages outstanding as of December 31, 2015. |
Item 3. Legal Proceedings.
We are not a party to, and none of our properties are subject to, any material pending legal proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
34
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our shares of common stock are not traded on a national securities exchange. No established public market currently exists for our shares and there may never be one. If our stockholders are able to find a buyer for their shares, they may not sell their shares unless the buyer meets applicable suitability and minimum purchase standards and the sale does not violate state securities laws. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of our outstanding shares of stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock by a single investor, unless exempted by our board of directors. Consequently, there is risk that our stockholders may not be able to sell their shares at a time or price acceptable to them.
In order for Financial Industry Regulatory Authority ("FINRA") members and their associated persons to participate in the IPO and sale of shares of common stock pursuant to our IPO, we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to stockholders a per share estimated value of the shares, the method by which it was developed and the date of the data used to develop the estimated value. In addition, we prepare annual statements of estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in our shares. We intend to publish an Estimated Per-Share NAV as of December 31, 2015 shortly following the filing of this Annual Report on Form 10-K for the year ended December 31, 2015.
Holders
As of February 29, 2016, we had 97.5 million shares of common stock outstanding held by a total of 20,303 stockholders.
Distributions
We qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2012. As a REIT, we are required, among other things, to distribute at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP and determined without regard for the deduction for dividends paid and excluding net capital gains) to our stockholders annually. The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable, and annual distribution requirements needed to maintain our status as a REIT under the Code.
In addition, under the restricted payments covenant in our Credit Facility, we may declare or pay cash distributions in an aggregate amount (excluding cash distributions reinvested through our DRIP) not to exceed the greater of (i) 95% of our MFFO for each fiscal quarter; or (ii) the amount necessary for us to be able to make distributions required to maintain our status as a REIT.
The following table details from a U.S. federal income tax perspective, the portion of distributions classified as return of capital and ordinary dividend income, per share per annum, for the years ended December 31, 2015, 2014 and 2013:
Year Ended December 31, | |||||||||||||||||||||
(in thousands) | 2015 | 2014 | 2013 | ||||||||||||||||||
Return of capital | 64.1 | % | $ | 0.41 | 88.7 | % | $ | 0.57 | 4.6 | % | $ | 0.03 | |||||||||
Ordinary dividend income | 35.9 | % | 0.23 | 11.3 | % | 0.07 | 95.4 | % | 0.61 | ||||||||||||
Total | 100.0 | % | $ | 0.64 | 100.0 | % | $ | 0.64 | 100.0 | % | $ | 0.64 | |||||||||
On September 19, 2011, our board of directors authorized, and we declared, distributions which are calculated based on stockholders of record each day during the applicable period of $0.0017534247 per day, which is equivalent to $0.64, based on a 365-day year.
35
Our distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distributions payments are not assured. The following table reflects distributions declared and paid in cash, including the DRIP, to common stockholders, excluding distributions related to Class B Units (as described in Note 10 — Related Party Transactions and Arrangements to our consolidated financial statements accompanying this report) as these distributions are recorded as expense in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2015 and 2014:
(In thousands) | Total Distributions Paid | Total Distributions Declared | ||||||
1st Quarter, 2015 | $ | 14,954 | $ | 15,000 | ||||
2nd Quarter, 2015 | 15,428 | 15,308 | ||||||
3rd Quarter, 2015 | 15,535 | 15,562 | ||||||
4th Quarter, 2015 | 15,458 | 15,663 | ||||||
Total | $ | 61,375 | $ | 61,533 | ||||
(In thousands) | Total Distributions Paid | Total Distributions Declared | ||||||
1st Quarter, 2014 | $ | 1,436 | $ | 2,080 | ||||
2nd Quarter, 2014 | 3,839 | 4,689 | ||||||
3rd Quarter, 2014 | 7,765 | 10,066 | ||||||
4th Quarter, 2014 | 13,992 | 14,960 | ||||||
Total | $ | 27,032 | $ | 31,795 | ||||
We, our board of directors and our Advisor share a similar philosophy with respect to paying our distributions. Distributions should principally be derived from cash flows generated from operations. In order to improve our operating cash flows and our ability to pay distributions from operating cash flows, our Advisor may waive certain recurring fees. Our Advisor will determine if a portion or all of such fees will be waived in subsequent periods on a quarter-to-quarter basis. The fees that are waived are not deferrals and accordingly, will not be paid by us. Because our Advisor may waive certain fees that we may owe, cash flows from operations that would have been paid to our Advisor will be available to pay distributions to our stockholders. During the years ended December 31, 2015 and 2014, our Advisor did not waive any such fees incurred. In certain instances, to improve our working capital, our Advisor may elect to absorb a portion of our general and administrative costs and/or property operating costs that would otherwise have been paid by us. Our Advisor absorbed $0.3 million of our general and administrative costs during the year ended December 31, 2014. No general and administrative costs were absorbed by our Advisor during the year ended December 31, 2015. No property operating costs were absorbed by our Advisor during the years ended December 31, 2015 or 2014.
During the years ended December 31, 2015 and 2014, distributions paid to common stockholders totaled $61.4 million and $27.0 million, inclusive of $35.1 million and $14.8 million of distributions reinvested in shares of common stock pursuant to the DRIP, respectively. During the year ended December 31, 2015, cash used to pay our distributions was generated from cash flows from operations, common stock issued pursuant to our DRIP, proceeds from disposition of land and proceeds from financings. During the year ended December 31, 2014, cash used to pay our distributions was generated from cash flows from operations, proceeds from the issuance of common stock and common stock issued pursuant to our DRIP. Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
Share-Based Compensation
Stock Option Plan
We have a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to our independent directors, officers, advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan is fixed at $10.00 per share until the termination of the IPO, and thereafter the exercise price for stock options granted to the independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. No shares have been issued under the Plan as of December 31, 2015. Notwithstanding any other provisions of our Plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize our status as a REIT under the Code.
36
Restricted Share Plan
We have an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further approval by our board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholders' meeting. Restricted stock issued to independent directors will vest over a five-year period following the date of grant in increments of 20.0% per annum. The RSP provides us with the ability to grant awards of restricted shares to our directors, officers and employees (if we ever have employees), employees of our Advisor and its affiliates, employees of entities that provide services to us, directors of our Advisor or of entities that provide services to us, certain consultants to us and our Advisor and its affiliates or to entities that provide services to us. The total number of shares of common stock granted under the RSP may not exceed 5.0% of our outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events). As of December 31, 2015, the total number of shares available under the RSP was 4.8 million.
Restricted share awards entitle the recipient to receive shares of common stock from us under terms that provide for vesting over a specified period of time. For restricted share awards granted prior to 2015, such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with us. Restricted share awards granted during or after 2015 provide for accelerated vesting of the portion of the unvested shares scheduled to vest in the year of the recipient's voluntary termination or failure to be re-elected to the board. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock will be subject to the same restrictions as the underlying restricted shares. As of December 31, 2015 and 2014, we had 11,400 and 15,600 unvested restricted shares, respectively, that were granted pursuant to the RSP.
Recent Sale of Unregistered Equity Securities
On November 23, 2015, we issued 3,000 shares of restricted stock that vest over a period of five years to our independent directors, pursuant to our RSP. No selling commissions or other considerations will be paid in connection with such issuances, which were made without registration under the Securities Act in reliance upon the exemption from registration in Section 4(a)(2) of the Securities Act as transactions not involving any public offering.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our common stock is currently not listed on a national securities exchange, and there is no assurance it will ever be listed. In order to provide stockholders with interim liquidity, our board of directors adopted the share repurchase program as initially approved (the "Original SRP") that enabled our stockholders to sell their shares back to us after having held them for at least one year, subject to significant conditions and limitations. Our Sponsor, Advisor, directors and affiliates are prohibited from receiving a fee on any share repurchases. The Original SRP was effective for the entirety of the years ended December 31, 2015, 2014 and 2013. Under the Original SRP, shares were repurchased on a quarterly basis.
In January 2016, our board of directors unanimously approved the Amended and Restated SRP, effective February 28, 2016, which supersedes and replaces the Original SRP. The Amended and Restated SRP permits investors to sell their shares back to us after they have held them for at least one year, subject to the significant conditions and limitations described below. We may repurchase shares on a semiannual basis, at each six-month period ending June 30 and December 31.
Prior to the NAV Pricing Date, the purchase price per share for requests other than for death or disability under both the Original SRP and the Amended and Restated SRP depends on the length of time investors have held such shares as follows (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations):
• | after one year from the purchase date — the lower of $9.25 or 92.5% of the amount they actually paid for each share; |
• | after two years from the purchase date —the lower of $9.50 or 95.0% of the amount they actually paid for each share; |
• | after three years from the purchase date — the lower of $9.75 or 97.5% of the amount they actually paid for each share; and |
• | after four years from the purchase date — the lower of $10.00 or 100.0% of the amount they actually paid for each share. |
In the case of requests for death or disability prior to the NAV Pricing Date, the repurchase price per share is equal to the price paid to acquire the shares from the Company.
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Under the Amended and Restated SRP, the repurchase price per share on and following the NAV Pricing Date for requests other than for death or disability will be as follows:
• | after one year from the purchase date — 92.5% of the Estimated Per-Share NAV; |
• | after two years from the purchase date — 95.0% of the Estimated Per-Share NAV; |
• | after three years from the purchase date — 97.5% of the Estimated Per-Share NAV; and |
• | after four years from the purchase date — 100.0% of the Estimated Per-Share NAV. |
In the case of requests for death or disability on and following the NAV Pricing Date, the repurchase price per share will be equal to the Estimated Per-Share NAV at the time of repurchase.
We intend to publish an Estimated Per-Share NAV as of December 31, 2015 shortly following the filing of this Annual Report on Form 10-K for the year ended December 31, 2015. In determining Estimated Per-Share NAV, we expect to obtain estimated values for all of our properties.
We were only authorized to repurchase shares pursuant to the Original SRP up to the value of the shares issued under the DRIP and limited the amount spent to repurchase shares in a given quarter to the value of the shares issued under the DRIP in that same quarter. Purchases under the Original SRP were limited in any calendar year to 5.0% of the number of shares of common stock outstanding on December 31st of the previous calendar year.
Under the Amended and Restated SRP, repurchases at each semi-annual period will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding during the previous fiscal year. Funding for repurchases pursuant to the Amended and Restated SRP for any given semiannual period will be limited to proceeds received during that same semiannual period through the issuance of common stock pursuant to the DRIP.
Our board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase, change the purchase price for repurchases or otherwise amend the terms of, suspend or terminate the Amended and Restated SRP. Due to these limitations, we cannot guarantee that we will be able to accommodate all repurchase requests.
When a stockholder requests a redemption and the redemption is approved, we will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Repurchased shares will have the status of authorized but unissued. The following table summarizes share repurchases cumulatively through December 31, 2015:
Number of Shares Repurchased | Cost of Shares Repurchased | Weighted-Average Price per Share | |||||||||
(In thousands) | |||||||||||
Cumulative repurchase requests as of December 31, 2012 | — | $ | — | $ | — | ||||||
Year ended December 31, 2013 | 8,674 | 87 | 9.98 | ||||||||
Cumulative repurchase requests as of December 31, 2013 | 8,674 | 87 | 9.98 | ||||||||
Year ended December 31, 2014 | 64,818 | 635 | 9.80 | ||||||||
Cumulative repurchase requests as of December 31, 2014 | 73,492 | 722 | 9.82 | ||||||||
Year ended December 31, 2015 | 1,281,670 | 12,128 | 9.46 | ||||||||
Cumulative repurchase requests as of December 31, 2015 (1) | 1,355,162 | 12,850 | $ | 9.48 | |||||||
Proceeds from shares issued through DRIP | 50,646 | ||||||||||
Excess | $ | 37,796 | |||||||||
_____________________
(1) | Includes 533,186 shares of accrued repurchase requests with a weighted-average repurchase price per share of $9.43, which were approved for repurchase as of December 31, 2015 and were completed during the first quarter of 2016. This $5.0 million liability is included in accounts payable and accrued expenses on our consolidated balance sheet as of December 31, 2015. There were no other shares requested to be repurchased as of December 31, 2015. |
The Amended and Restated SRP will immediately terminate if our shares are listed on any national securities exchange. In addition, our board of directors may amend, suspend (in whole or in part) or terminate the Amended and Restated SRP at any time upon 30 days' prior written notice to our stockholders. Further, our board of directors reserves the right, in its sole discretion, to reject any requests for repurchases.
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Item 6. Selected Financial Data.
The following selected financial data as of and for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" below:
December 31, | ||||||||||||||||||||
Balance sheet data (in thousands) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Total real estate investments, at cost | $ | 1,283,015 | $ | 764,785 | $ | 107,493 | $ | 55,057 | $ | — | ||||||||||
Total assets | $ | 1,286,847 | $ | 935,810 | $ | 119,942 | $ | 55,724 | $ | 36 | ||||||||||
Mortgage notes payable | $ | 128,945 | $ | 86,931 | $ | 63,083 | $ | 40,725 | $ | — | ||||||||||
Notes payable | $ | — | $ | — | $ | — | $ | 7,235 | $ | — | ||||||||||
Credit facility | $ | 304,000 | $ | — | $ | — | $ | — | $ | — | ||||||||||
Total liabilities | $ | 543,697 | $ | 152,710 | $ | 73,061 | $ | 57,046 | $ | 3,755 | ||||||||||
Total stockholders' equity (deficit) | $ | 743,150 | $ | 783,100 | $ | 46,881 | $ | (1,322 | ) | $ | (3,719 | ) | ||||||||
Year Ended December 31, | ||||||||||||||||||||
Operating data (In thousands, except share and per share data) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Total revenues | $ | 105,178 | $ | 28,109 | $ | 7,161 | $ | 1,266 | $ | — | ||||||||||
Total operating expenses | 99,239 | 36,887 | 8,974 | 2,635 | 313 | |||||||||||||||
Operating income (loss) | 5,939 | (8,778 | ) | (1,813 | ) | (1,369 | ) | (313 | ) | |||||||||||
Total other expenses, net | (7,332 | ) | (3,854 | ) | (2,891 | ) | (833 | ) | — | |||||||||||
Net loss | $ | (1,393 | ) | $ | (12,632 | ) | $ | (4,704 | ) | $ | (2,202 | ) | $ | (313 | ) | |||||
Other data: | ||||||||||||||||||||
Cash flows provided by (used in) operating activities (1) | $ | 29,858 | $ | 3,735 | $ | (1,239 | ) | $ | (132 | ) | $ | (260 | ) | |||||||
Cash flows used in investing activities (1) | $ | (428,538 | ) | $ | (588,510 | ) | $ | (12,978 | ) | $ | (12,910 | ) | $ | — | ||||||
Cash flows provided by financing activities (1) | $ | 267,750 | $ | 742,443 | $ | 27,234 | $ | 13,320 | $ | 259 | ||||||||||
Per share data: | ||||||||||||||||||||
Basic and diluted net loss per share | $ | (0.01 | ) | $ | (0.26 | ) | $ | (1.46 | ) | $ | (6.15 | ) | $ | (14.90 | ) | |||||
Distributions declared per common share | $ | 0.64 | $ | 0.64 | $ | 0.64 | $ | 0.64 | $ | — | ||||||||||
Basic and diluted weighted-average shares outstanding | 96,113,056 | 49,231,737 | 3,216,903 | 358,267 | 21,000 | |||||||||||||||
(1) | We changed our prior presentation of cash flows associated with restricted cash accounts from financing activities to operating activities or investing activities in the consolidated statements of cash flows based on the restrictions that permit the cash to be used to pay specific operating expenses such as real estate taxes and insurance or for capital expenditures and improvements. The restrictions arise from certain borrowing agreements and had previously been presented as cash flows from financing activities. |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" elsewhere in this report for a description of these risks and uncertainties.
Overview
We have acquired and own anchored, stabilized core retail properties for investment purposes, including power centers and lifestyle centers, which are located in the United States and were at least 80.0% leased at the time of acquisition. We purchased our first property and commenced active operations in June 2012. As of December 31, 2015, we owned 35 properties with an aggregate purchase price of $1.2 billion, comprised of 7.5 million rentable square feet, which were 95.1% leased on a weighted-average basis.
We were incorporated on July 29, 2010 as a Maryland corporation and qualified as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ended December 31, 2012. Substantially all of our business is conducted through American Realty Capital Retail Operating Partnership, L.P. (the "OP"), a Delaware limited partnership.
On March 17, 2011, we commenced our initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts. The IPO closed on September 12, 2014. On September 22, 2014, we registered an additional 25.0 million shares of common stock to be used under our distribution reinvestment plan (the "DRIP") pursuant to a registration statement on Form S-3D (File No. 333-198864). As of December 31, 2015, we had 96.9 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from the IPO and the DRIP of $961.7 million.
We intend to publish an estimate of net asset value per share of our common stock ("Estimated Per-Share NAV") as of December 31, 2015 shortly following the filing of this Annual Report on Form 10-K for the year ended December 31, 2015 (the "NAV Pricing Date"), and subsequent valuations will occur periodically at the discretion of our board of directors, provided that such calculations will be made at least once annually. In determining Estimated Per-Share NAV, we expect to obtain estimated values for all of our properties. Beginning with the NAV Pricing Date, we will offer shares pursuant to the DRIP and repurchase shares pursuant to our amended and restated share repurchase program (the "Amended and Restated SRP") at a price based on Estimated Per-Share NAV.
We have no direct employees. We have retained American Realty Capital Retail Advisor, LLC (our "Advisor") to manage our affairs on a day-to-day basis. Our Advisor has entered into a service agreement with an independent third party, Lincoln Retail REIT Services, LLC, a Delaware limited liability company ("Lincoln"), pursuant to which Lincoln provides, subject to our Advisor's oversight, real estate-related services, including locating investments, negotiating financing, and providing property-level asset management services, property management services, leasing and construction oversight services and disposition services, as needed. Our Advisor has paid and will continue to pay Lincoln a substantial portion of the fees and/or other expense reimbursements payable to the Advisor for the performance of real estate-related services. Our Advisor is under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, the "Parent of our Sponsor"), the parent of our sponsor, American Realty Capital IV, LLC (our "Sponsor"), as a result of which it is a related party of ours.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO and, together with its affiliates, continued to provide us with various services through December 31, 2015. RCS Capital Corporation, the parent company of our Former Dealer Manager and certain of its affiliates that provided services to us, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was under common control with the Parent of our Sponsor.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
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Offering and Related Costs
Offering and related costs included all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the dealer manager fees) included costs that were paid by the Advisor, the Former Dealer Manager or their affiliates on our behalf. These costs included but were not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Former Dealer Manager for amounts it 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. We were obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor was obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by us in our IPO exceeded 1.5% of gross offering proceeds from the IPO. As a result, these costs were only our liability to the extent aggregate selling commissions, dealer manager fees and other organization and offering costs did not exceed 11.5% of the gross proceeds determined at the end of our IPO. As of the close of the IPO, offering costs were less than 11.5% of the gross proceeds received from the IPO.
