The following analysis of our financial condition and results of operations
should be read in conjunction with our financial statements and the notes
thereto contained elsewhere in this Form 10-K.
OVERVIEW
General
We are a real estate investment trust, or REIT, that was incorporated under the
General Corporation Law of the State of Maryland on February 14, 2003, primarily
for the purpose of investing in and owning net leased industrial, commercial and
retail real property and selectively making long-term industrial and commercial
mortgage loans. Our portfolio of real estate is leased to a wide cross section
of tenants ranging from small businesses to large public companies, many of
which are corporations that do not have publicly-rated debt. We have
historically entered into, and intend in the future to enter into, purchase
agreements for real estate having triple net leases with terms of approximately
10 to 15 years and built in rental rate increases. Under a triple net lease, the
tenant is required to pay all operating, maintenance and insurance costs and
real estate taxes with respect to the leased property. We actively communicate
with buyout funds, real estate brokers and other third parties to locate
properties for potential acquisition or to provide mortgage financing in an
effort to build our portfolio. We currently own 80 properties totaling
8.0 million square feet, which have a total gross and net carrying value,
including intangible assets, of $618.6 million and $525.3 million, respectively.
We do not currently have any mortgage loan receivables outstanding.
Business Environment
The United States, or U.S., continues to feel the lingering impact of the
recession that began in late 2007. The U.S. is beginning to see long-term signs
of recovery as the unemployment rate has decreased over the last several months,
housing starts and building permits rose in September 2012 to the highest level
in four years, and prices for single-family homes increased across 20 U.S.
cities because of a dwindling surplus in the housing market. However, the
economic situation in Europe continues to be unpredictable and will need to
stabilize for the economy to fully recover and the U.S. will need to come to a
long-term solution for the debt crisis the country currently faces. As a result,
conditions within the U.S. capital markets generally, and the U.S. real estate
capital markets particularly, continue to experience certain levels of
dislocation and stress.
These economic conditions could materially and adversely impact the financial
condition of one or more of our tenants and, therefore, could increase the
likelihood that a tenant may declare bankruptcy or default upon its payment
obligations arising under a related lease. We currently have two vacant
buildings in our portfolio, one of the buildings is located in Hazelwood,
Missouri and the other building is located in Richmond, Virginia. The leases on
these two vacant buildings comprised 2.0% of our annualized rental income as of
December 31, 2012 and the annual carrying costs are $0.3 million. We are
actively seeking new tenants for both of these buildings. All of our remaining
properties are currently occupied and the tenants are paying in accordance with
their leases. However; in January 2013, we were notified by our tenant in our
Baytown, Texas property that they would not be renewing the lease that expires
in April 2013. We are aggressively pursuing new tenants for this building. This
tenant comprised less than 1.0% of our annualized rental income as of
December 31, 2012.
Moreover, our ability to make new investments is highly dependent upon our
ability to procure external financing. Our principal sources of external
financing generally include the issuance of equity securities, long-term
mortgage loans secured by properties and borrowings under our line of credit, or
the Line of Credit. The market for long-term mortgages was limited for the past
several years; however, long-term mortgages have become more obtainable. The
collateralized mortgage backed securities, or CMBS, market has made a comeback,
but it is more conservative and restrictive than it was prior to the recession.
Consequently, we continue to look to regional banks, insurance companies and
other non-bank lenders, in addition to the CMBS market to issue mortgages to
finance our real estate activities.
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In addition to leverage, we were active in the equity markets during 2012 and we
issued 138,205 of common shares for gross proceeds of $2.5 million, and net
proceeds of $2.4 million, through our At the Market, or ATM program and $38.5
million of 7.125% Series C Cumulative Term Preferred Stock, or Term Preferred
Stock, which is mandatorily redeemable five years from issuance. We also assumed
or issued $124.4 million in mortgages during 2012, to finance our new properties
or re-finance existing properties. In addition, we issued 129,278 of common
shares for gross proceeds of $2.4 million, and net proceeds of $2.3 million,
from the issuance of equity in January 2013 under our ATM program.
Recent Developments
2012 Investment Activities
Ashburn, Virginia: On January 25, 2012, we acquired a 52,130 square foot office
building located in Ashburn, Virginia for $10.8 million, excluding related
acquisition expenses of $0.1 million. We funded this acquisition using
borrowings from our Line of Credit. Independent Project Analysis, Inc., an
energy consultant, is the tenant in this building and has leased the property
for 15 years and has 2 options to renew the lease for additional periods of 5
years each. The lease provides for prescribed rent escalations over the life of
the lease, with annualized straight line rents of $1.0 million.
