Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
All statements contained herein, other than historical facts, may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements may relate to, among other things,
future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as may, might, believe, will, provided,
anticipate, future, could, growth, plan, intend, expect, should, would, if, seek, possible,
potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition,
liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such
forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled Risk Factors in our Annual Report on Form 10-K for the year ended December 31,
2012. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.
All references to we, our, us and the Company in this Report mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where it is
made clear that the term means only Gladstone Commercial Corporation.
OVERVIEW
General
We are an externally-advised
real estate investment trust, or REIT, that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003, primarily for the purpose of investing in and owning net leased industrial, commercial and retail real
property and selectively making long-term industrial and commercial mortgage loans. Our portfolio of real estate is leased to a wide cross section of tenants ranging from small businesses to large public companies, many of which are corporations
that do not have publicly-rated debt. We have historically entered into, and intend in the future to enter into, purchase agreements for real estate having triple net leases with terms of approximately 10 to 15 years and built in rental rate
increases. Under a triple net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property. We actively communicate with buyout funds, real estate brokers and other
third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. We currently own 85 properties totaling 9.0 million square feet, which have a total gross and net carrying value,
including intangible assets, of $728.7 million and $625.2 million, respectively. We do not currently have any mortgage loan receivables outstanding.
Business Environment
The United States, or U.S., is beginning to see long-term signs of
recovery as the unemployment rate has decreased over the last several months, housing starts and building permits have increased, and prices for single-family homes increased across 20 U.S. cities because of a dwindling surplus in the housing
market. However, various signs of weakness are still present in the U.S economy. Vacancy rates in certain markets are still higher than pre-recessionary levels as job growth has yet to return to all areas of the country. Additionally, interest
rates still remain at historic lows, even though they have experienced some recent volatility, which is increasing competition for new acquisitions and causing cap rate compression.
24
We continue to focus on increasing our funds from operations, or FFO, by re-leasing vacant space in our
portfolio. As of June 30, 2013 we had three fully vacant buildings and one partially vacant building. Our vacant buildings are located in Hazelwood, Missouri, Baytown, Texas and Richmond, Virginia. Our building located in Roseville, Minnesota
remains partially vacant. The leases on these four vacancies comprised 4.2% of our annualized rental income as of June 30, 2013 and the annual carrying costs are approximately $0.6 million. We are actively seeking new tenants for our Richmond,
Virginia, Baytown, Texas and Roseville, Minnesota buildings and have executed a lease with a new tenant for our Hazelwood, Missouri building that will begin in August of this year.
Our ability to make new investments is highly dependent upon our ability to procure external financing. Our principal sources of external financing generally include the issuance of equity securities,
long-term mortgage loans secured by properties and borrowings under our line of credit, or the Line of Credit. The market for long-term mortgages was limited for the past several years; however, long-term mortgages have become more
obtainable. The collateralized mortgage backed securities, or CMBS, market has made a comeback, but it is more conservative and restrictive than it was prior to the recession. Consequently, we continue to look to regional banks, insurance
companies and other non-bank lenders, in addition to the CMBS market to issue mortgages to finance our real estate activities.
In addition to
leverage, we have been active in the equity markets during 2013 and we have issued shares of common stock in two separate follow-on public offerings and under our open market sale agreement, or ATM Program, with Jefferies, LLC, or Jefferies,
discussed in more detail below.
Recent Developments
2013 Investment Activities
The following is a summary of our recent acquisitions:
Egg Harbor Township, New Jersey:
On March 28, 2013, we acquired a 29,257 square foot office building located in
Egg Harbor Township, New Jersey for $5.7 million, excluding related acquisition expenses of $0.1 million. We funded this acquisition with existing cash on hand and the issuance of $3.7 million of mortgage debt on the property. The tenant has leased
the property for 10 years and has 1 option to renew the lease for an additional period of 5 years. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $0.5 million.
Clintonville, Wisconsin
: On April 11, 2013, we funded a $3.3 million, 102,400 square foot expansion of our property located in
Clintonville, Wisconsin. In connection with the expansion of the property, we executed a lease amendment to extend the lease for an additional eight years, through October 2028. The lease was originally set to expire in October 2020. The
lease was also amended to provide for an increase to the rental income over the life of the lease, with annualized straight line rents of approximately $1.0 million, up from $0.6 million today.
Vance, Alabama:
On May 9, 2013, we acquired a 170,000 square foot industrial building located in Vance, Alabama for $13.4
million, excluding related acquisition expenses of $0.2 million. We funded this acquisition with existing cash on hand. The tenant has leased the property for 10 years and has 2 options to renew the lease for additional periods of 5-years each. The
lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $1.2 million.
Blaine, Minnesota
: On May 10, 2013, we acquired a 92,275 square foot office building located in Blaine, Minnesota for $14.4
million, excluding related acquisition expenses of $0.1 million. We funded this acquisition with existing cash on hand. The tenant has seven years remaining on the lease and has two options to renew the lease for additional periods of five-years
each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $1.5 million.
25
Austin, Texas
: On July 9, 2013, we acquired a 320,000 square foot office
building located in Austin, Texas for $57.0 million, excluding related acquisition expenses of $0.2 million. We funded this acquisition with cash proceeds from our recent common stock offering and the issuance of $35.3 million of mortgage debt on
the property. The tenant has seven years remaining on the lease and has three options to renew the lease for additional periods of three years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized
straight line rents of $4.7 million.
Allen, Texas
: On July 10, 2013, we acquired an 115,200 square foot office
building located in Allen, Texas for $15.2 million, excluding related acquisition expenses of $0.1 million. We funded this acquisition with existing cash on hand and the issuance of $8.9 million of mortgage debt on the property. There are two
tenants in this property, the largest of which occupies 73% of the space and has nine years remaining on the lease and has two options to renew the lease for additional periods of five years each. The other tenant has eight years remaining on the
lease and also has two options to renew the lease for additional periods of five years each. These two leases provide for prescribed rent escalations over the life of the leases, with annualized straight line rents of $1.4 million.