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rents receivable that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, acquisition date is considered to be the commencement date for purposes of this calculation. We defer the revenue related to lease payments received from tenants in advance of their due dates.
We own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, we defer the recognition of contingent rental income until the specified target that triggers the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. Contingent rental income is included in rental income on the consolidated statements of operations and comprehensive loss.
We continually review receivables related to rent and unbilled rents receivable and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. If a receivable is deemed uncollectible, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations and comprehensive loss.
Cost recoveries from tenants are included in operating expense reimbursements in our consolidated statements of operations and comprehensive loss in the period the related costs are incurred, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates.
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In allocating non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations prepared by independent valuation firms. We also consider information and other factors including: market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental rates, tenant credit profile, store profitability and the importance of the location of the real estate to the operations of the tenant’s business.
Real estate investments that are intended to be sold are designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on our operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all applicable periods. As of December 31, 2015, we had $0.5 million of land held for sale. There were no assets held for sale as of December 31, 2014.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. We have not yet selected a transition method and are currently evaluating the impact of the new guidance.
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In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We have adopted the provisions of this guidance for the fiscal year ending December 31, 2015 and determined that there is no impact to our financial position, results of operations and cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. We elected to adopt this guidance effective January 1, 2016. We have assessed the impact of the guidance and determined it will not have a significant impact on our financial position, results of operations or cash flows.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. 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. We elected to adopt this guidance effective January 1, 2016. In our future quarterly and annual filings, beginning with our next quarterly report on Form 10-Q, the adoption of this revised guidance will result in the reclassification of $1.7 million of deferred issuance costs related to our mortgage notes payable from deferred costs, net to mortgage notes payable in our consolidated balance sheet as of December 31, 2015.
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, to 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 was permitted. We have elected to adopt the new guidance for the fiscal year ended December 31, 2015. The adoption of this guidance had no impact on our consolidated financial position, results of operations or cash flows.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. We are currently evaluating the impact of the new guidance.
In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance.
Results of Operations
We purchased our first property and commenced active operations in June 2012. As of December 31, 2015, we owned 35 properties with an aggregate base purchase price of $1.2 billion, comprised of 7.5 million rentable square feet that were 95.1% leased on a weighted-average basis.
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Comparison of the Year Ended December 31, 2015 to Year Ended December 31, 2014
As of January 1, 2014, we owned three properties (our "2014-2015 Same Store") with an aggregate base purchase price of $107.6 million, comprised of 0.6 million rentable square feet that were 92.4% leased on a weighted-average basis. We have acquired 32 properties since January 1, 2014 for an aggregate base purchase price of $1.1 billion, comprised of 6.9 million rentable square feet that were 95.2% leased on a weighted-average basis as of December 31, 2015 (our "2014-2015 Acquisitions"). Accordingly, our results of operations for the year ended December 31, 2015 as compared to the year ended December 31, 2014 reflect significant increases in most categories.
During the year ended December 31, 2015, we entered into 30 new leases comprising a total of 180,127 rentable square feet. These leases will generate annualized rental income on a straight-line basis of $2.6 million, representing average rent per square foot of $14.59. In addition, we executed renewals on 53 leases comprising a total of 395,213 rentable square feet. These leases will generate annualized rental income on a straight-line basis of $7.3 million, representing average rent per square foot of $18.35. Prior to the renewals, the average annualized rental income on a straight-line basis was $18.03 per square foot. The one-time cost of executing the leases and renewals, including leasing commissions, tenant improvement costs and tenant concessions, was $6.57 per square foot.
Rental Income
Rental income increased $59.5 million to $81.0 million for the year ended December 31, 2015, compared to $21.5 million for the year ended December 31, 2014. This increase in rental income was primarily due to our 2014-2015 Acquisitions, which resulted in an increase in rental income of $59.0 million for the year ended December 31, 2015. In addition, 2014-2015 Same Store rental income increased by $0.5 million, primarily due to new leases and increases in rental rates resulting from renewed leases, as well as fees received for early lease terminations.
Operating Expense Reimbursements
Operating expense reimbursements from tenants increased $17.5 million to $24.2 million for the year ended December 31, 2015, compared to $6.7 million for the year ended December 31, 2014. This increase in operating expense reimbursements was primarily due to our 2014-2015 Acquisitions, which resulted in a $17.1 million increase for the year ended December 31, 2015. In addition, 2014-2015 Same Store operating expense reimbursements increased by $0.4 million, as a result of an increase in Same Store operating expenses. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent.
Property Operating Expenses
Property operating expenses increased $25.9 million to $34.7 million for the year ended December 31, 2015, compared to $8.8 million for the year ended December 31, 2014. This increase in property operating expenses was primarily due to our 2014-2015 Acquisitions, which resulted in a $25.3 million increase for the year ended December 31, 2015. In addition, 2014-2015 Same Store property operating expenses increased by $0.6 million, which primarily related to an increase in real estate taxes and repair and maintenance expenses. Property operating expenses primarily relate to the costs associated with maintaining our properties including property management fees incurred from Lincoln, real estate taxes, utilities, and repairs and maintenance.
Impairment Charges
We incurred $4.4 million of impairment charges during the year ended December 31, 2015. These charges related to the write-off of intangible assets in connection with certain unsuccessful contractual arrangements associated with the acquisition of The Shops at West End. We incurred $0.2 million of impairment charges during the year ended December 31, 2014. These charges related to the write-off of intangible assets in connection with an unsuccessful contractual arrangement associated with the acquisition of Stirling Slidell Centre.
Fair Value Adjustments to Contingent Purchase Price Obligation
During the year ended December 31, 2015, we recorded a $13.7 million fair value adjustment related to the return of previously recognized contingent purchase price consideration in connection with certain unsuccessful contractual arrangements associated with the acquisition of The Shops at West End. During the year ended December 31, 2014, we recorded a $0.7 million fair value adjustment related to the write-off of a contingent consideration purchase price obligation in connection with an unsuccessful contractual arrangement associated with the acquisition of Stirling Slidell Centre.
Asset Management Fees to Related Party
Asset management fees to related party for the year ended December 31, 2015 of $5.5 million were related to services that we received from our Advisor in connection with the management of our assets. See Note 10 — Related Party Transactions and Arrangements for more information on fees payable to our Advisor pursuant to the advisory agreement. There were no asset management fees to related party incurred during the year ended December 31, 2014 as we caused the OP to issue to the Advisor performance-based restricted partnership units of the OP designated as "Class B Units" in lieu of asset management fees.
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Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses decreased $2.1 million to $9.8 million for the year ended December 31, 2015, compared to $11.9 million for the year ended December 31, 2014. This decrease was primarily due to our acquisition of 15 properties with a base purchase price of $481.7 million during the year ended December 31, 2015, compared to our acquisition of 17 properties with a base purchase price of $593.3 million during the year ended December 31, 2014.
General and Administrative Expenses
General and administrative expenses increased $6.1 million to $8.7 million for the year ended December 31, 2015, compared to $2.6 million for the year ended December 31, 2014. This increase related primarily to higher legal and accounting fees, audit fees, transfer agent fees, and state and local income taxes to support our increased real estate portfolio. Additionally, beginning in the third quarter of 2015, our Advisor began requesting reimbursement for general and administrative expenses, which amounted to $1.0 million during the year ended December 31, 2015. Our Advisor elected to absorb $0.3 million of our general and administrative costs during the year ended December 31, 2014, which did not reoccur for the year ended December 31, 2015.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $35.7 million to $49.8 million for the year ended December 31, 2015, compared to $14.1 million for the year ended December 31, 2014. This increase was primarily attributable to our 2014-2015 Acquisitions, which resulted in an increase in depreciation and amortization expenses of $36.2 million for the year ended December 31, 2015. This increase was partially offset by a $0.5 million decrease in 2014-2015 Same Store depreciation and amortization, primarily due to the expiration of identifiable intangible assets associated with existing leases in-place at acquisition during the year ended December 31, 2014. The base purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.
Interest Expense
Interest expense increased $4.5 million to $8.4 million for the year ended December 31, 2015, compared to $3.9 million for the year ended December 31, 2014. Interest expense for the year ended December 31, 2015 resulted from our mortgage notes payable, which had a weighted-average balance of $103.1 million and a weighted-average effective interest rate of 4.51%, our credit facility, as amended (our "Credit Facility"), which had weighted average borrowings of $117.2 million and a weighted-average effective interest rate of 1.60%, as well as unused fees on our Credit Facility and amortization of deferred financing costs. Interest expense for the year ended December 31, 2014 resulted from our mortgage notes payable, which had a weighted-average balance of $70.3 million and a weighted-average interest rate of 4.11%, as well as unused fees on our Credit Facility and amortization of deferred financing costs.
Gain (Loss) on Disposition of Land
During the year ended December 31, 2015, we recorded a gain on disposition of land of $1.0 million in connection with a sale of excess land at The Streets of West Chester. During the year ended December 31, 2014, we recorded a loss on disposition of land of approximately 19,000 in connection with a sale of excess land at Tiffany Springs MarketCenter.
Comparison of the Year Ended December 31, 2014 to Year Ended December 31, 2013
As of January 1, 2013, we owned two properties (our "2013-2014 Same Store") with an aggregate base purchase price of $54.2 million, comprised of 0.3 million rentable square feet that were 96.5% leased on a weighted-average basis. We acquired 18 properties between January 1, 2013 and December 31, 2014 for an aggregate base purchase price of $662.1 million, comprised of 4.0 million rentable square feet that were 94.3% leased on a weighted-average basis as of December 31, 2014 (our "2013-2014 Acquisitions"). Accordingly, our results of operations for the year ended December 31, 2014 as compared to the year ended December 31, 2013 reflect significant increases in most categories.
During the year ended December 31, 2014, we entered into five new leases comprising a total of 12,821 rentable square feet. These leases will generate annualized rental income on a straight-line basis of $0.3 million, representing average rent per square foot of $23.53. In addition, we executed renewals on nine leases comprising a total of 81,957 rentable square feet. These leases will generate annualized rental income on a straight-line basis of $1.1 million, representing average rent per square foot of $13.59. Prior to the renewals, the average annualized rental income on a straight-line basis was $11.58 per square foot. The one-time cost of executing the leases and renewals, including leasing commissions, tenant improvement costs and tenant concessions, was $8.01 per square foot.
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Rental Income
Rental income increased $16.1 million to $21.5 million for the year ended December 31, 2014, compared to $5.4 million for the year ended December 31, 2013. This increase in rental income was primarily due to our 2013-2014 Acquisitions, which resulted in an increase in rental income of $15.8 million for the year ended December 31, 2014. In addition, 2013-2014 Same Store rental income increased by $0.2 million, primarily due to the increase in rental rates resulting from renewed leases of $0.1 million and an increase in contingent rental income of $0.1 million due to the increased duration of our ownership during tenants' lease years during the year ended December 31, 2014 as compared to the year ended December 31, 2013.
Operating Expense Reimbursements
Operating expense reimbursements from tenants increased $4.9 million to $6.7 million for the year ended December 31, 2014, compared to $1.8 million for the year ended December 31, 2013. This increase in operating expense reimbursements was primarily due to our 2013-2014 Acquisitions, which resulted in a $4.8 million increase for the year ended December 31, 2014. 2013-2014 Same Store operating expense reimbursements remained consistent at $1.4 million for the years ended December 31, 2014 and 2013. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent.
Property Operating Expenses
Property operating expenses increased $6.5 million to $8.8 million for the year ended December 31, 2014, compared to $2.3 million for the year ended December 31, 2013. This increase in property operating expenses was primarily due to our 2013-2014 Acquisitions, which resulted in a $6.3 million increase for the year ended December 31, 2014. In addition, 2013-2014 Same Store property operating expenses increased by $0.1 million, which primarily related to an increase in real estate taxes and third party management fees, coupled with the absorption of approximately $41,000 of property operating costs by the Advisor for the year ended December 31, 2013. No property operating costs were absorbed by the Advisor during the year ended December 31, 2014. Property operating expenses primarily relate to the costs associated with maintaining our properties including property management fees incurred from Lincoln, real estate taxes, utilities, and repairs and maintenance.
Impairment Charges
We incurred $0.2 million of impairment charges during the year ended December 31, 2014. These charges related to the write-off of intangible assets in connection with an unsuccessful contractual arrangement associated with acquisition of Stirling Slidell Centre. No impairment charges were incurred during the year ended December 31, 2013.
Fair Value Adjustments to Contingent Purchase Price Obligation
During the year ended December 31, 2014, we recorded $0.7 million of fair value adjustments related to the return of previously recognized contingent purchase price consideration in connection with an unsuccessful contractual arrangement associated with the acquisition of Stirling Slidell Centre. No such fair value adjustments were made during the year ended December 31, 2013.
Asset Management Fees to Related Party
Until October 1, 2013, our Advisor was entitled to asset management fees in connection with providing asset management services and oversight fees for properties managed by Lincoln. Our Advisor elected to waive these fees for the year ended December 31, 2013. For the year ended December 31, 2013, we would have incurred aggregate asset management and oversight fees of $0.1 million had these fees not been waived. Effective October 1, 2013, the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor was eliminated, in addition to the oversight fee. Instead, we caused the OP to issue (subject to periodic approval by our board of directors) to the Advisor Class B Units, which will be forfeited unless certain conditions are met. During the year ended December 31, 2014, the board of directors approved the issuance of 169,992 Class B Units to the Advisor in connection with this arrangement. During the year ended December 31, 2013, no Class B Units were issued to the Advisor in connection with this arrangement.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses increased $10.9 million to $11.9 million for the year ended December 31, 2014, compared to $1.0 million for the year ended December 31, 2013. This increase was primarily due to our acquisition of 17 properties with a base purchase price of $609.2 million during the year ended December 31, 2014. The acquisition and transaction related expenses of $1.0 million for the year ended December 31, 2013 primarily related to our acquisition of Tiffany Springs MarketCenter in September 2013.
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General and Administrative Expenses
General and administrative expenses increased $2.1 million to $2.6 million for the year ended December 31, 2014, compared to $0.5 million for the year ended December 31, 2013. This increase related primarily to higher legal and accounting fees, audit fees, transfer agent fees, state and local income taxes and support from affiliate fees to support our current real estate portfolio. Additionally, this increase resulted from the $0.4 million decrease in our general and administrative costs absorbed by the Advisor during the year ended December 31, 2014 compared to the year ended December 31, 2013.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $8.9 million to $14.1 million for the year ended December 31, 2014, compared to $5.2 million for the year ended December 31, 2013. This increase was primarily attributable to our 2013-2014 Acquisitions, which resulted in an increase in depreciation and amortization expenses of $9.9 million for the year ended December 31, 2014. This increase was partially offset by a $1.0 million decrease in 2013-2014 Same Store depreciation and amortization, primarily due to the expiration of identifiable intangible assets associated with existing leases in-place at acquisition. The base purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.
Interest Expense
Interest expense increased $1.1 million to $3.9 million for the year ended December 31, 2014, compared to $2.8 million for the year ended December 31, 2013. Interest expense for the year ended December 31, 2014 resulted from our mortgage notes payable, which had a weighted-average balance of $70.3 million and a weighted-average effective interest rate of 4.11%, as well as unused fees on our Credit Facility and amortization of deferred financing costs. Interest expense for the year ended December 31, 2013 resulted from our mortgage notes payable, which had a weighted-average balance of $45.6 million and a weighted-average interest rate of 4.78%, our unsecured notes payable, which had a weighted-average balance of $5.2 million and a weighted-average effective interest rate of 7.15% and amortization of deferred financing costs.
Extinguishment of Debt
We incurred $0.1 million for our extinguishment of debt during the year ended December 31, 2013 in connection with our refinancing of the Liberty Crossing property during June 2013. In connection with the refinancing, which qualified as an extinguishment of debt based on the significance of changes to the terms of the loan, we wrote off approximately $74,000 of related deferred financing costs and incurred approximately $56,000 of penalties, interest and fees during the year ended December 31, 2013. We did not extinguish any debt during the year ended December 31, 2014.
Cash Flows for the Year Ended December 31, 2015
During the year ended December 31, 2015, net cash provided by operating activities was $29.9 million. The level of cash flows provided by or used in operating activities is affected by the volume of acquisition activity, timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows from operating activities during the year ended December 31, 2015 were impacted by $9.8 million of acquisition and transaction related costs. Cash inflows primarily related to a net loss adjusted for non-cash items of $37.7 million (net loss of $1.4 million adjusted for depreciation and amortization of tangible and intangible real estate assets, amortization of deferred costs, bad debt expense, impairment charges and share-based compensation, partially offset by gain on disposition of land, amortization of mortgage premium and fair value adjustments to contingent purchase price obligations, totaling $39.1 million), an increase in accounts payable and accrued expenses of $5.2 million and an increase in deferred rent and other liabilities due to the timing of the receipt of rental payments and payment of our expenses of $2.4 million. Cash inflows were partially offset by an increase in prepaid expenses and other assets of $15.1 million resulting from rent receivables and unbilled rent receivables recorded in accordance with straight-line basis accounting, prepaid insurance and accrued income for real estate tax reimbursements and an increase in restricted cash of $0.3 million.
Net cash used in investing activities during the year ended December 31, 2015 of $428.5 million included $437.6 million related to our acquisition of 15 properties, $7.5 million related to capital expenditures and $1.0 million related to cash restricted for capital expenditures. Cash outflows were partially offset by $15.1 million of proceeds from contingent consideration and $2.5 million of proceeds from the disposition of land.
