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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-54377
The GC Net Lease REIT, Inc.
(Exact name of Registrant as specified in its charter)
Maryland | 26-3335705 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
2121 Rosecrans Avenue, Suite 3321,
El Segundo, California 90245
(Address of principal executive offices)
(310) 606-5900
(Registrants telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer |
¨ |
Accelerated filer |
¨ | |||||
Non-accelerated filer |
x |
(Do not check if a smaller reporting company) |
Smaller reporting company |
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of May 12, 2011: 2,976,011, $0.001 par value per share.
Table of Contents
FORM 10-Q
THE GC NET LEASE REIT, INC.
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Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q of The GC Net Lease REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable. Such forward-looking statements include, in particular, statements about our plans, strategies, and prospects and are subject to risks, uncertainties, and other factors. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, and our ability to find suitable investment properties, may be significantly hindered. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as may, will, expect, intend, anticipate, estimate, believe, continue, or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission. We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
See the risk factors identified in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission, and Part II Item 1A in this Form 10-Q for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
March 31, 2011 |
December 31, 2010 |
|||||||
ASSETS | (unaudited) | |||||||
Cash and cash equivalents |
$ | 1,469,553 | $ | 1,636,072 | ||||
Restricted cash |
1,785,645 | 1,658,070 | ||||||
Real estate: |
||||||||
Land |
11,703,796 | 11,703,796 | ||||||
Building and improvements |
77,096,442 | 77,096,442 | ||||||
Tenant origination and absorption cost |
18,095,906 | 18,095,906 | ||||||
Total real estate |
106,896,144 | 106,896,144 | ||||||
Less: accumulated depreciation and amortization |
(4,896,671 | ) | (3,862,595 | ) | ||||
Total real estate, net |
101,999,473 | 103,033,549 | ||||||
Above market leases, net |
1,673,377 | 1,725,856 | ||||||
Deferred rent |
812,319 | 671,995 | ||||||
Deferred financing costs, net |
794,728 | 967,051 | ||||||
Other assets |
530,021 | 448,483 | ||||||
Total assets |
$ | 109,065,116 | $ | 110,141,076 | ||||
LIABILITIES AND EQUITY | ||||||||
Mortgage payable |
$ | 25,991,166 | $ | 26,129,231 | ||||
Credit Facility |
35,000,000 | 35,000,000 | ||||||
Bridge Loan |
1,282,703 | 7,871,500 | ||||||
Restricted reserves |
666,316 | 538,741 | ||||||
Accounts payable and other liabilities |
799,243 | 857,322 | ||||||
Distributions payable |
269,586 | 248,092 | ||||||
Due to affiliates, net |
1,978,149 | 1,480,570 | ||||||
Below market leases, net |
852,222 | 870,807 | ||||||
Total liabilities |
66,839,385 | 72,996,263 | ||||||
Commitments and contingencies (Note 7) |
||||||||
Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of March 31, 2011 and December 31, 2010 |
4,886,686 | 4,886,686 | ||||||
Common stock subject to redemption |
302,081 | 170,810 | ||||||
Stockholders equity: |
||||||||
Preferred Stock, $0.001 par value; 200,000,000 shares authorized; no shares outstanding, as of March 31, 2011 and December 31, 2010 |
- | - | ||||||
Common Stock, $0.001 par value; 700,000,000 shares authorized; 2,591,769 and 1,845,339 shares outstanding, as of March 31, 2011 and December 31, 2010, respectively |
25,894 | 18,438 | ||||||
Additional paid-in capital |
21,687,563 | 15,441,289 | ||||||
Cumulative distributions |
(1,078,764 | ) | (713,332 | ) | ||||
Accumulated deficit |
(1,405,523 | ) | (1,236,878 | ) | ||||
Total stockholders equity |
19,229,170 | 13,509,517 | ||||||
Noncontrolling interests |
17,807,794 | 18,577,800 | ||||||
Total equity |
37,036,964 | 32,087,317 | ||||||
Total liabilities and equity |
$ | 109,065,116 | $ | 110,141,076 | ||||
See accompanying notes.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Revenue: |
||||||||
Rental income |
$ | 2,454,019 | $ | 1,174,882 | ||||
Property tax recovery |
339,957 | 97,840 | ||||||
Interest income |
350 | 2,006 | ||||||
Total revenue |
2,794,326 | 1,274,728 | ||||||
Expenses: |
||||||||
Asset management fees to affiliates |
204,212 | 102,830 | ||||||
Property management fees to affiliates |
74,472 | 32,082 | ||||||
Property tax expense |
339,957 | 97,840 | ||||||
Acquisition fees and expenses |
262 | - | ||||||
General and administrative expenses |
370,135 | 273,766 | ||||||
Depreciation and amortization |
1,034,076 | 555,974 | ||||||
Interest expense |
1,182,542 | 560,223 | ||||||
Total expenses |
3,205,656 | 1,622,715 | ||||||
Net loss |
(411,330 | ) | (347,987 | ) | ||||
Net loss attributable to noncontrolling interests |
(242,685 | ) | (300,313 | ) | ||||
Net loss attributable to The GC Net Lease REIT, Inc. common stockholders |
$ | (168,645 | ) | $ | (47,674 | ) | ||
Net loss per share, basic and diluted |
$ | (0.08 | ) | $ | (0.15 | ) | ||
Weighted average number of common shares outstanding, basic and diluted |
2,197,250 | 324,651 | ||||||
Distributions declared per common share |
$ | 0.17 | $ | 0.17 | ||||
See accompanying notes.
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CONSOLIDATED STATEMENTS OF EQUITY
Common Stock | Additional Paid-In Capital |
Cumulative Distributions |
Accumulated Deficit |
Total Stockholders Equity |
Non-controlling Interests |
Total Equity |
||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||
BALANCE December 31, 2009 |
252,319 | 2,523 | 928,009 | (92,834 | ) | (246,515 | ) | 591,183 | 17,678,748 | 18,269,931 | ||||||||||||||||||||||
Gross proceeds from issuance of common stock |
1,575,040 | 15,736 | 15,727,108 | - | - | 15,742,844 | - | 15,742,844 | ||||||||||||||||||||||||
Discount on issuance of common stock |
- | - | (21,635 | ) | - | - | (21,635 | ) | - | (21,635 | ) | |||||||||||||||||||||
Offering costs |
- | - | (1,192,014 | ) | - | - | (1,192,014 | ) | - | (1,192,014 | ) | |||||||||||||||||||||
Distributions |
- | - | - | (458,682 | ) | - | (458,682 | ) | - | (458,682 | ) | |||||||||||||||||||||
Issuance of shares for distribution reinvestment plan |
17,033 | 170 | 161,646 | (161,816 | ) | - | - | - | - | |||||||||||||||||||||||
Additions to common stock subject to redemption |
947 | 9 | (161,825 | ) | - | - | (161,816 | ) | - | (161,816 | ) | |||||||||||||||||||||
Contribution of noncontrolling interests |
- | - | - | - | - | - | 10,380,000 | 10,380,000 | ||||||||||||||||||||||||
Additions to noncontrolling interests subject to redemption |
- | - | - | - | - | - | (4,886,686 | ) | (4,886,686 | ) | ||||||||||||||||||||||
Distributions for noncontrolling interests |
- | - | - | - | - | - | (1,568,275 | ) | (1,568,275 | ) | ||||||||||||||||||||||
Distributions for noncontrolling interests subject to redemption |
- | - | - | - | - | - | (207,262 | ) | (207,262 | ) | ||||||||||||||||||||||
Net loss |
- | - | - | - | (990,363 | ) | (990,363 | ) | (2,818,725 | ) | (3,809,088 | ) | ||||||||||||||||||||
BALANCE December 31, 2010 |
1,845,339 | 18,438 | 15,441,289 | (713,332 | ) | (1,236,878 | ) | 13,509,517 | 18,577,800 | 32,087,317 | ||||||||||||||||||||||
Gross proceeds from issuance of common stock |
732,612 | 7,325 | 7,318,781 | - | - | 7,326,106 | - | 7,326,106 | ||||||||||||||||||||||||
Discount on issuance of common stock |
- | - | (5,634 | ) | - | - | (5,634 | ) | - | (5,634 | ) | |||||||||||||||||||||
Offering costs |
- | - | (1,066,742 | ) | - | - | (1,066,742 | ) | - | (1,066,742 | ) | |||||||||||||||||||||
Distributions |
- | - | - | (234,161 | ) | - | (234,161 | ) | - | (234,161 | ) | |||||||||||||||||||||
Issuance of shares for distribution reinvestment plan |
13,818 | 131 | 131,140 | (131,271 | ) | - | - | - | - | |||||||||||||||||||||||
Additions to common stock subject to redemption |
- | - | (131,271 | ) | - | - | (131,271 | ) | - | (131,271 | ) | |||||||||||||||||||||
Contribution of noncontrolling interests |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Additions to noncontrolling interests subject to redemption |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Distributions for noncontrolling interests |
- | - | - | - | - | - | (438,915 | ) | (438,915 | ) | ||||||||||||||||||||||
Distributions for noncontrolling interests subject to redemption |
- | - | - | - | - | - | (88,406 | ) | (88,406 | ) | ||||||||||||||||||||||
Net loss |
- | - | - | - | (168,645 | ) | (168,645 | ) | (242,685 | ) | (411,330 | ) | ||||||||||||||||||||
BALANCE March 31, 2011 |
2,591,769 | $ | 25,894 | $ | 21,687,563 | $ | (1,078,764 | ) | $ | (1,405,523 | ) | $ | 19,229,170 | $ | 17,807,794 | $ | 37,036,964 |
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Operating Activities: |
||||||||
Net loss |
$ | (411,330 | ) | $ | (347,987 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operations: |
||||||||
Depreciation of building and building improvements |
609,043 | 365,433 | ||||||
Amortization of intangible assets |
425,033 | 186,374 | ||||||
Amortization of above and below market leases |
33,894 | (9,053 | ) | |||||
Amortization of deferring financing costs |
172,323 | 4,167 | ||||||
Deferred rent |
(140,324 | ) | (96,421 | ) | ||||
Change in operating assets and liabilities: |
||||||||
Other assets |
(81,538 | ) | (90,834 | ) | ||||
Accounts payable and other liabilities |
(58,079 | ) | (353,596 | ) | ||||
Due to affiliates, net |
497,579 | (145,879 | ) | |||||
Net cash provided by (used in) operating activities |
1,046,601 | (487,796 | ) | |||||
Investing Activities: |
||||||||
Tenant improvements |
- | (447,337 | ) | |||||
Tenant improvements funded from restricted cash reserves |
- | 447,337 | ||||||
Net cash used in investing activities |
- | - | ||||||
Financing Activities: |
||||||||
Principal payoff of secured indebtedness |
(6,588,797 | ) | - | |||||
Principal amortization payments on secured indebtedness |
(138,065 | ) | (78,567 | ) | ||||
Issuance of common stock, net |
6,253,730 | 2,428,184 | ||||||
Distributions to noncontrolling interests |
(527,321 | ) | (336,205 | ) | ||||
Distributions to common stockholders |
(212,667 | ) | (39,433 | ) | ||||
Net cash (used in) provided by financing activities |
(1,213,120 | ) | 1,973,979 | |||||
Net (decrease) increase in cash and cash equivalents |
(166,519 | ) | 1,486,183 | |||||
Cash and cash equivalents at the beginning of the period |
$ | 1,636,072 | $ | 387,272 | ||||
Cash and cash equivalents at the end of the period |
$ | 1,469,553 | $ | 1,873,455 | ||||
Supplemental Disclosures of Cash Flow Information: |
||||||||
Cash paid for interest |
$ | 675,929 | $ | 367,415 | ||||
Supplemental Disclosures of Significant Non-cash Transactions: |
||||||||
Distributions payable to noncontrolling interests |
$ | 181,633 | $ | 115,804 | ||||
Distributions payable to common stockholders |
$ | 87,953 | $ | 20,594 | ||||
Common stock issued pursuant to the distribution reinvestment plan |
$ | 131,271 | $ | 7,014 |
See accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
1. | Organization |
The GC Net Lease REIT, Inc., a Maryland corporation (the Company), was formed on August 28, 2008 under the Maryland General Corporation Law. The Company was organized primarily with the purpose of acquiring single tenant net lease properties, and expects to use a substantial amount of the net proceeds from the Public Offering (as defined below) to invest in these properties. The Company was taxed as a REIT for the tax year ended December 31, 2010, after satisfying financial and non-financial requirements. The Companys year end is December 31.
