Description
Filed with the SEC from Oct 11 to Oct 17:
American Realty Capital Trust (ARCT)
Luxor Capital Group said in an Oct. 15 letter that it intends to vote against American Realty's proposed merger with Realty Income (ticker: O).
BUSINESS OVERVIEW
Organization
We are a Maryland corporation, incorporated on August 17, 2007, that elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December 31, 2008. As a REIT, we generally are not subject to corporate-level income taxes. To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our "REIT taxable income," as defined by the Internal Revenue Code of 1986, as amended (the "Code"), to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates.
On January 25, 2008, we commenced an initial public offering ("IPO") on a "best efforts" basis of up to 150.0 million shares of common stock offered at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-145949) (the "Registration Statement") filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. The Registration Statement also covered up to 25.0 million shares of common stock available pursuant to a distribution reinvestment plan (the "DRIP") under which our stockholders may elect to have their distributions reinvested in additional shares of our common stock at the greater of $9.50 per share, or 95% of the estimated value of a share of common stock.
On August 5, 2010, we filed a registration statement on Form S-11 to register 32.5 million shares of common stock in connection with a follow-on offering. The IPO was originally set to expire on January 25, 2011, three years after its effective date. However, as permitted by Rule 415 of the Securities Act, we were permitted to continue our IPO until July 25, 2011. On July 18, 2011, our IPO closed. All shares registered under the IPO and 22.2 million shares available under the DRIP were allocated to the IPO and sold. On July 11, 2011, we withdrew the registration for the additional 32.5 million shares in connection with the follow-on offering. In addition, on July 15, 2011, we filed a registration statement on Form S-3 to register an additional 24.0 million shares of common stock to be used for the DRIP.
Our Board of Directors has determined that it is in the best interests of the Company and our stockholders to internalize the management services currently provided by our Advisor and American Realty Capital Properties, LLC, which serves as our property manager (the “Property Manager”) concurrently with the listing (the "Listing"), of our shares of common stock on the NASDAQ Global Select Market, or NASDAQ. We intend to become a self-administered REIT and will be managed full-time by William M. Kahane, one of the key executives who founded our Company and was intricately involved in the acquisition of our property portfolio, together with certain members of our management team or our Internalization. As part of our Internalization, we have applied to list shares of our common stock on NASDAQ under the symbol “ARCT”, which we anticipate will occur on or about March 1, 2012. Further, we are offering for sale up to 6.6 million shares of our common stock in an underwritten public offering pursuant to a registration statement on Form S-11 filed on February 15, 2012 with the SEC (the “Offering”). This registration is not yet effective, Upon consummation of the Listing, we expect to complete our Internalization and terminate our existing Advisory Agreement with our Advisor, subject to a 60-day transition period (subject to our right to extend this agreement for up to three months) and we will purchase our Property Manager from AR Capital II, LLC (formerly American Realty Capital II, LLC) for $10.00. On or promptly upon completion of the Listing, we also intend to offer to purchase an amount in value of our shares of common stock between $200 million and $250 million pursuant to a tender offer. In accordance with the expected terms of our tender offer with the final purchase price being determined through a modified Dutch auction process, (the "Tender Offer"), we will select the lowest price, not greater than $11.00 nor less than $10.50 per share, that will allow us to purchase $250.0 million in value of our shares of common stock, or a lower amount depending upon the number of shares of our common stock properly tendered and not withdrawn based on the selection from three different tender price ranges within that range.
This Form 10-K shall not constitute an offer to sell or the solicitation of an offer to buy the securities planned to be offered pursuant to the Registration Statement on Form S-11, nor shall there be any offer or sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. A registration statement relating to these securities has been filed with the SEC but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. The offering will be made only by means of a prospectus which is a part of such registration statement. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330 . The SEC maintains an internet address at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In
addition, copies of our filings with the SEC may be obtained from the website maintained for us and our affiliates at www.americanrealtycap.com .
This Form 10-K is for informational purposes only and is not an offer to buy or the solicitation of an offer to sell any shares. The full details of the modified “Dutch auction” tender offer, including complete instructions on how to tender shares, will be included in the offer to purchase, the letter of transmittal and related materials, which will become available to stockholders promptly following commencement of the offer. Stockholders should read carefully the offer to purchase, the letter of transmittal and other related materials when they are available because they will contain important information. Stockholders may obtain free copies, when available, of the offer to purchase and other related materials that will be filed by the Company with the Securities and Exchange Commission at the Commission's website at www.sec.gov. When available, stockholders also may obtain a copy of these documents, free of charge, from the Company.
As of December 31, 2011 , we issued 178.0 million shares of common stock. Total gross proceeds from these issuances were $1.8 billion , including shares issued pursuant to the DRIP. As of December 31, 2011 , the aggregate value of all share issuances and subscriptions outstanding was $1.8 billion based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP). As of December 31, 2011 , 3.0 million shares of common stock had been redeemed under our stock repurchase program at a value of $13.5 million . Of that amount, 0.3 million shares with a redemption value of $2.8 million were accrued for redemption at December 31, 2011 , and subsequently paid to stockholders in January 2012. We are dependent upon the net proceeds from the offering to conduct our proposed operations.
We have used the proceeds from our IPO to acquire and manage a diverse portfolio of real estate properties consisting primarily of freestanding, single-tenant properties net leased to investment grade and other creditworthy tenants throughout the United States and Puerto Rico. We intend to use the net proceeds from the contemplated public offering to repay indebtedness under our revolving credit facility with RBS Citizens, N.A. We typically fund our acquisitions with a combination of equity and debt and in certain cases we may use only equity capital or we may fund a portion of the purchase price of an acquisition through investments from third parties. We expect to arrange long-term financing on both a secured and unsecured fixed rate basis. We intend to continue to grow our existing relationships and develop new relationships throughout various markets we serve, which we expect will lead to further acquisition opportunities. As of December 31, 2011 , our leverage ratio was 31.7% , or 30.1% including cash and cash equivalents of $33.3 million . Our Company began the process to garner a corporate credit rating and received its first rating from a major rating agency in late-2010. By early-2011, the Company secured a second corporate credit rating from another major rating agency. The Company intends to focus on improving its balance sheet and performance metrics in keeping with the rating agencies methodologies. We intend to maintain leverage, coverage and other levels consistent with our existing ratings and to seek to have our ratings increased when appropriate.
As of December 31, 2011 , we owned 482 properties with 15.5 million square feet, 100% leased with a weighted average remaining lease term of 13.5 years. In constructing our portfolio, we are committed to diversification (industry, tenant and geography). As of December 31, 2011 , rental revenues derived from investment grade tenants, as rated by a major rating agency, represented 71.6% of annualized rental income on a straight-line basis. Our strategy encompasses receiving the majority of our revenue from investment grade tenants.
Substantially all of our business is conducted through American Realty Capital Operating Partnership, L.P. (the "OP”), a Delaware limited partnership. We are the sole general partner of and following the internalization, we will own a 99.99% partnership interest in the OP. The Advisor is the sole limited partner and will be the owner of 0.01% (non-controlling interest) of the partnership interests of the OP. The limited partner interests have the right to convert OP units into cash or, at our option, a corresponding number of common shares, as allowed by the limited partnership agreement.
Real estate-related investments are higher-yield and higher-risk investments than real properties, if we elect to acquire such investments. The real estate-related investments in which we may invest include: (i) mortgage loans; (ii) equity securities such as common stocks, preferred stocks and convertible preferred securities of real estate companies; (iii) debt securities, such as mortgage-backed securities, commercial mortgages, mortgage loan participations and debt securities issued by other real estate companies; and (iv) certain types of illiquid securities, such as mezzanine loans and bridge loans. While we may invest in any of these real estate-related investments, we have elected to suspend all activities relating to acquiring real estate-related investments for an indefinite period based on the current adverse climate affecting the capital markets. Since our inception, we have not acquired any real estate-related investments, other than investments in common stock of other REITs.