Net cash provided by financing activities during the year ended December 31, 2015 of $267.8 million related to proceeds from our Credit Facility of $304.0 million. These inflows were partially offset by cash distributions of $26.2 million, common stock repurchases of $7.4 million, payments related to offering costs of $1.2 million, payments of deferred financing costs of $0.8 million and payments of mortgage notes payable of $0.6 million.
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Cash Flows for the Year Ended December 31, 2014
During the year ended December 31, 2014, net cash provided by operating activities was $3.7 million. The level of cash flows provided by or used in operating activities is affected by the volume of acquisition activity, timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows from operating activities during the year ended December 31, 2014 were impacted by $11.9 million of acquisition and transaction related costs. Cash inflows primarily related to an increase in accounts payable and accrued expenses of $5.1 million, a net loss adjusted for non-cash items of $2.0 million (net loss of $12.6 million adjusted for depreciation and amortization of tangible and intangible real estate assets, amortization of deferred costs, impairment charges, share-based compensation, loss on disposition of land and the ineffective portion of the derivative, partially offset by amortization of mortgage premium and fair value adjustments to contingent purchase price obligation totaling $14.6 million) and an increase in deferred rent and other liabilities due to the timing of the receipt of rental payments and payment of our expenses of $1.2 million. Cash inflows were partially offset by an increase in prepaid expenses and other assets of $4.2 million resulting from rent receivables and unbilled rent receivables recorded in accordance with straight-line basis accounting, prepaid insurance and accrued income for real estate tax reimbursements and an increase in restricted cash of $0.3 million.
Net cash used in investing activities during the year ended December 31, 2014 of $588.5 million included $584.0 million related to our acquisition of 17 properties, $2.1 million related to cash restricted for capital expenditures, $1.5 million related to capital expenditures and $1.3 million related to deposits for future real estate acquisitions, partially offset by $0.5 million of proceeds from the disposition of an outparcel of land.
Net cash provided by financing activities during the year ended December 31, 2014 of $742.4 million related to proceeds from the issuance of common stock of $853.5 million. These inflows were partially offset by payments related to offering costs of $90.1 million, cash distributions of $12.2 million, payments of deferred financing costs of $7.1 million and payments to affiliates, net of $1.0 million, payments of mortgage notes payable of $0.4 million and common stock repurchases of $0.3 million.
Cash Flows for the Year Ended December 31, 2013
During the year ended December 31, 2013, net cash used in operating activities was $1.2 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, timing of interest payments and the amount of borrowings outstanding during the year, as well as the receipt of scheduled rent payments. Cash flows used in operating activities during the year ended December 31, 2013 were impacted by $1.0 million of acquisition and transaction costs. Cash outflows included an increase in prepaid expenses and other assets of $1.5 million due to rent receivables and unbilled rent receivables recorded in accordance with straight-line basis accounting, prepaid property and directors and officers insurance and prepaid strategic advisory fees, a decrease in accounts payable and accrued expenses of $0.9 million primarily related to a decrease in due to affiliate of $1.2 million partially offset by an increase in accrued property and an increase in restricted cash of $0.5 million. These cash outflows were partially offset by cash inflows including net loss adjusted for non-cash items of $1.4 million (net loss of $4.7 million adjusted for depreciation and amortization of tangible and intangible real estate assets, amortization of deferred costs and share-based compensation totaling $6.1 million) and an increase in deferred rent and other liabilities of $0.2 million.
Net cash used in investing activities during the year ended December 31, 2013 of $13.0 million primarily related to our acquisition of Tiffany Springs MarketCenter for a base purchase price of $53.5 million, an increase in restricted cash of $0.2 million and $0.2 million of capital expenditures, partially offset by acquisition financing of $40.9 million.
Net cash provided by financing activities during the year ended December 31, 2013 of $27.2 million related to proceeds from the issuances of common stock of $62.3 million and proceeds from mortgage notes payable of $11.0 million. These inflows were partially offset by payments of mortgage notes payable of $29.5 million, payments of notes payable of $7.2 million, payments related to offering costs of $7.2 million, cash distributions of $1.1 million, payments of deferred financing costs of $0.9 million and common stock repurchases of $0.1 million.
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Liquidity and Capital Resources
In March 2012, we raised proceeds sufficient to break escrow in connection with our IPO. We continued offering and selling shares in our IPO from March 2012 until our IPO closed in September 2014. Following the closing of our IPO, we registered an additional 25.0 million shares of common stock to be issued under the DRIP (as amended to include a direct stock purchase component) pursuant to a registration statement on Form S-3D (File No. 333-198864). As of December 31, 2015, we had 96.9 million shares of common stock outstanding, including unvested restricted stock and shares issued pursuant to the DRIP, and had received total proceeds from the IPO and the DRIP of $961.7 million. We purchased our first property and commenced active operations in June 2012. We used substantially all of the net proceeds from our IPO, net of cumulative offering costs of $101.4 million, to acquire existing anchored, stabilized core retail properties, including power centers and lifestyle centers which are located in the United States and were at least 80.0% leased at the time of acquisition. As of December 31, 2015, the Company owned 35 properties with an aggregate purchase price of $1.2 billion, comprised of 7.5 million rentable square feet, which were 95.1% leased on a weighted-average basis.
As of December 31, 2015, we had cash and cash equivalents of $40.0 million. Our principal demands for funds will continue to be for capital expenditures, the payment of operating expenses, distributions to our stockholders, asset management fees to our Advisor, the payment of principal and interest on our outstanding indebtedness and repurchases of our common stock pursuant to the Amended and Restated SRP. Generally, capital needs for property acquisitions have been funded with the net proceeds received from our IPO, proceeds from secured financings and proceeds from our Credit Facility. We may also from time to time enter into other agreements with third parties whereby third parties will make equity investments in specific properties or groups of properties that we acquire. Expenditures other than property acquisitions are expected to be sourced from cash flows from operations.
We have entered into our Credit Facility, which provides for aggregate revolving loan borrowings of up to $325.0 million (subject to unencumbered asset pool availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility, subject to certain conditions. Availability of borrowings under our Credit Facility for any period is based on the lower of (i) 60% of the asset value pool of eligible unencumbered real estate assets that comprises our borrowing base, (ii) the amount that would cause the debt service coverage ratio of the borrowing base for the last four fiscal quarters to exceed 1.5 times, and (iii) the aggregate commitments under the Credit Facility, which allow for up to $325.0 million in borrowings with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility, subject to certain conditions. Through an uncommitted “accordion feature,” the OP may increase commitments under the Credit Facility to up to $575.0 million under certain circumstances and to the extent agreed to by our lenders.
Borrowings under our Credit Facility, along with cash on hand from our IPO, have been used and are expected to be used to finance acquisitions and for general corporate purposes. As of December 31, 2015, our unused borrowing capacity was $21.0 million, based on the aggregate commitments under the Credit Facility. As of December 31, 2015, we had $304.0 million outstanding under the Credit Facility.
The Credit Facility provides for quarterly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period (though no longer than three months) with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Credit Facility will mature on December 2, 2018, provided that the OP, subject to certain conditions, may elect to extend the maturity date one year to December 2, 2019. The Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. We, certain of our wholly-owned subsidiaries and certain wholly-owned subsidiaries of the OP guarantee the obligations under the Credit Facility.
We expect to meet our future short-term operating liquidity requirements through a combination of cash on hand, net cash provided by our current property operations, proceeds received from common stock issued under the DRIP and proceeds from our Credit Facility. Management expects that in the future, as we continue to optimize our portfolio and leasing activity at our properties, cash flows from our properties will be sufficient to fund operating expenses and the payment of our monthly distribution. Other potential future sources of capital include proceeds from public and private offerings and proceeds from the sale of properties.
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We also expect to use proceeds from secured and unsecured financings from banks or other lenders as a source of capital. Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total "net assets" (as defined by our charter) as of the date of any borrowing, which is equal to 75% of the cost of our investments. We may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. Our borrowings are also restricted by covenants in our existing indebtedness. In addition, it is currently our intention to limit our aggregate borrowings to approximately 50% of the aggregate fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation does not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
As of December 31, 2015, our secured debt leverage ratio (total secured debt divided by the base purchase price of acquired real estate investments) and leverage ratio (total debt divided by total assets) approximated 11.3% and 34.0%, respectively.
Our board of directors has adopted the share repurchase program as initially approved (the "Original SRP") that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we have sufficient funds available to fund such repurchase. There are limits on the number of shares we may repurchase under this program during any 12-month period. Further, we are only authorized to repurchase shares using the proceeds secured from the DRIP in any given quarter. In January 2016 our board of directors approved the Amended and Restated SRP. See Note 15 — Subsequent Events to the consolidated financial statements accompanying this report for additional details.
The following table summarizes share repurchases cumulatively through December 31, 2015:
Number of Shares Repurchased | Weighted-Average Price per Share | ||||||
Cumulative repurchase requests as of December 31, 2012 | — | $ | — | ||||
Year ended December 31, 2013 | 8,674 | 9.98 | |||||
Cumulative repurchase requests as of December 31, 2013 | 8,674 | 9.98 | |||||
Year ended December 31, 2014 | 64,818 | 9.80 | |||||
Cumulative repurchase requests as of December 31, 2014 | 73,492 | 9.82 | |||||
Year ended December 31, 2015 | 1,281,670 | 9.46 | |||||
Cumulative repurchase requests as of December 31, 2015 (1) | 1,355,162 | $ | 9.48 | ||||
_____________________
(1) | Includes 533,186 shares of accrued repurchase requests with a weighted-average repurchase price per share of $9.43, which were approved for repurchase as of December 31, 2015 and were completed during the first quarter of 2016. This $5.0 million liability is included in accounts payable and accrued expenses on our consolidated balance sheet as of December 31, 2015. There were no other shares requested to be repurchased as of December 31, 2015. |
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
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We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and, when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and amortize acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the “IPA”), an industry trade group, has published a standardized measure of performance known as modified funds from operations (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year over year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisitions fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses, amounts relating to deferred rent receivables and accretion of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), contingent purchase price consideration, accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guideline or the SEC or another regulatory body could standardize the allowable adjustments across the a publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
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The below table reflects the items deducted or added to net loss in our calculation of FFO and MFFO for the periods presented:
Three Months Ended | ||||||||||||||||||||
(In thousands) | March 31, 2015 | June 30, 2015 | September 30, 2015 | December 31, 2015 | Year Ended December 31, 2015 | |||||||||||||||
Net income (loss) in accordance with GAAP | $ | 46 | $ | 4,999 | $ | (6,108 | ) | $ | (330 | ) | $ | (1,393 | ) | |||||||
Gain on disposition of land | — | — | — | (1,021 | ) | (1,021 | ) | |||||||||||||
Impairment charges | — | 4,434 | — | — | 4,434 | |||||||||||||||
Depreciation and amortization | 9,779 | 10,679 | 13,581 | 15,716 | 49,755 | |||||||||||||||
FFO | 9,825 | 20,112 | 7,473 | 14,365 | 51,775 | |||||||||||||||
Acquisition fees and expenses | 580 | 3,399 | 5,585 | 219 | 9,783 | |||||||||||||||
Amortization of mortgage premium | (9 | ) | (8 | ) | (99 | ) | (251 | ) | (367 | ) | ||||||||||
Accretion of market and other intangibles, net | (557 | ) | (624 | ) | (1,252 | ) | (804 | ) | (3,237 | ) | ||||||||||
Mark-to-market adjustments | 2 | (1 | ) | 2 | (3 | ) | — | |||||||||||||
Straight-line rent | (867 | ) | (279 | ) | (546 | ) | (685 | ) | (2,377 | ) | ||||||||||
Fair value adjustments to contingent purchase price consideration | — | (13,802 | ) | 4 | 103 | (13,695 | ) | |||||||||||||
MFFO | $ | 8,974 | $ | 8,797 | $ | 11,167 | $ | 12,944 | $ | 41,882 | ||||||||||
Distributions
On September 19, 2011, our board of directors authorized, and we declared, distributions payable to stockholders of record each day during the applicable period equal to $0.0017534247 per day, which is equivalent to $0.64 per annum, per share of common stock. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
During the year ended December 31, 2015, distributions paid to common stockholders totaled $61.4 million, inclusive of $35.1 million of distributions that were reinvested in additional shares of our common stock through our DRIP. During the year ended December 31, 2015, cash used to pay distributions was generated from cash flows from operations, proceeds received from common stock issued under the DRIP, proceeds from disposition of land and proceeds from financings.
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The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock, for the period indicated:
Three Months Ended | Year Ended | ||||||||||||||||||||||||||||||||||
March 31, 2015 | June 30, 2015 | September 30, 2015 | December 31, 2015 | December 31, 2015 | |||||||||||||||||||||||||||||||
(Dollar amounts in thousands) | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | ||||||||||||||||||||||||||||||
Distributions: | $ | 14,954 | $ | 15,428 | $ | 15,535 | $ | 15,458 | $ | 61,375 | |||||||||||||||||||||||||
Source of distribution coverage: | |||||||||||||||||||||||||||||||||||
Cash flows provided by operations (1) | $ | 6,630 | 44.3 | % | $ | 7,025 | 45.5 | % | $ | 9,996 | 64.4 | % | $ | 6,207 | 40.2 | % | $ | 29,858 | 48.6 | % | |||||||||||||||
Proceeds from common stock issued through the DRIP | 8,324 | 55.7 | % | 8,403 | 54.5 | % | 4,853 | 31.2 | % | 6,131 | 39.6 | % | 27,711 | 45.2 | % | ||||||||||||||||||||
Proceeds from disposition of land | — | — | % | — | — | % | — | — | % | 2,503 | 16.2 | % | 2,503 | 4.1 | % | ||||||||||||||||||||
Proceeds from financings | — | — | % | — | — | % | 686 | 4.4 | % | 617 | 4.0 | % | 1,303 | 2.1 | % | ||||||||||||||||||||
Total source of distribution coverage | $ | 14,954 | 100.0 | % | $ | 15,428 | 100.0 | % | $ | 15,535 | 100.0 | % | $ | 15,458 | 100.0 | % | $ | 61,375 | 100.0 | % | |||||||||||||||
Cash flows provided by operations (GAAP basis) | $ | 10,442 | $ | 4,485 | $ | 8,724 | $ | 6,207 | $ | 29,858 | |||||||||||||||||||||||||
Net income (loss) (in accordance with GAAP) | $ | 46 | $ | 4,999 | $ | (6,108 | ) | $ | (330 | ) | $ | (1,393 | ) | ||||||||||||||||||||||
(1) | Cash flows provided by operations for the year ended December 31, 2015 were impacted by acquisition and transaction related expenses of $9.8 million. |
For the year ended December 31, 2015, cash flows provided by operations were $29.9 million. As shown in the table above, we funded distributions with cash flows provided by operations, proceeds received from common stock issued under the DRIP, proceeds from disposition of land and proceeds from financings.
We may not generate sufficient cash flow from operations in 2016 to pay distributions at our current level and we may not generate sufficient cash flows from operations to pay future distributions. The amount of cash available for distributions is affected by many factors, such as rental income from acquired properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We cannot give any assurance that future acquisitions of real properties, if any, will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing a distribution rate to stockholders.
If we do not generate sufficient cash flows from our operations, we expect to use a portion of our cash on hand and the proceeds from our DRIP to pay distributions. A decrease in the level of stockholder participation in our DRIP could have an adverse impact on our ability to meet these expectations. If these sources are insufficient, we may use other sources, such as from borrowings, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, as to which it has no obligation, to fund distributions.
To the extent we pay distributions in excess of cash flows provided by operations, our stockholders' investment may be adversely impacted. Since inception, our cumulative distributions have exceeded our cumulative FFO and our cash flows from operations. See “Risk Factors - We may be unable to maintain distributions over time." under Item 1A in this Annual Report on Form 10-K.
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The following table compares cumulative distributions paid, including distributions related to unvested restricted shares, to cumulative net loss and cumulative cash flows provided by operations (in accordance with GAAP) and cumulative FFO for the period from July 29, 2010 (date of inception) through December 31, 2015:
(In thousands) | Period from July 29, 2010 (date of inception) to December 31, 2015 | |||
Distributions paid: | ||||
Total distributions paid | $ | 90,290 | ||
Reconciliation of net loss: | ||||
Revenues | $ | 141,714 | ||
Acquisition and transaction related | (23,639 | ) | ||
Depreciation and amortization | (70,145 | ) | ||
Other operating expenses | (54,264 | ) | ||
Other non-operating expenses | (14,910 | ) | ||
Net loss (in accordance with GAAP) (1) | $ | (21,244 | ) | |
Cash flows provided by operations | $ | 31,962 | ||
FFO | $ | 52,518 | ||
_____________________
(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 certain of our mortgage loan obligations require principal and interest payments monthly, with all unpaid principal and interest due at maturity. Our loan agreements require us to comply with specific reporting covenants. As of December 31, 2015, we were in compliance with the financial covenants under our loan agreements.
Our Advisor may, with approval from our independent board of directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third parties on a case-by-case basis as acquisition opportunities present themselves. We view the use of short-term borrowings as an efficient and accretive means of acquiring real estate. As of December 31, 2015, our secured debt leverage ratio (total secured debt divided by the base purchase price of acquired real estate investments) and leverage ratio (total debt divided by total assets) approximated 11.3% and 34.0%, respectively.
Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable and Credit Facility as well as minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of December 31, 2015:
Years Ended December 31, | ||||||||||||||||||||
(In thousands) | Total | 2016 | 2017-2018 | 2019-2020 | Thereafter | |||||||||||||||
Principal on mortgage notes payable | $ | 128,945 | $ | 1,112 | $ | 65,224 | $ | 2,628 | $ | 59,981 | ||||||||||
Interest on mortgage notes payable | 27,196 | 6,133 | 10,973 | 6,721 | 3,369 | |||||||||||||||
Credit Facility | 304,000 | — | 304,000 | — | — | |||||||||||||||
Interest on Credit Facility | 16,055 | 5,507 | 10,548 | — | — | |||||||||||||||
Ground lease rental payments due | 11,999 | 504 | 1,038 | 1,081 | 9,376 | |||||||||||||||
$ | 488,195 | $ | 13,256 | $ | 391,783 | $ | 10,430 | $ | 72,726 | |||||||||||
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Election as a REIT
We elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2012. Commencing with such taxable year, we have been organized and have operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT. In order to continue to qualify for taxation as a REIT, we must, among other things, distribute annually at least 90% of our REIT taxable income to our stockholders (which does not equal net income as calculated in accordance with GAAP) determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties, as well as federal income and excise taxes on our undistributed income. Further, we have taxable REIT subsidiaries, which are set up to conduct activities that cannot otherwise be conducted by a REIT, and are subject to corporate income tax.