Griffin Capital Corporation, a California corporation (the Sponsor), is the sponsor of the Companys Public Offering (as defined below). The Companys Sponsor was formed in 1995 to principally engage in acquiring and developing office and industrial properties.
The GC Net Lease REIT Advisor, LLC, a Delaware limited liability company (the Advisor) was formed on August 27, 2008. The Sponsor is the sole member of the Advisor. On November 6, 2009, the Company entered into its amended and restated advisory agreement for the Public Offering, as amended. On November 9, 2010, the Company entered into its second amended and restated advisory agreement for the Public Offering (the Second Amended and Restated Advisory Agreement), which states that the Advisor is responsible for managing the Companys affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company. The officers of the Advisor are also officers of the Sponsor. The Second Amended and Restated Advisory Agreement has a one-year term and it may be renewed for an unlimited number of successive one-year periods.
On August 28, 2008, the Advisor purchased 100 shares of common stock for $1,000 and became the Companys initial stockholder. The Companys Third Articles of Amendment and Restatement authorize 700,000,000 shares of common stock with a par value of $0.001 and 200,000,000 shares of preferred stock with a par value of $0.001. On February 20, 2009, the Company began to offer a maximum of 10,000,000 shares of common stock, which included shares for sale pursuant to the distribution reinvestment plan, pursuant to a private placement offering to accredited investors (collectively, the Private Offering). Simultaneously with the Private Offering, the Company undertook the process of registering an offering of a maximum of 82,500,000 shares of common stock, consisting of 75,000,000 shares for sale to the public (the Primary Public Offering) and 7,500,000 shares for sale pursuant to the distribution reinvestment plan at $9.50 per share (collectively, the Public Offering). On November 6, 2009, the Securities and Exchange Commission (the SEC) declared the Public Offering effective, and the Company terminated the Private Offering with the commencement of the Public Offering. As of March 31, 2011 and December 31, 2010, the Company had 2,591,769 and 1,845,339 shares outstanding, respectively. As of March 31, 2011 and December 31, 2010, the Company had $0.30 million and $0.17 million in shares classified as common stock subject to redemption. (See Note 7, Share Redemption Program).
Griffin Capital Securities, Inc. (the Dealer Manager) is one of the Companys affiliates. The Dealer Manager is responsible for marketing the Companys shares being offered pursuant to the Public Offering. On October 27, 2009, the Company and the Dealer Manager entered into a dealer manager agreement for the Public Offering. The dealer manager agreement may be terminated by either party upon prior written notice.
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
The GC Net Lease REIT Operating Partnership, L.P., a Delaware limited partnership (the Operating Partnership), was formed on August 29, 2008. On December 26, 2008, the Advisor purchased a 99% limited partnership interest in the Operating Partnership for $200,000 and on December 26, 2008, the Company contributed the initial $1,000 capital contribution, received by the Advisor, to the Operating Partnership in exchange for a 1% general partner interest. As of March 31, 2011, the Company owned approximately 45% of the limited partnership units of the Operating Partnership, and, as a result of the contribution of four properties to the Company, certain affiliates of the Sponsor, including the Companys President and Director, Kevin A. Shields, the Companys Vice President Acquisitions, Don Pescara and David C. Rupert, the President of the Sponsor, owned approximately 46% of the limited partnership units of the Operating Partnership. The remaining approximately 9% of the limited partnership units were owned by third parties. The Operating Partnership will own, directly or indirectly, all of the properties acquired. The Operating Partnership will conduct certain activities through the Companys taxable REIT subsidiary, The GC Net Lease REIT TRS, Inc., a Delaware corporation (the TRS) formed on September 2, 2008, which is a wholly-owned subsidiary of the Operating Partnership.
The Companys property manager is The GC Net Lease REIT Property Management, LLC, a Delaware limited liability company (the Property Manager), which was formed on August 28, 2008 to manage the Companys properties. The Property Manager derives substantially all of its income from the property management services it performs for the Company.
2. | Basis of Presentation and Summary of Significant Accounting Policies |
The accompanying unaudited consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with principles generally accepted in the United States (GAAP) for interim financial information as contained in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), and in conjunction with rules and regulations of the Securities Exchange Commission (SEC). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of normal recurring nature and necessary for a fair presentation of the Companys financial position, results of operations and cash flows for the interim period. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010. The unaudited consolidated financial statements include accounts of the Company and the Operating Partnership. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statement and accompanying notes. Actual results could materially differ from those estimates.
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were no restrictions on the use of the Companys operating cash balance as of March 31, 2011 and December 31, 2010.
The Company maintains cash accounts with major financial institutions. The cash balances consist of business checking accounts and money market accounts. These accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 at each institution. At times, the balances in these accounts may exceed the insured amounts. The Company has not experienced any losses with respect to cash balances in excess of government-provided insurance. Management believes there was no significant concentration of credit risk with respect to these cash balances as of March 31, 2011 and December 31, 2010.
Restricted Cash
In conjunction with the acquisition and contribution of certain real estate assets (see Note 3, Real Estate), the Company assumed certain reserves to be used for specific property improvements. As of March 31, 2011 and December 31, 2010, the balance of these reserves, included on the consolidated balance sheets as restricted cash, was $1.79 million and $1.66 million, respectively.
Real Estate
Purchase Price Allocation
The Company applies the provisions in ASC 805-10, Business Combinations, to account for business combinations. In accordance with the provisions, the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their fair values as of the acquisition date, on an as if vacant basis. Further, the Company recognizes the fair value of assets acquired, liabilities assumed and any noncontrolling interest in acquisitions of less than a 100% interest when the acquisition constitutes a change in control of the acquired entity. The accounting provisions have also established that acquisition-related costs and restructuring costs are considered separate and not a component of a business combination and, therefore, are expensed as incurred.
Acquired in-place leases are valued as above-market or below-market as of the date of acquisition. The valuation is measured based on the present value (using an interest rate, which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) managements estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases, taking into consideration extension options for below-market leases. In addition, renewal options are considered and will be included in the valuation of in-place leases if (1) it is likely that the tenant will exercise the option, and (2) the renewal rent is considered to be sufficiently below a fair market rental rate at the time of renewal. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
The aggregate fair value of in-place leases includes direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals, which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated using methods similar to those used in independent appraisals and managements consideration of current market costs to execute a similar lease. These direct costs are included as intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, including real estate taxes, insurance, and other operating expenses, pursuant to the in-place leases over a market lease-up period for a similar lease. Customer relationships are valued based on managements evaluation of certain characteristics of each tenants lease and the Companys overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extent of the Companys existing business relationships with tenants, growth prospects for developing new business with the tenant, the tenants credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. These intangibles will be included in intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining term of the respective leases.
The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Companys reported net income.
Depreciation
The purchase price of real estate acquired and costs related to development, construction, and property improvements will be capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of the real estate asset and will be expensed as incurred. The Company considers the period of future benefit of an asset to determine the appropriate useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:
Buildings |
25-40 years | |
Building Improvements |
5-20 years | |
Land Improvements |
15-25 years | |
Tenant Improvements |
Shorter of estimated useful life or remaining contractual lease term | |
Tenant origination and absorption cost |
Remaining contractual lease term | |
In-place lease valuation |
Remaining contractual lease term with consideration as to extension options for below-market leases |
Impairment of Real Estate and Related Intangible Assets and Liabilities
The Company will continually monitor events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
the assets and the eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment loss to the extent the carrying value exceeds the estimated fair value of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of March 31, 2011 and December 31, 2010, there were no impairment indicators present that would have required the Company to record an impairment loss related to the real estate assets or intangible assets and liabilities.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets (see Note 3, Real Estate), have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. As of March 31, 2011, there were no leases that provide for contingent rental income.
During the three months ended March 31, 2011 and 2010, the Company recognized deferred rent from tenants of $0.14 million and $0.10 million, respectively. As of March 31, 2011 and December 31, 2010, the cumulative deferred rent balance was $0.81 million and $0.67 million, respectively, and is included in deferred rent on the consolidated balance sheets.
The Company records an estimate for real estate tax reimbursement each month. At the end of the calendar year the Company reconciles the estimated real estate tax reimbursement to the actual amount incurred and adjusts the property tax recovery to reflect the actual amount incurred.
Organizational and Offering Costs
The initial organizational and offering costs of the Private Offering and the Public Offering were paid by the Sponsor, on behalf of the Advisor, for the Company and will be reimbursed from the proceeds of the Private Offering and the Public Offering. Organizational and offering costs consist of all expenses (other than sales commissions and dealer manager fees) to be paid by the Company in connection with the Public Offering, including legal, accounting, printing, mailing and filing fees, charges from the escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse the Advisor for all marketing-related costs and expenses, such as salaries and direct expenses of employees of the Advisor and its affiliates in connection with registering and marketing the Companys shares; (ii) technology costs associated with the offering of the Companys shares; (iii) costs of conducting training and education meetings; (iv) costs of attending seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses.
The initial advisory agreement required the Company to pay directly or reimburse the Advisor for all organizational and offering expenses related to the Private Offering. Pursuant to the Second Amended and Restated Advisory Agreement, the Company will reimburse the Advisor for organizational and offering expenses incurred in connection with the Primary Public Offering in an amount not to exceed 3.5% of gross offering proceeds of the terminated or completed Primary Public Offering for issuer costs
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
(excluding sales commissions and dealer manager fees). In addition, pursuant to the Second Amended and Restated Advisory Agreement, organization and offering expenses (including sales commissions and dealer manager fees and non-accountable due diligence expense allowance but excluding acquisition fees and expenses) may not exceed 15% of gross offering proceeds of the terminated or completed Public Offering. If the organization and offering expenses exceed such limits discussed above, within 60 days after the end of the month in which the Public Offering terminates or is completed, the Advisor must reimburse the Company for any excess amounts. As long as the Company is subject to the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (NASAA REIT Guidelines), such limitations discussed above will also apply to any future public offerings.