Investment Objectives
We invest in commercial real estate properties. Our primary investment objectives are:
• to provide current income for investors through the payment of cash distributions; and
• to preserve and return investors’ capital contributions.
We also seek capital gain from our investments. Investors may be able to obtain a return on all or a portion of their capital contribution in connection with the sale of an investor’s shares if we list our shares on a national securities exchange. We cannot assure investors that we will attain any of these objectives. See "Risk Factors.”
Our core investment strategy for achieving these objectives is to primarily acquire, own and manage a portfolio of free-standing commercial properties that are leased to a diversified group of credit worthy companies on a single tenant, net lease basis. Net leases generally require the tenant to pay substantially all of the costs associated with operating and maintaining the property such as maintenance, insurance, taxes, structural repairs and all other operating and capital expenses (referred to as "triple-net leases”).
Our Board of Directors may revise our investment policies, which we describe in more detail below, without the concurrence of our stockholders. Our independent directors will review our investment policies, which we discuss in detail below, at least annually to determine that our policies are in the best interest of our stockholders.
Acquisition and Investment Policies
We seek to build a diversified portfolio comprised primarily of free-standing single-tenant bank branch, convenience store, restaurant, retail, office and industrial properties that are double-net and triple-net leased to investment grade (S&P BBB- or better) and other creditworthy tenants. Triple-net (NNN) leases typically require the tenant to pay substantially all of the costs associated with operating and maintaining the property such as maintenance, insurance, taxes, structural repairs and all other operating and capital expenses. Double-net (NN) leases typically provide that the landlord is responsible for maintaining the roof and structure, or other structural aspects of the property, while the tenant is responsible for all remaining expenses associated with the property. We will seek to build a portfolio where at least 50% of the portfolio will be comprised of properties leased to investment grade tenants. We currently exceed our objective as 71.6% of our annualized rental income on a straight-line basis is from investment grade tenants, as rated by a major rating agency, as of December 31, 2011 . While most of our investment will be directly in such properties, we may also invest in entities that own or invest in such properties.
We intend to assemble a portfolio of real estate that is diversified by industry, geography, tenants, credits, and use. We anticipate that our portfolio will consist primarily of freestanding, single-tenant properties net leased for use as bank branches, convenience stores, restaurants, retail, office and industrial establishments. Although we expect our portfolio will consist primarily of freestanding, single-tenant properties, we will not forgo opportunities to invest in other types of real estate investments that meet our overall investment objectives.
Borrowing Policies
Our Advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to investors. By operating on a leveraged basis, we will have more funds available for investment in properties. This will allow us to make more investments than would otherwise be possible, resulting in a more diversified portfolio. There is no limitation on the amount we may borrow against any single improved property. However, under our charter, we are required to limit our borrowings to 75% of the greater of the aggregate cost (before deducting depreciation or other non-cash reserves) or the aggregate fair market value of our gross assets as of the date of any borrowing (and to 300% of our net assets (as defined in our charter)), unless excess borrowing is approved by a majority of the independent directors and disclosed to our stockholders in the next quarterly report along with the justification for such excess borrowing. As of December 31, 2011 , we have maintained a disciplined approach with respect to borrowing, having a leverage ratio of 31.7% (long-term mortgage financing as a percentage of total real estate investments, at cost). In the event that we issue preferred stock that is entitled to a preference over the common stock in respect of distributions or liquidation or is treated as debt under accounting principles generally accepted in the United States of America ("GAAP”), we will include it in the leverage restriction calculations, unless the issuance of the preferred stock is approved or ratified by our stockholders.
Our Advisor will use its best efforts to obtain financing on the most favorable terms available to us. Lenders may have recourse to certain of our assets in order to secure the repayment of the indebtedness.
Our OP may, with the approval of a majority of our independent directors, utilize unsecured revolving equity lines in connection with property acquisitions as opportunities present themselves, which equity shall be repaid as we raise common equity. Currently, we have one such equity line of up to $10.0 million provided by certain managing principals of AR Capital, LLC (formerly American Realty Capital II, LLC), which as of December 31, 2011 had no amounts outstanding.
In addition, short-term equity facilities may be obtained from third parties on a case-by-case basis as acquisition opportunities present themselves simultaneous with our capital raising efforts. We view the use of short-term equity facilities as an efficient and accretive means of acquiring real estate in advance of raising equity capital.
We have a $230.0 million revolving credit facility with RBS Citizens that matures on August 17, 2014. The facility bears interest at the rate of (i) LIBOR with respect to Eurodollar rate loans plus a margin 205 to 285 basis points, depending on our leverage ratio; and (ii) the greater of the federal funds rate plus 1.0% and the interest rate publicly announced by RBS Citizens as its ‘‘prime rate’’ or ‘‘base rate’’ at such time with respect to base rate loans plus a margin of 125 to 175 basis points depending on our leverage ratio. The facility contains various covenants, including financial covenants with respect to consolidated leverage, net worth, fixed charge coverage, variable debt ratio, recourse debt to total asset value and secured debt to total asset value. As of December 31, 2011, we were in compliance with all of these covenants. As of December 31, 2011 , there was $10.0 million outstanding on this facility, which has been repaid as of January 31, 2012.
Distribution Policy
To maintain our qualification as a REIT, we are required, among other things, to generally make aggregate annual distributions to our stockholders of at least 90% of our annual REIT taxable income which does not necessarily equal net income as calculated in accordance with GAAP, determined without regard to the deduction for distributions paid and excluding any net capital gain. Our Board of Directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our Board of Directors deems relevant. We calculate our monthly distributions based upon daily record and distribution declaration dates so investors may be entitled to distributions immediately upon purchasing our shares. The payment date is the 1 st day following each month-end to stockholders of record at the close of business each day during the applicable period.
The distribution is calculated based on stockholders of record each day during the applicable period at a rate that, if paid each day for a 365-day period, would equal a specified annualized rate based on a share price of $10.00. The initial annualized rate was 6.5% based on the share price of $10.00. On November 5, 2008, the Board of Directors of approved an increase in its annual cash distribution from $0.65 to $0.67 per share. Based on a $10.00 share price, this 20 basis point increase, effective January 2, 2009, resulted in an annualized distribution rate of 6.7%. On April 1, 2010, our daily distribution rate increased by another 30 basis points, resulting in an annualized distribution rate of 7.0%. During the years ended December 31, 2011 and 2010 , distributions totaled $86.6 million and $20.7 million , respectively, inclusive of $39.1 million and $9.3 million of common shares issued under the DRIP, respectively, and exclusive of $1.0 million and $0.3 million paid on unvested restricted stock grants, respectively. Distribution payments are dependent on the availability of funds. Our Board of Directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
We, our Board of Directors and Advisor have shared a similar philosophy with respect to paying our distribution. The distribution should principally be derived from cash flows generated from real estate operations. In order to improve our operating cash flows and our ability to pay distributions from operating cash flows, our related party Advisor agreed to waive certain fees including asset management and property management fees. We owed our Advisor an annualized asset management fee of 1.0% based on the aggregate contract purchase price of all properties. During the years ended December 31, 2011 and 2010 , we paid asset management fees to the Advisor of $5.6 million and $1.4 million , respectively. The Advisor has elected to waive the remainder of its asset management fee through December 31, 2011 . Such fees waived during the years ended December 31, 2011 and 2010 were $9.7 million and $4.0 million , respectively. The fees that were waived relating to the activity during 2011 and 2010 are not deferrals and accordingly, will not be paid. Because the Advisor waived certain fees that we owed, cash flow from operations that would have been paid to the Advisor was available to pay distributions to our stockholders.