2013 Financing Activities
The following
is a summary of our recent financings:
Citigroup
: On March 28, 2013, through a wholly-owned subsidiary, we
borrowed $3.7 million pursuant to a long-term note payable from Citigroup Global Markets Realty Corp., which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 4.16% per year and we
may not repay this note prior to the last two months of the term, or we would be subject to a prepayment penalty. The note has a maturity date of April 6, 2023. We used the proceeds from the note to acquire the property in Egg Harbor Township,
New Jersey on the same date.
Prudential
: On July 3, 2013, through a wholly-owned subsidiary, we borrowed $8.2
million pursuant to a long-term note payable from Prudential Mortgage Capital Company, LLC, which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 5.0% per year and we may not repay
this note prior to the last three months of the term, or we would be subject to a prepayment penalty. The note has a maturity date of August 1, 2023. We used the proceeds from the note to acquire properties.
Cantor Commercial Real Estate
: On July 9, 2013, through a wholly-owned subsidiary, we borrowed $35.3 million pursuant to a
long-term note payable from Cantor Commercial Real Estate Lending, L.P., which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 4.81% per year and we may not repay this note prior
to the last three months of the term, or we would be subject to a prepayment penalty. The note has a maturity date of August 6, 2023. We used the proceeds from the note to acquire the property in Austin, Texas on the same date.
Synovus Bank
: On July 10, 2013, through a wholly-owned subsidiary, we borrowed $8.9 million pursuant to a long-term note
payable from Synovus Bank, which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 4.2% per year and we may prepay this note prior to maturity without penalty. The note has a
maturity date of July 10, 2023. We used the proceeds from the note to acquire the property in Allen, Texas on the same date.
2013
Leasing Activities
The following is a summary of our recent leasing activity:
Champaign, Illinois
: On January 14, 2013, we extended the lease with the tenant occupying our property located in Champaign,
Illinois. The lease covering this property was extended for an additional 11 years, through December 2024. The lease was originally set to expire in December 2013. The lease provides for prescribed rent escalations over the life of
the lease, with annualized straight line rents of approximately $1.4 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.4 million in leasing commissions.
26
Akron, Ohio:
On April 10, 2013, we extended the lease with the tenant occupying
our property located in Akron, Ohio. The lease covering this property was extended for an additional 10 years, through January 2024. The lease was originally set to expire in January 2014. The lease provides for prescribed rent
escalations over the life of the lease, with annualized straight line rents of approximately $0.3 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of
$0.5 million.
Hazelwood, Missouri
: On July 17, 2013, we executed a revised lease with a tenant to occupy our
previously vacant property located in Hazelwood, Missouri. The lease commences on August 1, 2013 and expires in May 2023. The tenant has two options to purchase the property: one option in March 2017 and the other option in May 2023. The
lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.2 million. In connection with the extension of the lease and the modification of certain terms under the lease,
we will pay $0.1 million in leasing commissions and $0.3 million in tenant improvements.
2013 Equity Activities
The equity issuances summarized below were issued under our effective shelf registration statement (File No. 333-169290) on file with the Securities
and Exchange Commission.
Common Equity
: During 2013, we have completed two separate public offerings totaling 2,743,000
shares of our common stock. We issued 1,265,000 shares of common stock in the first offering, which closed on April 29, 2013, at a public offering price of $18.90 per share. Gross proceeds of this offering totaled $23.9 million and net
proceeds, after deducting offering expenses and underwriter discounts, were $22.6 million. We issued 1,478,000 shares of common stock in the second offering, which closed on June 24, 2013, with a partial exercise of the over-allotment option
closing on July 11, 2013, at a public offering price of $18.82 per share. Gross proceeds of this offering totaled $27.8 million and net proceeds, after deducting offering expenses and underwriter discounts, were $26.3 million. Proceeds from
these offerings were used to acquire real estate.
ATM Program:
During the six months ended June 30, 2013, we
raised approximately $6.2 million in net proceeds under our ATM Program with Jefferies. We used the proceeds from this offering to fund our acquisition in Egg Harbor Township, New Jersey and for general corporate purposes. Under this agreement we
may, from time to time, offer to sell shares of our common stock with an aggregate sales price of up to $25.0 million on the open market through Jefferies, as agent, or to Jefferies, as principal, based upon our instructions (including any price,
time or size limits or other customary parameters or conditions that we may impose). Sales of shares of our common stock through Jefferies will be executed by means of ordinary brokers transactions on the NASDAQ or otherwise at market prices,
in privately negotiated transactions, crosses or block transactions, as may be agreed between us and Jefferies, including a combination of any of these transactions. We will pay Jefferies a commission equal to 2.0% of the gross sales proceeds of any
common stock sold through Jefferies as agent under the ATM Program.
Senior Common Equity:
During the six months ended
June 30, 2013, we sold 124,337 shares of our senior common stock at $15.00 per share in an ongoing best-efforts public offering and issued 3,133 shares of our senior common stock under the Dividend Reinvestment Plan, or DRIP, program. The net
proceeds, after deducting the underwriting discount and commission were $1.7 million. We can issue up to 3,000,000 shares of senior common stock and the offering will continue until the earlier of March 28, 2015 or the date on which 3,000,000
shares of senior common stock are sold. We have used the proceeds of the offering for general corporate purposes and to acquire additional real estate.