On May 6, 2009, the Company sold the minimum amount of shares and thereby became obligated to the Advisor for organizational and offering costs incurred on the Companys behalf. Organizational and offering costs incurred, including those due to the Advisor, for the combined Private and Public offerings are as follows:
March 31, 2011 | December 31, 2010 | |||||||
Cumulative offering costs- Private and Public Offerings |
$ | 4,383,134 | $ | 3,507,244 | ||||
Cumulative organizational costs- Private and Public Offerings |
$ | 342,545 | $ | 341,455 | ||||
Due from Advisor (included in Due to Affiliates) see discussion below |
$ | (55,542 | ) | $ | (276,632 | ) |
As of March 31, 2011, the Company incurred organizational and offering costs related to its Public Offering of approximately $4.16 million, which exceeds the 15% of gross offering proceeds limitation pursuant to the Second Amended and Restated Advisory Agreement. Therefore, if the Company terminated its Public Offering on March 31, 2011, the Company would not be liable to the Advisor for advanced organizational and offering costs, based on the gross proceeds raised to date and organizational and offering costs incurred in excess of the limitation discussed above. As a result, the Company generated a receivable due from the Advisor of $0.06 million (after deducting $0.64 million in unreimbursed amounts previously advanced by the Advisor), which is reflected as a reduction in the Due to Affiliates balance on the consolidated balance sheets. No payment is required until 60 days following the completion or termination of the offering in accordance with the Second Amended and Restated Advisory Agreement. The Company continues to monitor both the 3.5% and 15% limitations and expects the receivable to decrease as the Company raises additional offering proceeds. (See Note 6, Related Party Transactions.)
Deferred Financing Costs
Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized as a component of interest expense over the terms of the respective financing agreements. As of March 31, 2011 and December 31, 2010, the Companys deferred financing costs, net of amortization, were $0.79 million and $0.97 million, respectively.
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Noncontrolling Interests
Due to the Companys control through the general partner interest in the Operating Partnership and the limited rights of the limited partners, the Operating Partnership, including its wholly-owned subsidiary, is consolidated with the Company and the limited partners interests are reflected as noncontrolling interests on the accompanying consolidated balance sheets.
The Company reports noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from total stockholders equity. Also, any acquisitions or dispositions of noncontrolling interests that do not result in a change of control are accounted for as equity transactions. Further, the Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated upon a change in control. Net income (loss) allocated to noncontrolling interests is shown as a reduction to net income (loss) in calculating net income (loss) available to common stockholders. Any future purchase or sale of an interest in an entity that results in a change of control may have a material impact on the financial statements, as the interest in the entity will be recognized at fair value with gains and losses included in net income (loss).
If noncontrolling interests are determined to be redeemable, they are classified as temporary equity and reported at their redemption value as of the balance sheet date. Thus, noncontrolling interests determined to be redeemable were classified as temporary equity.
Share-Based Compensation
On February 12, 2009, the Company adopted an Employee and Director Long-Term Incentive Plan (the Plan) pursuant to which the Company may issue stock-based awards to its directors and full-time employees (should the Company ever have employees), executive officers and full-time employees of the Advisor and its affiliate entities that provide services to the Company, and certain consultants who provide significant services to the Company. The term of the Plan is 10 years and the total number of shares of common stock reserved for issuance under the Plan is 10% of the outstanding shares of stock at any time. Awards granted under the Plan may consist of stock options, restricted stock, stock appreciation rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period. No awards have been granted under the Plan as of March 31, 2011.
Fair Value Measurements
The framework established by the FASB for measuring fair value in generally accepted accounting principles for both financial and nonfinancial assets and liabilities provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
| Level 1. Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets; |
| Level 2. Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in |
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
inactive markets; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
| Level 3. Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Financial instruments as of December 31, 2010, consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and other accrued expenses, mortgage payable, the Credit Facility and the Bridge Loan, as defined in Note 4, Debt. Pursuant to the terms of the Credit Facility, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants, one of which is a varying interest rate covenant that would require the Operating Partnership to effect an interest rate hedge if the minimum varying debt to total debt requirement is not satisfied. As of March 31, 2011, the Company had two interest rate cap agreements in effect for a combined notional amount of $22.20 million. (See Note 4, Debt.) Other than the Plainfield mortgage debt, as discussed in Note 4, Debt, the amounts of the financial instruments presented in the consolidated financial statements substantially approximate their fair value. The fair value of the Plainfield mortgage debt is estimated using borrowing rates available to the Company for debt instruments with similar terms and maturities. As of March 31, 2011 and December 31, 2010, the fair value of the Plainfield mortgage debt was $21.7 million and $21.8 million, respectively, compared to the carrying value of $20.73 million and $20.8 million, respectively.
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Code) for the year ended December 31, 2010. To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these requirements and maintain its REIT status for the current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxes on taxable income that is distributed to stockholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the IRS grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. As of March 31, 2011, the Company satisfied the REIT requirements and distributed all of its taxable income.
Pursuant to the Code, the Company has elected to treat its corporate subsidiary as a taxable REIT subsidiary (TRS). In general, the TRS may perform non-customary services for the Companys tenants and may engage in any real estate or non real estate-related business. The TRS will be subject to corporate federal and state income tax. As of March 31, 2011, the Companys TRS had not commenced operations.
Per Share Data
The Company reports earnings per share for the period as (1) basic earnings per share computed by dividing net income (loss) by the weighted average number of shares outstanding during the period, and (2) diluted earnings per share computed by dividing net income (loss) by the weighted average
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
number of shares outstanding, including common stock equivalents. As of March 31, 2011 and December 31, 2010, there were no common stock equivalents that would have a dilutive effect on earnings per share for common stockholders.
The Company made its first distribution on June 15, 2009 to investors of record on May 31, 2009. Distributions declared and paid per common share assumes each share was issued and outstanding each day during the three months ended March 31, 2011 and the year ended December 31, 2010. Distributions declared per common share was based on daily declaration and record dates selected by the Companys board of directors of $0.00184932 per day per share on the outstanding shares of common stock.
Recently Issued Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force) (ASU No. 2010-29). ASU No. 2010-29 updated accounting guidance to clarify that pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior reporting period pro forma financial information. These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. The new accounting guidance is effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. The Companys adoption of this ASU as of December 31, 2010 did not have a material impact on the Companys consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (ASU No. 2010-01). This ASU clarifies that when the stock portion of a distribution allows stockholders to elect to receive cash or stock with a potential limitation on the total amount of cash that all stockholders can elect to receive in the aggregate, the distribution would be considered a share issuance as opposed to a stock dividend and the share issuance would be reflected in earnings per share prospectively. ASU No. 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The adoption of ASU No. 2010-01 did not have an impact on the Companys consolidated financial statements.
3. | Real Estate |
As of March 31, 2011, the Company owned six properties, encompassing approximately 2.0 million rentable square feet as shown in the table below:
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Property |
Acquisition Date |
Purchase Price |
Property Type |
Year of Lease Expiration | ||||||
Renfro Clinton, SC |
06/18/09 | $ | 21,700,000 | Manufacturing/Distribution |
2021 | |||||
Plainfield Plainfield, IL |
06/18/09 | $ | 32,660,000 | Office/Laboratory |
2022 | |||||
Will Partners Monee, IL |
06/04/10 | $ | 26,305,000 | Manufacturing/Distribution |
2020 | |||||
Emporia Partners Emporia, KS |
08/27/10 | $ | 8,360,000 | Manufacturing/Distribution |
2020 | |||||
ITT Los Angeles, CA |
09/23/10 | $ | 7,800,000 | Office |
2016 | |||||
Quad/Graphics Loveland, CO |
12/30/10 | $ | 11,850,000 | Printing Facility/Office |
2022 |
Intangibles
The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation and tenant origination and absorption cost, as discussed above and as shown below. The leases were measured against comparable leasing information and the present value of the difference between the contractual, in-place rent and the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the value of the real estate at acquisition or contribution. The Emporia Partners property in-place lease was considered to be at market, therefore none of the purchase price was allocated to an in-place lease valuation. The intangible assets are amortized over the remaining lease term of each property which, on a weighted-average basis, was 9.9 years as of March 31, 2011.
In-place Lease Valuation |
Tenant Origination and Absorption Cost |
|||||||
Annual amortization |
$ | 135,577 | $ | 1,700,130 | ||||
5-year amortization |
$ | 677,885 | $ | 8,500,650 |
Reserves
As part of the real estate asset acquisitions and contributions, the Company assumed certain building and tenant improvement reserves, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenants respective lease as follows:
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Balance December 31, 2010 |
Additions | Utilizations | Balance March 31, 2011 |
|||||||||||||
Plainfield (1) |
$ | 308,333 | $ | 25,000 | $ | - | $ | 333,333 | ||||||||
Will Partners (1) |
99,923 | 26,258 | (21,941 | ) | 104,240 | |||||||||||
Emporia Partners (2) |
645,092 | 98,258 | - | 743,350 | ||||||||||||
ITT (3) |
344,722 | - | - | 344,722 | ||||||||||||
Quad/Graphics (3) |
260,000 | - | - | 260,000 | ||||||||||||
Total |
$ | 1,658,070 | $ | 149,516 | $ | (21,941 | ) | $ | 1,785,645 | |||||||
(1) | Additions to the reserve balance are funded by the tenant. |
(2) | The balance at March 31, 2011 consisted of a replacement reserve of $0.51 million, which was funded by the contributing entity and tax and insurance reserves totaling $0.23 million, which were funded by the tenant. |
(3) | Balance represents remaining reserves, which were initially funded by the Company at closing. |
The following summarizes the future minimum net rent payments pursuant to the lease terms for the properties discussed above as of March 31, 2011:
2011 |
$ | 7,128,558 | ||
2012 |
9,561,938 | |||
2013 |
9,619,892 | |||
2014 |
9,822,242 | |||
Thereafter |
63,403,335 | |||
Total |
$ | 99,535,965 | ||
As of March 31, 2011, our six properties, based on rental income, were as follows:
Property |
Location | Revenue as a percentage of total rent |
||||
Plainfield |
Plainfield, IL | 24.3 | % | |||
Will Partners |
Monee, IL | 23.3 | % | |||
Renfro |
Clinton, SC | 18.8 | % | |||
Emporia Partners |
Emporia, KS | 13.7 | % | |||
Quad/Graphics |
Loveland, CO | 12.2 | % | |||
ITT |
Los Angeles, CA | 7.7 | % | |||
Total |
100 | % |
Approximately 47.6% of the Companys rental income was concentrated in the State of Illinois as of March 31, 2011.
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Pro Forma Financial Information (unaudited)
The following condensed pro forma operating information is presented as if the properties acquired during the year ended December 31, 2010 had been included in operations at the beginning of the prior period:
Three Months Ended March 31, 2010 |
||||
Revenue |
$ | 2,736,644 | ||
Net Loss |
$ | (2,378,770 | ) | |
Net loss attributable to common stockholders |
$ | (570,905 | ) | |
Loss per share |
$ | (0.58 | ) |
4. | Debt |
In conjunction with the contribution of the Emporia Partners property on August 27, 2010, the Company assumed the mortgage debt as follows:
Original loan balance |
$6.93 million | |
Assumed loan balance |
$5.42 million | |
Interest rate |
5.88% (fixed) | |
Initial loan term |
20 years | |
Loan Maturity |
September 2023 |
The terms of the loan require monthly principal and interest payments. The loan is secured by a first mortgage and security agreement on the Companys interest in the underlying Emporia Partners property, a fixture filing, and an assignment of leases, rents, income and profits. As of March 31, 2011 the balance of the loan was $5.26 million.