Inflation
Some of our leases with our tenants contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the term of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions. However, our net leases require the tenant to pay its allocable share of operating expenses, which may include common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
We have entered into agreements with affiliates of our Sponsor, whereby we have paid and/or may in the future pay certain fees or reimbursements to our Advisor, its affiliates and entities under common ownership with our Advisor in connection with items such as acquisition and financing activities, sales and maintenance of common stock under our suspended IPO, asset and property management services and reimbursement of operating and offering related costs. The predecessor to the Parent of our Sponsor is a party to a services agreement with RCS Advisory Services, LLC, a subsidiary of the parent company of the Former Dealer Manager (“RCS Advisory”), pursuant to which RCS Advisory and its affiliates provided us and certain other companies sponsored by the Parent of our Sponsor with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to the Parent of our Sponsor instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory. We are also party to a transfer agency agreement with American National Stock Transfer, LLC, a subsidiary of the parent company of the Former Dealer Manager (“ANST”), pursuant to which ANST provided us with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services), and supervisory services overseeing the transfer agency services performed by a third-party transfer agent. The Parent of our Sponsor received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. On February 26, 2016, we entered into a definitive agreement with DST Systems, Inc., its previous provider of sub-transfer agency services, to provide us directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services). See Note 10 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the various related party transactions, agreements and fees.
In addition, the limited partnership agreement of the OP provides for a special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to our Advisor, a limited partner of the OP. In connection with this special allocation, our Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP. Our Advisor is directly or indirectly controlled by certain of our officers and directors.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings and our Credit Facility, bears interest at fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
As of December 31, 2015, our fixed-rate debt consisted of secured mortgage financings with a carrying value of $133.7 million and a fair value of $134.7 million. Changes in market interest rates on our fixed-rate debt impacts its fair value, 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 December 31, 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 $4.0 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $4.2 million.
As of December 31, 2015, our variable-rate debt consisted of our Credit Facility, which had a carrying and fair value of $304.0 million. Interest rate volatility associated with this variable-rate Credit Facility affects interest expense incurred and cash flow. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 2015 levels with all other variables held constant. A 100 basis point increase or decrease in variable rates on our variable-rate Credit Facility would increase or decrease our interest expense by $3.0 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of December 31, 2015 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"), the Company is required to establish and maintain disclosure controls and procedures as defined in subparagraph (e) of that rule. Management is required to evaluate, with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. 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.
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Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) promulgated under the Exchange Act and as set forth below. Under Rule 13a-15(c), management must evaluate, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness, as of the end of each calendar year, of the Company’s internal control over financial reporting. The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
(1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
(2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
(3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In the course of preparing this Annual Report on Form 10-K and the consolidated financial statements included herein, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2015 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2015.
KPMG LLP, an independent registered public accounting firm was engaged to audit the consolidated financial statements as of December 31, 2015 and 2014 included in this Annual Report on Form 10-K, and their audit report is included on Page F-2 of this Annual Report on Form 10-K. KPMG LLP was not engaged or required to audit the effectiveness of the Company's internal control over financial reporting as of December 31, 2015 and accordingly you will not find a report from KPMG LLP regarding the effectiveness of internal controls over financial reporting in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
We completed the execution of our remediation plan with respect to our material weaknesses identified in our Annual Report on Form 10-K for the year ended December 31, 2014 during the quarter ended June 30, 2015. No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. A copy of our code of ethics may be obtained, free of charge, by sending a written request to our executive office – 405 Park Avenue – 14th Floor, New York, NY 10022, Attention: Chief Financial Officer. Our code of ethics is also publicly available on our website at www.retailcentersofamerica.com/uploads/ARCRCACodeofEthics.pdf. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code of ethics to our chief executive officer, chief financial officer, chief accounting officer or controller or persons performing similar functions, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
The information required by this Item is incorporated by reference to our proxy statement to be filed with the SEC with respect to our 2016 annual meeting of stockholders (the "Proxy Statement").
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to our Proxy Statement to be filed with the SEC with respect to our 2016 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to our Proxy Statement to be filed with the SEC with respect to our 2016 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to our Proxy Statement to be filed with the SEC with respect to our 2016 annual meeting of stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to our Proxy Statement to be filed with the SEC with respect to our 2016 annual meeting of stockholders.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Financial Statement Schedules
See the Index to Consolidated Financial Statements at page F-1 of this report.
The following financial statement schedule is included herein at page F-34 of this report:
Schedule III — Real Estate and Accumulated Depreciation
(b) Exhibits
EXHIBITS INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2015 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. | Description | |
3.1 (3) | Articles of Amendment and Restatement of the Company | |
3.2 (2) | Bylaws of the Company | |
4.1 (8) | Second Amended and Restated Agreement of Limited Partnership of American Realty Capital Retail Operating Partnership, L.P., dated as of October 24, 2014, among the Company and American Realty Capital Retail Advisor, LLC, Lincoln Retail REIT Services, LLC and other Limited Partners | |
4.2 (12) | First Amendment to the Second Amended and Restated Agreement of Limited Partnership of American Realty Capital Retail Operating Partnership, L.P., dated as of April 15, 2015, among the Company and American Realty Capital Retail Advisor, LLC, Lincoln Retail REIT Services, LLC and other Limited Partners | |
4.3 (13) | Second Amendment to the Second Amended and Restated Agreement of Limited Partnership of American Realty Capital Retail Operating Partnership, L.P., dated as of June 30, 2015, among the Company and American Realty Capital Retail Advisor, LLC, Lincoln Retail REIT Services, LLC and other Limited Partners | |
10.1 (1) | Property Management Agreement, dated March 17, 2011, between the Company and American Realty Capital Retail Advisor, LLC | |
10.2 (1) | Leasing Agreement, dated March 17, 2011, between the Company and American Realty Capital Retail Advisor, LLC | |
10.3 (4) | Company's Restricted Share Plan | |
10.4 (4) | Company's Stock Option Plan | |
10.5* | Form of Restricted Stock Award Agreement | |
10.6 (5) | Purchase and Sale Agreement, dated as of June 28, 2013, among Cousins Tiffany Springs Marketcenter LLC, CP-Tiffany Springs Investments LLC, and American Realty Capital IV, LLC | |
10.7 (5) | Amendment to Purchase and Sale Agreement, dated as of July 29, 2013, among Cousins Tiffany Springs Marketcenter LLC, CP-Tiffany Springs Investments LLC, and American Realty Capital IV, LLC | |
10.8 (5) | Second Amendment to Purchase and Sale Agreement, dated as of August 1, 2013, among Cousins Tiffany Springs Marketcenter LLC, CP-Tiffany Springs Investments LLC, and American Realty Capital IV, LLC | |
10.9 (6) | Term Loan Agreement, dated as of September 26, 2013, between ARC TSKCYMO001, LLC and Bank of America, N.A. | |
10.10 (16) | Third Amended and Restated Advisory Agreement, dated as of June 30, 2015, among the Company, American Realty Capital Operating Partnership, L.P. and American Realty Capital Advisor, LLC | |
10.11 (9) | Agreement of Purchase and Sale dated as of January 28, 2014, among Streets of West Chester-Phase II, LLC, RREEF America REIT II Corp. CCC and American Realty Capital IV, LLC | |
10.12 (9) | Agreement of Purchase and Sale dated as of April 2, 2014, between Prairie Towne LLC and American Realty Capital IV, LLC | |
10.13 (9) | Agreement of Purchase and Sale of Real Property and Escrow Instructions dated as of April 4, 2014, between FP Southway, LLC and American Realty Capital IV, LLC | |
10.14 (15) | Amended and Restated Credit Agreement dated as of December 2, 2014, among American Realty Capital Retail Operating Partnership, L.P., the guarantors party thereto, the lenders party thereto, Regions Bank and BMO Harris Bank N.A. | |
10.15 (14) | First Amendment to the Amended and Restated Credit Agreement, dated as of September 8, 2015, among American Realty Capital Retail Operating Partnership, L.P. and BMO Harris Bank N.A. | |
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Exhibit No. | Description | |
10.16 (10) | Contract of Sale dated as of June 11, 2014, between DRA-RCG North Charleston SPE LLC and American Realty Capital IV, LLC | |
10.17 (10) | Purchase and Sale Agreement dated as of July 14, 2014, between American Realty Capital IV, LLC and Northlake Commons, L.L.C. | |
10.18 (8) | Agreement of Sale, dated July 17, 2014, between Centennial Plaza 555, LLC and American Realty Capital IV, LLC | |
10.19 (8) | Contract of Sale, dated August 13, 2014, between Pineville Centrum Limited Partnership and American Realty Capital IV, LLC | |
10.20 (8) | Purchase and Sale Agreement, dated August 19, 2014, between Southroads, L.L.C. and American Realty Capital IV, LLC | |
10.21 (8) | Loan Agreement, dated as of March 6, 2014, between Sebring Landing, LLC and Goldman Sachs Mortgage Company | |
10.22 (8) | Assumption and Release Agreement, dated as of September 5, 2014, among Sebring Landing, LLC, Debartolo Real Estate Investments, LLC, ARC SSSEBFL001, the Company and American Realty Capital Retail Operating Partnership, L.P. | |
10.23 (8) | Guaranty, dated September 5, 2014, between the Company and American Realty Capital Operating Partnership, L.P. for the benefit of Wells Fargo Bank, National Association | |
10.24 (15) | Agreement for Purchase and Sale, dated as of November 3, 2014, between AD West End, LLC and American Realty Capital IV, LLC | |
10.25 (15) | First Amendment to Agreement for Purchase and Sale, dated as of December 3, 2014, between AD West End, LLC and American Realty Capital IV, LLC | |
10.26 (15) | Second Amendment to Agreement for Purchase and Sale, dated as of December 5, 2014, between AD West End, LLC and American Realty Capital IV, LLC | |
10.27 (15) | Third Amendment to Agreement for Purchase and Sale, dated as of December 10, 2014, between AD West End, LLC and American Realty Capital IV, LLC | |
10.28 (15) | Fourth Amendment to Agreement for Purchase and Sale, dated as of December 16, 2014, between AD West End, LLC and American Realty Capital IV, LLC | |
10.29 (15) | Fifth Amendment to Agreement for Purchase and Sale, dated as of December 18, 2014, between AD West End, LLC and American Realty Capital IV, LLC | |
10.30 (15) | Sixth Amendment to Agreement for Purchase and Sale, dated as of December 19, 2014, between AD West End, LLC and American Realty Capital IV, LLC | |
10.31 (15) | Seventh Amendment to Agreement for Purchase and Sale, dated as of December 22, 2014, between AD West End, LLC and American Realty Capital IV, LLC | |
10.32 (15) | Eighth Amendment to Agreement for Purchase and Sale, dated as of December 23, 2014, between AD West End, LLC and American Realty Capital IV, LLC | |
10.33 (15) | Indemnification Agreement, dated as of December 31, 2014, between the Company and certain current and former directors, officers and service providers of the Company | |
10.34 * | Indemnification Agreement, dated as of December 7, 2015, between the Company and Leslie D. Michelson and Katie P. Kurtz | |
14.1 (7) | Code of Ethics | |
16.1 (11) | Letter from Grant Thornton LLP to the Securities and Exchange Commission dated January 28, 2015 | |
21.1 * | List of Subsidiaries | |
23.1 * | Consent of KPMG LLP | |
23.2 * | Consent of Grant Thornton LLP | |
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 the Company's Annual Report on Form 10-K for the year ended December 31, 2015, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Stockholders' Equity (Deficit), (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. | |
60
_____________________
* | Filed herewith. |
(1) | Filed as an exhibit to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 1 to the Company's Registration Statement filed with the SEC on August 12, 2011. |
(2) | Filed as an exhibit to the Company's Registration Statement on Form S-11/A filed with the SEC on February 7, 2011. |
(3) | Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on July 3, 2012. |
(4) | Filed as an exhibit to Pre-Effective Amendment No. 4 to the Company's Registration Statement filed with the SEC on March 15, 2011. |
(5) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC on August 14, 2013. |
(6) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 filed with the SEC on November 13, 2013. |
(7) | Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 12, 2013. |
(8) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 filed with the SEC on November 14, 2014. |
(9) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 8, 2014. |
(10) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 12, 2014. |
(11) | Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on January 28, 2015. |
(12) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 filed with the SEC on May 15, 2015. |
(13) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 filed with the SEC on August 13, 2015. |
(14) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed with the SEC on November 16, 2015. |
(15) | Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on April 15, 2015. |
(16) | Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on July 2, 2015. |
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized this 11th day of March, 2016.
AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC. | ||
By: | /s/ EDWARD M. WEIL, JR. | |
EDWARD M. WEIL, JR. | ||
CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Capacity | Date | ||
/s/ Edward M. Weil, Jr. | Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) | March 11, 2016 | ||
Edward M. Weil, Jr. | ||||
/s/ Katie P. Kurtz | Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) | March 11, 2016 | ||
Katie P. Kurtz | ||||
/s/ Leslie D. Michelson | Lead Independent Director | March 11, 2016 | ||
Leslie D. Michelson | ||||
/s/ Edward G. Rendell | Independent Director | March 11, 2016 | ||
Edward G. Rendell | ||||
62
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Financial Statement Schedule: | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
American Realty Capital - Retail Centers of America, Inc.:
We have audited the accompanying consolidated balance sheets of American Realty Capital - Retail Centers of America, Inc. (a Maryland Corporation) and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule III. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Realty Capital - Retail Centers of America, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
March 11, 2016
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
American Realty Capital - Retail Centers of America, Inc.
We have audited the consolidated balance sheet of American Realty Capital - Retail Centers of America, Inc. (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2013 (not presented herein) and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the year then ended. Our audit of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of American Realty Capital - Retail Centers of America, Inc. and subsidiaries for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
New York, New York
March 10, 2014
F-3
AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, | |||||||
2015 | 2014 | ||||||
ASSETS | |||||||
Real estate investments, at cost: | |||||||
Land | $ | 274,993 | $ | 158,787 | |||
Buildings, fixtures and improvements | 815,568 | 478,854 | |||||
Acquired intangible lease assets | 192,454 | 127,144 | |||||
Total real estate investments, at cost | 1,283,015 | 764,785 | |||||
Less: accumulated depreciation and amortization | (68,221 | ) | (19,115 | ) | |||
Total real estate investments, net | 1,214,794 | 745,670 | |||||
Cash and cash equivalents | 40,033 | 170,963 | |||||
Restricted cash | 4,828 | 3,469 | |||||
Prepaid expenses and other assets | 17,629 | 7,591 | |||||
Deferred costs, net | 9,063 | 8,117 | |||||
Land held for sale | 500 | — | |||||
Total assets | $ | 1,286,847 | $ | 935,810 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Mortgage notes payable | $ | 128,945 | $ | 86,931 | |||
Mortgage premiums, net | 4,764 | 292 | |||||
Credit facility | 304,000 | — | |||||
Below-market lease liabilities, net | 78,103 | 48,113 | |||||
Derivatives, at fair value | 415 | 332 | |||||
Accounts payable and accrued expenses (including $828 and $2,178 due to related parties as of December 31, 2015 and 2014, respectively) | 18,216 | 10,329 | |||||
Deferred rent and other liabilities | 3,958 | 1,575 | |||||
Distributions payable | 5,296 | 5,138 | |||||
Total liabilities | 543,697 | 152,710 | |||||
Preferred stock, $0.01 par value per share, 50,000,000 authorized, none issued or outstanding at December 31, 2015 and 2014 | — | — | |||||
Common stock, $0.01 par value per share, 300,000,000 shares authorized, 96,866,152 and 94,448,748 shares issued and outstanding at December 31, 2015 and 2014, respectively | 969 | 944 | |||||
Additional paid-in capital | 859,421 | 836,387 | |||||
Accumulated other comprehensive loss | (410 | ) | (327 | ) | |||
Accumulated deficit | (116,830 | ) | (53,904 | ) | |||
Total stockholders' equity | 743,150 | 783,100 | |||||
Total liabilities and stockholders' equity | $ | 1,286,847 | $ | 935,810 | |||
The accompanying notes are an integral part of these audited consolidated financial statements.
F-4
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Revenues: | |||||||||||
Rental income | $ | 80,975 | $ | 21,450 | $ | 5,406 | |||||
Operating expense reimbursements | 24,203 | 6,659 | 1,755 | ||||||||
Total revenues | 105,178 | 28,109 | 7,161 | ||||||||
Operating expenses: | |||||||||||
Asset management fees to related party | 5,487 | — | — | ||||||||
Property operating | 34,732 | 8,844 | 2,337 | ||||||||
Impairment charges | 4,434 | 186 | — | ||||||||
Fair value adjustments to contingent purchase price consideration | (13,695 | ) | (672 | ) | — | ||||||
Acquisition and transaction related | 9,783 | 11,891 | 978 | ||||||||
General and administrative | 8,743 | 2,558 | 457 | ||||||||
Depreciation and amortization | 49,755 | 14,080 | 5,202 | ||||||||
Total operating expenses | 99,239 | 36,887 | 8,974 | ||||||||
Operating income (loss) | 5,939 | (8,778 | ) | (1,813 | ) | ||||||
Other (expense) income: | |||||||||||
Interest expense | (8,374 | ) | (3,907 | ) | (2,761 | ) | |||||
Extinguishment of debt | — | — | (130 | ) | |||||||
Gain (loss) on disposition of land | 1,021 | (19 | ) | — | |||||||
Other income | 21 | 72 | — | ||||||||
Total other expense, net | (7,332 | ) | (3,854 | ) | (2,891 | ) | |||||
Net loss | $ | (1,393 | ) | $ | (12,632 | ) | $ | (4,704 | ) | ||
Other comprehensive loss: | |||||||||||
Change in unrealized loss on derivative | (83 | ) | (229 | ) | (98 | ) | |||||
Comprehensive loss | $ | (1,476 | ) | $ | (12,861 | ) | $ | (4,802 | ) | ||
Basic and diluted weighted-average shares outstanding | 96,113,056 | 49,231,737 | 3,216,903 | ||||||||
Basic and diluted net loss per share | $ | (0.01 | ) | $ | (0.26 | ) | $ | (1.46 | ) | ||
The accompanying notes are an integral part of these audited consolidated financial statements.