27
Diversity of Our Portfolio
Gladstone Management Corporation, or our Adviser, seeks to diversify our portfolio to avoid dependence on any one particular tenant, industry or geographic market. By diversifying our portfolio, our
Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic market. The table below reflects the breakdown of our total rental income by tenant industry
classification for the six months ended June 30, 2013 and 2012, respectively (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
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|
|
2013
|
|
|
2012
|
|
Industry Classification
|
|
Rental
Income
|
|
|
Percentage of
Rental Income
|
|
|
Rental
Income
|
|
|
Percentage of
Rental Income
|
|
Telecommunications
|
|
$
|
4,665
|
|
|
|
16.7
|
%
|
|
$
|
3,636
|
|
|
|
14.8
|
%
|
Healthcare
|
|
|
3,729
|
|
|
|
13.4
|
|
|
|
2,496
|
|
|
|
10.3
|
|
Personal, Food & Miscellaneous Services
|
|
|
2,566
|
|
|
|
9.2
|
|
|
|
907
|
|
|
|
3.7
|
|
Electronics
|
|
|
2,228
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|
|
|
8.0
|
|
|
|
3,091
|
|
|
|
12.7
|
|
Diversified/Conglomerate Manufacturing
|
|
|
1,833
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|
|
|
6.6
|
|
|
|
1,832
|
|
|
|
7.5
|
|
Chemicals, Plastics & Rubber
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|
|
1,576
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|
|
|
5.7
|
|
|
|
1,576
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|
|
|
6.5
|
|
Beverage, Food & Tobacco
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|
|
1,510
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|
|
|
5.4
|
|
|
|
1,279
|
|
|
|
5.3
|
|
Automobile
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|
|
1,431
|
|
|
|
5.1
|
|
|
|
682
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|
|
|
2.8
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|
Personal & Non-Durable Consumer Products
|
|
|
1,290
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|
|
|
4.6
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|
|
|
1,217
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|
|
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5.0
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|
Containers, Packaging & Glass
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|
|
1,171
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|
|
|
4.2
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|
|
|
1,171
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|
|
|
4.8
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|
Machinery
|
|
|
1,130
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|
|
|
4.1
|
|
|
|
1,130
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|
|
|
4.6
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|
Buildings and Real Estate
|
|
|
1,076
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|
|
|
3.9
|
|
|
|
1,068
|
|
|
|
4.4
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|
Printing & Publishing
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|
|
929
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|
|
|
3.3
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|
|
|
947
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|
|
|
3.9
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|
Oil & Gas
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|
|
638
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|
|
|
2.3
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|
|
|
635
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|
|
|
2.6
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|
Diversified/Conglomerate Services
|
|
|
622
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|
|
|
2.2
|
|
|
|
622
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|
|
|
2.6
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|
Banking
|
|
|
577
|
|
|
|
2.1
|
|
|
|
575
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|
|
|
2.4
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|
Education
|
|
|
328
|
|
|
|
1.2
|
|
|
|
915
|
|
|
|
3.8
|
|
Childcare
|
|
|
292
|
|
|
|
1.0
|
|
|
|
292
|
|
|
|
1.2
|
|
Home & Office Furnishings
|
|
|
265
|
|
|
|
1.0
|
|
|
|
265
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,856
|
|
|
|
100.0
|
%
|
|
$
|
24,336
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below reflects the breakdown of our total rental income by state for the six months ended June 30, 2013
and 2012, respectively (dollars in thousands):
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|
|
|
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|
|
|
|
|
|
|
|
|
State
|
|
Number of
Leases for the six
months ended
June 30, 2013
|
|
|
Rental Revenue
for the
six
months ended
June 30, 2013
|
|
|
% of Base Rent
|
|
|
Number of
Leases for the six
months ended
June 30, 2012
|
|
|
Rental Revenue
for the
six
months ended
June 30, 2012
|
|
|
% of Base Rent
|
|
Ohio
|
|
|
14
|
|
|
|
4,646
|
|
|
|
16.7
|
%
|
|
|
14
|
|
|
|
3,981
|
|
|
|
16.4
|
%
|
North Carolina
|
|
|
7
|
|
|
|
2,399
|
|
|
|
8.6
|
%
|
|
|
7
|
|
|
|
2,390
|
|
|
|
9.8
|
%
|
South Carolina
|
|
|
2
|
|
|
|
2,231
|
|
|
|
8.0
|
%
|
|
|
1
|
|
|
|
961
|
|
|
|
3.9
|
%
|
Texas
|
|
|
5
|
|
|
|
2,028
|
|
|
|
7.3
|
%
|
|
|
4
|
|
|
|
1,311
|
|
|
|
5.4
|
%
|
Minnesota
|
|
|
4
|
|
|
|
1,831
|
|
|
|
6.6
|
%
|
|
|
3
|
|
|
|
2,660
|
|
|
|
10.9
|
%
|
All Other States
|
|
|
36
|
|
|
|
14,721
|
|
|
|
52.8
|
%
|
|
|
33
|
|
|
|
13,033
|
|
|
|
53.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
68
|
|
|
$
|
27,856
|
|
|
|
100
|
%
|
|
|
62
|
|
|
$
|
24,336
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Adviser and Administrator
Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans. Our Adviser is controlled by Mr. David Gladstone, our chairman and chief
executive officer. Mr. Gladstone is also the chairman and chief executive officer of our Adviser. Terry Lee Brubaker, our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser. Gladstone
Administration, LLC, or our Administrator, employs our chief financial officer and treasurer, chief compliance officer, internal counsel, secretary and their respective staffs.
28
Our Adviser and Administrator also provide investment advisory and administrative services, respectively, to
certain of our affiliates, including, but not limited to, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly-traded business development companies, as well as Gladstone Land Corporation, a publicly traded real estate
company. With the exception of Ms. Danielle Jones, our chief financial officer and treasurer, and Mr. Robert Cutlip, our president, all of our executive officers and all of our directors serve as either directors or executive officers, or
both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In addition, with the exception of our president, all of our executive officers and all of our directors, with the exception of Mr. David Dullum, serve as either
directors or executive officers, or both, of Gladstone Land Corporation. In the future, our Adviser may provide investment advisory services to other companies, both public and private.
Advisory and Administration Agreements
We are externally managed pursuant to contractual
arrangements with our Adviser and our Administrator. Our Adviser and Administrator employ all of our personnel and pay their payroll, benefits and general expenses directly. We have an investment advisory agreement with our Adviser, or the Advisory
Agreement, and an administration agreement with our Administrator, or the Administration Agreement.
Under the terms of the Advisory
Agreement, we are responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest on short-term debt and mortgages, tax preparation, directors and officers insurance, stock
transfer services, stockholder-related fees, consulting and related fees. In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which include real estate brokerage fees, mortgage
placement fees, lease-up fees and transaction structuring fees (although we may be able to pass some or all of such fees on to our tenants and borrowers).
During the six months ended June 30, 2013 and 2012, none of these third party expenses were incurred by us directly. The actual amount of such fees that we incur in the future will depend largely
upon the aggregate costs of the properties that we acquire, the aggregate amount of mortgage loans that we make and the extent to which we are able to pass on such fees to our tenants and borrowers pursuant to the terms of the agreements.