On June 4, 2010, the Company, through the Operating Partnership, entered into a credit agreement with KeyBank National Association (KeyBank), which provided the Company with an initial $25 million credit facility (the Credit Facility) to finance the acquisition of properties. The terms of the Credit Facility provide for monthly, interest-only payments with the balance due on June 4, 2013. The Credit Facility is guaranteed by the Company and is secured by a security agreement on the Operating Partnerships underlying interest in the Will Partners and ITT properties, a fixture filing, and an assignment of leases, rents, income and profits.
Under the terms of the Credit Facility, the Operating Partnership has the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the agreement relating to the Credit Facility) to which the administrative agent is subject, with respect to this rate, for Eurocurrency funding (the LIBOR-based rate), plus 3.75%, or (b) an alternate base rate, which is the greater of the (i) Prime Rate, (ii) Federal Funds Rate plus 0.50%, or (iii) the adjusted LIBOR-based rate set forth in subsection (a) plus 3.75%. These rates are subject to a minimum LIBOR of 2.00%. As of March 31, 2011 the LIBOR-based rate was 0.25%.
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Prior to November 28, 2011, the Operating Partnership may request an increase in the total commitments under the Credit Facility up to $150 million, subject to certain conditions. The Operating Partnership made an initial draw of $16.9 million to acquire the Will Partners property and a subsequent draw of $5.07 million to acquire the ITT property. The Operating Partnership elected to have the LIBOR-based rate apply to such loans, which amounted to an initial interest rate of 5.75%. The Operating Partnership may change this election from time to time, as provided by the Credit Facility terms.
Pursuant to the terms of the Credit Facility, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants. Compliance with these covenants was required beginning with the quarter ended September 30, 2010. With the acquisition and financing of the ITT property, the Company was required to effect an interest rate hedge instrument on September 28, 2010. The Company executed an interest rate cap for a notional amount of $3.6 million, fixing the index at 2.0%. The hedge is in place for six months, expiring on April 7, 2011, for which the Company paid $7,000. On December 28, 2010, the Company executed an additional interest rate cap in connection with the refinancing of the Renfro property debt, as discussed below, for a notional amount of $18.6 million, fixing the index at 2.0%. The second hedge is also in place for six months, expiring on June 30, 2011, for which the Company paid $10,000. The Company executed an interest rate cap upon expiration of the first hedge, fixing the index at 2.0% for a notional amount of $16.4 million, resulting in a total notional amount of $35 million. This hedge, for which the Company paid $5,000, also expires on June 30, 2011.
On November 22, 2010, the Company, through the Operating Partnership, entered into an amendment to the credit agreement with KeyBank, thereby increasing the total amount of the Credit Facility, upon which the Company drew an additional $13.03 million from the facility to refinance the debt encumbering the Renfro property. The additional debt is subject to the same terms described above. The total amount of funds drawn under the credit facility is $35 million. As part of the amendment, KeyBank temporarily amended the interest coverage ratio covenant requirement from 1.85 times adjusted earning before interest, taxes, depreciation, and amortization (EBITDA) to 1.80 times for the third and fourth quarters ending September 30, 2010 and December 31, 2010, respectively, and clarified the definition of fixed charge coverage ratio.
On December 30, 2010, the Company, through the Operating Partnership, entered into a bridge loan with KeyBank (the Bridge Loan) and thereby obtained approximately $7.87 million from KeyBank to help fund the acquisition of the Quad/Graphics property. The Bridge Loan has a term of six months, and bears interest at a rate of daily LIBOR plus 450 basis points, with an initial rate of 6.5%. These rates are subject to a minimum LIBOR of 2.0%. The terms of the Bridge Loan require payments made periodically throughout the month equal to the net equity raised in the Companys Public Offering, subject to a monthly minimum amount of approximately $1.33 million. The Bridge Loan is guaranteed by various wholly-owned subsidiaries of the Companys Operating Partnership, as well as by Kevin A. Shields, the Companys President and Director. In connection with the Bridge Loan, the Company also executed another amendment to the credit agreement with KeyBank (the Second Amendment to Credit Facility). Pursuant to the Second Amendment to Credit Facility, the debt obtained from the Bridge Loan is secured under the Credit Facility. When the Bridge Loan is paid in full, the Quad/Graphics property will serve as additional security for the Credit Facility, the guarantees issued in connection with the Bridge Loan will be released, and the Quad/Graphics property may be refinanced pursuant to the terms of the Credit Facility. In addition, as part of the Second Amendment to Credit Facility, KeyBank further amended the tangible net worth definition (as defined in the Second Amendment to Credit Facility) and
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
liquidity covenant requirements from $2.0 million to $1.0 million through June 30, 2011. As of March 31, 2011 the balance of the loan was $1.28 million and was subsequently paid in full on April 18, 2011.
The following summarizes the future principal repayments as of March 31, 2011 per the loan terms discussed above:
2011 |
$ | 1,686,507 | ||
2012 |
572,403 | |||
2013 |
35,614,600 | (1) | ||
2014 |
654,737 | |||
2015 |
697,506 | |||
Thereafter |
23,048,116 | |||
Total |
$ | 62,273,869 | ||
(1) | Amount includes payment of the remaining balance of the Credit Facility upon expiration on June 4, 2013. |
5. | Noncontrolling Interests |
Noncontrolling interests represent limited partnership interests in the Operating Partnership in which the Company is the general partner. Operating partnership units were issued as part of the initial capitalization of the Operating Partnership and in conjunction with the contribution of certain assets, as discussed in Note 1, Organization, and in Note 3, Real Estate, respectively. As of March 31, 2011, noncontrolling interests were approximately 55% of total shares outstanding (assuming limited partnership units were converted to common stock) and approximately 59% of weighted average shares outstanding (assuming limited partnership units were converted to common stock). The Company has evaluated the terms of the limited partnership interest in the Operating Partnership and as a result, has classified limited partnership interests issued as the initial capitalization and in conjunction with the contributed assets to noncontrolling interests and are presented as a component of permanent equity, except as discussed below.
In subsequent periods the Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity on the consolidated balance sheets. Any noncontrolling interest that fails to qualify will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.
The limited partners of the Operating Partnership will have the right to cause the Operating Partnership to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Companys option, purchase their limited partnership units by issuing one share of the Companys common stock for each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. Furthermore, the limited partners may exercise their redemption rights only after their limited partnership units have been outstanding for one year. The limited partnership units are reported in the consolidated financial statements as noncontrolling interests.
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
On June 4, 2010, the Operating Partnership issued 813,000 limited partnership units in exchange for the Will Partners property. The terms of the Will Partners contribution agreement require that the units be held for a minimum of one year. Thereafter, the limited partners have the right to require the general partner to redeem their units for the Cash Amount (as defined in the operating partnership agreement), at an exchange price of 92.0% of the Cash Amount pursuant to the Will Partners contribution agreement. The Will Partners contribution agreement requires the general partner to redeem the limited partnership units only for the Cash Amount, until the Company is listed on a national securities exchange. As the limited partners redemption rights are outside the control of the Company, the limited partnership units are considered to be temporary equity and are presented in the accompanying balance sheets as noncontrolling interests subject to redemption. Subsequent to the contribution, the affiliated contributor of Will Partners waived the redemption rights pursuant to the contribution agreement and is subject to the redemption provisions of the Operating Partnership agreement. As a result of the waiver, approximately $2.6 million of noncontrolling interests subject to redemption (temporary equity) was reclassified to noncontrolling interests and are now considered a component of permanent equity.
6. | Related Party Transactions |
Pursuant to the agreements discussed below, the following summarizes the related party costs incurred during the year ended December 31, 2010 through the three months ended March 31, 2011 and due to affiliates as of December 31, 2010 and March 31, 2011:
Year Ended December 31, 2010 | Three Months Ended March 31, 2011 | |||||||||||||||||||||||
Incurred | Paid | Payable | Incurred | Paid | Payable | |||||||||||||||||||
Advisor and Property Manager fees |
||||||||||||||||||||||||
Acquisition fees and expenses |
$ | 1,629,344 | $ | - | $ | 1,629,344 | $ | - | $ | - | $ | 1,629,344 | ||||||||||||
Operating expenses |
91,371 | 46,485 | 44,886 | 80,777 | - | 125,663 | ||||||||||||||||||
Asset management fees |
560,141 | 499,150 | 60,991 | 204,212 | 60,991 | 204,212 | ||||||||||||||||||
Property management fees |
188,793 | 166,812 | 21,981 | 74,472 | 21,981 | 74,472 | ||||||||||||||||||
Receivable for organizational and offering costs incurred in excess of the 15% limitation |
(276,632 | ) | - | (276,632 | ) | (55,542 | ) | - | (55,542 | ) | ||||||||||||||
Total |
$ | 2,193,017 | $ | 712,447 | $ | 1,480,570 | $ | 303,919 | $ | 82,972 | $ | 1,978,149 | ||||||||||||
Dealer Manager fees |
$ | 1,545,875 | $ | 1,545,875 | $ | - | $ | 731,677 | $ | 731,677 | $ | - | ||||||||||||
The Second Amended and Restated Advisory Agreement requires upon termination of the Public Offering that any organizational and offering costs incurred above 15% of gross proceeds shall be reimbursed to the Company. If the Company terminated its Public Offering on March 31, 2011, the Company would not be liable to the Advisor for advanced organizational and offering costs, based on the gross proceeds raised to date and organizational and offering costs incurred in excess of the 15% limitation discussed above. As a result, the Company generated a receivable due from the Advisor of $0.06 million, which is reflected as a reduction in the Due to Affiliates balance on the consolidated balance sheets as noted in the schedule above. No payment is required until 60 days following the completion or termination of the offering in accordance with the amended and restated advisor agreement. The following table summarizes the receivable due from Advisor:
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Organizational and offering costs incurred Public Offering |
$ | 4,163,236 | ||
Limitation for organizational and offering costs at 15% of gross offering proceeds of $23,091,686 if Public Offering terminated on March 31, 2011 |
3,463,753 | |||
Amount incurred in excess of limitation |
699,483 | |||
Organizational and offering costs advanced by the Advisor as of March 31, 2011 |
643,941 | |||
Receivable due from Advisor as of March 31, 2011 if Public Offering terminated on March 31, 2011 |
$ | 55,542 | ||
The Company continues to monitor this limitation and expects that as offering proceeds increase, the receivable will decrease and the Company will again become liable for organizational and offering costs advanced by the Advisor.