In connection with the Internalization, we will terminate the advisory agreement subject to a 60 day notice period (subject to our right to extend this agreement for three consecutive one month periods), without payment or penalty in connection with such termination (other than the prepayment of $3.6 million in respect of the 60 day notice period (constituting 1.00% per annum (prorated for 60 days) of our average unadjusted book value of our real estate assets)).
In connection with the listing of our common stock on NASDAQ, our Sponsor or its affiliate will be entitled to a subordinated incentive listing fee equal to 15% of the amount, if any, by which (a) the market value of our outstanding common stock plus distributions paid by us prior to listing, exceeds (b) the sum of the total amount of capital raised from stockholders during our prior continuous offering and the amount of cash flow necessary to generate a 6% annual cumulative, non-compounded return to such stockholders. For this purpose, (i) the market value of our common stock will be calculated based on the average market value of the shares issued and outstanding at listing over the 30 trading days beginning 180 days after the shares are first listed or included for quotation and (ii) we have agreed with the Ohio Division of Securities that such fee will be paid by the issuance of a non-interest bearing, non-transferrable promissory note that would be subject to mandatory amortization payments from any sale proceeds (except for the interest imputed for tax purposes) (subject to the right of the holder to convert any unpaid portion of the note into shares of our common stock at the end of three years).
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2008. We believe that, commencing with such taxable year, we are organized and operate in such a manner as to qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. Pursuant to our charter, our Board of Directors has the authority to make any tax elections on our behalf that, in their sole judgment, are in our best interest. This authority includes the ability to elect not to qualify as a REIT for federal income tax purposes or, after qualifying as a REIT to revoke or otherwise terminate our status as a REIT. Our Board of Directors has the authority under our charter to make these elections without the necessity of obtaining the approval of our stockholders. In addition, our Board of Directors has the authority to waive any restrictions and limitations contained in our charter that are intended to preserve our status as a REIT during any period in which our Board of Directors has determined not to pursue or preserve our status as a REIT.
Competition
The United States commercial real estate investment market continues to be highly competitive. We actively compete with many other entities engaged in the acquisition and operation of commercial properties. As such, we compete for a limited supply of properties and financing for these properties that meet our investment criteria. Investors include large institutional investors, pension funds, REITs, insurance companies, as well as foreign and private investors. These entities may have greater financial resources than we do. This increased competition in the commercial real estate and finance markets may limit the number of suitable properties available to us and result in higher pricing, lower yields and an increased cost of funds. These factors could also result in delays in the investment of proceeds from our initial public offering.
Regulations
Our investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our investments.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future. We hire third parties to conduct Phase I environmental reviews of the real property that we intend to purchase.
Employees
We have no direct employees. The employees of the Advisor and other affiliates perform a full range of real estate services for us, including acquisitions, property management, accounting, legal, asset management, wholesale brokerage and investor relations services.
We are dependent on these affiliates for services that are essential to us, including the sale of shares of our common stock, asset acquisition decisions, property management and other general administrative responsibilities. In the event that any of these companies were unable to provide these services to us, we would be required to provide such services ourselves or obtain such services from other sources.
However, upon consummation of the Internalization, we plan to lease office space, have our own communications and information systems and directly employ ten persons who were associated with our Advisor or its affiliates prior to the Internalization.
Financial Information About Industry Segments
Our current business consists of owning, managing, operating, leasing, acquiring, investing in and disposing of real estate assets. All of our consolidated revenues are from our consolidated real estate properties. We internally evaluate operating performance on an individual property level and view all of our real estate assets as one industry segment, and, accordingly, all of our properties are aggregated into one reportable segment. Please see Part IV, Item 15 — Exhibits and Financial Statement Schedules included elsewhere in this annual report for more detailed financial information.
CEO BACKGROUND
Nicholas S. Schorsch
Nicholas S. Schorsch has served as the chairman of the Board of our Company since August 2007. Mr. Schorsch served as the chief executive officer of our Company, American Realty Capital Advisors, LLC (our “Former Advisor”) and American Realty Capital Properties, LLC (our “Former Property Manager”) from our formation in August 2007 until March 2012. Since October 2009, Mr. Schorsch has also served as chairman of the Board and chief executive officer of American Realty Capital New York Recovery REIT, Inc. (“NYRR”). Since November 2009, he served as the chief executive officer of the property manager and advisor of NYRR. Mr. Schorsch has been the chief executive officer of the Phillips Edison — ARC Shopping Center REIT, Inc. (“PE-ARC”) advisor since its formation in December 2009. Mr. Schorsch has been the chairman and chief executive officer of American Realty Capital — Retail Centers of America, Inc. (“ARC RCA”) and the chief executive officer of ARC RCA’s advisor since their formation in July and May 2010, respectively. Mr. Schorsch has been the chairman and chief executive officer of American Realty Capital Healthcare Trust Inc. (“ARC HT”) and the chief executive officer of the ARC HT advisor and property manager since their formation in August 2010. Mr. Schorsch has been the chairman and chief executive officer of American Realty Capital Daily Net Asset Value Trust, Inc. (“ARC DNAV”) and the chief executive officer of the advisor and property manager of ARC DNAV since their formation in September 2010. Mr. Schorsch has served as the chairman and chief executive officer of American Realty Capital Trust III, Inc. (“ARCT III”) and the chief executive officer of its advisor and property manager since their formation in October 2010. Mr. Schorsch has also been the chairman and chief executive officer of American Realty Capital Properties, Inc. (“ARCP”) since its formation in December 2010, and the chief executive officer of its advisor since its formation in November 2010. Mr. Schorsch also has been the chairman and chief executive officer of American Realty Capital Global Daily Net Asset Value Trust, Inc. (“ARC Global DNAV”) and the chief executive officer of the ARC Global DNAV advisor and the ARC Global DNAV property manager since their formation in July 2011, July 2011 and January 2012, respectively. Mr. Schorsch also has been the chairman and chief executive officer of American Realty Capital Trust IV, Inc. (“ARCT IV”), the ARCT IV advisor and the ARCT IV property manager since their formation in February 2012. Mr. Schorsch also has been the interested director and chief executive officer of Business Development Corporation of America, Inc. (“BDCA”) since its formation in May 2010.
Prior to his current position with our Company, from September 2006 to July 2007, Mr. Schorsch was chief executive officer of an affiliate, American Realty Capital, a real estate investment firm. Mr. Schorsch founded and formerly served as president, chief executive officer and vice chairman of American Financial Realty Trust (“AFRT”) from its inception as a REIT in September 2002 until August 2006. AFRT was a publicly traded REIT that invested exclusively in offices, operation centers, bank branches, and other operating real estate assets that are net leased to tenants in the financial service industry, such as banks and insurance companies.
From 1995 to September 2002, Mr. Schorsch served as chief executive officer and president of American Financial Resource Group (“AFRG”), AFRT’s predecessor, a private equity firm founded for the purpose of acquiring operating companies and other assets in a number of industries. Through AFRG and its successor corporation, AFRT, Mr. Schorsch executed in excess of 1,000 acquisitions acquiring businesses and real estate property with transactional value of approximately $5.0 billion. In 2003, Mr. Schorsch received an Entrepreneur of the Year award from Ernst & Young LLP. Prior to AFRG, Mr. Schorsch served as president of Thermal Reduction, a non-ferrous metal product manufacturing business. He successfully built the business through mergers and acquisitions and ultimately sold his interests to Corrpro (NYSE) in 1994. Mr. Schorsch attended Drexel University.
We believe that Mr. Schorsch’s current experience as chairman and chief executive officer, as applicable, of NYRR, ARC RCA, ARC HT, ARC DNAV, ARCP, ARCT III, BDCA, ARC Global DNAV and ARCT IV and his previous experience as president, chief executive officer and vice chairman of AFRT, and his significant real estate acquisition experience make him well qualified to serve as our chairman of the Board.