Accordingly, the amount of these fees that we will pay in the future is not determinable at this time.
Advisory Agreement
The Advisory Agreement provides for an annual base management fee equal to 2.0% of our total stockholders equity, less the recorded value of any
preferred stock, or total common stockholders equity, and for an incentive fee based on FFO. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties as is common with other externally-advised REITs;
however, our Adviser may earn fee income from our borrowers or tenants or other sources.
For purposes of calculating the incentive fee, FFO
includes any realized capital gains and capital losses, less any distributions paid on preferred stock and senior common stock, but FFO does not include any unrealized capital gains or losses. The incentive fee would reward our Adviser if our
quarterly FFO, before giving effect to any incentive fee, or pre-incentive fee FFO, exceeds 1.75%, or the hurdle rate, of total common stockholders equity. We pay our Adviser an incentive fee with respect to our pre-incentive fee FFO quarterly
as follows:
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|
no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not exceed the hurdle rate of 1.75% (7% annualized);
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|
|
100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% in any calendar quarter (8.75% annualized); and
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|
|
20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar quarter (8.75% annualized).
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29
Quarterly Incentive Fee Based on FFO
Pre-incentive fee FFO
(expressed as a percentage of total common stockholders equity)
Percentage of pre-incentive fee FFO allocated to the incentive fee
The incentive fee may be reduced because of a covenant which exists in our Line of Credit agreement which limits distributions to our stockholders to 95%
of FFO with acquisition-related costs that are required to be expensed under ASC 805, Business Combinations, added back to FFO. In order to comply with this covenant, our Board of Directors accepted our Advisers offer to unconditionally,
irrevocably and voluntarily waive on a quarterly basis a portion of the incentive fee for the six months ended June 30, 2013 and 2012, which allowed us to maintain the current level of distributions to our stockholders. These waived fees may
not be recouped by our Adviser in the future. Our Adviser has indicated that it intends to continue to waive all or a portion of the incentive fee in order to support the current level of distributions to our stockholders; however, our Adviser is
not required to issue any such waiver, either in whole or in part.
Administration Agreement
Pursuant to the Administration Agreement, we pay for our allocable portion of our Administrators overhead expenses incurred while performing its
obligations to us, including, but not limited to, rent and the salaries and benefits expenses of our personnel, including our chief financial officer and treasurer, chief compliance officer, internal counsel, investor relations department and their
respective staffs. Our allocable portion of expenses is generally derived by multiplying our Administrators total expenses by the percentage of our total assets at the beginning of each quarter in comparison to the total assets of all
companies managed by our Adviser under similar agreements.
30
Critical Accounting Policies
The preparation of our financial statements in accordance with Generally Accepted Accounting Principles in the U.S., or GAAP, requires management to make judgments that are subjective in nature in order
to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these
estimates. A summary of all of our significant accounting policies is provided in Note 1 to our condensed consolidated financial statements included elsewhere in this Form 10-Q. Below is a summary of accounting polices involving estimates and
assumptions that require complex, subjective or significant judgments in their application and that materially affect our results of operations.
Allocation of Purchase Price
When we acquire real estate, we allocate the purchase price
to (i) the acquired tangible assets and liabilities, consisting of land, building, tenant improvements and long-term debt and (ii) the identified intangible assets and liabilities, consisting of the value of above-market and below-market
leases, in-place leases, unamortized lease origination costs, tenant relationships and capital lease obligations, based in each case on their fair values in accordance with ASC 805, Business Combinations. All expenses related to the acquisition are
expensed as incurred.
Our Adviser estimates value using methods similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods, considering current market conditions and costs to execute similar leases. Our Adviser also considers
information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. In estimating carrying costs,
management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the hypothetical expected lease-up periods, which primarily range from 9 to 18 months, depending on specific
local market conditions. Our Adviser also estimates costs to execute similar leases, including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as
part of the transaction. Our Adviser also considers the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenants credit quality and managements
expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. A change in any of the assumptions above, which are very subjective, could have a material impact on our results of operations.
The allocation of the purchase price directly affects the following in our condensed consolidated financial statements:
|
|
|
The amount of purchase price allocated to the various tangible and intangible assets on our balance sheet;
|
|
|
|
The amounts allocated to the value of above-market and below-market lease values are amortized to rental income over the remaining non-cancelable terms
of the respective leases. The amounts allocated to all other tangible and intangible assets are amortized to depreciation or amortization expense. Thus, depending on the amounts allocated between land and other depreciable assets, changes in the
purchase price allocation among our assets could have a material impact on our FFO, a metric which is used by many REIT investors to evaluate our operating performance; and
|
|
|
|
The period of time over which tangible and intangible assets are depreciated varies greatly, and thus, changes in the amounts allocated to these assets
will have a direct impact on our results of operations. Intangible assets are generally amortized over the respective life of the leases, which normally range from 10 to 15 years. Also, we depreciate our buildings over 39 years, but do not
depreciate our land. These differences in timing could have a material impact on our results of operations.
|
31
Asset Impairment Evaluation
We periodically review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be
modified. In determining if impairment exists, our Adviser considers such factors as our tenants payment histories, the financial condition of our tenants, including calculating the current leverage ratios of tenants, the likelihood of lease
renewal, business conditions in the industries in which our tenants operate and whether the carrying value of our real estate has decreased. If any of the factors above indicate the possibility of impairment, we prepare a projection of the
undiscounted future cash flows, without interest charges, of the specific property and determine if the carrying amount of such property is recoverable. In preparing the projection of undiscounted future cash flows, we estimate the holding periods
of the properties and cap rates using information that we obtain from market comparability studies and other comparable sources. If impairment were indicated, the carrying value of the property would be written down to its estimated fair value based
on our best estimate of the propertys discounted future cash flows using assumptions from market participants. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of
operations, as the changes would impact our determination of whether impairment is deemed to have occurred and the amount of impairment loss that we would recognize.
Using the methodology discussed above we evaluated our entire portfolio as of June 30, 2013 for any impairment indicators and performed an impairment analysis on those select properties that had an
indication of impairment. We concluded that none of our properties were impaired as of June 30, 2013; however, we determined that our property located in South Hadley, Massachusetts may become impaired in the future. The lease on this property
expires in January 2014 and we are currently negotiating a potential lease extension with the existing tenant. There is a possibility we would have to impair the property in 2013 if we do not negotiate a lease extension on this building or find a
replacement tenant.