Advisory and Dealer Manager Agreements
The Company does not expect to have any employees. The Advisor will be primarily responsible for managing the business affairs and carrying out the directives of the Companys board of directors. The Company executed an advisory agreement with the Advisor and a dealer manager agreement with the Dealer Manager for the Private Offering. The Company subsequently entered into an amended and restated advisory agreement, and later, the Second Amended and Restated Advisory Agreement with the Advisor and a new dealer manager agreement with the Dealer Manager for the Public Offering. Each of the agreements entitles the Advisor and the Dealer Manager to specified fees and incentives upon the provision of certain services with regard to the Private Offering and the Public Offering and investment of funds in real estate properties, among other services, as well as reimbursement for organizational and offering costs incurred by the Advisor on the Companys behalf and reimbursement of certain costs and expenses incurred by the Advisor in providing services to the Company.
Management Compensation
The following table summarizes the compensation and fees the Company will pay to the Advisor, the Property Manager, the Dealer Manager and other affiliates, including amounts to reimburse costs in providing services. The sales commissions may vary for different categories of purchasers.
Type of Compensation (Recipient) |
Determination of Amount | |
Sales Commissions (Participating Dealers) |
The Dealer Manager was entitled to receive a sales commission of up to 7% of gross proceeds from sales in the Private Offering, and, pursuant to the new agreement, which was executed on October 27, 2009, the Dealer Manager is entitled to the same sales commission from gross sales proceeds in the Primary Public Offering. The Dealer Manager has entered into participating dealer agreements with certain other broker-dealers to authorize them to sell shares of the Company in the Public Offering. Upon sale of shares of the Company by such broker-dealers, the Dealer Manager will re-allow all of the sales commissions paid in connection with sales made by these broker-dealers, except that no sales commission is payable on shares sold under the Companys |
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Type of Compensation (Recipient) |
Determination of Amount | |
distribution reinvestment plan. | ||
Dealer Manager Fee (Dealer Manager) |
The Dealer Manager was entitled to receive a dealer manager fee of up to 3% of gross proceeds from sales in the Private Offering, and is entitled to the same fee from sales in the Public Offering. The Dealer Manager has entered into participating dealer agreements with certain other broker-dealers as noted above. The Dealer Manager may re-allow to these broker-dealers a portion of the 3% dealer manager fee as marketing fees, reimbursement of certain costs and expenses of attending training and education meetings sponsored by the Dealer Manager, payment of attendance fees required for employees of the Dealer Manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. No dealer manager fee is payable on shares sold under the Companys distribution reinvestment plan. | |
Reimbursement of Organization and Offering Expenses (Advisor) |
The Company is required under the Second Amended and Restated Advisory Agreement to reimburse the Advisor for organization and offering costs (as defined in the Companys prospectus and the Second Amended and Restated Advisory Agreement) up to 3.5% of gross proceeds from the Primary Public Offering, excluding sales commissions and dealer manager fees. The Second Amended and Restated Advisory Agreement also states that organization and offering expenses may not exceed 15% of gross offering proceeds of the Public Offering. If the organization and offering expenses exceed such limits, within 60 days after the end of the month in which the Public Offering terminates or is completed, the Advisor must reimburse the Company for any excess amounts. | |
Acquisition Fees and Expenses (Advisor) |
Under the Second Amended and Restated Advisory Agreement the Advisor receives acquisition fees equal to 2.5% of the Contract Purchase Price, as defined therein, of each property acquired by the Company, and reimbursement for actual acquisition expenses incurred as defined in the agreements. The acquisition fee and acquisition expenses paid by the Company shall be reasonable and in no event exceed an amount equal to 6.0% of the contract purchase price, unless approved by a majority of the independent directors. | |
Disposition Fee (Advisor) |
Under the Second Amended and Restated Advisory Agreement, if the Advisor provides a substantial amount of the services in connection with the sale of one or more properties, the Advisor receives fees in an amount up to 3% of the contract sales price of such properties. However, the total disposition fees paid (including fees paid to third parties) may not exceed the lesser of a competitive real estate commission or an amount equal to 6.0% of the contract sale price of the property. | |
Asset Management Fee (Advisor) |
The Advisor receives an annual asset management fee for managing the Companys assets equal to 0.75% of the Average Invested Assets, defined as the aggregate carrying value of the assets invested. The fee will be computed based on the average of these values at the end of each month. The asset management fees are earned monthly. | |
Operating Expenses (Advisor) |
The Advisor and its affiliates are entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of the Company in connection with their provision of administrative services with regard to the Public Offering, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Companys average invested assets for that 12 months then ended; or (ii) 25% of the Companys net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the Companys assets, for that fiscal year. Such costs are allocated to the Company using methodologies meant to fairly allocate such costs based upon the related |
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Type of Compensation (Recipient) |
Determination of Amount | |
activities and in accordance with the agreement. The Company expects the Advisors direct and indirect allocated costs to increase as offering proceeds and acquisition activity increase. | ||
Property Management Fees (Property Manager) |
The Property Manager is entitled to receive a fee for its services in managing the Companys properties up to 3% of the gross monthly revenues from the properties plus reimbursement of the costs of managing the properties. In the event that the Property Manager assists with the development or redevelopment of a property, the Company may pay a separate market-based fee for such services. In the event that the Company contracts directly with a non-affiliated third-party property manager with respect to a particular property, the Company will pay the Property Manager an oversight fee equal to 1% of the gross revenues of the property managed. In no event will the Company pay both a property management fee to the Property Manager and an oversight fee to the Property Manager with respect to a particular property.
In addition, the Company may pay the Property Manager or its designees a leasing fee in an amount equal to the fee customarily charged by others rendering similar services in the same geographic area. The Company may also pay the Property Manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which the Company is responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. The Property Manager shall also be entitled to a construction management fee of 5% of the cost of improvements. | |
Liquidation/Termination/Listing Stage | ||
Subordinated Share of Net Sale Proceeds (payable only if the Company is not listed on a national securities exchange); (Advisor)
Subordinated Performance Fee Due Upon Termination of the Amended and Restated Advisory Agreement (payable only if the Company is not listed on a national securities exchange); and (Advisor)
Subordinated Incentive Listing Fee (payable only if the Company is listed on a national securities exchange) (Advisor) |
The Advisor is entitled to receive the following:
1) A Subordinated Share of Net Sales Proceeds (as defined in the amended and restated advisory agreement) in the event of a sale transaction involving a property or an entity owning a property, if the Companys stockholders are paid their return of capital plus an annual cumulative, non-compounding return;
2) A Subordinated Performance Fee (as defined in the amended and restated advisory agreement) Due Upon Termination of the Amended and Restated Advisory Agreement if the Company terminates the amended and restated advisory agreement for any reason other than a material breach by the Advisor as a result of willful or intentional misconduct or bad faith on behalf of the Advisor. Such fee is reduced by any prior payment to the advisor of a subordinated share of net sale proceeds; and
3) A Subordinated Incentive Listing Fee (as defined in the amended and restated advisory agreement) in the event the Company lists its stock for trading, which fee, in excess of capital invested in the Company, will be subordinated until each shareholders investment value is equal to their initial invested capital.
Each compensation discussed above is calculated as follows:
5.0% if the stockholders are paid return of capital plus a 6.0% to 8.0% annual cumulative, non-compounding return; or
10.0% if the stockholders are paid return of capital plus an 8.0% to 10.0% |
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
Type of Compensation (Recipient) |
Determination of Amount | |
annual cumulative, non-compounding return; or
15.0% if the stockholders are paid return of capital plus a 10.0% or more annual cumulative, non-compounding return.
The subordinated performance and incentive fees may be paid in the form of non-interest bearing promissory notes (the Performance Fee Note and Listing Fee Note, respectively, as defined in Amendment 1 to the amended and restated advisory agreement). Payment of the Performance Fee and Listing Fee notes will be deferred until the Company receives net proceeds from the sale or refinancing of properties held at the termination date or the valuation date, respectively. If either promissory note has not been paid in full within three years from the termination date or valuation date, then the Advisor may elect to convert the balance of the fee into shares of the Companys common stock. |
Conflicts of Interest
All of the Companys executive officers and one of the directors are also executive officers, managers and/or holders of a direct or indirect controlling interest in the Advisor, the Dealer Manager, and other affiliates of the Company. The director and these executive officers, managers, and/or holders of a direct or indirect controlling interest have a fiduciary responsibility to all affiliated entities.
Some of the material conflicts that the Advisor, the Dealer Manager or its affiliates will face are (1) competing demand for time of the Advisors executive officers and other key personnel from the Sponsor and other affiliated entities; (2) determining if a certain investment opportunity should be recommended to the Company or another program of the Sponsor; and (3) influence of the fee structure under the amended and restated advisory agreement that could result in actions not necessarily in the long-term best interest of the Companys stockholders.
Economic Dependency
The Company will be dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Companys shares of common stock available for issue, the identification, evaluation, negotiation, purchase and disposition of properties and other investments, management of the daily operations of the Companys real estate portfolio, and other general and administrative responsibilities. In the event that the Advisor and the Dealer Manager are unable to provide the respective services, the Company will be required to obtain such services from other resources.
7. | Commitments and Contingencies |
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
effect on the Companys business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Distribution Reinvestment Plan
The Company has adopted a distribution reinvestment plan that allows stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of common stock. The Company has registered 7,500,000 shares of common stock pursuant to the distribution reinvestment plan for the Public Offering. The distribution reinvestment plan in the Public Offering became effective on November 6, 2009. The purchase price per share will be the higher of $9.50 per share or 95% of the fair market value of a share of the Companys common stock as estimated by the Companys board of directors or a firm chosen by the Companys board of directors, until the earliest to occur of (A) the date that all distribution reinvestment plan shares have been issued or (B) all offerings terminate and the Company elects to deregister with the SEC any unsold public distribution reinvestment plan shares, if any. No sales commission or dealer manager fee will be paid on shares sold through the distribution reinvestment plan. The Company may amend or terminate the distribution reinvestment plan for any reason at any time upon ten days prior written notice to stockholders. As of March 31, 2011 and December 31, 2010, $0.30 million and $0.17 million in shares, respectively, had been issued under the distribution reinvestment plan.
Share Redemption Program
The Company has adopted a share redemption program that will enable stockholders to sell their stock to the Company in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may be able to have all or any portion of their shares of stock redeemed by the Company. The Company may redeem, on a quarterly basis, the shares of stock presented for redemption for cash to the extent that there are sufficient funds available to fund such redemptions. In no event shall the Company redeem more than 5.0% of the weighted average shares outstanding during the prior calendar year, and the cash available for redemption will be limited to the proceeds from the sale of shares pursuant to the Companys distribution reinvestment plan. The amount paid to redeem stock is expected to be the redemption price set forth in the following table which is based upon the number of years the stock is held:
Number of Years Held | Redemption Price | |
Less than one |
No Redemption Allowed | |
One or more but less than two |
92.5% of redemption amount | |
Two or more but less than three |
95.0% of redemption amount | |
Three or more but less than four |
97.5% of redemption amount | |
Four or more |
100.0% of redemption amount |
For 18 months after the most recent offering of shares, the redemption amount shall be the per share price of the most recent offering. Thereafter, the per share redemption amount will be based on the then-current net asset value. The redemption amount is subject to adjustment as determined from time to time by the board of directors.