William M. Kahane
Mr. Kahane has served as an executive officer of our Company, our Former Advisor and our Property Manager from their formation in August 2007 and a director of our Company since its formation August 2007. He was appointed as the chief executive officer of our Company in March 2012 following the Internalization (as defined and described in “Compensation Discussion and Analysis”). He has been active in the structuring and financial management of commercial real estate investments for over 35 years. William M. Kahane has served as a director of ARC RCA since its formation in July 2010 and, until March 2012, he served as president and chief operating officer of ARC RCA and the ARC RCA advisor from their formation in July 2010 and May 2010, respectively. Mr. Kahane also has been a director of PE-ARC and the president, chief operating officer and treasurer of the PE-ARC advisor since their formation in December 2009. Mr. Kahane also served as a an executive officer of ARCT III, the ARCT III advisor and the ARCT III property manager from their formation in October 2010 until March 2012. Mr. Kahane currently serves as a director of ARC HT since its formation in August 2010 and also served as an executive officer of ARC HT, the ARC HT advisor and the ARC HT property manager from their formation in August 2010 until March 2012. Mr. Kahane served as a director and executive officer of ARC DNAV and an executive officer of the ARC DNAV advisor and the ARC DNAV property manager from their formation in September 2010 until March 2012. Mr. Kahane has served as a director of NYRR since their formation in October 2009 and served as the president and treasurer of NYRR from October 2009 until March 2012 and the NYRR advisor and NYRR property manager from their respective formations in November 2009 until March 2012. Mr. Kahane served as a director and executive officer of ARCP and an executive officer of the ARCP advisor from their formation in December 2010 and November 2010, respectively, until March 2012. Mr. Kahane also has been an interested director of BDCA from their formation in May 2010 and, until March 2012, was chief operating officer. Mr. Kahane served as president of BDCA from their formation in May 2010 until March 2012. Mr. Kahane has served as a member of the investment committee of Aetos Capital Asia Advisors, a $3 billion series of opportunistic funds focusing on assets primarily in Japan and China, since 2008.
Mr. Kahane began his career as a real estate lawyer practicing in the public and private sectors from 1974 – 1979. From 1981 – 1992, Mr. Kahane worked at Morgan Stanley & Co., specializing in real estate, becoming a managing director in 1989. In 1992, Mr. Kahane left Morgan Stanley to establish a real estate advisory and asset sales business known as Milestone Partners which continues to operate and of which Mr. Kahane is currently the chairman. Mr. Kahane worked very closely with Mr. Schorsch while a trustee at AFRT (April 2003 to August 2006), during which time Mr. Kahane served as chairman of the finance committee of AFRT’s board of trustees. Mr. Kahane has been a managing director of GF Capital Management & Advisors LLC, a New York-based merchant banking firm, where he has directed the firm’s real estate investments since 2001. GF Capital offers comprehensive wealth management services through its subsidiary TAG Associates LLC, a leading multi-client family office and portfolio management services company with approximately $5 billion of assets under management. Mr. Kahane also was on the board of directors of Catellus Development Corp., a NYSE growth-oriented real estate development company, where he served as chairman. Mr. Kahane received a B.A. from Occidental College, a J.D. from the University of California, Los Angeles Law School and an MBA from Stanford University’s Graduate School of Business. We believe that Mr. Kahane’s current experience as a director of ARC RCA, PE-ARC, ARC HT, NYRR and BDCA, his prior experience as an executive officer of ARC-RCA, ARC HT, ARC DNAV, NYRR, BDCA, ARCT III and ARCP, his prior experience as chairman of the board of Catellus Development Corp. and his significant investment banking experience in real estate make him well qualified to serve as a member of our Board of Directors.
Leslie D. Michelson
Leslie D. Michelson was appointed as an independent director of our Company on January 22, 2008. Mr. Michelson also has served as an independent director of BDCA and ARC HT since January 2011. Mr. Michelson was appointed as an independent director of ARC RCA in March 2012. Mr. Michelson served as an independent director of DNAV from August 2011 until February 2012 and as an independent director of NYRR from October 2009 until August 2011. Mr. Michelson has served as the chairman and chief executive officer of Private Health Management, a retainer-based primary care medical practice management company since April 2007. Mr. Michelson served as vice chairman and chief executive officer of the Prostate Cancer Foundation, the world’s largest private source of prostate cancer research funding, from April 2002 until December 2006 and currently serves on its board of directors. Mr. Michelson served on the board of directors of Catellus Development Corp. from 1997 until 2004 when the company was sold to ProLogis. Mr. Michelson was a member of the Audit Committee of the board of directors for 5 years and served at various times as the chairman of the Audit Committee and the Compensation Committee. From April 2001 to April 2002, he was an investor in, and served as an advisor or director of, a portfolio of entrepreneurial healthcare, technology and real estate companies. From March 2000 to August 2001, he served as chief executive officer and as a director of Acurian, Inc., an Internet company that accelerates clinical trials for new prescription drugs. From 1999 to March 2000, Mr. Michelson served as an adviser of Saybrook Capital, LLC, an investment bank specializing in the real estate and health care industries. From June 1998 to February 1999, Mr. Michelson served as chairman and co-chief executive officer of Protocare, Inc., a manager of clinical trials for the pharmaceutical industry and disease management firm. From 1988 to 1998, he served as chairman and chief executive officer of Value Health Sciences, Inc., an applied health services research firm he co-founded. Mr. Michelson has been a director of Nastech Pharmaceutical Company Inc., a NASDAQ-traded biotechnology company focused on innovative drug delivery technology, from 2004 to 2008, of Highlands Acquisition Company, an AMEX-traded special purpose acquisition company, from 2007 to 2009, and of G&L Realty Corp., a NYSE-traded medical office building REIT from 1995 to 2001, and of Landmark Imaging, a privately held diagnostic imaging and treatment company from 2007 to 2010. Also since June 2004 and through the present, he has been and is a director and vice chairman of ALS-TDI, a philanthropy dedicated to curing Amyotrophic Lateral Sclerosis (ALS), commonly known as Lou Gehrig’s disease. Mr. Michelson received his B.A. from The Johns Hopkins University in 1973 and a J.D. from Yale Law School in 1976.
We believe that Mr. Michelson’s current experience as a director of ARC RCA, BDCA and ARC HT, his previous experience as a member of the board of directors of Catellus Development Corp. and his legal education make him well qualified to serve as a member of our Board of Directors.
William G. Stanley
William G. Stanley was appointed as an independent director of our Company on January 22, 2008. Mr. Stanley has also served as an independent director of NYRR since October 2009, BDCA since January 2011 and ARC RCA since February 2011. Mr. Stanley is the founder and managing member of Stanley Laman Securities, LLC, a FINRA member broker-dealer, since 2004, and the founder and president of The Stanley-Laman Group, Ltd (“SLG”), a registered investment advisor for high net worth clients since 1997. Mr. Stanley serves on the Advisory Board of Highland Capital’s, High Cap Group. Highland Capital is a wholly owned subsidiary of National Financial Partners (NYSE:NFP). The Stanley-Laman Group has two separate groups within the organization, the Planning Group and the Investment Management Group. The Planning Group represents high worth families and family offices specializing in business continuity and estate planning using propriety computer models and tax planning techniques that have been researched, applied and refined over 30 years. SLG represents some of the wealthiest families in the world and has recently expanded its planning practice to international client matters. The Investment Management Group manages portfolios using proprietary trading and security selection techniques along with a global economic research. SLG acts as a separate account manager for other financial advisors nationally through Charles Schwab’s Institutional Separate Account Manager Platform. Mr. Stanley has earned designations as a Chartered Financial Consultant, Chartered Life Underwriter, and received his Masters Degree in Financial Services from the American College in 1997. Mr. Stanley served as an auditor for General Electric Capital from 1977 to 1979 and as a registered representative for Capital Analysts, Inc. of Radnor, Pennsylvania, a national investment advisory firm that specialized in sophisticated planning for high net worth individuals from 1979 to 1991. Mr. Stanley received a B.A. from Concord University and a Masters of Financial Services from The American College. He has also received the following designations: Chartered Life Underwriter from The American College; Chartered Financial Consultant from The American College.