We will continue to monitor our portfolio for any indicators of impairment and there have been no impairments recognized
on our real estate assets since inception.
Results of Operations
The weighted-average yield on our total portfolio, which was 9.0% as of June 30, 2013, is calculated by taking the annualized straight-line rents, reflected as rental income on our condensed
consolidated statements of operations, of each acquisition as a percentage of the acquisition. The weighted-average yield does not account for the interest expense incurred on the mortgages placed on our properties.
32
A comparison of our operating results for the three and six months ended June 30, 2013 and 2012 is
below (dollars in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in Thousands, except per share data)
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
14,190
|
|
|
$
|
12,323
|
|
|
$
|
1,867
|
|
|
|
15
|
%
|
Tenant recovery revenue
|
|
|
68
|
|
|
|
87
|
|
|
|
(19
|
)
|
|
|
-22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
14,258
|
|
|
|
12,410
|
|
|
|
1,848
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,220
|
|
|
|
3,992
|
|
|
|
1,228
|
|
|
|
31
|
%
|
Property operating expenses
|
|
|
564
|
|
|
|
353
|
|
|
|
211
|
|
|
|
60
|
%
|
Acquisition related expense
|
|
|
274
|
|
|
|
528
|
|
|
|
(254
|
)
|
|
|
-48
|
%
|
Base management fee
|
|
|
451
|
|
|
|
372
|
|
|
|
79
|
|
|
|
21
|
%
|
Incentive fee
|
|
|
933
|
|
|
|
787
|
|
|
|
146
|
|
|
|
19
|
%
|
Administration fee
|
|
|
367
|
|
|
|
265
|
|
|
|
102
|
|
|
|
38
|
%
|
General and administrative
|
|
|
477
|
|
|
|
404
|
|
|
|
73
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses before credit to incentive fee
|
|
|
8,286
|
|
|
|
6,701
|
|
|
|
1,585
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to incentive fee
|
|
|
(917
|
)
|
|
|
(674
|
)
|
|
|
(243
|
)
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,369
|
|
|
|
6,027
|
|
|
|
1,342
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(5,764
|
)
|
|
|
(4,885
|
)
|
|
|
(879
|
)
|
|
|
18
|
%
|
Distributions attributable to Series C mandatorily redeemable preferred stock
|
|
|
(686
|
)
|
|
|
(686
|
)
|
|
|
|
|
|
|
0
|
%
|
Other income
|
|
|
12
|
|
|
|
42
|
|
|
|
(30
|
)
|
|
|
-71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(6,438
|
)
|
|
|
(5,529
|
)
|
|
|
(909
|
)
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
451
|
|
|
|
854
|
|
|
|
(403
|
)
|
|
|
-47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions attributable to Series A and B preferred stock
|
|
|
(1,023
|
)
|
|
|
(1,024
|
)
|
|
|
1
|
|
|
|
0
|
%
|
Distributions attributable to senior common stock
|
|
|
(69
|
)
|
|
|
(22
|
)
|
|
|
(47
|
)
|
|
|
214
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(641
|
)
|
|
$
|
(192
|
)
|
|
$
|
(449
|
)
|
|
|
234
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders per weighted average share of common stock - diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
150
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common stockholders
|
|
$
|
4,579
|
|
|
$
|
3,800
|
|
|
$
|
779
|
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per weighted average share of common stock - diluted
|
|
$
|
0.36
|
|
|
$
|
0.34
|
|
|
$
|
0.02
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in Thousands, except per share data)
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
27,856
|
|
|
$
|
24,336
|
|
|
$
|
3,520
|
|
|
|
14
|
%
|
Tenant recovery revenue
|
|
|
437
|
|
|
|
171
|
|
|
|
266
|
|
|
|
156
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
28,293
|
|
|
|
24,507
|
|
|
|
3,786
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,121
|
|
|
|
7,896
|
|
|
|
2,225
|
|
|
|
28
|
%
|
Property operating expenses
|
|
|
1,300
|
|
|
|
686
|
|
|
|
614
|
|
|
|
90
|
%
|
Acquisition related expense
|
|
|
459
|
|
|
|
688
|
|
|
|
(229
|
)
|
|
|
-33
|
%
|
Base management fee
|
|
|
804
|
|
|
|
765
|
|
|
|
39
|
|
|
|
5
|
%
|
Incentive fee
|
|
|
1,864
|
|
|
|
1,686
|
|
|
|
178
|
|
|
|
11
|
%
|
Administration fee
|
|
|
730
|
|
|
|
575
|
|
|
|
155
|
|
|
|
27
|
%
|
General and administrative
|
|
|
866
|
|
|
|
787
|
|
|
|
79
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses before credit to incentive fee
|
|
|
16,144
|
|
|
|
13,083
|
|
|
|
3,061
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to incentive fee
|
|
|
(1,502
|
)
|
|
|
(1,259
|
)
|
|
|
(243
|
)
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,642
|
|
|
|
11,824
|
|
|
|
2,818
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(11,425
|
)
|
|
|
(9,458
|
)
|
|
|
(1,967
|
)
|
|
|
21
|
%
|
Distributions attributable to Series C mandatorily redeemable preferred stock
|
|
|
(1,372
|
)
|
|
|
(1,143
|
)
|
|
|
(229
|
)
|
|
|
20
|
%
|
Other income
|
|
|
29
|
|
|
|
73
|
|
|
|
(44
|
)
|
|
|
-60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(12,768
|
)
|
|
|
(10,528
|
)
|
|
|
(2,240
|
)
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
883
|
|
|
|
2,155
|
|
|
|
(1,272
|
)
|
|
|
-59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions attributable to Series A and B preferred stock
|
|
|
(2,047
|
)
|
|
|
(2,047
|
)
|
|
|
|
|
|
|
0
|
%
|
Distributions attributable to senior common stock
|
|
|
(122
|
)
|
|
|
(41
|
)
|
|
|
(81
|
)
|
|
|
198
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(1,286
|
)
|
|
$
|
67
|
|
|
$
|
(1,353
|
)
|
|
|
-2019
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders per weighted average share of common stock - diluted
|
|
$
|
(0.11
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
|
|
-1200
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common stockholders
|
|
$
|
8,835
|
|
|
$
|
7,963
|
|
|
$
|
872
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per weighted average share of common stock - diluted
|
|
$
|
0.74
|
|
|
$
|
0.73
|
|
|
$
|
0.01
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
Rental income increased for both the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012, because of the six properties acquired subsequent to
June 30, 2012, partially offset by a loss of rental income due to vacancies in our portfolio subsequent to June 30, 2012.