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
As the use of the proceeds from the distribution reinvestment plan for redemptions is outside the Companys control, the net proceeds from the distribution reinvestment plan are considered to be temporary equity and are presented as common stock subject to redemption on the accompanying consolidated balance sheets. The cumulative proceeds from the distribution reinvestment plan, net of any redemptions, will be computed at each reporting date and will be classified as temporary equity on the Companys consolidated balance sheets. As noted above the redemption is limited to proceeds from new permanent equity from the sale of shares pursuant to the Companys distribution reinvestment plan. As of March 31, 2011 and December 31, 2010, $0.30 million and $0.17 million in shares of common stock subject to redemption, respectively, were eligible for redemption. There were no redemption requests as of March 31, 2011.
8. | Declaration of Distributions |
On March 23, 2011, the Companys board of directors declared distributions for the second quarter of 2011 in the amount of $0.00184932 per day per share on the outstanding shares of common stock (equivalent to an annual distribution rate of 6.75% assuming the share was purchased for $10) payable to stockholders of record of such shares as shown on the Companys books at the close of business on each day during the period commencing on April 1, 2011 until June 30, 2011. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as the Companys President may determine.
9. | Subsequent Events |
The Company has completed an evaluation of all transactions subsequent to the date of the financial statements. The following events happened subsequent to the date of the financial statements, up to the issuance date of this report:
Acquisition of LTI property
On May 13, 2011, the Company, through the Operating Partnership, acquired the ownership interests in a single-story, office/flex facility located in Carlsbad, CA (LTI property) from twenty-nine third party unaffiliated investors and one affiliated investor. Certain investors contributed all or a portion of their ownership interest in exchange for limited partnership units in the operating partnership. The LTI property is 100% leased to a single tenant, Life Technologies Corporation (LTI), on a net lease basis, obligating LTI to all costs and expenses to operate and maintain the property, including capital expenditures. On the acquisition date the remaining term was approximately 11 years.
The purchase price of the LTI property was $56.0 million. The Company caused the Operating Partnership to issue approximately $7.8 million in limited partnership units with a portion of the purchase price financed with an expansion and extension of the existing Bridge Loan discussed in Note 4, Debt in the amount of $12.3 million and assumption of the existing mortgage loan of $34.4 million. The remaining purchase price and other closing fees and expenses were funded with items due to and deferred by the Company. The purchase price allocation to tangible and intangible assets and the value of the assumed debt was not finalized as of May 13, 2011.
Offering Status
As of May 12, 2011, in connection with the Public Offering, the Company has issued 2,728,033 shares of the Companys common stock for gross proceeds of approximately $27.21 million. Through
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THE GC NET LEASE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)
May 12, 2011, the Company had received aggregate gross offering proceeds of approximately $29.56 million from the sale of shares in the Private Offering, which commenced on February 20, 2009 and terminated on November 6, 2009, and the Public Offering.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Companys consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q, as well as Managements Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, and the notes thereto contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2010. See also Cautionary Note Regarding Forward-Looking Statements preceding Part I.
Overview
We were formed on August 28, 2008 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in single tenant net lease properties. We began operations on May 6, 2009 and are subject to the general risks associated with a start-up enterprise, including the risk of business failure. Our year end is December 31. As used in this report, we, us and our refer to The GC Net Lease REIT, Inc. We were taxed as a REIT for the tax year ended December 31, 2010 after satisfying both financial and non-financial requirements.
We have no paid employees and are externally advised and managed by an affiliate, The GC Net Lease REIT Advisor, LLC, which is our advisor. Griffin Capital Corporation, our sponsor, is the sole member of our advisor and an affiliate of the sole owner of The GC Net Lease REIT Property Management, LLC, our property manager. Our operating partnership is The GC Net Lease REIT Operating Partnership, L.P. We expect to own all of our properties directly or indirectly through our operating partnership or similar entities.
On February 20, 2009, we commenced a private offering to accredited investors only pursuant to a confidential private placement memorandum. On May 6, 2009 we satisfied our minimum offering requirement and commenced operations. We declared our first distribution to stockholders in the second quarter of 2009, which was paid on June 15, 2009.
We terminated our private offering on November 6, 2009, having raised approximately $2.36 million through the issuance of 0.25 million shares, and began our offering to the public upon the SEC declaring our registration statement effective. We are currently offering a maximum of 82.5 million shares of common stock to the public, consisting of 75 million shares for sale to the public (our Primary Public Offering) and 7.5 million shares for sale pursuant to our distribution reinvestment plan (collectively, our Public Offering). As of March 31, 2011, we had issued 2.34 million total shares of our common stock for gross proceeds of approximately $23.39 million in our Public Offering, of which 31,138 shares, or $0.30 million, were issued pursuant to the distribution reinvestment plan.
Significant Accounting Policies and Estimates
We have established accounting policies which conform to generally accepted accounting principles (GAAP). The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that
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different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
We believe the accounting policies listed below are the most critical in the preparation of our consolidated financial statements. These policies are described in greater detail in Part I of this report and in our Annual Report on Form 10-K for the year ended December 31, 2010 and continue to include the following areas:
| Real Estate - Valuation and purchase price allocation, depreciation |
| Impairment of Real Estate and Related Intangible Assets and Liabilities; |
| Revenue Recognition; |
| Noncontrolling Interests in Consolidated Subsidiaries; |
| Common Stock and Noncontrolling Interests Subject to Redemption; |
| Fair Value Measurements; |
| Income Taxes - deferred tax assets and related valuation allowance, REIT qualification; and |
| Loss Contingencies. |
Recently Issued Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force) (ASU No. 2010-29). ASU No. 2010-29 updated accounting guidance to clarify that pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior reporting period pro forma financial information. These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. The new accounting guidance is effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. Our adoption of this ASU as of December 31, 2010 did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (ASU No. 2010-01). This ASU clarifies that when the stock portion of a distribution allows stockholders to elect to receive cash or stock with a potential limitation on the total amount of cash that all stockholders can elect to receive in the aggregate, the distribution would be considered a share issuance as opposed to a stock dividend and the share issuance would be reflected in earnings per share prospectively. ASU No. 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The adoption of ASU No. 2010-01 did not have an impact on our consolidated financial statements.
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Results of Operations
As of March 31, 2011, we owned six properties, encompassing approximately 2.0 million rentable square feet as shown in the table below:
Property |
Acquisition Date |
Purchase Price | Property Type |
Year Built/ Renovated |
Square Feet |
Approximate Acres |
||||||||||||||||
Renfro Clinton, SC |
06/18/09 | $ | 21,700,000 | Manufacturing/Distribution |
1986 | 565,000 | 42.2 | |||||||||||||||
Plainfield Plainfield, IL |
06/18/09 | $ | 32,660,000 | Office/Laboratory |
1958-1991 | 176,000 | 29.1 | |||||||||||||||
Will Partners Monee, IL |
06/04/10 | $ | 26,305,000 | Manufacturing/Distribution |
2000 | 700,200 | 34.3 | |||||||||||||||
Emporia Partners Emporia, KS |
08/27/10 | $ | 8,360,000 | Manufacturing/Distribution |
1954/2000 | 320,800 | 16.6 | |||||||||||||||
ITT Los Angeles, CA |
09/23/10 | $ | 7,800,000 | Office |
1996/2010 | 35,800 | 3.5 | |||||||||||||||
Quad/Graphics Loveland, CO |
12/30/10 | $ | 11,850,000 | Printing Facility/Office |
1986/1996/2009 | 169,800 | 15.0 | |||||||||||||||
Total |
$ | 108,675,000 | 1,967,600 | 140.7 | ||||||||||||||||||
We owned two properties as of March 31, 2010 and six properties as of March 31, 2011, as shown in the table above. Therefore, our results of operations for the three months ended March 31, 2011 are not directly comparable to those for the three months ended March 31, 2010. Our results of operations for the three months ended March 31, 2011 are not indicative of those expected in the future periods and we expect that rental income, operating expenses, depreciation, and amortization expenses will each increase in future periods as we acquire additional properties.
Comparison of the Three Months Ended March 31, 2011 and 2010
The following table provides summary information about our results of operations for the three months ended March 31, 2011 and 2010:
Three Months Ended March, 31 |
Increase | Percentage Change |
||||||||||||||
2011 | 2010 | |||||||||||||||
Rental income |
$ | 2,454,019 | $ | 1,174,882 | $ | 1,279,137 | 109 | % | ||||||||
Property tax recovery |
$ | 339,957 | $ | 97,840 | $ | 242,117 | 247 | % | ||||||||
Asset management fees |
$ | 204,212 | $ | 102,830 | $ | 101,382 | 99 | % | ||||||||
Property management fees |
$ | 74,472 | $ | 32,082 | $ | 42,390 | 132 | % |
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Property tax expense |
$ | 339,957 | $ | 97,840 | $ | 242,117 | 247 | % | ||||||||
Acquisition fees and expenses |
$ | 262 | $ | - | $ | 262 | 100 | % | ||||||||
General and administrative expenses |
$ | 370,135 | $ | 273,766 | $ | 96,369 | 35 | % | ||||||||
Depreciation and amortization |
$ | 1,034,076 | $ | 555,974 | $ | 478,102 | 86 | % | ||||||||
Interest expense |
$ | 1,182,542 | $ | 560,223 | $ | 622,319 | 111 | % |
Rental Income
Rental income for the three months ended March 31, 2011 is comprised of rental income of $2.34 million and adjustments to straight-line contractual rent of $0.14 million, less in-place lease valuation amortization of $0.03 million. Rental income for the three months ended March 31, 2011 increased by $1.28 million compared to the same period a year ago as a result of (1) $1.41 million in additional rental income related to the real estate acquired subsequent to March 31, 2010 and (2) a net decrease in adjustments to straight-line contractual rent and in-place lease valuation amortization of $0.13 million. Also included as a component of revenue is the recovery of property taxes, which increased by $0.24 million compared to the same period a year ago as a result of the acquisition of additional real estate. We expect rental income to increase in future periods as we acquire additional properties.
Property Operating Expenses
Property operating expenses for the three months ended March 31, 2011 and 2010 totaled $0.62 million and $0.23 million, respectively, consisting of asset management fees, property management fees, and property taxes. The total increase from the three month ended March 31, 2010 compared to the same period a year ago of $0.38 million is a result of $0.10 million in asset management fees, $0.04 million in property management fees and $0.24 million in property taxes for the real estate acquired subsequent to March 31, 2010. We expect property operating expenses to increase in future periods as we acquire additional properties.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2011 increased by $0.10 million compared to the same period a year ago due to increased operating activity. General and administrative expenses for the three months ended March 31, 2011 consisted mostly of accounting and legal fees of $0.14 million, directors and officers insurance of $0.05 million, board of directors fees of $0.02 million, as well as other expenses totaling $0.18 million, consisting of allocated personnel costs and rent incurred by our advisor ($0.08 million in total), transfer agent fees (approximately $0.02 million). Further, organizational costs were adjusted ($0.03 million) to the extent the amount of organizational costs incurred exceeded 15% of the total equity raised in our Public Offering, as discussed in our amended and restated advisory agreement and in the Organizational and Offering Costs section of Note 2 to the consolidated financial statements. The adjustment to organizational costs is reflected as a reduction of the Due to Affiliates balance on the consolidated balance sheets. We expect general and administrative expenses to increase in future periods as we make additional investments, but to decrease as a percentage of total revenues.