We believe that Mr. Stanley’s current experience as a director of NYRR, BDCA and ARC RCA as well as his significant background in finance makes him well qualified to serve on our Board of Directors.
Robert H. Burns
Robert H. Burns was appointed as an independent director of our Company on January 22, 2008. Mr. Burns has also served as an independent director of NYRR since October 2009 and ARCT III from January 2011 to March 2012. Mr. Burns was appointed as an independent director of ARC HT in March 2012. Mr. Burns is a hotel industry veteran with an international reputation and over thirty years of hotel, real estate, food and beverage and retail experience. He founded and built the luxurious Regent International Hotels brand, which he sold in 1992. From 1970 to 1992, Mr. Burns served as chairman and chief executive officer of Regent International Hotels, where he was personally involved in all strategic and major operating decisions. Mr. Burns and his team of professionals performed site selection, obtained land use and zoning approvals, performed all property due diligence, financed each project by raising both equity and arranging debt, oversaw planning, design and construction of each hotel property, and managed each asset. Each Regent hotel typically contained a significant food and beverage element and high-end retail component, frequently including luxury goods such as clothing, jewelry, as well as retail shops. In fact, Mr. Burns is extremely familiar with the retail landscape as his flagship hotel in Hong Kong was part of a mixed-use complex anchored by a major enclosed shopping center connected to the Regent Hong Kong. Mr. Burns opened the first Regent hotel in Honolulu, Hawaii, in 1970. From 1970 to 1979, the company opened and managed a number of prominent hotels, but gained truly international recognition in 1980 with the opening of The Regent Hong Kong, which brought a new dimension in amenities and service to hotels in the city and attracted attention throughout the world. In all, Mr. Burns developed over 18 major hotel projects including the Four Seasons Hotel in New York City, the Beverly Wilshire Hotel in Beverly Hills, the Four Seasons Hotel in Milan, Italy, and the Four Seasons Hotel in Bali, Indonesia. Mr. Burns currently serves as chairman of Barings’ Chrysalis Emerging Markets Fund, a position he has held since 1991, and as a director of Barings’ Asia Pacific Fund, a position he has held since 1986. Additionally, he has been a member of the executive committee of the board of directors of Jazz at Lincoln Center in New York City since 2000. He also chairs the Robert H. Burns Foundation which he founded in 1992. The Robert H. Burns Foundation funds the education of Asian students at American schools. Mr. Burns frequently lectures at Stanford Business School. Mr. Burns served as a faculty member at the University of Hawaii from 1963 to 1994 and as president of the Hawaii Hotel Association from 1968 to 1970. Mr. Burns began his career in Sheraton’s Executive Training Program in 1958, and advanced within Sheraton and then within Westin Hotels from 1962 to 1963. He later spent eight years with Hilton International Hotels from 1963 to 1970. Mr. Burns graduated from the School of Hotel Management at Michigan State University in 1958 and the University of Michigan’s Graduate School of Business in 1960 after serving three years in the U.S. Army in Korea. For the past five years Mr. Burns has devoted his time to owning and operating Villa Feltrinelli on Lago di Garda, in Northern Italy, a small, luxury hotel, and working on developing hotel projects in Asia, focusing on Vietnam and China.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are a Maryland corporation, incorporated on August 17, 2007, that elected to be taxed as a real estate investment trust ("REIT") for federal income tax purposes, beginning with the taxable year ended December 31, 2008. As a REIT, we generally are not subject to corporate-level income taxes. To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates.
On January 25, 2008, we commenced an initial public offering (the "IPO") on a “best efforts” basis of up to 150.0 million shares of common stock offered at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-145949) (the “Registration Statement”) filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended. The Registration Statement also covered up to 25.0 million shares of common stock available pursuant to a distribution reinvestment plan (the “DRIP”) under which our stockholders may elect to have their distributions reinvested in additional shares of our common stock at the greater of $9.50 per share, or 95% of the estimated value of a share of common stock.
On August 5, 2010, we filed a registration statement on Form S-11 to register 32.5 million shares of common stock in connection with a follow-on offering. The IPO was originally set to expire on January 25, 2011, three years after its effective date. However, as permitted by Rule 415 of the Securities Act, we were permitted to continue our IPO until July 25, 2011. On July 18, 2011, our IPO closed. All shares registered under the IPO and 22.2 million shares available under the DRIP were allocated to the IPO and sold. On July 11, 2011, we withdrew the registration for the additional 32.5 million shares in connection with the follow-on offering. In addition, on July 15, 2011, we filed a registration statement on Form S-3 to register an additional 24.0 million shares of common stock to be used for the DRIP.
Our Board of Directors has determined that it is in the best interests of the Company and our stockholders to internalize the management services currently provided by our Advisor and American Realty Capital Properties, LLC, which serves as our property manager (the “Property Manager”) concurrently with the listing (the "Listing"), of our shares of common stock on the NASDAQ Global Select Market, or NASDAQ. We intend to become a self-administered REIT and will be managed full-time by William M. Kahane, one of the key executives who founded our Company and was intricately involved in the acquisition of our property portfolio, together with certain members of our management team or our Internalization. As part of our Internalization, we have applied to list shares of our common stock on NASDAQ under the symbol “ARCT”, which we anticipate will occur on or about March 1, 2012. Further, we are offering for sale up to 6.6 million shares of our common stock in an underwritten public offering pursuant to a registration statement on Form S-11 filed on February 15, 2012 with the SEC (the “Offering”). This registration is not yet effective, Upon consummation of the Listing, we expect to complete our Internalization and terminate our existing Advisory Agreement with our Advisor, subject to a 60-day transition period (subject to our right to extend this agreement for up to three months) and we will purchase our Property Manager from AR Capital II, LLC (formerly American Realty Capital II, LLC) for $10.00. On or promptly upon completion of the Listing, we also intend to offer to purchase an amount in value of our shares of common stock between $200 million and $250 million pursuant to a tender offer. In accordance with the expected terms of our tender offer with the final purchase price being determined through a modified Dutch auction process, (the "Tender Offer"), we will select the lowest price, not greater than $11.00 nor less than $10.50 per share, that will allow us to purchase $250.0 million in value of our shares of common stock, or a lower amount depending upon the number of shares of our common stock properly tendered and not withdrawn based on the selection from three different tender price ranges within that range.
This Form 10-K shall not constitute an offer to sell or the solicitation of an offer to buy the securities planned to be offered pursuant to the Registration Statement on Form S-11, nor shall there be any offer or sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. A registration statement relating to these securities has been filed with the SEC but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. The offering will be made only by means of a prospectus which is a part of such registration statement. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330 . The SEC maintains an internet address at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC may be obtained from the website maintained for us and our affiliates at www.americanrealtycap.com .
This Form 10-K is for informational purposes only and is not an offer to buy or the solicitation of an offer to sell any shares. The full details of the modified “Dutch auction” tender offer, including complete instructions on how to tender shares, will be included in the offer to purchase, the letter of transmittal and related materials, which will become available to stockholders promptly following commencement of the offer. Stockholders should read carefully the offer to purchase, the letter of transmittal and other related materials when they are available because they will contain important information. Stockholders may obtain free copies, when available, of the offer to purchase and other related materials that will be filed by the Company with the Securities and Exchange Commission at the Commission's website at www.sec.gov. When available, stockholders also may obtain a copy of these documents, free of charge, from the Company.