Tenant
recovery revenue decreased for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. This decrease was primarily due to a decrease in our insurance premiums and, thus, a decrease in the amount
reimbursed by our tenants, partially offset by reimbursements from our partially vacant building located in Roseville, Minnesota. We are responsible for paying the operating expenses at this building; however, the current tenant that occupies a
portion of the space is reimbursing us for a portion of these expenses. Tenant recovery revenue increased for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. This increase was primarily due to
reimbursements from our tenant in our partially vacant building located in Roseville, Minnesota.
34
Operating Expenses
Depreciation and amortization expenses increased for the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012, because of the six properties
acquired subsequent to June 30, 2012.
Property operating expenses consist of franchise taxes, management fees, insurance, ground lease
payments and overhead expenses paid on behalf of certain of our properties. Property operating expenses increased for both the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012, primarily
because of an increase in overhead expenses at our partially vacant Roseville, Minnesota building.
Acquisition related expense primarily
consists of legal fees and fees incurred for third-party reports prepared in connection with potential acquisitions and our due diligence analyses related thereto. Acquisition related expense decreased for both the three and six months ended
June 30, 2013, as compared to the three and six months ended June 30, 2012, as a result of costs incurred related to the five properties acquired during the six months ended June 30, 2012, versus only three properties acquired during
the six months ended June 30, 2013.
The base management fee increased for the three and six months ended June 30, 2013, as compared
to the three and six months ended June 30, 2012, due to an increase in total common stockholders equity, the main component of the calculation. The calculation of the base management fee is described in detail above under
Advisory and Administration Agreements.
The incentive fee increased for both the three and six months ended June 30,
2013, as compared to the three and six months ended June 30, 2012, because of an increase in pre-incentive fee FFO. The increase in pre-incentive fee FFO was due to an increase in rental revenues from the acquisitions acquired subsequent to
June 30, 2012, which was partially offset by an increase in property operating and interest expenses during the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012.
The incentive fee credit increased for both the three and six months ended June 30, 2013, as compared to the three and six months ended
June 30, 2012, because of an increase in the amount of common dividends paid from the shares issued during 2013. The calculation of the incentive fee is described in detail above within
Advisory and Administration Agreements.
The administration fee increased for both the three and six months ended June 30, 2013, as compared to the three and six months
ended June 30, 2012, as a result of an increase in the amount of the total expenses our Administrator incurred during the six months ended June 30, 2013, coupled with a larger percentage of the fee being allocated to us as a result of the
increase in our total assets during the last 12 months. The calculation of the administration fee is described in detail above within
Advisory and Administration Agreements.
General and administrative expenses increased for both the three and six months ended June 30, 2013, as compared to the three and six months ended
June 30, 2012, as a result of an increase in professional fees related to tax and audit work from the increase in our asset size.
Other Income and Expenses
Interest
expense increased for the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012. This increase was primarily a result of interest on the $94.4 million of mortgage debt assumed and issued in
the past 12 months, partially offset by reduced interest expense on our long-term financings from amortizing and balloon principal payments made during the last 12 months.
Distributions on our mandatorily redeemable preferred stock increased for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, because the public offering of
shares of our Term Preferred Stock was completed in February 2012, and thus was not outstanding for the full six months ended June 30, 2012.
35
Other income decreased during both the three and six months ended June 30, 2013, as compared to the
three and six months ended June 30, 2012, because of lower interest income on employee loans earned during the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012 due to principal
repayments made by employees of our Adviser during the past twelve months.
Net (Loss) Income Available to Common Stockholders
Net (loss) income available to common stockholders decreased for both the three and six months ended June 30, 2013, as compared to
the three and six months ended June 30, 2012, primarily because of increased interest expense and increased distributions to our preferred stockholders from the issuance of our 7.125% Series C Cumulative Term Preferred Stock, or the Term
Preferred Stock, partially offset by an increase in rental income earned from the 6 properties acquired in the past 12 months.
Liquidity
and Capital Resources
Overview
Our sources of liquidity include cash flows from operations, cash and cash equivalents, borrowings under our Line of Credit, obtaining mortgages on our unencumbered properties and issuing additional
equity securities. Our available liquidity at June 30, 2013, was $30.3 million, including $4.0 million in cash and cash equivalents and an available borrowing capacity of $26.3 million under our Line of Credit.
Future Capital Needs
We actively seek
conservative investments that are likely to produce income to pay distributions to our stockholders. We intend to use the proceeds received from future equity raised and debt capital borrowed to continue to invest in industrial, commercial and
retail real property, make mortgage loans, or pay down outstanding borrowings under our Line of Credit. Accordingly, to ensure that we are able to effectively execute our business strategy, we routinely review our liquidity requirements and
continually evaluate all potential sources of liquidity. Our short-term liquidity needs include proceeds necessary to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages, and fund our current
operating costs. Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments.
We believe that
our available liquidity is sufficient to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages and fund our current operating costs in the near term. Additionally, to satisfy our short-term
obligations, we may request credits to our management fees that are issued from our Adviser, although our Adviser is under no obligation to provide any such credits, either in whole or in part. Historically, our Adviser has provided such partial
credits to our management fees on a quarterly basis. We further believe that our cash flow from operations coupled with the financing capital available to us in the future are sufficient to fund our long-term liquidity needs.
Equity Capital
During 2013, we raised
$51.7 million of common equity in two follow-on public offerings, or $48.9 million in net proceeds, at an average share price of $18.86, we also raised $6.3 million of common equity under our ATM Program, or $6.2 million in net proceeds, at an
average share price of $18.85. We also raised $1.7 million in net proceeds of senior common equity. We used these proceeds to acquire additional real estate, repay a portion of the outstanding balance of the Line of Credit, with the remainder used
for general corporate and working capital needs.