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Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended March 31, 2011 consisted of depreciation of building and building improvements of our properties of $0.61 million and amortization of the contributed and acquired values allocated to tenant origination and absorption costs of $0.42 million. The increase of $0.48 million as compared to the same period in 2010 is a result of depreciation and amortization for the real estate acquired subsequent to March 31, 2010. We expect depreciation and amortization expense to increase in future periods as we acquire additional properties.
Interest Expense
Interest expense for the three months ended March 31, 2011 increased by $0.62 million compared to the same period in 2010. The increase is due primarily to interest expense related to the real estate acquired subsequent to March 31, 2010: (1) $0.07 million in interest expense related to the assumption of the Emporia Partners property debt in conjunction with the contribution on August 27, 2010; (2) $0.31 million in interest expense related to the origination of the Credit Facility; and (3) $0.08 million in interest expense related to the short-term bridge facility, as discussed in Note 4, Debt, to the consolidated financial statements. Interest expense for the three months ended March 31, 2011 also includes the amortization of deferred financing costs of $0.17 million whereas during the same period in 2010, deferred financing costs were less than $0.01 million. We expect interest expense to increase in future periods as we acquire additional real estate and assume any related debt.
Liquidity and Capital Resources
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of debt service on our outstanding indebtedness and other investments. Generally, cash needs for items, other than property acquisitions, will be met from operations and proceeds received from offerings. However, there may be a delay between the sale of our shares and our purchase of properties that could result in a delay in the benefits to our stockholders, if any, of returns generated from our investments. Our advisor will evaluate potential additional property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to temporarily invest any unused proceeds from offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
On June 4, 2010, we, through our operating partnership, entered into a credit agreement with KeyBank National Association, which provided our operating partnership with an initial $25 million credit facility (the Credit Facility) to finance the acquisition of properties. Our operating partnership made an initial draw of $16.9 million to facilitate the acquisition of the Will Partners property and a subsequent draw of $5.07 million to finance the ITT property acquisition.
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On November 22, 2010, we, through our operating partnership, entered into an amendment to the credit agreement with KeyBank, thereby increasing the total amount of the Credit Facility, upon which we drew an additional $13.03 million from the facility to refinance the debt encumbering the Renfro property. The total amount of funds drawn under the Credit Facility is $35 million.
On December 30, 2010, we, through our operating partnership, entered into a Bridge Loan with KeyBank (the Bridge Loan) and thereby obtained approximately $7.87 million used as a source to fund the acquisition of the Quad/Graphics property. The terms of the Bridge Loan require weekly payments equal to the net equity raised in our Public Offering, subject to a monthly minimum amount of approximately $1.33 million. As of March 31, 2011 the balance of the loan was $1.28 million and was subsequently paid in full on April 18, 2011.
Other potential future sources of capital include proceeds from our Public Offering, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility (other than the current Credit Facility) or other third party source of liquidity, we will be heavily dependent upon the proceeds of our Public Offering and income from operations in order to meet our long-term liquidity requirements and to fund our distributions.
Short-Term Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements with proceeds received in our Public Offering and operating cash flows generated from our properties and other properties we acquire in the future. All advances from our advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in the Management Compensation section of our prospectus.
The line of credit associated with the Renfro property had an initial term of one year but was extended until July 29, 2010 with an automatic option to extend it further to January 29, 2011. On July 29, 2010, we exercised the automatic second extension and extended the term to January 29, 2011. On November 22, 2010, we, through our operating partnership, entered into an amendment to the credit agreement with KeyBank, thereby increasing the total amount of the Credit Facility, upon which we drew an additional $13.03 million from the facility to refinance the debt encumbering the Renfro property. The total amount of funds drawn under the Credit Facility is $35 million.
Our cash and cash equivalent balances decreased by $0.16 million during the three months ended March 31, 2011 and were used in or provided by the following:
Operating Activities. During the three months ended March 31, 2011, we generated $1.05 million of cash from operating activities, compared to $0.49 million used during the year same period in 2010. The net loss in the current period is offset by (1) non-cash adjustments of $1.1 million (consisting of depreciation and amortization of $1.24 million less deferred rent of $0.14 million), which increased compared to the same period in 2010 in which non-cash adjustments totaled $0.45 million, as a result of the properties acquired subsequent to March 31, 2010 and (2) cash provided by working capital of $0.36 million
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compared to cash used for working capital of $0.60 million for the three months ended March 31, 2011. The increase in working capital is due to the acquisitions made subsequent to March 31, 2010 and the related acquisition fees and expenses, which are included in the Due to Affiliates balance on the consolidated balance sheets.
Investing Activities. During the three months ended March 31, 2011, we had no investing activities. During the same period a year ago, we funded $0.45 million for tenant improvements from reserve proceeds held by lenders, which were assumed by us in conjunction with the contribution of the Plainfield and Renfro properties.
Financing Activities. During the three months ended March 31, 2011, we used $1.21 million in financing activities as compared to $1.97 million generated from financing activities during the same period a year ago, an increase in cash usage of $3.18 million. The net increase in cash usage is a result of an increase of $3.83 million in the issuance of common stock during the three months ended March 31, 2011, compared to the same period a year ago, which was offset by: (1) $6.59 million in payments made on the Bridge Loan, of which there were none in the same period a year ago; (2) a $0.06 million increase in loan amortization compared to the same period a year ago due to the amortization of the Emporia Partners mortgage; and (3) a $0.36 million increase in distribution payments.
Distributions and Our Distribution Policy
Distributions will be paid to our stockholders as of the record date selected by our board of directors. We expect to continue to pay distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares. We expect to regularly pay distributions unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our board of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
| the amount of time required for us to invest the funds received in our Public Offering; |
| our operating and interest expenses; |
| the amount of distributions or dividends received by us from our indirect real estate investments; |
| our ability to keep our properties occupied; |
| our ability to maintain or increase rental rates; |
| tenant improvements, capital expenditures and reserves for such expenditures; |
| the issuance of additional shares; and |
| financings and refinancings. |
We made our first distribution on June 15, 2009 to investors of record on May 31, 2009. We achieved our minimum escrow requirement on May 6, 2009; therefore, our first monthly
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distribution was for a partial month. Since June 15, 2009, we funded distributions with operating cash flow from our properties and offering proceeds raised in our private offering and our Public Offering. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders.
The following table shows total distributions for the first quarter of 2011 and the last three quarters during the year ended December 31, 2010:
March 31, 2011 |
December 30, 2010 |
September 30, 2010 |
June 30, 2010 |
|||||||||||||||||||||||||||||
Distributions paid in cash- noncontrolling interests |
$ | 527,321 | $ | 533,179 | $ | 496,645 | $ | 343,676 | ||||||||||||||||||||||||
Distributions paid in cash- common stockholders |
212,667 | 162,080 | 123,391 | 80,337 | ||||||||||||||||||||||||||||
Distributions reinvested (shares issued) |
131,271 | 79,788 | 48,124 | 26,890 | ||||||||||||||||||||||||||||
Total distributions |
$ | 871,259 | (1) | $ | 775,047 | $ | 668,160 | (1) | $ | 450,903 | ||||||||||||||||||||||
Source of distributions: |
||||||||||||||||||||||||||||||||
Cash flows provided by (used in) operations |
$ | 739,988 | 85% | (2) | $ | 276,853 | 36% | (2) | $ | (96,454 | ) | (14% | )(2) | $ | (517,377 | ) | (115% | )(2) | ||||||||||||||
Proceeds from issuance of common stock (3) |
- | 418,406 | 54% | 716,490 | 107% | 941,390 | 209% | |||||||||||||||||||||||||
Distributions reinvested (shares purchased) |
131,271 | 15% | 79,788 | 10% | 48,124 | 7% | 26,890 | 6% | ||||||||||||||||||||||||
Total sources |
$ | 871,259 | 100% | $ | 775,047 | 100% | $ | 668,160 | 100% | $ | 450,903 | 100% | ||||||||||||||||||||
(1) | Total distributions declared but not paid as of March 31, 2011 for noncontrolling interests (including our Advisor), and common stockholders were $181,633 and $87,953, respectively. |
(2) | Percentages were calculated by dividing the respective source amount by the total sources of distributions. Sources appearing as negative amounts represent instances in which cash flows were used in, rather than provided by, operations. Accordingly, percentages calculated on these amounts also appear as negative numbers. |
(3) | During the three months ended March 31, 2011, proceeds from issuance of common stock were used to pay down the principal balance of the Bridge Loan. |
From our inception through March 31, 2011, we paid cumulative distributions of approximately $1.08 million to common stockholders and approximately $3.04 million to the limited partners of our operating partnership, as compared to cumulative FFO of approximately $(1.56) million. The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
Funds from Operations
We believe that funds from operations (FFO) is a beneficial indicator of the performance of an equity REIT. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. Our management believes that historical cost
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accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. Other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do.
The Investment Program Association, (IPA), issued Practice Guideline 2010-01 (the IPA MFFO Guideline) on November 2, 2010, which extended financial measures to include Modified Funds from Operations (MFFO). We adopted the IPA MFFO Guideline for the year ended December 31, 2010 as presented in the Managements Discussion and Analysis of Financial Condition and Results of Operations on Form 10-K. Management believes that MFFO is a beneficial indicator of on-going portfolio performance and our ability to sustain our current distribution level. More specifically, MFFO isolates the financial results of the REITs operations. MFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, MFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. In computing MFFO, FFO is adjusted for certain non-cash items such as straight-line rent and the amortization of in-place lease valuations. FFO is further adjusted for certain non-operating cash items such as acquisitions fees and expenses.
By providing FFO and MFFO, we present information that assists investors in aligning their analysis with managements analysis of long-term operating activities. MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes. As explained below, managements evaluation of our operating performance excludes items considered in the calculation of MFFO based on the following economic considerations:
| Straight line rent and amortization of in-place lease valuation. These items are GAAP non-cash adjustments and are included in historical earnings. These items are added back to FFO as a means of determining operating results of our portfolio. |
| Acquisition-related costs. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments revenues and expenses. Management believes that excluding acquisition costs from MFFO provides investors with supplemental performance information that is consistent with the performance |
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models and analysis used by management, and provides investors a view of the performance of our portfolio over time, including after we cease to acquire properties on a frequent and regular basis. In accordance with GAAP, as of January 1, 2009, acquisition related transaction costs are required to be expensed as incurred compared to the prior practice of capitalizing such costs and amortizing them over the estimated useful lives of the assets acquired. These costs have been and will continue to be funded with cash proceeds from our primary offering. |
For all of these reasons, we believe the non-GAAP measures of FFO and MFFO, in addition to net income and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of our real estate portfolio. However, FFO and MFFO should not be considered as alternatives to net income or to cash flows from operating activities. The material limitation associated with FFO and MFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and MFFO. FFO or MFFO should not be considered as an alternative to net income (loss), or an indication of our liquidity, and each should be reviewed in connection with GAAP measurements.
Neither the SEC, NAREIT, nor any other applicable regulatory body has evaluated the acceptability of the exclusions contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.
Our calculation of FFO and MFFO is presented in the following table for the three months ended March 31, 2011 and 2010.