F-5
AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock | ||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders' Equity (Deficit) | |||||||||||||||||
Balance, December 31, 2012 | 834,118 | $ | 8 | $ | 1,372 | $ | — | $ | (2,702 | ) | $ | (1,322 | ) | |||||||||
Issuances of common stock | 6,349,720 | 63 | 62,708 | — | — | 62,771 | ||||||||||||||||
Common stock offering costs, commissions and dealer manager fees | — | — | (8,309 | ) | — | — | (8,309 | ) | ||||||||||||||
Common stock issued through distribution reinvestment plan | 69,669 | 1 | 662 | — | — | 663 | ||||||||||||||||
Common stock repurchases | (8,674 | ) | — | (87 | ) | — | — | (87 | ) | |||||||||||||
Share-based compensation | 9,000 | — | 38 | — | — | 38 | ||||||||||||||||
Distributions declared | — | — | — | — | (2,071 | ) | (2,071 | ) | ||||||||||||||
Net loss | — | — | — | — | (4,704 | ) | (4,704 | ) | ||||||||||||||
Other comprehensive loss | — | — | — | (98 | ) | — | (98 | ) | ||||||||||||||
Balance, December 31, 2013 | 7,253,833 | 72 | 56,384 | (98 | ) | (9,477 | ) | 46,881 | ||||||||||||||
Issuances of common stock | 85,692,602 | 857 | 852,213 | — | — | 853,070 | ||||||||||||||||
Common stock offering costs, commissions and dealer manager fees | — | — | (86,477 | ) | — | — | (86,477 | ) | ||||||||||||||
Common stock issued through distribution reinvestment plan | 1,560,476 | 16 | 14,808 | — | — | 14,824 | ||||||||||||||||
Common stock repurchases | (64,818 | ) | (1 | ) | (634 | ) | — | — | (635 | ) | ||||||||||||
Share-based compensation, net of forfeitures | 6,655 | — | 93 | — | — | 93 | ||||||||||||||||
Distributions declared | — | — | — | — | (31,795 | ) | (31,795 | ) | ||||||||||||||
Net loss | — | — | — | — | (12,632 | ) | (12,632 | ) | ||||||||||||||
Other comprehensive loss | — | — | — | (229 | ) | — | (229 | ) | ||||||||||||||
Balance, December 31, 2014 | 94,448,748 | 944 | 836,387 | (327 | ) | (53,904 | ) | 783,100 | ||||||||||||||
Change in offering costs | — | — | 4 | — | — | 4 | ||||||||||||||||
Common stock issued through distribution reinvestment plan | 3,698,474 | 37 | 35,103 | — | — | 35,140 | ||||||||||||||||
Common stock repurchases | (1,281,670 | ) | (12 | ) | (12,116 | ) | — | — | (12,128 | ) | ||||||||||||
Share-based compensation, net of forfeitures | 600 | — | 43 | — | — | 43 | ||||||||||||||||
Distributions declared | — | — | — | — | (61,533 | ) | (61,533 | ) | ||||||||||||||
Net loss | — | — | — | — | (1,393 | ) | (1,393 | ) | ||||||||||||||
Other comprehensive loss | — | — | — | (83 | ) | — | (83 | ) | ||||||||||||||
Balance, December 31, 2015 | 96,866,152 | $ | 969 | $ | 859,421 | $ | (410 | ) | $ | (116,830 | ) | $ | 743,150 | |||||||||
The accompanying notes are an integral part of these audited consolidated financial statements.
F-6
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (1,393 | ) | $ | (12,632 | ) | $ | (4,704 | ) | ||
Adjustment to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
Depreciation | 20,154 | 6,857 | 3,116 | ||||||||
Amortization of in-place lease assets | 29,467 | 7,177 | 2,079 | ||||||||
Amortization (including accelerated write-off) of deferred costs | 2,074 | 758 | 472 | ||||||||
Amortization of mortgage premiums | (367 | ) | (12 | ) | — | ||||||
(Accretion) amortization of market lease and other intangibles, net | (3,237 | ) | 172 | 428 | |||||||
Bad debt expense | 1,241 | — | — | ||||||||
Fair value adjustments to contingent purchase price consideration | (13,695 | ) | (672 | ) | — | ||||||
Impairment charges | 4,434 | 186 | — | ||||||||
(Gain) loss on disposition of land | (1,021 | ) | 19 | — | |||||||
Share-based compensation | 43 | 93 | 38 | ||||||||
Ineffective portion of derivative | — | 5 | — | ||||||||
Changes in assets and liabilities: | |||||||||||
Prepaid expenses and other assets | (15,071 | ) | (4,244 | ) | (1,527 | ) | |||||
Accounts payable and accrued expenses | 5,185 | 5,144 | (922 | ) | |||||||
Deferred rent and other liabilities | 2,383 | 1,193 | 234 | ||||||||
Restricted cash | (339 | ) | (309 | ) | (453 | ) | |||||
Net cash provided by (used in) operating activities | 29,858 | 3,735 | (1,239 | ) | |||||||
Cash flows from investing activities: | |||||||||||
Investments in real estate and other assets | (437,642 | ) | (584,018 | ) | (12,575 | ) | |||||
Deposits for real estate acquisitions | — | (1,344 | ) | — | |||||||
Proceeds from disposition of land | 2,503 | 543 | — | ||||||||
Proceeds from contingent purchase price consideration | 15,116 | — | — | ||||||||
Restricted cash | (1,020 | ) | (2,142 | ) | (238 | ) | |||||
Capital expenditures | (7,495 | ) | (1,549 | ) | (165 | ) | |||||
Net cash used in investing activities | (428,538 | ) | (588,510 | ) | (12,978 | ) | |||||
Cash flows from financing activities: | |||||||||||
Proceeds from mortgage notes payable | — | — | 11,000 | ||||||||
Payments of mortgage notes payable | (598 | ) | (384 | ) | (29,517 | ) | |||||
Proceeds from credit facility | 304,000 | — | — | ||||||||
Payments of notes payable | — | — | (7,235 | ) | |||||||
Payments of deferred financing costs | (812 | ) | (7,061 | ) | (949 | ) | |||||
Proceeds from issuances of common stock | — | 853,535 | 62,311 | ||||||||
Common stock repurchases | (7,429 | ) | (308 | ) | (87 | ) | |||||
Payments of offering costs and fees related to stock issuances, net | (1,176 | ) | (90,112 | ) | (7,209 | ) | |||||
Distributions paid | (26,235 | ) | (12,208 | ) | (1,080 | ) | |||||
Payments to related party, net | — | (1,019 | ) | — | |||||||
Net cash provided by financing activities | 267,750 | 742,443 | 27,234 | ||||||||
Net change in cash and cash equivalents | (130,930 | ) | 157,668 | 13,017 | |||||||
Cash and cash equivalents, beginning of period | 170,963 | 13,295 | 278 | ||||||||
Cash and cash equivalents, end of period | $ | 40,033 | $ | 170,963 | $ | 13,295 | |||||
F-7
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Supplemental Disclosures: | |||||||||||
Cash paid for interest | $ | 6,538 | $ | 3,088 | $ | 2,311 | |||||
Cash paid for income taxes | $ | 368 | $ | 411 | $ | 12 | |||||
Change in offering costs in accounts payable and accrued expenses | $ | (1,180 | ) | $ | 1,180 | $ | 4,815 | ||||
Receivables for issuances of common stock | $ | — | $ | — | $ | 465 | |||||
Change in accrued common stock repurchases | $ | 4,699 | $ | 327 | $ | — | |||||
Change in capital improvements in accounts payable and accrued expenses | $ | (981 | ) | $ | 1,284 | $ | — | ||||
Non-Cash Investing and Financing Activities: | |||||||||||
Mortgage notes payable assumed or used to acquire investments in real estate | $ | 42,612 | $ | 24,232 | $ | 40,875 | |||||
Premium assumed on mortgage note payable | $ | 4,839 | $ | 304 | $ | — | |||||
Common stock issued through distribution reinvestment plan | $ | 35,140 | $ | 14,824 | $ | 663 | |||||
The accompanying notes are an integral part of these audited consolidated financial statements.
F-8
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Note 1 — Organization
American Realty Capital — Retail Centers of America, Inc. (the "Company") has acquired and owns anchored, stabilized core retail properties for investment purposes, including power centers and lifestyle centers, which are located in the United States and were at least 80.0% leased at the time of acquisition. The Company purchased its first property and commenced active operations in June 2012. As of December 31, 2015, the Company owned 35 properties with an aggregate purchase price of $1.2 billion, comprised of 7.5 million rentable square feet, which were 95.1% leased on a weighted-average basis.
The Company, incorporated on July 29, 2010, is a Maryland corporation that qualified as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ended December 31, 2012. Substantially all of the Company's business is conducted through American Realty Capital Retail Operating Partnership, L.P. (the "OP"), a Delaware limited partnership.
On March 17, 2011, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts. The IPO closed on September 12, 2014. On September 22, 2014, the Company registered an additional 25.0 million shares of common stock to be used under the distribution reinvestment plan (the "DRIP") pursuant to a registration statement on Form S-3D (File No. 333-198864).
As of December 31, 2015, the Company had 96.9 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP and had received total proceeds from the IPO and the DRIP of $961.7 million.
The Company intends to publish an estimate of net asset value per share of the Company's common stock ("Estimated Per-Share NAV") as of December 31, 2015 shortly following the filing of this Annual Report on Form 10-K for the year ended December 31, 2015 (the "NAV Pricing Date"), and subsequent valuations will occur periodically at the discretion of the Company's board of directors, provided that such calculations will be made at least once annually. In determining Estimated Per-Share NAV, the Company expects to obtain estimated values for all of its properties. Until the NAV Pricing Date, the Company has offered shares pursuant to the DRIP at $9.50 per share and has repurchased shares pursuant to its original share repurchase program (the "Original SRP"). Beginning with the NAV Pricing Date, the Company will offer shares pursuant to the DRIP and repurchase shares pursuant to its amended and restated share repurchase program (the "Amended and Restated SRP") at a price based on Estimated Per-Share NAV.
The Company has no direct employees. The Company has retained American Realty Capital Retail Advisor, LLC (the "Advisor") to manage its affairs on a day-to-day basis. The Advisor has entered into a service agreement with an independent third party, Lincoln Retail REIT Services, LLC, a Delaware limited liability company ("Lincoln"), pursuant to which Lincoln provides, subject to the Advisor's oversight, real estate-related services, including locating investments, negotiating financing, and providing property-level asset management services, property management services, leasing and construction oversight services and disposition services, as needed. The Advisor has paid and will continue to pay Lincoln a substantial portion of the fees and/or other expense reimbursements payable to the Advisor for the performance of real estate-related services. The Advisor is under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, the "Parent of the Sponsor" or "AR Global"), the parent of the Company's sponsor, American Realty Capital IV, LLC (the "Sponsor"), as a result of which it is a related party of the Company.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO and, together with its affiliates, continued to provide the Company with various services through December 31, 2015. RCS Capital Corporation, the parent company of the Former Dealer Manager and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was under common control with the Parent of the Sponsor.
Note 2 — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP").
F-9
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate and fair value measurements, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, the Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company's estimate of fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates.
In allocating non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including real estate valuations, prepared by independent valuation firms. The Company also considers 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.
F-10
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Acquired intangible assets and lease liabilities consist of the following as of December 31, 2015 and 2014:
December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Intangible assets: | ||||||||||||||||||||||||
In-place leases | $ | 168,293 | $ | 34,298 | $ | 133,995 | $ | 112,997 | $ | 7,949 | $ | 105,048 | ||||||||||||
Above-market leases | 22,583 | 4,547 | 18,036 | 12,569 | 1,751 | 10,818 | ||||||||||||||||||
Below-market ground lease | 1,578 | 39 | 1,539 | 1,578 | — | 1,578 | ||||||||||||||||||
Total acquired intangible lease assets | $ | 192,454 | $ | 38,884 | $ | 153,570 | $ | 127,144 | $ | 9,700 | $ | 117,444 | ||||||||||||
Intangible liabilities: | ||||||||||||||||||||||||
Below-market lease liabilities | $ | 84,837 | $ | 6,734 | $ | 78,103 | $ | 49,315 | $ | 1,202 | $ | 48,113 | ||||||||||||
Real estate investments that are intended to be sold are designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on the Company's operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all applicable periods. As of December 31, 2015, the Company had $0.5 million of land held for sale. There were no assets held for sale as of December 31, 2014.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
The following table provides the projected amortization expense and adjustments to revenue and property operating expense for intangible assets and liabilities for the next five years:
(in thousands) | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||
In-place leases | $ | 32,453 | $ | 27,608 | $ | 20,567 | $ | 14,044 | $ | 9,523 | ||||||||||
Total to be added to depreciation and amortization | $ | 32,453 | $ | 27,608 | $ | 20,567 | $ | 14,044 | $ | 9,523 | ||||||||||
Above-market lease assets | $ | (3,631 | ) | $ | (3,437 | ) | $ | (2,571 | ) | $ | (1,742 | ) | $ | (1,134 | ) | |||||
Below-market lease liabilities | 6,728 | 6,349 | 5,753 | 5,215 | 4,718 | |||||||||||||||
Total to be added to (deducted from) rental income | $ | 3,097 | $ | 2,912 | $ | 3,182 | $ | 3,473 | $ | 3,584 | ||||||||||
Below-market ground lease asset | $ | 39 | $ | 39 | $ | 39 | $ | 39 | $ | 39 | ||||||||||
Total to be added to property operating expense | $ | 39 | $ | 39 | $ | 39 | $ | 39 | $ | 39 | ||||||||||
F-11
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
For the years ended December 31, 2015, 2014 and 2013, amortization of in-place leases of $29.5 million, $7.2 million and $2.1 million, respectively, is included in depreciation and amortization on the consolidated statements of operations and comprehensive loss. For the years ended December 31, 2015, 2014 and 2013, net (amortization) and accretion of above- and below-market lease intangibles of $3.3 million, $(0.2) million and $(0.4) million, respectively, is included in rental income on the consolidated statements of operations and comprehensive loss. For the year ended December 31, 2015, amortization of the below-market ground lease asset of approximately $39,000 was recognized in property operating expense. No amortization of the below-market ground lease asset was recognized in property operating expense for the years ended December 31, 2014 or 2013.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Cash and Cash Equivalents
Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less and funds in overnight repurchase agreements, in which excess funds over an established threshold are swept daily. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company ("FDIC") up to an insurance limit. As of December 31, 2015, the Company had deposits of $40.0 million of which $39.0 million were in excess of the amount insured by the FDIC. As of December 31, 2014, the Company had deposits of $171.0 million of which $170.2 million were in excess of the amount insured by the FDIC. Although the Company bears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result thereof.
Restricted Cash
Restricted cash primarily consists of reserves related to lease expirations, real estate taxes and insurance, as well as maintenance, structural, and debt service reserves.
Deferred Costs, Net
Deferred costs, net, consists of deferred financing costs net of accumulated amortization and deferred leasing costs net of accumulated amortization.
Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining financing. These costs are amortized to interest expense over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Deferred leasing costs, consisting primarily of lease commissions and payments made to execute new leases, are deferred and amortized over the term of the lease.
As of December 31, 2015, the Company had $9.1 million of deferred costs, net, consisting of $6.4 million of deferred financing costs, net and $2.7 million of deferred leasing costs, net. As of December 31, 2014, the Company had $8.1 million of deferred costs, net, consisting of $7.5 million of deferred financing costs, net and $0.6 million of deferred leasing costs, net.
Derivative Instruments
The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements 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.
F-12
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has 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, are 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, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides 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 are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any change in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the accompanying consolidated statement of operations and comprehensive loss. If the derivative is designated and qualifies for hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. When the Company acquires a property, acquisition date is considered to be the commencement date for purposes of this calculation.
The Company owns certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, the Company defers the recognition of contingent rental income, until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. Contingent rental income is included in rental income on the accompanying consolidated statements of operations and comprehensive loss.
The Company continually reviews receivables related to rent and unbilled rent receivables and determines 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, the Company will record an increase in the allowance for uncollectible accounts or record a direct write-off of the receivable in the Company's consolidated statements of operations and comprehensive loss.
Cost recoveries from tenants are included in operating expense reimbursements on the accompanying consolidated statements of operations and comprehensive loss in the period the related costs are incurred, as applicable.
F-13
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Offering and Related Costs
Offering and related costs included all expenses incurred in connection with the Company's IPO. Offering costs (other than selling commissions and the dealer manager fee) included costs that were paid by the Advisor, the Former Dealer Manager or their affiliates on behalf of the Company. These costs included but were not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow related fees; (iii) reimbursement of the Former Dealer Manager for amounts it paid to reimburse the 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. The Company is obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs that were paid by them on behalf of the Company, provided that the Advisor is obligated to reimburse the Company to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by the Company in its offering exceeded 1.5% of gross offering proceeds. As a result, these costs are only a liability of the Company to the extent aggregate selling commissions, the dealer manager fee and other organization and offering costs did not exceed 11.5% of the gross proceeds determined at the end of the IPO. As of the end of the IPO, offering costs were less than 11.5% (See Note 10 — Related Party Transactions and Arrangements).
Share-Based Compensation
The Company has a stock-based award plan, which is accounted for under the guidance for share based payments. The expense for such awards is included in general and administrative expenses and is recognized over the vesting period or when the requirements for exercise of the award have been met (See Note 12 — Share-Based Compensation).
Income Taxes
The Company qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with the taxable year ended December 31, 2012. Commencing with such taxable year, the Company has been organized and has operated in a manner so that it qualifies for taxation as a REIT under the Code. The Company intends to continue to operate in such a manner, but no assurance can be given that the Company will operate in a manner so as to remain qualified as a REIT. In order to continue to qualify for taxation as a REIT, the Company must, among other things, distribute annually at least 90% of its REIT taxable income to the Company's stockholders (which does not equal net income as calculated in accordance with GAAP) determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and properties, as well as federal income and excise taxes on its undistributed income. Further, the Company has taxable REIT subsidiaries, which are set up to conduct activities that cannot otherwise be conducted by a REIT, and are subject to corporate income tax.