36
As of today, we have the ability to raise up to $153.4 million of additional equity capital through the sale
and issuance of securities that are registered under our universal shelf registration statement on Form S-3 (File No. 333-169290), or the Universal Shelf, in one or more future public offerings. Of the $153.4 million of available capacity under
our Universal Shelf, $12.6 million of common stock is reserved for additional sales under our ATM Program and $48.0 million is reserved for sales of our senior common stock. Our Universal Shelf expires in September 2013; however, we intend to file a
new registration statement to continue to give us the ability to raise equity capital through follow-on public offerings and pursuant to our ATM Program and Dealer Manager Agreement.
Debt Capital
As of June 30, 2013, we had fixed-rate mortgage notes payable in the
aggregate principal amount of $358.4 million, collateralized by a total of 65 properties with terms at issuance ranging from 5 years to 17 years. The weighted-average interest rate on the mortgage notes payable as of June 30, 2013 was 5.62%.
The CMBS market has returned, see the discussion in
Overview Business Environment
above. Specifically, we continue
to see banks and other non-bank lenders willing to issue 10-year mortgages. Consequently, we are focused on obtaining mortgages through regional banks, non-bank lenders and CMBS.
We have mortgage debt in the aggregate principal amount of $12.1 million payable during the remainder of 2013 and $24.5 million payable during 2014. The 2013 and 2014 principal amounts payable include
both amortizing principal payments and balloon principal payments due in December of 2013 of $8.5 million and June 2014 of $17.3 million; however, we are initiating conversations with these lenders in advance of these maturities and anticipate being
able to extend the maturity dates or refinance with new lenders. We intend to pay the 2013 and 2014 debt amortization payments from operating cash flow and borrowings under our Line of Credit.
Operating Activities
Net cash provided
by operating activities during the six months ended June 30, 2013, was $7.5 million, as compared to net cash provided by operating activities of $10.8 million for the six months ended June 30, 2012. This decrease was primarily a result of
a decrease in our payables and commissions paid for renewing existing leases, coupled with a decrease in revenues from vacancies in our portfolio in the past 12 months, partially offset by an increase in rental income received from the 6 properties
acquired in the past 12 months. The majority of cash from operating activities is generated from the rental payments that we receive from our tenants. We utilize this cash to fund our property-level operating expenses and use the excess cash
primarily for debt and interest payments on our mortgage notes payable, interest payments on our Line of Credit, distributions to our stockholders, management fees to our Adviser, and other entity-level expenses.
Investing Activities
Net cash used in
investing activities during the six months ended June 30, 2013, was $38.3 million, which primarily consisted of the acquisition of three properties, the expansion at another property and tenant improvements performed at certain of our
properties during the six months ended June 30, 2013, as compared to net cash used in investing activities during the six months ended June 30, 2012, of $46.3 million, which primarily consisted of the acquisition of five properties,
coupled with tenant improvements performed at certain of our properties and net payments to our lenders for reserves.
Financing Activities
Net cash provided by financing activities during the six months ended June 30, 2013, was $29.3 million, which primarily consisted of
proceeds from the sale of common stock and proceeds from the issuance of mortgage notes payable, partially offset by net repayments on our Line of Credit, distributions paid to our stockholders and principal repayments on mortgage notes payable. Net
cash provided by financing activities for the six months ended June 30, 2012, was $36.5 million, which primarily consisted of proceeds from the sale of our Term Preferred Stock and proceeds from the issuance of mortgage notes payable, partially
offset by distributions paid to our stockholders, principal repayments on mortgage notes payable and net repayments on our Line of Credit.
37
Line of Credit
In December 2010, we procured a $50.0 million Line of Credit maturing on December 28, 2013, with Capital One, N.A. serving as a revolving lender, a letter of credit issuer and an administrative agent
and Branch Banking and Trust Company serving as a revolving lender and letter of credit issuer. The Line of Credit originally provided for a senior secured revolving credit facility of up to $50.0 million, with a standby letter of credit sublimit of
up to $20.0 million. In January 2012, the Line of Credit was expanded to $75.0 million and Citizens Bank of Pennsylvania was added as a revolving lender and letter of credit issuer. The interest rate per annum applicable to the Line of Credit is
equal to the London Interbank Offered Rate, or LIBOR, plus an applicable margin of up to 3.00% depending upon our leverage. Our leverage ratio used in determining the applicable margin for interest on the Line of Credit is recalculated quarterly. We
are subject to an annual maintenance fee of 0.25% per year. Our ability to access this source of financing is subject to our continued ability to meet customary lending requirements such as compliance with financial and operating covenants and
our meeting certain lending limits. One such covenant requires us to limit distributions to our stockholders to 95% of our FFO, with acquisition-related costs required to be expensed under ASC 805 added back to FFO for covenant purposes. In
addition, the maximum amount that we may draw under this agreement is based on a percentage of the value of properties pledged as collateral to the banks, which must meet agreed upon eligibility standards. Currently, 15 of our properties are
pledged as collateral under our Line of Credit.
When we are able to procure mortgages for these pledged properties, the banks will release
the properties from the Line of Credit and reduce the availability under the Line of Credit by the advanced amount of the released property. Conversely, as we purchase new properties meeting the eligibility standards, we may pledge these new
properties to obtain additional advances under the Line of Credit. Our availability under the Line of Credit will also be reduced by letters of credit used in the ordinary course of business. We may use the advances under the Line of Credit for both
general corporate purposes and the acquisition of new investments.
As of June 30, 2013, there was $11.2 million outstanding under the
Line of Credit at an interest rate of approximately 3.0% and $5.6 million outstanding under letters of credit at a weighted average interest rate of 3.0%. As of June 30, 2013, the remaining borrowing capacity available under the Line of Credit
was $26.3 million. Our ability to increase the availability under our Line of Credit is dependent upon our pledging additional properties as collateral. Traditionally, we have pledged new properties to the Line of Credit as we arrange for long-term
mortgages for these pledged properties. Currently, only 17 of our properties do not have long-term mortgages, and 15 of those are pledged as collateral under our Line of Credit. Accordingly, we have only 2 properties which are unencumbered. We were
in compliance with all covenants under the Line of Credit as of June 30, 2013.