As of December 31, 2011 , we had 178.0 million shares of common stock outstanding including shares issued under the DRIP and the restricted share plan. Total gross proceeds from these issuances were $1.8 billion , including shares issued pursuant to the DRIP. As of December 31, 2011 , the aggregate value of all share issuances and subscriptions outstanding was $1.8 billion based on a per share value of $10.00 (or $9.50 for shares issued under the DRIP). As of December 31, 2011 , 1.4 million shares of common stock had been redeemed under our stock repurchase program at a value of $13.5 million . Of that amount, 0.3 million shares with a redemption value of $2.8 million were accrued for redemption at December 31, 2011 , and subsequently paid to stockholders in January 2012.
We have used the proceeds of our IPO to acquire a diverse portfolio of real estate properties consisting primarily of freestanding, single-tenant properties net leased to investment grade and other creditworthy tenants throughout the United States and Puerto Rico. We intend to use the proceeds from the Offering to repay indebtedness under our existing line of credit with RBS Citizens, N.A. We typically fund our acquisitions with a combination of equity and debt and in certain cases we may use only equity capital or we may fund a portion of the purchase price of an acquisition through investments from third parties. We expect to arrange long-term financing on both a secured and unsecured fixed rate basis. We intend to continue to grow our existing relationships and develop new relationships throughout the various markets we serve, which we expect will lead to further acquisition opportunities. As of December 31, 2011 , our leverage ratio was 31.7% , or 30.1% including cash and cash equivalents of $33.3 million . Our Company began the process to garner a corporate credit rating and received its first rating from a major rating agency in late-2010. By early-2011, the Company secured a second corporate credit rating from another major rating agency. The Company intends to focus on improving its balance sheet and performance metrics in keeping with the rating agencies methodologies. We intend to maintain leverage, coverage and other levels consistent with our existing ratings and to seek to have our ratings increased when appropriate.
As of December 31, 2011 , we owned 482 properties with 15.5 million square feet, 100% leased with a weighted average remaining lease term of 13.5 years. In constructing our portfolio, we are committed to diversification (industry, tenant and geography). As of December 31, 2011 , rental revenues derived from investment grade tenants, as rated by major rating agencies, represented 71.6% of annualized rental income on a straight-line basis. Our strategy encompasses receiving the majority of our revenue from investment grade tenants.
Substantially all of our business is conducted through the OP. We are the sole general partner and following the internalization we will own a 99.99% partnership interest in the OP. The Advisor is the sole limited partner and will be the owner of 0.01% (non-controlling interest) of the partnership interests of the OP. The limited partner interests have the right to convert OP units into cash or, at our option, an equal number of our common shares, as allowed by the limited partnership agreement.
Real estate-related investments are higher-yield and higher-risk investments than real properties, if we elect to acquire such investments. The real estate-related investments in which we may invest include: (i) mortgage loans; (ii) equity securities such as common stocks, preferred stocks and convertible preferred securities of real estate companies; (iii) debt securities, such as mortgage-backed securities, commercial mortgages, mortgage loan participations and debt securities issued by other real estate companies; and (iv) certain types of illiquid securities, such as mezzanine loans and bridge loans. While we may invest in any of these real estate-related investments, our Advisor, with the support of our Board of Directors, has elected to suspend all activities relating to acquiring real estate-related investments, except for selected investments in common stock of publicly traded companies, for an indefinite period based on the current adverse climate affecting the capital markets. Since our inception, we have not acquired any real estate-related investments, other than investments in common stock of other REITs.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates include:
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to forty years for buildings and improvements, fifteen years for land improvements, five to ten years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as “held for sale” on the balance sheet.
Purchase Price Allocation
We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases and the value of customer relationships, as applicable.
Amounts allocated to land, land improvements, buildings, improvements and fixtures are based on cost segregation studies performed by independent third-parties or on our analysis of comparable properties in our portfolio.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by us in our analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period, which typically ranges from six to eighteen months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease. The capitalized below-market lease values will be amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, we initially will consider, and evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
The aggregate value of intangibles assets related to customer relationships, as applicable, is measured based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from 5 to 30 years. The value of customer relationship intangibles, as applicable, is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
We are a Maryland corporation, incorporated on August 17, 2007, that has elected to be taxed as a REIT beginning with the taxable year ended December 31, 2008. As a REIT, we generally are not subject to corporate-level income taxes. To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates.
We were formed to acquire a diversified portfolio of commercial real estate, primarily freestanding single tenant properties net leased to creditworthy tenants on a long-term basis. In January 2008, we commenced an initial public offering ("IPO") on a "best efforts" basis to sell up to 150.0 million shares of common stock, excluding 25.0 million shares issuable pursuant to a Distribution Reinvestment Plan ("DRIP"), offered at a price of $10.00 per share, subject to certain volume and other discounts. In March 2008, we commenced real estate operations. Our IPO closed in July 2011 and we operated as a non-traded REIT through February 29, 2012.
Effective as of March 1, 2012, we internalized the management services previously provided to us by the Former Advisor and its affiliates, as a result of which we became a self-administered REIT managed full-time by our own management team (the "Internalization"). Concurrent with the Internalization, we listed our common stock on The NASDAQ Global Select Market ("NASDAQ") under the symbol "ARCT" (the "Listing").
To provide for an orderly transition in conjunction with the Internalization and Listing, we and the OP entered into an agreement, effective as of March 1, 2012, with our Former Advisor, a wholly-owned subsidiary of AR Capital, LLC ("ARC") that managed our day-to-day business and affairs prior to the Internalization, to terminate advisory agreement between us, the OP and the Former Advisor (the "Advisory Agreement") and provide for certain transitional services by our Former Advisor to us. See Note 13 — Related Party Transactions and Arrangements to the consolidated financial statements elsewhere in this report.
In connection with the Listing, we offered to purchase up to $220.0 million in shares of our common stock from stockholders, pursuant to a modified "Dutch Auction" cash tender offer (the "Tender Offer"). As a result of the Tender Offer, on April 4, 2012, we purchased 21.0 million shares of our common stock at a purchase price of $10.50 per share, for an aggregate cost of $220.0 million , excluding fees and expenses relating to the Tender Offer. See Note 9 — Common Stock to the consolidated financial statements elsewhere in this report.
Substantially all of our business is conducted through the OP, a Delaware limited partnership. We are the sole general partner of the OP and own over 99.99% of the partnership interest in the OP. Our Former Advisor is the sole limited partner of the OP and owns less than a 0.01% partnership interest (non-controlling interest) in the OP. The limited partner interests have the right to convert OP units into cash or, at our option, a corresponding number of shares of common stock, as allowed by the limited partnership agreement of the OP.
As of June 30, 2012 , we owned 486 properties with 15.6 million square feet of leasable area, 100% leased with a weighted average remaining lease term of 13.0 years. In constructing the portfolio, we have been committed to diversification by industry, tenant and geography.
Our strategy is to own properties leased to investment grade and other creditworthy tenants. As of June 30, 2012 , 75% of our average annualized rental income, including annualized rents for properties acquired in 2012, is derived from investment grade tenants, as determined by major credit rating agencies, and 92% of our average annualized rental income, including annualized rents for properties acquired in 2012, is derived from tenants that are rated by major credit rating agencies.
Real estate-related investments may be higher-yield and higher-risk investments than real properties, if we elect to acquire such investments. The real estate-related investments in which we may invest include: (i) mortgage loans; (ii) equity securities such as common stock, preferred stock and convertible preferred securities of real estate companies; (iii) debt securities, such as mortgage-backed securities, commercial mortgages, mortgage loan participations and debt securities issued by other real estate companies; and (iv) certain types of illiquid securities, such as mezzanine loans and bridge loans. Since our inception, we have not acquired any real estate-related investments, other than investments in common stock of other REITs.