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Net Loss |
$ | (411,330 | ) | $ | (347,987 | ) | ||
Adjustments: |
||||||||
Depreciation of building and improvements |
609,043 | 365,433 | ||||||
Amortization of intangible assets |
425,033 | 186,374 | ||||||
Funds from Operations (FFO) |
$ | 622,746 | $ | 203,820 | ||||
Reconciliation of FFO to Modified Funds From Operations |
||||||||
Funds From Operations |
$ | 622,746 | $ | 203,820 | ||||
Adjustments: |
||||||||
Acquisition fees and expenses |
262 | - |
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Revenues in excess of cash received (straight- line rents) |
(140,324 | ) | (96,421 | ) | ||||
Amortization of above/(below market) rent |
33,894 | (9,053 | ) | |||||
Modified Funds From Operations |
$ | 516,578 | $ | 98,346 | ||||
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of March 31, 2011:
Payments Due During the Years Ending December 31, | ||||||||||||||||||||
Total | 2011 | 2012-2013 | 2014-2015 | Thereafter | ||||||||||||||||
Outstanding debt obligations (1) |
||||||||||||||||||||
Plainfield |
$ | 20,727,806 | $ | 193,539 | $ | 576,048 | $ | 663,217 | $ | 19,295,002 | ||||||||||
Credit Facility (2) |
35,000,000 | - | 35,000,000 | - | - | |||||||||||||||
Emporia |
5,263,360 | 210,265 | 610,955 | 689,026 | 3,753,114 | |||||||||||||||
Bridge Loan (3) |
1,282,703 | 1,282,703 | - | - | - | |||||||||||||||
Total outstanding debt |
62,273,869 | 1,686,507 | 36,187,003 | 1,352,243 | 23,048,116 | |||||||||||||||
Interest on outstanding debt obligations (4) |
||||||||||||||||||||
Plainfield |
$ | 8,770,706 | $ | 1,047,556 | $ | 2,733,192 | $ | 2,645,524 | $ | 2,344,434 | ||||||||||
Credit Facility |
4,595,208 | 1,537,326 | 3,057,882 | - | - | |||||||||||||||
Emporia |
2,244,132 | 231,201 | 566,035 | 487,568 | 959,328 | |||||||||||||||
Bridge Loan |
3,979 | 3,979 | - | - | - | |||||||||||||||
Total interest |
15,614,025 | 2,820,062 | 6,357,109 | 3,133,092 | 3,303,762 | |||||||||||||||
Total |
$ | 77,887,894 | $ | 4,506,569 | $ | 42,544,112 | $ | 4,485,335 | $ | 26,351,878 | ||||||||||
(1) | Amounts include principal payments only. |
(2) | $16.9 million of the Credit Facility was used to finance the Will Partners property acquisition; an additional $5.07 million of the Credit Facility was used to finance the ITT property acquisition; and an additional $13.03 million of the Credit Facility was used to refinance the Renfro property debt. The total Credit Facility is $35 million and is due on June 4, 2013. |
(3) | The Bridge Loan was used to finance the Quad/Graphics property acquisition and was paid in full on April 18, 2011. |
(4) | Projected interest payments are based on the outstanding principal amounts and interest rates in effect at March 31, 2011. |
Subsequent Events
See Note 9, Subsequent Events, to the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. We expect that the primary market risk to which we will be exposed is interest rate risk, including the risk of changes in the underlying rates on our variable rate debt.
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As of March 31, 2011, our debt consisted of the property-specific mortgage loans of $26 million, a $35.0 million draw from the Credit Facility and $1.28 million remaining on the Bridge Loan. Such amounts were consistent with our debt outstanding as of December 31, 2010, except that the balance on the Bridge Loan was $7.87 million as of December 31, 2010.
Emporia Partners Debt
In conjunction with the contribution of the Emporia Partners property, we assumed $5.42 million in debt. See Note 4, Debt, to the consolidated financial statements for a detailed description of the assumed debt. As this is fixed-rate debt, an increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows.
Credit Facility
On June 4, 2010, we obtained approximately $16.9 million in debt to finance our acquisition of the Will Partners property pursuant to the Credit Facility. On September 23, 2010, we further obtained $5.07 million in debt from the Credit Facility to finance our acquisition of the ITT property. On November 22, 2010, we increased the total amount of the Credit Facility, upon which we drew an additional $13.03 million from the facility to refinance the debt encumbering the Renfro property. See Note 4, Debt, to the consolidated financial statements, for a detailed description of the Credit Facility, which is subject to certain debt covenant requirements. An increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows as the minimum interest rate on the Credit Facility would still apply.
Bridge Loan
On December 30, 2010, we obtained approximately $7.87 million in debt to help fund the acquisition of the Quad/Graphics property pursuant to the Bridge Loan. In connection with the Bridge Loan, we also executed another amendment to the credit agreement with KeyBank (the Second Amendment to Credit Facility). Pursuant to the Second Amendment to Credit Facility, the debt obtained from the Bridge Loan is secured under the Credit Facility. When the Bridge Loan is paid in full, the Quad/Graphics property will serve as additional security for the Credit Facility, the guarantees issued in connection with the Bridge Loan will be released, and the Quad/Graphics property may be refinanced pursuant to the terms of the Credit Facility. An increase in current interest rates of 1.00% would have no impact on our future earnings or cash flows as the minimum interest rate on Bridge Loan would still apply. As of March 31, 2011 the balance of the loan was $1.28 million and was subsequently paid in full on April 18, 2011
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our president and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our president and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed,
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summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our president and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010 other than the additional disclosure of the risk factors listed below.
If we breach covenants under our credit facility with KeyBank National Association, we could be held in default under such credit facility, which could accelerate our repayment date and materially adversely affect the value of your investment in us.
We entered into a credit facility with KeyBank National Association (KeyBank) under which we have borrowed $35 million and may borrow up to $75 million. The credit facility includes a number of financial covenant requirements for us. If we should breach certain of those financial covenant requirements, Key Bank could consider the loan in default and accelerate our repayment date. If we do not have sufficient cash to repay the credit facility at that time, KeyBank could foreclose on a number of our properties securing the credit facility. Such foreclosure could result in a material loss for us and would adversely affect the value of your investment in us.
Your interest in us will be diluted as we issue additional shares.
Our stockholders will not have preemptive rights to any shares issued by us in the future. Subject to any limitations set forth under Maryland law, our board of directors may increase the number of authorized shares of stock (currently 900,000,000 shares), increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our board of directors. Therefore, as we (1) sell shares in this offering or sell additional shares in the future, including those issued pursuant to our distribution reinvestment plan, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of restricted common stock or stock options to our independent directors, (5) issue shares to our advisor, its successors or assigns, in payment of an outstanding fee obligation as set forth under
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our advisory agreement, or (6) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our operating partnership, existing stockholders and investors purchasing shares in this offering will experience dilution of their equity investment in us. Because the limited partnership interests of our operating partnership may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between our operating partnership 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. As of March 31, 2011, we had approximately 2.59 million shares of common stock issued and outstanding, and we own approximately 45% of the operating partnership units. The affiliates of our sponsor own approximately 46% of the limited partnership units, and the remaining approximately 9% is owned by third parties. Because of these and other reasons described in this Risk Factors section, you should not expect to be able to own a significant percentage of our shares.
In addition, the net book value per share of our common stock was $7.54 as of March 31, 2011 as compared to our offering price per share of $10.00 as of March 31, 2011. Therefore, upon a purchase of our shares in the Primary Public Offering, you will be immediately diluted based on the net book value. Net book value takes into account a deduction of selling commissions, the dealer manager fee and estimated offering expenses paid by us, and is calculated to include depreciated tangible assets, deferred financing costs, and amortized identified intangible assets, which include in-place market leases. Net book value is not an estimate of net asset value, or of the market value or other value of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) | None. |
(b) | We registered 82,500,000 shares of our common stock in our Public Offering (SEC File No. 333-159167, effective November 6, 2009), of which we registered 75,000,000 shares to be offered to the public in our primary offering at an aggregate offering price of up to $750,000,000, or $10.00 per share, and 7,500,000 shares to be offered to investors pursuant to our distribution reinvestment plan at an aggregate offering price of $71,250,000, or $9.50 per share. During the three months ended March 31, 2011, we did not sell any equity securities that were not registered under the Securities Act of 1933. Our equity raise as of March 31, 2011 resulted in the following: |
Common shares issued in our Public Offering |
2,312,653 | |||
Common shares issued in our Public Offering pursuant to the distribution reinvestment plan |
31,138 | |||
Gross Public Offering proceeds |
$ | 23,091,686 | ||
Gross Public Offering proceeds from shares issued pursuant to the distribution reinvestment plan |
295,816 | |||
Total Gross Public Offering proceeds |
23,387,502 |
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Selling commissions and dealer manager fees paid |
2,282,552 | |||
Reimbursement to our advisor of O&O costs paid |
190,694 | |||
Reimbursement to our advisor of O&O costs Deferred |
129,233 | |||
Net Public Offering proceeds |
$ | 20,785,023 | ||
The remainder of the net proceeds was used to fund general operating expenses, shareholder distributions and principal payments made on the Bridge Loan.
(c) | None. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
(a) | During the quarter ended March 31, 2011, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K. |
(b) | During the quarter ended March 31, 2011, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors. |
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the period ended March 31, 2011 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. |
Description | |
3.1 | Third Articles of Amendment and Restatement of The GC Net Lease REIT, Inc., incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 3 to the Registrants Registration Statement on Form S-11, filed on October 29, 2009, Commission File No. 333-159167 | |
3.2 | Bylaws of The GC Net Lease REIT, Inc., incorporated by reference to Exhibit 3.2 to the Registrants Registration Statement on Form S-11, filed on May 12, 2009, Commission File No. 333-159167 |
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Exhibit No. |
Description | |
4.1 | Form of Subscription Agreement and Subscription Agreement Signature Page (included as Appendix B to prospectus, incorporated by reference to the Registrants final prospectus filed pursuant to Rule 424(b)(3), filed on November 6, 2009, Commission File No. 333-159167) | |
10.1 | Purchase and Sale Agreement by and between One Directory Place LLC and The GC Net Lease (Loveland) Investors, LLC, incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed on January 6, 2011, Commission File No. 333-159167 | |
10.2 | Lease between One Directory Place LLC and Directory Printing Company, incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K, filed on January 6, 2011, Commission File No. 333-159167 | |
10.3 | First Amendment to Lease between One Directory Place LLC and Quebecor Printing Loveland, Inc., incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K, filed on January 6, 2011, Commission File No. 333-159167 | |
10.4 | Second Amendment to Lease between One Directory Place LLC and Quebecor World Loveland, Inc., incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K, filed on January 6, 2011, Commission File No. 333-159167 | |
10.5 | Third Amendment to Lease between One Directory Place LLC and World Color (USA), LLC, incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K, filed on January 6, 2011, Commission File No. 333-159167 | |
10.6 | Lease Memorandum, incorporated by reference to Exhibit 10.6 to the Registrants Current Report on Form 8-K, filed on January 6, 2011, Commission File No. 333-159167 | |
31.1* | Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2* | Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE GC NET LEASE REIT, INC. (Registrant) | ||||||
Dated: May 13, 2011 | By: | /s/ Joseph E. Miller | ||||
Joseph E. Miller Chief Financial Officer and Treasurer |
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