The amount of distributions payable to the Company's stockholders is determined by the board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable, and annual distribution requirements needed to maintain the Company's status as a REIT under the Code.
The following table details from a U.S. federal income tax perspective, the portion of distributions classified as return of capital and ordinary dividend income, per share per annum, for the years ended December 31, 2015, 2014 and 2013:
Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
Return of capital | 64.1 | % | $ | 0.41 | 88.7 | % | $ | 0.57 | 4.6 | % | $ | 0.03 | |||||||||
Ordinary dividend income | 35.9 | % | 0.23 | 11.3 | % | 0.07 | 95.4 | % | 0.61 | ||||||||||||
Total | 100.0 | % | $ | 0.64 | 100.0 | % | $ | 0.64 | 100.0 | % | $ | 0.64 | |||||||||
Per Share Data
Basic loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share considers the effect of potentially dilutive instruments outstanding during such period.
F-14
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Reportable Segments
The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company's investments in real estate generate rental revenue and other income through the leasing of properties, which comprise 100% of its total consolidated revenues. Management evaluates the operating performance of the Company's investments in real estate on an individual property level.
Reclassifications
The Company changed its prior presentation of cash flows associated with restricted cash accounts from financing activities to operating activities or investing activities in the consolidated statements of cash flows based on the restrictions that permit the cash to be used to pay specific operating expenses such as real estate taxes and insurance or for capital expenditures and improvements. The restrictions arise from certain borrowing agreements and had previously been presented as cash flows from financing activities.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The Company has not yet selected a transition method and is currently evaluating the impact of the new guidance.
In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company has adopted the provisions of this guidance for the fiscal year ending December 31, 2015 and determined that there is no impact to the Company's consolidated financial position, results of operations and cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. The Company elected to adopt this guidance effective January 1, 2016.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. 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 was permitted for financial statements that have not previously been issued. The Company elected to adopt this guidance effective January 1, 2016. In the Company's future quarterly and annual filings, beginning with the Company's next quarterly report on Form 10-Q, the adoption of this revised guidance will result in the reclassification of $1.7 million of deferred issuance costs related to the Company's mortgage notes payable from deferred costs, net to mortgage notes payable in the Company's consolidated balance sheet as of December 31, 2015.
F-15
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
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, to 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 was permitted. The Company has elected to adopt the new guidance for the fiscal year ended December 31, 2015. The adoption of this guidance had no impact on the Company’s consolidated financial position, results of operations or cash flows.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. The Company is currently evaluating the impact of the new guidance.
In February 2016, the FASB issued an update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance.
Note 3 — Real Estate Investments
The Company owned 35 properties, which were acquired for investment purposes, as of December 31, 2015. The rentable square feet or annualized rental income on a straight-line basis of the three properties summarized below represented 5.0% or more of the Company's total portfolio's rentable square feet or annualized rental income on a straight-line basis as of December 31, 2015.
Southroads Shopping Center
On October 29, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Southroads Shopping Center, a power center located in Tulsa, Oklahoma ("Southroads Shopping Center"). The seller had no preexisting relationship with the Company. The contract purchase price of Southroads Shopping Center was $57.8 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of Southroads Shopping Center as a business combination and incurred acquisition related costs of $1.0 million at acquisition, which are reflected in acquisition and transaction related expenses of the consolidated statement of operations and comprehensive loss for the year ended December 31, 2014.
The Shops at West End
On December 23, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in The Shops at West End, a lifestyle center located in St. Louis Park, Minnesota ("The Shops at West End"). The seller had no preexisting relationship with the Company. The contract purchase price of The Shops at West End was $117.1 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of The Shops at West End as a business combination and incurred acquisition related costs of $1.9 million at acquisition, which are reflected in acquisition and transaction related expenses of the consolidated statement of operations and comprehensive loss for the year ended December 31, 2014.
F-16
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
During the quarter ended June 30, 2015, the Company settled its contingent consideration arrangement associated with The Shops at West End and recognized a fair value adjustment to contingent purchase price of $13.8 million, which is reflected on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2015. Simultaneously, during the quarter ended June 30, 2015, the Company impaired the contingent-related items that were ascribed value at acquisition and recognized impairment charges of $4.4 million, which is reflected on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2015. During the year ended December 31, 2015, the Company received proceeds as a return of contingent consideration associated with The Shops at West End of $13.8 million.
Patton Creek
On August 28, 2015, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Patton Creek, a power center located in Hoover, Alabama ("Patton Creek"). The seller had no preexisting relationship with the Company. The contract purchase price of Patton Creek was $83.5 million, exclusive of closing costs. The acquisition of Patton Creek was funded with proceeds from the Company's IPO and assumption of an existing mortgage secured by Patton Creek. The Company accounted for the purchase of Patton Creek as a business combination and incurred acquisition related costs of $1.5 million at acquisition, which are reflected in acquisition and transaction related expenses of the consolidated statements of operations and comprehensive loss for the year ended December 31, 2015.
The following table presents the allocation of the assets acquired and liabilities assumed during the years ended December 31, 2015, 2014 and 2013:
Year Ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2015 | 2014 | 2013 | |||||||||
Real estate investments, at cost: | ||||||||||||
Land | $ | 118,188 | $ | 134,146 | $ | 15,757 | ||||||
Buildings, fixtures and improvements | 330,129 | 411,322 | 28,834 | |||||||||
Total tangible assets | 448,317 | 545,468 | 44,591 | |||||||||
Acquired intangibles: | ||||||||||||
In-place leases | 63,217 | (1) | 102,911 | 5,305 | ||||||||
Above-market lease assets | 10,098 | (1) | 7,609 | 3,101 | ||||||||
Below-market lease liabilities | (36,539 | ) | (1) | (48,340 | ) | (111 | ) | |||||
Below-market ground lease asset | — | 1,578 | — | |||||||||
Total intangible real estate investments, net | 36,776 | 63,758 | 8,295 | |||||||||
Land held for sale | — | — | 564 | |||||||||
Total assets acquired, net | 485,093 | 609,226 | 53,450 | |||||||||
Mortgage notes payable assumed or used to acquire real estate investments | (42,612 | ) | (24,232 | ) | (40,875 | ) | ||||||
Premiums on mortgage notes payable assumed | (4,839 | ) | (304 | ) | — | |||||||
Contingent purchase price obligation | — | (672 | ) | — | ||||||||
Cash paid for acquired real estate investments | $ | 437,642 | $ | 584,018 | $ | 12,575 | ||||||
Number of properties purchased | 15 | (2) | 17 | 1 | ||||||||
_____________________
(1) | Weighted-average remaining amortization periods for in-place leases, above-market lease assets and below-market lease liabilities acquired during the year ended December 31, 2015 were 6.7, 13.0 and 18.5 years, respectively, as of each property's respective acquisition date. |
(2) | On December 12, 2015, the Company purchased additional shop space at Parkside Shopping Center, which was acquired during the year ended December 31, 2014. The acquisition is included in the dollar amounts above, but it is not included as an additional property purchased during the year ended December 31, 2015. |
F-17
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The following table presents unaudited pro forma information as if the acquisitions during the year ended December 31, 2015 had been consummated on January 1, 2014 and as if the acquisitions during the year ended December 31, 2014 had been consummated on January 1, 2013. Additionally, the unaudited pro forma net income was adjusted to reclassify acquisition related expense of $9.8 million from the year ended December 31, 2015 to the year ended December 31, 2014 and to reclassify acquisition related expense of $11.9 million from the year ended December 31, 2014 to the year ended December 31, 2013 (not presented in table below):
Year Ended December 31, | ||||||||
(In thousands) | 2015 (1) | 2014 | ||||||
Pro forma revenues | $ | 132,005 | $ | 127,651 | ||||
Pro forma net income | $ | 5,405 | $ | 10,358 | ||||
Basic and diluted pro forma net income per share | $ | 0.06 | $ | 0.21 | ||||
_____________________
(1) | For the year ended December 31, 2015, aggregate revenues and net loss derived from the Company's 2015 acquisitions (for the Company's period of ownership) were $20.7 million and $3.7 million, respectively. |
The following table presents future minimum base rent payments on a cash basis due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items:
(In thousands) | Future Minimum Base Rent Payments | |||
2016 | $ | 94,274 | ||
2017 | 89,042 | |||
2018 | 75,672 | |||
2019 | 59,137 | |||
2020 | 47,601 | |||
Thereafter | 184,792 | |||
$ | 550,518 | |||
No tenant represented 10.0% or greater of consolidated annualized rental income on a straight-line basis for all properties as of December 31, 2015 and 2014.
The following table lists the states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of December 31, 2015 and 2014:
December 31, | ||||
State | 2015 | 2014 | ||
Texas | 12.4% | 14.1% | ||
North Carolina | 11.6% | * | ||
Minnesota | * | 17.0% | ||
Florida | * | 13.4% | ||
Oklahoma | * | 11.2% | ||
____________________________
* | State's annualized rental income on a straight-line basis was not greater than or equal to 10.0% of consolidated annualized rental income for all properties as of the date specified. |
The Company did not own properties in any other state that in total represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of December 31, 2015 and 2014.
F-18
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Note 4 — Credit Facility
The Company has entered into a credit facility, that provides for aggregate revolving loan borrowings of up to $325.0 million (subject to unencumbered asset pool availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility, subject to certain conditions, as amended (the "Credit Facility"). Through an uncommitted “accordion feature,” the OP, subject to certain conditions, may increase commitments under the Credit Facility to up to $575.0 million. Borrowings under the Credit Facility, along with cash on hand from the Company’s IPO, have been used to finance acquisitions and for general corporate purposes. As of December 31, 2015, the Company's unused borrowing capacity was $21.0 million, based on the asset pool availability governed by the Credit Facility. As of December 31, 2015, the Company had $304.0 million outstanding under the Credit Facility. As of December 31, 2014, the Company had no outstanding borrowings under the Credit Facility.
Borrowings under the Credit Facility bear interest, at the OP's election, at either (i) the base rate (which is defined in the Credit Agreement as the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) LIBOR for a one month interest period plus 1.0%) plus an applicable spread ranging from 0.35% to 1.00%, depending on the Company's consolidated leverage ratio, or (ii) LIBOR for the applicable interest period plus an applicable spread ranging from 1.35% to 2.00%, depending on the Company's consolidated leverage ratio. As of December 31, 2015, the weighted average interest rate on the Credit Facility was 1.77%. The Credit Facility requires the Company to pay an unused fee per annum of 0.25% and 0.15%, if the unused balance exceeds, or is equal to or less than, 50.0% of the available facility, respectively.
The Credit Facility provides for quarterly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period (though no longer than three months) with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Credit Facility will mature on December 2, 2018, provided that the OP, subject to certain conditions, may elect to extend the maturity date one year to December 2, 2019. The Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. The Company, certain of its wholly-owned subsidiaries and certain wholly-owned subsidiaries of the OP guarantee the obligations under the Credit Facility.
The Credit Facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of December 31, 2015, the Company was in compliance with the financial covenants under the Credit Facility.
Note 5 — Mortgage Notes Payable
The Company's mortgage notes payable as of December 31, 2015 and 2014 consist of the following:
Outstanding Loan Amount as of | Effective Interest Rate as of | |||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||
Portfolio | Encumbered Properties | 2015 | 2014 | 2015 | 2014 | Interest Rate | Maturity Date | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||
Liberty Crossing | 1 | $ | 11,000 | $ | 11,000 | 4.66 | % | 4.66 | % | Fixed | Jul. 2018 | |||||||||
San Pedro Crossing | 1 | 17,985 | 17,985 | 3.79 | % | 3.79 | % | Fixed | Jan. 2018 | |||||||||||
Tiffany Springs MarketCenter | 1 | 33,802 | 33,802 | 3.92 | % | 3.92 | % | Fixed | (1) | Oct. 2018 | ||||||||||
Shops at Shelby Crossing | 1 | 23,781 | 24,144 | 4.97 | % | 4.97 | % | Fixed | Mar. 2024 | |||||||||||
Patton Creek | 1 | 42,377 | — | 5.76 | % | — | % | Fixed | Dec. 2020 | |||||||||||
Total | 5 | $ | 128,945 | $ | 86,931 | 4.76 | % | (2) | 4.28 | % | (2) | |||||||||
_________________________________
(1) | Fixed as a result of entering into a swap agreement. |
(2) | Calculated on a weighted-average basis for all mortgages outstanding as of the dates indicated. |
F-19
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The following table summarizes the scheduled aggregate principal payments for the Company's aggregate long-term debt obligations for the five years subsequent to December 31, 2015:
(In thousands) | Future Principal Payments on Mortgage Notes Payable | Future Principal Payments on Credit Facility | Total Future Principal Payments on Long-Term Debt Obligations | |||||||||
2016 | $ | 1,112 | $ | — | $ | 1,112 | ||||||
2017 | 1,185 | — | 1,185 | |||||||||
2018 | 64,039 | 304,000 | 368,039 | |||||||||
2019 | 1,322 | — | 1,322 | |||||||||
2020 | 1,306 | — | 1,306 | |||||||||
Thereafter | 59,981 | — | 59,981 | |||||||||
$ | 128,945 | $ | 304,000 | $ | 432,945 | |||||||
The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of December 31, 2015, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
Note 6 — 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 derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with this derivative utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparty. However, as of December 31, 2015 and 2014, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivative. As a result, the Company has determined that its derivative valuation in its entirety is 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.
F-20
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The following table presents information about the Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and 2014, aggregated by the level in the fair value hierarchy within which those instruments fall:
(In thousands) | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||||||
December 31, 2015 | ||||||||||||||||
Interest rate swap | $ | — | $ | (415 | ) | $ | — | $ | (415 | ) | ||||||
December 31, 2014 | ||||||||||||||||
Interest rate swap | $ | — | $ | (332 | ) | $ | — | $ | (332 | ) | ||||||
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets and liabilities. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2015 or 2014. There were no transfers into or out of Level 3 of the fair value hierarchy during the years ended December 31, 2015 or 2014.
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, prepaid expenses and other assets, accounts payable and accrued expenses and distributions payable approximates their carrying value on the accompanying 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 accompanying consolidated balance sheets are reported in the following table:
Carrying Amount at | Fair Value at | Carrying Amount at | Fair Value at | |||||||||||||||
(In thousands) | Level | December 31, 2015 | December 31, 2015 | December 31, 2014 | December 31, 2014 | |||||||||||||
Mortgage notes payable and premium, net | 3 | $ | 133,709 | $ | 134,707 | $ | 87,223 | $ | 89,347 | |||||||||
Credit Facility | 3 | $ | 304,000 | $ | 304,000 | $ | — | $ | — | |||||||||
The fair value of mortgage notes payable is estimated by an independent third party using a discounted cash flow analysis, based on management's estimates of market interest rates. Advances under the Credit Facility are considered to be reported at fair value, because its interest rate varies with changes in LIBOR.
Note 7 — 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 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.
F-21
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is 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 is recognized directly in earnings.
Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next 12 months, the Company estimates that an additional $0.3 million will be reclassified from other comprehensive loss as an increase to interest expense.
As of December 31, 2015 and 2014, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
December 31, | ||||||||||||
2015 | 2014 | |||||||||||
Interest Rate Derivative | Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | ||||||||
(In thousands) | (In thousands) | |||||||||||
Interest Rate Swap | 1 | $ | 34,098 | 1 | $ | 34,098 | ||||||
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the accompanying consolidated balance sheets as of December 31, 2015 and 2014:
December 31, | ||||||||||
(In thousands) | Balance Sheet Location | 2015 | 2014 | |||||||
Derivatives designated as hedging instruments: | ||||||||||
Interest Rate Swap | Derivatives, at fair value | $ | (415 | ) | $ | (332 | ) | |||
The table below details the location in the accompanying consolidated financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the years ended December 31, 2015, 2014 and 2013.
Year Ended December 31, | ||||||||||||
(In thousands) | 2015 | 2014 | 2013 | |||||||||
Amount of (loss) gain recognized in accumulated other comprehensive loss from interest rate derivatives (effective portion) | $ | (576 | ) | $ | (734 | ) | $ | (225 | ) | |||
Amount of loss reclassified from accumulated other comprehensive loss into income as interest expense (effective portion) | $ | (493 | ) | $ | (505 | ) | $ | (127 | ) | |||
Amount of (loss) gain recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing) * | $ | — | $ | (5 | ) | $ | — | |||||
_________________________________
* The Company reclassified approximately $5,000 of other comprehensive loss, net to interest expense during the year ended December 31, 2014, which represented the ineffective portion of the change in fair value of the derivative. There was no net gain or loss recognized for the year ended December 31, 2015 as a result of reclassifications of other comprehensive income and other comprehensive loss, net. There were no such reclassifications during the year ended December 31, 2013.
F-22
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of December 31, 2015 and 2014. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying consolidated balance sheets:
Gross Amounts Not Offset on the Balance Sheet | ||||||||||||||||||||||||
(In thousands) | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Balance Sheet | Net Amounts of Liabilities presented on the Balance Sheet | Financial Instruments | Cash Collateral Received (Posted) | Net Amount | ||||||||||||||||||
December 31, 2015 | $ | (415 | ) | $ | — | $ | (415 | ) | $ | — | $ | — | $ | (415 | ) | |||||||||
December 31, 2014 | $ | (332 | ) | $ | — | $ | (332 | ) | $ | — | $ | — | $ | (332 | ) | |||||||||
Derivatives Not Designated as Hedges
Derivatives not designated as hedges are not speculative. These derivatives may be used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements to be classified as hedging instruments. As of December 31, 2015 and 2014, the Company does not have any hedging instruments that do not qualify for hedge accounting.
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 December 31, 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 $0.5 million. As of December 31, 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 $0.5 million at December 31, 2015.
Note 8 — Common Stock
As of December 31, 2015 and 2014, the Company had 96.9 million and 94.4 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP.