Expenses Related to the Listing and Internalization
The Listing occurred on March 1, 2012. In addition, effective as of March 1, 2012, in connection with the Internalization, we provided the Former Advisor with notice of termination of the Advisory Agreement between us, the OP and the Former Advisor.
For the six months ended June 30, 2012 , we recognized $17.7 million of costs related to items that resulted from the Listing and Internalization.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates include:
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to forty years for buildings and improvements, fifteen years for land improvements, five to ten years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
We present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are designated as “held for sale” on the balance sheet.
Long-lived assets are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted or when they are designated as held for sale. Valuation of real estate is considered a “critical accounting estimate” because the evaluation of impairment and the determination of fair values involve a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate. Additionally, decisions regarding when a property should be classified as held for sale are also highly subjective and require significant management judgment.
Purchase Price Allocation
We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases and the value of customer relationships, as applicable.
Amounts allocated to land, land improvements, buildings, improvements and fixtures are based on cost segregation studies performed by independent third-parties or on our analysis of comparable properties in our portfolio.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by us in our analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period, which typically ranges from six to eighteen months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease. The capitalized below-market lease values are amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, we initially will consider, and evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
The aggregate value of intangible assets related to customer relationships, as applicable, is measured based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from 5 to 30 years. The value of customer relationship intangibles, as applicable, is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed. The allocations presented in the accompanying consolidated balance sheets are substantially complete; however, there are certain items that we will finalize once we receive additional information. Accordingly, these allocations are subject to revision when final information is available, although we do not expect future revisions to have a significant impact on our financial position or results of operations.
Derivative Instruments
We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are described in Note 3 — Summary of Significant Accounting Policies to our consolidated financial statements.
Results of Operations
As of June 30, 2012 , we owned 486 properties that were 100% leased, compared to 368 properties at June 30, 2011 . Accordingly, our results of operations for the three and six months ended June 30, 2012 , as compared to the three and six months ended June 30, 2011 , reflect significant increases in most categories.
Comparison of Three Months Ended June 30, 2012 to Three Months Ended June 30, 2011
Rental Income
Rental income increased $16.1 million to $44.1 million for the three months ended June 30, 2012 , compared to $28.1 million for the three months ended June 30, 2011 . The increase in rental income was driven by our acquisition of $509.3 million of net leased properties subsequent to June 30, 2011 , with total square footage of 4.6 million square feet. These properties were acquired at an average 8.2% capitalization rate, defined as annualized rental income divided by base purchase price. Annualized rental income for net leases represents projected rental income for 2012, including annualized rents for properties acquired in 2012, on a straight-line basis as of June 30, 2012 , which includes the effect of tenant concessions such as free rent, as applicable. For modified gross leased properties, annualized rental income represents projected rental income for 2012 on a straight-line basis as of June 30, 2012 , which includes the effect of tenant concessions such as free rent, as applicable, plus operating expense reimbursement revenue less property operating expenses.
CONF CALL
William Kahane - Co-Founder
Thank you operator, welcome everyone and thank you for participating in American Realty Capital Trust, second quarter 2012 earnings call. I am pleased to be joined today by Brian Jones, your Chief Financial Officer. Let me begin by furnishing you an overview of recent events before I turn the call over to Brian to discuss our operating results for Q2.
Following Brian’s comments I will also provide a portfolio update on our real estate holdings. Before I begin as a reminder we will make certain comments that maybe considered to be forward-looking statements under federal securities law during this call. The company’s actual future results may differ significantly from the matters discussed in any such forward-looking statements. I personally I am extremely pleased with our second quarter results and confident in our recently published earnings guidance through year end 2012 and for calendar for 2013. That confidence is a result of our business model namely investing in real estate at least long term to strong corporate credit tenants, investing in real estate net leased long term; this model offers few surprises on the downside.
It is being carefully constructed on a diversified portfolio of well-located properties leased for an average remaining primary term of 13 years to high credit quality tenants on a basis we are operating and capital expenses are borne almost entirely by the tenants themselves. With no material lease expirations in portfolio until 2018. Our strong first half and particularly strong second quarter operating results allow me to announce a couple of noteworthy events, first the company’s Board of Directors has approved an increase in the current annual dividend of $0.70 per share to $0.71.5 per share commencing September 15, 2012.
This reflects a 2.14% increase in the dividend, second in clarifying our previous FFO and AFFO guidance for 2012 and providing new 2013 guidance we are forecasting 13% earnings growth over that period at the mid-points of each range. Brian will discuss our guidance in further detail in his prepared remarks. Earnings growth is anchored in part on balance sheet improvements; let’s recap several corner stone events that speak directly to strengthening our balance sheet and our continuing progress to achieve an investment grade credit rating.
Number 1, we completed our sales tender offer of close to 21 million shares of common stock in April 2012 at a cost of 220 million reducing total shares outstanding to approximately a 158 million shares. We funded the prepayment of a $161.2 million of secured mortgage debt on April 17, 2012 resulting in a net annual reduction in interest expense of $4.3 million.
We secured a permanent term loan of $235 million led by Wells Fargo securities on July 2, 2012. This replaced the $200 million interim term loan previously funded by Wells Fargo. Next we increased our revolving line of credit with RBS Citizens from 220 million to 330 million on May 4, 2012.
We were upgraded by two major credit rating agencies reflecting our balance sheet strength. Moody’s upgraded our rating from a Ba3 to Ba2 on April 5th with an adjusted score of BAA and another major rating agency upgraded us by two notches from a B++ to a BB with a stable outlook in June. We were incorporated into several different industries most notably the Russell 2000 and the FTSE NAREIT Equity REIT Index.
For the remainder of this year we will continue to focus on improving our balance sheet, growing the company’s assets and earnings per share through acquisition opportunities accretive to the dividend similar to the $64 million of new acquisitions recently announced on July 12, at an average cap rate of 8.66%. I will now turn the call over to Brian Jones our CFO to discuss in further detail our operating performance and earnings guidance, I will then take the call back and provide you a portfolio update before opening the call up to questions. Brian?
Brian Jones - CFO
Thank you, Bill, I am happy to report that second quarter 2012 results are in-line with our budgets as well as our previously provided FFO and AFFO guidance. I will comment briefly on our financial statements and provide a few highlights of the financial results for the quarter.
I will then discuss our clarified 2012 and preliminary 2013 FFO and AFFO guidance. Starting with the income statement, total revenue increased 57% in the second quarter 2012 over the same quarter 2011, revenue for the quarter was approximately 45.6 million compared to 29 million in 2011.
For the first half of the year revenue increased 83% from 49.8 million in 2011 to 91.3 million in 2012, these increases reflect over 500 million of new acquisitions over the past year. Net operating income increased 56% to 43.7 million for the second quarter compared to 28.1 million in 2011.
For the first half of the year NOY increased 78% to 86.6 million compared to 48.7 million for 2011. Operating expenses for the quarter totaled 32.3 million, depreciation and amortization expense was 26.2 million of that an increase of 10.9 million over the comparative quarterly period. Obviously depreciation expense increases as our property portfolio continues to grow.
General and administrative expenses for the quarter were 3.7 million and are right in line with our annualized budget. G&A this quarter includes 650,000 of non-cash equity based compensation expense accrued as well as a 1.1 million seasonal expense for state income and franchise tax is paid.
As we mentioned in our first quarter call we expect annual G&A for the company as self-administered to be between 9 million and 10 million per year. Inclusive of equity based compensation, year-to-date is running on-budget and we believe that 9 million to 10 million of annual G&A continues to be the right level for now.