Our Line of Credit matures in December 2013. We are
currently in discussions with various lenders to implement a new line of credit. We anticipate being able to issue a new line in advance of the maturity of our existing line in an amount similar to our existing Line of Credit.
If we cannot find replacement financing, management has reviewed its cash uses and sources and has identified plans that could be implemented to continue
operations despite the maturity of the Line of Credit. These steps could include obtaining an extension from the current lender to provide additional time to obtain replacement financing, suspension of capital spending, cost reductions, an equity
raise and possible asset disposals. Additionally, management has assessed that the remaining assets in the portfolio would produce sufficient cash flows to fund operating cash needs and meet remaining debt service requirements in the near term.
38
Contractual Obligations
The following table reflects our material contractual obligations as of June 30, 2013 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than 1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than 5 Years
|
|
Debt Obligations
(1)
|
|
$
|
408,130
|
|
|
$
|
44,245
|
|
|
$
|
108,706
|
|
|
$
|
121,954
|
|
|
$
|
133,225
|
|
Interest on Debt Obligations
(2)
|
|
|
110,718
|
|
|
|
22,910
|
|
|
|
39,950
|
|
|
|
20,863
|
|
|
|
26,995
|
|
Operating Lease Obligations
(3)
|
|
|
7,194
|
|
|
|
413
|
|
|
|
825
|
|
|
|
830
|
|
|
|
5,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
526,042
|
|
|
$
|
67,568
|
|
|
$
|
149,481
|
|
|
$
|
143,647
|
|
|
$
|
165,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Debt obligations represent borrowings under our Line of Credit, which represents $11.2 million of the debt obligation due in 2013, mortgage notes payable that were
outstanding as of June 30, 2013, and amounts due to the holders of our Term Preferred Stock.
|
(2)
|
Interest on debt obligations includes estimated interest on our borrowings under our Line of Credit, mortgage notes payable and interest due to the holders of our Term
Preferred Stock. The balance and interest rate on our Line of Credit is variable; thus, the amount of interest calculated for purposes of this table was based upon rates and balances as of June 30, 2013.
|
(3)
|
Operating lease obligations represent the ground lease payments due on our Tulsa, Oklahoma, Dartmouth, Massachusetts, and Springfield, Missouri properties.
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Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2013.
Funds from
Operations
The National Association of Real Estate Investment Trusts, or NAREIT, developed FFO as a relevant non-GAAP supplemental measure
of operating performance of an equity REIT, to recognize that income-producing real estate historically has not depreciated on the same basis determined under GAAP. FFO, as defined by NAREIT, is net income (computed in accordance with GAAP),
excluding gains or losses from sales of property and impairment losses on property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures.
FFO does not represent cash flows from operating activities in accordance with GAAP, which, unlike FFO, generally reflects all cash effects of
transactions and other events in the determination of net income and should not be considered an alternative to net income as an indication of our performance or to cash flows from operations as a measure of liquidity or ability to make
distributions. Comparison of FFO, using the NAREIT definition, to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.
FFO available to common stockholders is FFO adjusted to subtract distributions made to holders of preferred and senior common stock. We believe that
net income available to common stockholders is the most directly comparable GAAP measure to FFO available to common stockholders.
Basic funds
from operations per share, or Basic FFO per share, and diluted funds from operations per share, or Diluted FFO per share, is FFO available to common stockholders divided by the number of weighted average shares of common stock outstanding and FFO
available to common stockholders divided by the number of weighted average shares of common stock outstanding on a diluted basis, respectively, during a period. We believe that FFO available to common stockholders, Basic FFO per share and Diluted
FFO per share are useful to investors because they provide investors with a further context for evaluating our FFO results in the same manner that investors use net income and earnings per share, or EPS, in evaluating net income available to common
stockholders. In addition, because most REITs provide FFO available to common stockholders, Basic FFO and Diluted FFO per share information to the investment community, we believe these are useful supplemental measures when comparing us to other
REITs. We believe that net income is the most directly comparable GAAP measure to FFO, Basic EPS is the most directly comparable GAAP measure to Basic FFO per share, and that diluted EPS is the most directly comparable GAAP measure to Diluted FFO
per share.
39
The following table provides a reconciliation of our FFO available to common stockholders for the three and
six months ended June 30, 2013 and 2012, to the most directly comparable GAAP measure, net income available to common stockholders, and a computation of basic and diluted FFO per weighted average share of common stock:
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|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
Net income
|
|
$
|
451
|
|
|
$
|
854
|
|
|
$
|
883
|
|
|
$
|
2,155
|
|
Less: Distributions attributable to preferred and senior common stock
|
|
|
(1,092
|
)
|
|
|
(1,046
|
)
|
|
|
(2,169
|
)
|
|
|
(2,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(641
|
)
|
|
$
|
(192
|
)
|
|
$
|
(1,286
|
)
|
|
$
|
67
|
|
Add: Real estate depreciation and amortization
|
|
|
5,220
|
|
|
|
3,992
|
|
|
|
10,121
|
|
|
|
7,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common stockholders
|
|
$
|
4,579
|
|
|
$
|
3,800
|
|
|
$
|
8,835
|
|
|
$
|
7,963
|
|
Weighted average common shares outstanding - basic
|
|
|
12,380,402
|
|
|
|
10,945,379
|
|
|
|
11,808,701
|
|
|
|
10,945,379
|
|
Weighted average common shares outstanding - diluted
|
|
|
12,576,161
|
|
|
|
11,018,870
|
|
|
|
11,989,454
|
|
|
|
11,011,259
|
|
Diluted net (loss) income per weighted average share of common stock
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic FFO per weighted average share of common stock
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.75
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted FFO per weighted average share of common stock
|
|
$
|
0.36
|
|
|
$
|
0.34
|
|
|
$
|
0.74
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared per share of common stock
|
|
$
|
0.375
|
|
|
$
|
0.375
|
|
|
$
|
0.750
|
|
|
$
|
0.750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40