On September 19, 2011, the Company's board of directors authorized, and the Company declared, distributions payable to stockholders of record each day during the applicable period equal to $0.0017534247 per day, which is equivalent to $0.64 per annum, per share of common stock. Distributions began to accrue on June 8, 2012, the date of the Company's initial property acquisition. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
Share Repurchase Program
The Company's board of directors adopted the share repurchase program as initially approved (the "Original SRP"), which enabled stockholders to sell their shares to the Company in limited circumstances. The Original SRP permitted investors to sell their shares back to the Company after they had held them for at least one year, subject to the significant conditions and limitations described below. The Original SRP was effective for the entirety of the years ended December 31, 2015, 2014 and 2013. Under the Original SRP, shares were repurchased on a quarterly basis.
In January 2016, the Company's board of directors unanimously approved the Amended and Restated SRP, effective February 28, 2016, which supersedes and replaces the Original SRP. The Amended and Restated SRP permits investors to sell their shares back to the Company after they have held them for at least one year, subject to the significant conditions and limitations described below. The Company may repurchase shares on a semiannual basis, at each six-month period ending June 30 and December 31.
F-23
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Prior to the NAV Pricing Date, the purchase price per share for requests other than for death or disability under both the Original SRP and the Amended and Restated SRP depends on the length of time investors have held such shares as follows (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations):
• | after one year from the purchase date — the lower of $9.25 or 92.5% of the amount they actually paid for each share; |
• | after two years from the purchase date —the lower of $9.50 or 95.0% of the amount they actually paid for each share; |
• | after three years from the purchase date — the lower of $9.75 or 97.5% of the amount they actually paid for each share; and |
• | after four years from the purchase date — the lower of $10.00 or 100.0% of the amount they actually paid for each share. |
In the case of requests for death or disability prior to the NAV Pricing Date, the repurchase price per share is equal to the price paid to acquire the shares from the Company.
Under the Amended and Restated SRP, the repurchase price per share on and following the NAV Pricing Date for requests other than for death or disability will be as follows:
• | after one year from the purchase date — 92.5% of the Estimated Per-Share NAV; |
• | after two years from the purchase date — 95.0% of the Estimated Per-Share NAV; |
• | after three years from the purchase date — 97.5% of the Estimated Per-Share NAV; and |
• | after four years from the purchase date — 100.0% of the Estimated Per-Share NAV. |
In the case of requests for death or disability on and following the NAV Pricing Date, the repurchase price per share will be equal to the Estimated Per-Share NAV at the time of repurchase.
The Company intends to publish an Estimated Per-Share NAV as of December 31, 2015 shortly following the filing of this Annual Report on Form 10-K for the year ended December 31, 2015. In determining Estimated Per-Share NAV, the Company expects to obtain estimated values for all of its properties.
The Company was only authorized to repurchase shares pursuant to the Original SRP up to the value of the shares issued under the DRIP and limited the amount spent to repurchase shares in a given quarter to the value of the shares issued under the DRIP in that same quarter. Purchases under the Original SRP by the Company were limited in any calendar year to 5.0% of the number of shares of common stock outstanding on December 31 of the previous calendar year.
Under the Amended and Restated SRP, repurchases at each semi-annual period will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding during the previous fiscal year. Funding for repurchases pursuant to the Amended and Restated SRP for any given semiannual period will be limited to proceeds received during that same semiannual period through the issuance of common stock pursuant to the DRIP.
The Company's board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase, change the purchase price for repurchases or otherwise amend the terms of, suspend or terminate the SRP and the Amended and Restated SRP. Due to these limitations, the Company cannot guarantee that it will be able to accommodate all repurchase requests.
F-24
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
When a stockholder requests repurchases and the repurchases are approved by the Company's board of directors, it will reclassify such obligation from equity to a liability based on the settlement value of the obligation. The following table summarizes the share repurchases cumulatively through December 31, 2015:
Number of Shares Repurchased | Weighted-Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2012 | — | $ | — | ||||
Year Ended December 31, 2013 | 8,674 | 9.98 | |||||
Cumulative repurchases as of December 31, 2013 | 8,674 | 9.98 | |||||
Year Ended December 31, 2014 | 64,818 | 9.80 | |||||
Cumulative repurchases as of December 31, 2014 | 73,492 | 9.82 | |||||
Year Ended December 31, 2015 | 1,281,670 | 9.46 | |||||
Cumulative repurchases as of December 31, 2015 (1) | 1,355,162 | $ | 9.48 | ||||
_____________________
(1) | Includes 533,186 shares of accrued repurchase requests with a weighted-average repurchase price per share of $9.43, which were approved for repurchase as of December 31, 2015 and were completed during the first quarter of 2016. This $5.0 million liability is included in accounts payable and accrued expenses on the Company's consolidated balance sheet as of December 31, 2015. There were no other shares requested to be repurchased as of December 31, 2015. |
Distribution Reinvestment Plan
Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP. Participants purchasing shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the IPO. The board of directors may designate that certain cash or other distributions be excluded from the DRIP. The Company has the right to amend any aspect of the DRIP or terminate the DRIP with ten days' notice to participants. Shares issued under the DRIP are recorded to equity in the accompanying consolidated balance sheet in the period distributions are declared. During the year ended December 31, 2015, the Company issued 3.7 million shares of common stock with a value of $35.1 million and a par value per share of $0.01 pursuant to the DRIP.
Note 9 — Commitments and Contingencies
Future Minimum Ground Lease Payments
The Company entered into ground lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter:
(In thousands) | Future Minimum Base Rent Payments | |||
2016 | $ | 504 | ||
2017 | 514 | |||
2018 | 524 | |||
2019 | 535 | |||
2020 | 546 | |||
Thereafter | 9,376 | |||
$ | 11,999 | |||
Total rental expense was $0.7 million and approximately $20,000 during the years ended December 31, 2015 and 2014, respectively. There was no rental expense during the year ended December 31, 2013.
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.
F-25
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
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 its financial position or results of operations.
Note 10 — Related Party Transactions and Arrangements
The Sponsor and American Realty Capital Retail Special Limited Partnership, LLC, an entity controlled by the Sponsor, owned 242,222 shares of the Company's outstanding common stock as of December 31, 2015 and 2014. The Company is the sole general partner and holds substantially all the units of limited partner interest in the OP ("OP Units"). The Advisor, a limited partner in the OP, holds 202 OP Units, which represents a nominal percentage of the aggregate OP ownership. After holding the OP Units for a period of one year, or upon liquidation of the OP or sale of substantially all of the assets of the OP, holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests 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. As of December 31, 2015 and 2014, the Advisor owned 202 OP Units.
Fees Paid in Connection with the IPO
During the IPO, the Former Dealer Manager was paid fees and compensation in connection with the sale of the Company's common stock. The Former Dealer Manager was paid a selling commission of up to 7.0% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Former Dealer Manager received up to 3.0% of the gross proceeds from the sale of common stock, before reallowance to participating broker-dealers, as a dealer manager fee. The Former Dealer Manager was entitled to reallow its dealer manager fee to participating broker-dealers, based on such factors as the volume of shares sold by respective participating broker-dealers and marketing support incurred as compared to those of other participating broker-dealers. The following table details total selling commissions and dealer manager fees incurred by the Company during the years ended December 31, 2015, 2014 and 2013 and payable to the Former Dealer Manager as of December 31, 2015 and 2014:
Year Ended December 31, | Payable as of December 31, | |||||||||||||||||||
(In thousands) | 2015 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||
Total commissions and fees to the Former Dealer Manager | $ | — | $ | 81,728 | $ | 5,711 | $ | — | $ | — | ||||||||||
The Advisor and its affiliates were paid compensation and received expense reimbursements for services relating to the IPO. The Company utilized transfer agent services provided by an affiliate of the Former Dealer Manager. All offering costs relating to the IPO incurred by the Company or entities affiliated with the Advisor or the Former Dealer Manager on behalf of the Company were charged to additional paid-in capital on the accompanying consolidated balance sheets. The following table details offering costs and reimbursements incurred during the years ended December 31, 2015, 2014 and 2013 and payable to the Advisor and its affiliates and Former Dealer Manager and its affiliates as of December 31, 2015 and 2014:
Year Ended December 31, | Payable as of December 31, | |||||||||||||||||||
(In thousands) | 2015 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||
Fees and expense reimbursements to the Advisor and its affiliates and Former Dealer Manager and its affiliates | $ | — | $ | 2,854 | $ | 1,361 | $ | — | $ | 1,152 | ||||||||||
The Company was responsible for paying offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 1.5% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs in excess of the 1.5% cap as of the end of the IPO would have been the Advisor's responsibility. As of the close of the IPO, cumulative offering and related costs, excluding commissions and dealer manager fees, did not exceed the 1.5% threshold.
F-26
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Fees and Participations Paid in Connection With the Operations of the Company
The Advisor is paid an acquisition fee equal to 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for any loan or other investment. The Advisor is also paid for services provided for which it incurs investment-related expenses, or insourced expenses. Such insourced expenses will be fixed initially at, and may not exceed, 0.5% of the contract purchase price and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company pays third party acquisition expenses. Once the proceeds from the IPO have been fully invested, the aggregate amount of acquisition fees and financing coordination fees (as described below) will not exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment, as applicable, for all the assets acquired. In no event will the total of all acquisition fees and acquisition expenses (including any financing coordination fees) payable with respect to the Company's portfolio of investments or reinvestments exceed 4.5% of the contract purchase price to be measured at the close of the acquisition phase or 4.5% of the amount advanced for all loans or other investments.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 1.0% of the amount available or outstanding under such financing, subject to certain limitations.
In connection with the asset management services provided by the Advisor, the Company issued to the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted, forfeitable partnership units of the OP designated as "Class B Units." Class B Units are intended to be profit interests which will vest, and no longer be subject to forfeiture, at such time as: (x) the value of the OP's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 7.0% cumulative, pre-tax, non-compounded annual return thereon (the "economic hurdle"); (y) any one of the following occurs: (1) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; (2) a listing of the Company's common stock on a national securities exchange; or (3) another liquidity event; and (z) the Advisor is still providing advisory services to the Company (the "performance condition"). Unvested Class B Units will be forfeited immediately if: (a) the advisory agreement is terminated other than by an affirmative vote of a majority of the Company's independent directors without cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of the Company's independent directors without cause before the economic hurdle has been met.
When approved by the board of directors, the Class B Units were issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. The number of Class B Units issued in any quarter was equal to the cost of the Company's assets multiplied by 0.1875%, divided by the value of one share of common stock as of the last day of such calendar quarter, which was equal initially to $9.00 (the initial offering price in the IPO minus selling commissions and dealer manager fees). As of December 31, 2015, the Company could not determine the probability of achieving the performance condition. The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. The Advisor receives distributions on the vested and unvested Class B Units it received in connection with its asset management subordinated participation at the same rate as distributions received on the Company's common stock. Such distributions on issued Class B Units are included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss until the performance condition is considered probable to occur. As of December 31, 2015, the Company's board of directors has approved the issuance of and the OP has issued 479,802 Class B Units to the Advisor in connection with this arrangement on a cumulative basis.
Effective April 1, 2015:
i. | for any period commencing on or after April 1, 2015, the Company pays the Advisor or its assignees as compensation for services rendered in connection with the management of the Company’s assets an Asset Management Fee (as defined in the advisory agreement) equal to 0.0625% per month of the Cost of Assets (as defined in the advisory agreement) (or, once the Company begins disclosing net asset value ("NAV") in periodic or current reports filed with the SEC, 0.0625% of the lower of the Cost of Assets and the fair market value of the Company's assets as reported in the applicable periodic or current report filed with the SEC disclosing NAV); |
ii. | such Asset Management Fee is payable monthly in arrears in cash, in shares of common stock, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor; and |
iii. | the Company shall not cause the OP to issue any Class B Units in respect of periods subsequent to March 31, 2015. |
F-27
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
In connection with property management and leasing services, unless the Company contracts with a third party, the Company will pay to an affiliate of the Advisor a property management fee of 2.0% of gross revenues from the Company's stand-alone single-tenant net leased properties which are not part of a shopping center and 4.0% of gross revenues from all other types of properties. The Company will also reimburse the affiliate for property level expenses. If the Company contracts directly with third parties for such services, the Company will pay them customary market fees and, prior to January 28, 2014, would pay the Advisor an oversight fee of up to 1.0% of the gross revenues of the property managed. In no event would the Company pay the Advisor or any of its affiliates both a property management fee and an oversight fee with respect to any particular property. Effective January 28, 2014, the Advisor eliminated the oversight fee.
In connection with any construction, renovation or tenant finish-out on any property, the Company will pay the Advisor 6.0% of the hard costs of the construction, renovation and/or tenant finish-out, as applicable. No such amounts were incurred during the years ended December 31, 2015, 2014 or 2013.
Effective March 1, 2013, the Company entered into an agreement with the Former Dealer Manager to provide strategic advisory services and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. Strategic advisory fees were amortized over the estimated remaining term of the IPO and, as such, were fully amortized as of December 31, 2014. These fees are included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss during the periods the services were provided. The Former Dealer Manager and its affiliates also provided transfer agency services, as well as transaction management and other professional services. These fees are also included in general and administrative expenses on the accompanying consolidated statements of operations and comprehensive loss during the periods the services were provided.
The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that it will not reimburse the Advisor for any amount by which the Company's operating expenses (including the asset management fee, as applicable) at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets, or (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash expenses and excluding any gain from the sale of assets for that period, unless the Company's independent directors determine that such excess was justified based on unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the Advisor in subsequent periods. Additionally, the Company reimburses the Advisor for personnel costs in connection with other services during the operational stage; however, the Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions. The Company will not reimburse the Advisor for salaries and benefits paid to the Company's executive officers. During the year ended December 31, 2015, the Company incurred $1.0 million of reimbursements from the Advisor for providing administrative services. These reimbursements are included in general and administrative expense on the consolidated statements of operations and comprehensive loss. No reimbursements were made to the Advisor for providing administrative services during the years ended December 31, 2014 or 2013.
In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flows from operations that would have been paid to the Advisor may be available to pay distributions. The fees that may be forgiven are not deferrals and accordingly, will not be paid to the Advisor. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs and/or property operating costs. No general and administrative costs of the Company were absorbed by the Advisor during the year ended December 31, 2015. The Advisor absorbed $0.3 million and $0.7 million of general and administrative costs of the Company during the years ended December 31, 2014 and 2013, respectively. No property operating costs were absorbed by the Advisor during the years ended December 31, 2015 and 2014. The advisor absorbed approximately $41,000 of property operating costs during the year ended December 31, 2013. General and administrative expenses and property operating expenses are presented net of costs absorbed by the Advisor on the accompanying consolidated statements of operations and comprehensive loss.
The predecessor to the Parent of the Sponsor is a party to a services agreement with RCS Advisory Services, LLC, a subsidiary of the parent company of the Former Dealer Manager (“RCS Advisory”), pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by AR Global with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to the Parent of the Sponsor instructed RCS Advisory to stop providing such services in November 2015, and no services have since been provided by RCS Advisory.
F-28
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The Company is also party to a transfer agency agreement with American National Stock Transfer, LLC, a subsidiary of the parent company of the Former Dealer Manager (“ANST”), pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services), and supervisory services overseeing the transfer agency services performed by a third-party transfer agent. The Parent of the Sponsor received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. On February 26, 2016, the Company entered into a definitive agreement with DST Systems, Inc., its previous provider of sub-transfer agency services, to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services).
The following table details amounts incurred and forgiven during the years ended December 31, 2015, 2014 and 2013 and amounts contradctually due as of December 31, 2015 and 2014 in connection with the operations related services described above. Amounts below are inclusive of fees and other expense reimbursements incurred from and due to the Advisor that are passed through and ultimately paid to Lincoln as a result of the Advisor's exclusive service agreement with Lincoln:
Year Ended December 31, | Payable as of December 31, | |||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||||||||||||
(In thousands) | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | ||||||||||||||||||||||||||
One-time fees and reimbursements: | ||||||||||||||||||||||||||||||||
Acquisition fees and related cost reimbursements | $ | 7,245 | $ | — | $ | 9,214 | $ | — | $ | 802 | $ | — | $ | — | $ | — | ||||||||||||||||
Financing coordination fees (1) | 426 | — | 3,492 | — | 409 | — | — | — | ||||||||||||||||||||||||
Ongoing fees: | ||||||||||||||||||||||||||||||||
Asset management fees | 5,487 | — | — | — | — | 18 | — | — | ||||||||||||||||||||||||
Property management and leasing fees | 5,445 | — | 1,362 | — | 455 | 72 | 452 | 249 | ||||||||||||||||||||||||
Professional fees and other reimbursements | 4,399 | — | 1,288 | — | 276 | — | 376 | 777 | ||||||||||||||||||||||||
Strategic advisory fees | — | — | 425 | — | 495 | — | — | — | ||||||||||||||||||||||||
Distributions on Class B Units | 243 | — | 41 | — | — | — | — | — | ||||||||||||||||||||||||
Total related party operation fees and reimbursements | $ | 23,245 | $ | — | $ | 15,822 | $ | — | $ | 2,437 | $ | 90 | $ | 828 | $ | 1,026 | ||||||||||||||||
_________________________________
(1) | These fees are initially capitalized to deferred costs, net on the consolidated balance sheets and subsequently amortized over the life of the respective instrument to interest expense on the consolidated statements of operations and comprehensive loss. |
Fees and Participations Paid in Connection with Liquidation or Listing
The Company will pay a brokerage commission to the Advisor or its affiliates on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and one-half of the total brokerage commission paid, if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in light of the size, type and location of the property, 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. The Company incurred approximately $6,000 of brokerage commissions from the Advisor during the year ended December 31, 2014. No such fees were incurred during the years ended December 31, 2015 or 2013.
F-29
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The Company will pay the Advisor a subordinated participation in the net sales proceeds of the sale of real estate assets of 15.0% of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 7.0% cumulative, pre-tax non-compounded annual return on the capital contributed by investors. The Company cannot assure that it will provide this 7.0% annual return and the Advisor will not be entitled to the subordinated participation in net sale proceeds unless the Company's investors have received a 7.0% cumulative non-compounded annual return on their capital contributions plus the 100.0% repayment of capital committed by such investors. No such amounts were incurred during the years ended December 31, 2015, 2014 or 2013.