We also have spent some additional 400,000 of cost related to the listing during the second quarter. These were primarily transfer agent cost and this should be the end of the listing related expenses. As Bill mentioned there was a lot going on during the quarter on the balance sheet and the interest expense line, we increased our line borrowings by 280 million to fund the tender offer and successfully funded the $200 million interim term loan with Wells Fargo. We used net proceeds from that loan to repay a 162 million of high cost mortgage debt with a remainder going to reduce the balance on the revolver. In all interest expense for the quarter was 10.1 million up 1.3 million over 2011 and up 200,000 over the first quarter.
On a related note our coverage ratios remain strong, with interest coverage at 4.1 times and fixed charge coverage at 3.9 times. Net debt to total market cap is approximately 35% and debt to annualized EBITDA is approximately 5.5 times. For the quarter net income available to common stock holders was 4.3 million or $0.03 a share, this compares to a net loss in 2011 of 9.5 million or $0.09 a share. Funds from operations or FFO for the second quarter was 30.7 million or $19.3 a share compared to the first quarter adjusted for listing and other non-recurring expenses of 30.9 million or $18.9 per share. FFO per share grew in the second quarter primarily as a result of interest expense savings and fewer shares outstanding.
Adjusted funds from operations or AFFO for the second quarter was 30.4 million or $19.1 per share compared to 31.1 million or $0.19 a share for this first quarter. Significant adjustments from FFO to AFFO continued to include straight line rents and amortization of deferred financing cost and equity based compensation. These results are right in line with our previous provided FFO and AFFO guidance.
Returning to the balance sheet, we believe we have established and expect to maintain a conservative and very safe capital structure. At quarter end we had 511 million of mortgage debt, 200 million of interim term loan and 200 million of revolver outstanding. We substantially recapitalized and upsized the term loan to 235 million and reduced the revolver balance with the net proceeds. This is in addition to upsizing the revolver from 220 million to 330 million last quarter both of which I think demonstrate our ability to access debt capital markets. The term loan recap pushed our revolver balance down to just a 168 million increasing the unused borrowing capacity on the $330 million to a 162 million. This liquidity is more than adequate to fund projected acquisition volumes for the rest of 2012.
At quarter end the effective annualized rate on our revolver was 2.32% or a LIBOR plus 205 and the effective annualized rate of the term loan was 2.62% or LIBOR plus 235. We are monitoring the five year SWAP rate closely and expect to lock that in sometime in the next few months depending on market conditions.
We continue to maintain a simple capital structure with no preferred equity, no minority OP unit holders and a very small number of joint venture interest. As we discussed last quarter in April we received a one notch upgrade to BA2 on our corporate credit rating for Moody’s. Another major credit rating agency gave us a two notch upgrade to BB in May, so we continue see positive moment on the credit ratings front and as Bill mentioned one of our primary corporate objectives is reaching and maintaining an investment grade credit rating.
In March, we provided annualized FFO and AFFO guidance for the 12 month period commencing April 1, 2012 in a range of $0.79 to $0.82 per share which includes the impact of a $100 million of acquisitions funded with available balance sheet liquidity. We are now clarifying our guidance to provide data for the calendar year ending December 31, 2012 as well as initial guidance for 2013.
We are projecting based on first and second quarter FFO per share of $18.9 and $19.3 respectively and adjusted first and second quarter AFFO per share of $0.19 and $19.01 respectively. At full year 2012 FFO and AFFO should range between $75.05 and $77.05 per share. This guidance is in-line with our previous estimates and is still based on $100 million of acquisitions funded with available liquidity. As previously noted, we have a strong liquidity position and financial capacity and therefore do not expect the need to issue equity this year.
Preliminary 2013 guidance is for FFO to range from $82.2 to $85.2 per share and for AFFO to range from $0.84 to $0.87 per share. This projection assumes 300 million of acquisitions in 2013 and factors in our 100% physical and economic occupancy rate and zero lease expirations in 2012 or 2013.
AFFO benefits from a projected increase in cash rents of more 1.2 million in 2013 or nearly 1.5 million on a 2012 to 2013 year end run-rate basis. We do not take into account any potential interest cost savings that could result from further recapitalization of our mortgage debt or from potential rating agency upgrades. In summary, the strength and stability of our operating strategy is evident in the consistency of our financial results. We believe the growth targets set in our guidance are modest and readily achievable. We currently have excellent liquidity to fund future growth and believe our overall balance sheet remains very healthy and base.
And there is the potential for further upside as we continue to strengthen the balance sheet and reduce our secure volume. Let me now turn the call back over to Bill who will give a brief portfolio update.
William Kahane - Co-Founder
Thank you Brian, as of June 30, 2012 the company have 486 free standing single tenant at lease properties totaling 15.6 million rentable square feet located in 43 states plus Puerto Rico. This compares to 368 properties totaling 11 million square feet for the same time period in 2011. ARCT’s portfolio is comprised of 62 corporate tenants operating in 20 distinct industries. The weighted average remaining primary term of the portfolio is 13 years, with negligible lease expirations in the next five years, 75% of annualized rental income is from tenants with investment grade ratings. From a majority or major credit rating agency, for the first half of the year we acquired three Tractor Supply retail properties, a Family Dollar store and an expansion space to a previously acquired FedEx distribution facility all are 100% occupied for an average capitalization rate of 8.5%.
Keeping in line with our earnings guidance on July 12, we announced they are CT and entered into agreements to acquire approximately $64 million of new properties which include the Family Dollar and FedEx I previously mentioned. These purchases are for multiple sellers and also included the Shaw's grocery store, seven Ruby Tuesday restaurants, 15 additional Family Dollar stores, five Dollar General stores, a Walgreens Pharmacy and a (inaudible) distribution facility which we own and has been expanded. The portfolio has an average remaining lease term of approximately 12 years and is priced at an average cap rate of 8.66%.
The acquisitions will add two new tenants to the ARCT property portfolio bringing the company’s total number of discrete corporate tenants to 64 while maintaining at almost 74% investment grade tenancy, an increasing our geographic presence to 44 states. The acquisitions are in-line with the company’s strategy to achieve diversified portfolio with the 60% concentration in the retail sector.
It's worth pointing out on this call that expansion opportunities are an underappreciated aspect of our distribution warehouse portfolio. The greatest long term risk to say a FedEx distribution facility is not the package volumes drop leading to a closure of a site. Rather it's the risk that volumes increase and the tenant outgrows the facility, therefore we typical acquire these properties with additional developable land included, it lowers our initial yield to pay for this expansion land but leads the long term value creation opportunities as well as providing strong vacancy risk mitigation.
As it relates to rents for the second quarter 2012 cash rents on the 318 same store properties held for full period in both ’11 and ’12 increased 1.5% to 24.7 million compared to 24.3 million for the same time period in 2011. The company since its inception has had no lease turnover, no dark stores, no lease renegotiations. ARCT’s investment grade portfolio percentage increased during the quarter which is weighted by average annual rent to 74.6% from 71.1% in the first quarter of 2012.
Our top 10 tenants weighted by annualized rent are all rated by a major credit rating agency, 84% were rated investment grade. The company intends to maintain a high level of investment grade tenancy as well as continuing to diversify its tenant base. Approximately, 92% of the company’s tenants are rated by major national credit rating agency. ARCT’s real estate portfolio continues to perform according to our acquisition underwriting and operating budgets and provide sufficient lease revenues to more than support our annualized dividend.
Additional, comprehensive data can be found in the supplemental information on the company’s second quarter 2012 operations in the current report on Form 8K that was filed with the SEC on Tuesday, July 31, 2012. In conclusion, we will continue to focus on maintaining portfolio quality, increasing earnings per share, reducing capital costs, achieving an investment grade credit rating and building our capacity to grow our dividend overtime. Earnings growth will result from accretive acquisitions and contractual rent growth, which should allow us to increase distributable cash flow.
We continue to be very excited about the company’s strong market position and compelling growth prospects and we are grateful for your ongoing support. We will now open the call to your questions. Operator?
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Fund Letters