If the Company's shares of common stock are listed on a national securities exchange, the Advisor will receive a subordinated incentive listing distribution from the OP of 15.0% of the amount by which the Company's market value plus distributions paid prior to listing exceeds the aggregate capital contributed by investors plus an amount equal to a 7.0% cumulative, pre-tax non-compounded annual return to investors. The Company cannot assure that it will provide this 7.0% annual return and the Advisor will not be entitled to the subordinated incentive listing distribution unless investors have received a 7.0% cumulative, pre-tax non-compounded annual return on their capital contributions plus the 100.0% repayment of capital committed by such investors. No such distribution was incurred during the years ended December 31, 2015, 2014 or 2013. Neither the Advisor nor any of its affiliates can earn both the subordinated participation in the net sales proceeds and the subordinated listing distribution.
Upon termination or non-renewal of the advisory agreement, the Advisor will receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company's market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 7.0% cumulative, pre-tax non-compounded return to investors. The Advisor 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.
Note 11 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company including accounting and legal services, human resources and information technology.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 12 — Share-Based Compensation
Stock Option Plan
The Company has a stock option plan (the "Plan") which authorizes 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 Plan. The exercise price for stock options granted to the independent directors under the Plan will be equal to the fair market value, as defined in the Plan, of a share on the last business day preceding the annual meeting of stockholders. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. As of December 31, 2015 and December 31, 2014, no stock options were issued under the Plan.
Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further approval by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholders' meeting. Restricted stock issued to independent directors will vest over a five-year period following the date of grant in increments of 20.0% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of shares of common stock granted under the RSP may not exceed 5.0% of the Company's outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
F-30
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. For restricted share awards granted prior to 2015, 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 share awards granted during or after 2015 provide for accelerated vesting of the portion of the unvested shares scheduled to vest in the year of the recipient's voluntary termination or the failure to be re-elected to the board. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock will be subject to the same restrictions as the underlying restricted shares.
The following table reflects restricted share award activity for the years ended December 31, 2015, 2014 and 2013:
Number of Shares of Restricted Stock | Weighted-Average Issue Price Per Share | |||||
Unvested, December 31, 2012 | 13,800 | $ | 9.35 | |||
Granted | 9,000 | 9.00 | ||||
Vested | (3,000 | ) | 9.43 | |||
Forfeitures | — | — | ||||
Unvested, December 31, 2013 | 19,800 | 9.18 | ||||
Granted | 9,000 | 9.00 | ||||
Vested | (4,800 | ) | 9.25 | |||
Forfeitures | (8,400 | ) | 9.14 | |||
Unvested, December 31, 2014 | 15,600 | 9.08 | ||||
Granted | 9,000 | 9.00 | ||||
Vested | (4,800 | ) | 9.13 | |||
Forfeitures | (8,400 | ) | 9.07 | |||
Unvested, December 31, 2015 | 11,400 | $ | 9.00 | |||
As of December 31, 2015, the Company had $0.1 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company's RSP. That cost is expected to be recognized over a weighted-average period of 3.1 years.
The fair value of the restricted shares is being expensed in accordance with the service period required. Compensation expense related to restricted stock was approximately $43,000, $38,000 and $27,000 during the years ended December 31, 2015, 2014 and 2013, respectively. Compensation expense related to restricted stock is included in general and administrative expense on the accompanying consolidated statements of operations and comprehensive loss.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors, at each director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. The following table reflects the shares of common stock issued to directors in lieu of cash compensation:
Year Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Shares issued in lieu of cash | — | 6,055 | — | |||||||||
Value of shares issued in lieu of cash (in thousands) | $ | — | $ | 55 | $ | — | ||||||
F-31
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Note 13 — Net Loss Per Share
The following is a summary of the basic and diluted net loss per share computation for the years ended December 31, 2015, 2014 and 2013:
Year Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Net loss (in thousands) | $ | (1,393 | ) | $ | (12,632 | ) | $ | (4,704 | ) | |||
Basic and diluted weighted-average shares outstanding | 96,113,056 | 49,231,737 | 3,216,903 | |||||||||
Basic and diluted net loss per share | $ | (0.01 | ) | $ | (0.26 | ) | $ | (1.46 | ) | |||
Diluted net loss per share assumes the conversion of all common stock equivalents into an equivalent number of common shares, unless the effect is antidilutive. The Company considers unvested restricted stock and OP Units to be common share equivalents. The Company had the following common share equivalents on a weighted-average basis that were excluded from the calculation of diluted net loss per share as their effect would have been antidilutive for the periods presented:
Year Ended December 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Shares of unvested restricted stock (1) | 15,473 | 21,827 | 17,214 | ||||||
OP Units | 202 | 202 | 202 | ||||||
Class B Units (2) | 393,225 | 63,896 | — | ||||||
Total common stock equivalents | 408,900 | 85,925 | 17,416 | ||||||
_____________________
(1) | Weighted-average number of shares of unvested restricted stock outstanding for the periods presented. There were 11,400, 15,600 and 19,800 shares of unvested restricted stock outstanding as of December 31, 2015, 2014 and 2013, respectively. |
(2) | Weighted-average number of issued and unvested Class B Units for the periods outstanding. As of December 31, 2015 and 2014, the Company's board of directors had approved the issuance of 479,802 and 169,992 Class B Units, respectively. No Class B Units had been approved for issuance as of December 31, 2013. |
Note 14 – Quarterly Results (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2015, 2014 and 2013:
Quarters Ended | ||||||||||||||||
(In thousands, except share and per share data) | March 31, 2015 | June 30, 2015 | September 30, 2015 | December 31, 2015 | ||||||||||||
Total revenues | $ | 21,095 | $ | 22,648 | $ | 27,888 | $ | 33,547 | ||||||||
Net income (loss) | $ | 46 | $ | 4,999 | $ | (6,108 | ) | $ | (330 | ) | ||||||
Basic weighted-average shares outstanding | 95,040,086 | 95,915,695 | 96,400,048 | 97,070,924 | ||||||||||||
Basic net income (loss) per share | $ | 0.00 | $ | 0.05 | $ | (0.06 | ) | $ | 0.00 | |||||||
Diluted weighted-average shares outstanding | 95,040,288 | 95,929,948 | 96,400,048 | 97,070,924 | ||||||||||||
Diluted net income (loss) per share | $ | 0.00 | $ | 0.05 | $ | (0.06 | ) | $ | 0.00 | |||||||
Quarters Ended | ||||||||||||||||
(In thousands, except share and per share data) | March 31, 2014 | June 30, 2014 | September 30, 2014 | December 31, 2014 | ||||||||||||
Total revenues | $ | 2,799 | $ | 4,278 | $ | 6,755 | $ | 14,277 | ||||||||
Net loss | $ | (599 | ) | $ | (2,913 | ) | $ | (4,773 | ) | $ | (4,347 | ) | ||||
Basic and diluted weighted-average shares outstanding | 12,997,881 | 29,000,403 | 61,255,619 | 92,685,013 | ||||||||||||
Basic and diluted net loss per share | $ | (0.05 | ) | $ | (0.10 | ) | $ | (0.08 | ) | $ | (0.05 | ) | ||||
F-32
AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Quarters Ended | ||||||||||||||||
(In thousands, except share and per share data) | March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | ||||||||||||
Total revenues | $ | 1,397 | $ | 1,386 | $ | 1,694 | $ | 2,684 | ||||||||
Net loss | $ | (1,052 | ) | $ | (1,051 | ) | $ | (1,510 | ) | $ | (1,091 | ) | ||||
Basic and diluted weighted-average shares outstanding | 969,506 | 2,063,622 | 3,785,878 | 5,987,213 | ||||||||||||
Basic and diluted net loss per share | $ | (1.09 | ) | $ | (0.51 | ) | $ | (0.40 | ) | $ | (0.18 | ) | ||||
Note 15 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K, and determined that there have not been any events that have occurred that would require adjustments to, or disclosures in, the consolidated financial statements except for the following disclosures:
Sponsor Transaction
In January 2016, AR Global became the successor business to AR Capital, LLC and became the parent of the Company's current Sponsor.
RCS Capital Corporation Bankruptcy
RCS Capital Corporation, the parent company of the Former Dealer Manager and certain of its affiliates that provided the Company with services, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was also under common control with the Parent of the Sponsor.
Amended and Restated SRP
In January 2016, the Company's board of directors unanimously approved the Amended & Restated SRP, effective February 28, 2016, which supersedes and replaces the Original SRP. Under the Amended and Restated SRP, the Company may repurchase shares on a semiannual basis, at each six-month period ending June 30 and December 31.
The repurchase price per share on and following the NAV Pricing Date for requests other than for death or disability will be as follows:
• | after one year from the purchase date — 92.5% of the Estimated Per-Share NAV; |
• | after two years from the purchase date — 95.0% of the Estimated Per-Share NAV; |
• | after three years from the purchase date — 97.5% of the Estimated Per-Share NAV; and |
• | after four years from the purchase date — 100.0% of the Estimated Per-Share NAV. |
In the case of requests for death or disability on and following the NAV Pricing Date, the repurchase price per share will be equal to the Estimated Per-Share NAV at the time of repurchase.
Under the Amended and Restated SRP, repurchases at each semi-annual period will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding during the previous fiscal year. Funding for repurchases pursuant to the Amended and Restated SRP for any given semiannual period will be limited to proceeds received during that same semiannual period through the issuance of common stock pursuant to the DRIP.
American National Stock Transfer, LLC Termination
On February 10, 2016, the Parent of the Sponsor received written notice from ANST, the Company's transfer agent and an affiliate of the Company's Former Dealer Manager, that it would wind down operations by the end of the month. ANST withdrew as the transfer agent effective February 29, 2016.
On February 26, 2016, the Company entered into a definitive agreement with DST Systems, Inc., its previous provider of sub-transfer agency services, to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services).
F-33
AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2015
(In thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | |||||||||||||||||||||||||||||||
Property | State | Acquisition Date | Encumbrances at December 31, 2015 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount Carried at December 31, 2015 (2) (3) (4) | Accumulated Depreciation (5) (6) | |||||||||||||||||||||||
Liberty Crossing | TX | 6/8/2012 | $ | 11,000 | $ | 2,887 | $ | 17,084 | $ | — | $ | 329 | $ | 19,964 | $ | (2,887 | ) | |||||||||||||||
San Pedro Crossing | TX | 12/21/2012 | 17,985 | 9,548 | 16,873 | — | 817 | 26,530 | (3,401 | ) | ||||||||||||||||||||||
Tiffany Springs MarketCenter | MO | 9/26/2013 | 33,802 | 15,757 | 28,834 | — | 1,666 | 45,855 | (4,082 | ) | ||||||||||||||||||||||
The Streets of West Chester | OH | 4/3/2014 | — | (1) | 11,812 | 25,946 | — | — | 36,276 | (1,364 | ) | |||||||||||||||||||||
Prairie Towne Center | IL | 6/4/2014 | — | (1) | 11,033 | 11,185 | — | — | 22,218 | (572 | ) | |||||||||||||||||||||
Southway Shopping Center | TX | 6/6/2014 | — | (1) | 10,330 | 17,908 | — | 6 | 28,244 | (793 | ) | |||||||||||||||||||||
Stirling Slidell Centre | LA | 8/8/2014 | — | (1) | 3,517 | 10,067 | — | 10 | 13,594 | (452 | ) | |||||||||||||||||||||
Northwoods Marketplace | SC | 8/15/2014 | — | (1) | 12,886 | 19,853 | — | 100 | 32,840 | (838 | ) | |||||||||||||||||||||
Centennial Plaza | OK | 8/27/2014 | — | (1) | 3,538 | 21,405 | — | — | 24,943 | (808 | ) | |||||||||||||||||||||
Northlake Commons | NC | 9/4/2014 | — | (1) | 16,930 | 12,729 | — | 286 | 29,945 | (569 | ) | |||||||||||||||||||||
Shops at Shelby Crossing | FL | 9/5/2014 | 23,781 | 4,575 | 21,396 | — | 583 | 26,054 | (1,090 | ) | ||||||||||||||||||||||
Shoppes of West Melbourne | FL | 9/18/2014 | — | (1) | 3,546 | 12,528 | — | 1,225 | 17,299 | (502 | ) | |||||||||||||||||||||
The Centrum | NC | 9/29/2014 | — | (1) | 11,530 | 21,182 | — | 261 | 32,973 | (835 | ) | |||||||||||||||||||||
Shoppes at Wyomissing | PA | 10/16/2014 | — | (1) | 3,406 | 21,207 | — | 895 | 25,507 | (776 | ) | |||||||||||||||||||||
Southroads Shopping Center | OK | 10/29/2014 | — | (1) | 6,770 | 46,543 | — | 359 | 53,672 | (1,436 | ) | |||||||||||||||||||||
Parkside Shopping Center | KY | 11/12/2014 | — | (1) | 11,537 | 17,903 | — | 355 | 29,795 | (811 | ) | |||||||||||||||||||||
West Lake Crossing | TX | 11/20/2014 | — | (1) | 2,082 | 9,981 | — | 107 | 12,170 | (343 | ) | |||||||||||||||||||||
Colonial Landing | FL | 12/18/2014 | — | (1) | — | 32,821 | — | 26 | 32,847 | (898 | ) | |||||||||||||||||||||
The Shops at West End | MN | 12/23/2014 | — | (1) | 12,799 | 76,727 | — | 1,456 | 90,982 | (2,088 | ) | |||||||||||||||||||||
Township Marketplace | PA | 12/23/2014 | — | (1) | 7,855 | 31,941 | — | — | 39,796 | (884 | ) | |||||||||||||||||||||
Cross Pointe Centre | NC | 3/25/2015 | — | 7,866 | 15,218 | — | — | 23,084 | (342 | ) | ||||||||||||||||||||||
Towne Centre Plaza | TX | 4/10/2015 | — | 3,149 | 10,598 | — | — | 13,747 | (234 | ) | ||||||||||||||||||||||
Harlingen Corners | TX | 5/7/2015 | — | 12,661 | 13,052 | — | 111 | 25,824 | (269 | ) | ||||||||||||||||||||||
Village at Quail Springs | OK | 6/17/2015 | — | 2,338 | 9,035 | — | — | 11,373 | (132 | ) | ||||||||||||||||||||||
Pine Ridge Plaza | KS | 6/17/2015 | — | 13,688 | 17,873 | — | — | 31,560 | (261 | ) | ||||||||||||||||||||||
Bison Hollow | MI | 6/17/2015 | — | 4,150 | 14,044 | — | — | 18,194 | (195 | ) | ||||||||||||||||||||||
Jefferson Commons | KY | 6/26/2015 | — | 4,992 | 28,591 | — | 200 | 33,782 | (423 | ) | ||||||||||||||||||||||
Northpark Center | OH | 6/29/2015 | — | 9,487 | 23,018 | — | — | 32,505 | (338 | ) | ||||||||||||||||||||||
Anderson Station | SC | 7/28/2015 | — | 4,968 | 22,763 | — | — | 27,731 | (303 | ) | ||||||||||||||||||||||
Patton Creek | AL | 8/28/2015 | 42,377 | 14,764 | 62,519 | — | — | 77,283 | (618 | ) | ||||||||||||||||||||||
North Lakeland Plaza | FL | 9/22/2015 | — | 2,076 | 9,605 | — | 304 | 11,986 | (73 | ) | ||||||||||||||||||||||
F-34
AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2015
(In thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | |||||||||||||||||||||||||||||||
Property | State | Acquisition Date | Encumbrances at December 31, 2015 | Land | Building and Improvements | Land | Building and Improvements | Gross Amount Carried at December 31, 2015 (2) (3) (4) | Accumulated Depreciation (5) (6) | |||||||||||||||||||||||
Riverbend Marketplace | NC | 9/25/2015 | — | 4,908 | 16,716 | — | — | 21,624 | (123 | ) | ||||||||||||||||||||||
Montecito Crossing | NV | 9/29/2015 | — | 16,313 | 33,680 | — | — | 49,993 | (232 | ) | ||||||||||||||||||||||
Best on the Boulevard | NV | 9/29/2015 | — | 10,223 | 27,210 | — | — | 37,433 | (184 | ) | ||||||||||||||||||||||
Shops at RiverGate South | NC | 9/30/2015 | — | 5,073 | 24,602 | — | 125 | 29,800 | (183 | ) | ||||||||||||||||||||||
Parkside Shopping Center - Additional Space | KY | 12/23/2015 | — | (1) | 1,532 | 1,606 | — | — | 3,138 | — | ||||||||||||||||||||||
$ | 128,945 | $ | 280,526 | $ | 804,243 | $ | — | $ | 9,221 | $ | 1,090,561 | $ | (29,339 | ) | ||||||||||||||||||
________________
(1) | These unencumbered properties collateralize a credit facility of up to $325.0 million, which had $304.0 million of outstanding borrowings as of December 31, 2015. |
(2) | Acquired intangible lease assets allocated to individual properties in the amount of $192.5 million are not reflected in the table above. |
(3) | The tax basis of aggregate land, buildings and improvements as of December 31, 2015 is $1.2 billion. |
(4) | Gross amount carried is net of tenant improvement dispositions of $1.4 million due to tenant lease expirations. |
(5) | The accumulated depreciation column excludes $38.9 million of accumulated amortization associated with acquired intangible lease assets. |
(6) | Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements. |
F-35
AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2015
(In thousands)
A summary of activity for real estate and accumulated depreciation for the years ended December 31, 2015, 2014 and 2013:
Year Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Real estate investments, at cost: | ||||||||||||
Balance at beginning of year | $ | 637,641 | $ | 90,894 | $ | 46,392 | ||||||
Acquisitions | 448,318 | 545,467 | 44,591 | |||||||||
Additions | 6,817 | 2,239 | 165 | |||||||||
Disposals | (2,215 | ) | (959 | ) | (254 | ) | ||||||
Balance at end of the year | $ | 1,090,561 | $ | 637,641 | $ | 90,894 | ||||||
Accumulated depreciation and amortization: | ||||||||||||
Balance at beginning of year | $ | 9,417 | $ | 3,519 | $ | 657 | ||||||
Depreciation expense | 20,155 | 6,857 | 3,116 | |||||||||
Disposals | (233 | ) | (959 | ) | (254 | ) | ||||||
Balance at end of the year | $ | 29,339 | $ | 9,417 | $ | 3,519 | ||||||
F-36