Ottumwa, Iowa: On May 30, 2012, we acquired a 352,860 square foot bottling plant
located in Ottumwa, Iowa for $7.1 million, excluding related acquisition
expenses of $0.1 million. We funded this acquisition through a combination of
cash on hand and the issuance of $5.0 million of mortgage debt on the property.
The American Bottling Company, the largest operating subsidiary of Dr. Pepper
Snapple Group, Inc., is the tenant in this building and has leased the property
for 12 years and has 3 options to renew the lease for additional periods of 5
years each. The lease provides for prescribed rent escalations over the life of
the lease, with annualized straight line rents of $0.68 million.
New Albany, Ohio: On June 5, 2012, we acquired an 89,000 square foot office
building located in New Albany, Ohio for $13.3 million, excluding related
acquisition expenses of $0.2 million. We funded this acquisition with existing
cash on hand. Commercial Vehicle Group, Inc., a global supplier of fully
integrated interiors system solutions for the global commercial vehicle market,
is the tenant in this building and has leased the property for 10.5 years and
has 2 options to renew the lease for additional periods of 5 years each. The
lease provides for prescribed rent escalations over the life of the lease, with
annualized straight line rents of $1.36 million.
Columbus, Georgia: On June 21, 2012, we acquired a 32,000 square foot office and
classroom facility located in Columbus, Georgia for $7.3 million, excluding
related acquisition expenses of $0.1 million. We funded this acquisition through
a combination of cash on hand and the issuance of $4.8 million of mortgage debt
on the property. University of Phoenix, a private education provider, which has
been in the education business for more than 35 years, is the tenant in this
building and has leased the property for 11.5 years and has 2 options to renew
the lease for additional periods of 5 years each. The lease provides for
prescribed rent escalations over the life of the lease, with annualized straight
line rents of $0.66 million.
Columbus, Ohio: On June 28, 2012, we acquired a 31,293 square foot office
building located in Columbus, Ohio for $4.0 million, excluding related
acquisition expenses of $0.1 million. We funded this acquisition with existing
cash on hand. Nationwide Children's Hospital, one of the largest children's
hospital systems in the U.S., is the tenant in this building and has leased the
property for 10 years. The lease provides for prescribed rent escalations over
the life of the lease, with annualized straight line rents of $0.34 million.
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Jupiter, Florida: On September 26, 2012, we acquired a 60,000 square foot office
building located in Jupiter, Florida for $15.5 million, excluding related
acquisition expenses of $0.1 million. We funded this acquisition with existing
cash on hand and the assumption of $10.8 million of mortgage debt on the
property. G4S Secure Solutions USA, Inc., one of the largest operating
subsidiaries of G4S and the world's largest provider of security solutions, with
operations in 125 countries, is the tenant in this building and has leased the
property for 10.5 years and has 2 options to renew the lease for additional
periods of 5 years each. The lease provides for prescribed rent escalations over
the life of the lease, with annualized straight line rents of $1.37 million.
Fort Worth, Texas: On November 8, 2012, we acquired a 208,234 square foot office
building located in Fort Worth, Texas for $20.0 million, excluding related
acquisition expenses of $0.1 million. We funded this acquisition with a
combination of borrowings from our Line of Credit and the assumption of $14.2
million of mortgage debt on the property. The National Archives and Records
Administration Southwest Region Records Center is the tenant in this building
and has leased the property for 14 years. The lease provides for prescribed rent
escalations over the life of the lease, with annualized straight line rents of
$1.63 million.
Columbia, South Carolina: On November 21, 2012, we acquired a 146,483 square
foot office building located in Columbia, South Carolina for $29.2 million,
excluding related acquisition expenses of $0.1 million. We funded this
acquisition through a combination of cash on hand and the issuance of $19.0
million of mortgage debt on the property. Verizon Wireless is the tenant in this
building and has leased the property for 10 years and has 3 options to renew the
lease for additional periods of 5 years each. The lease provides for prescribed
rent escalations over the life of the lease, with annualized straight line rents
of $2.61 million.
2012 Financing Activities
Line of Credit Expansion
On January 31, 2012, we amended our Line of Credit to increase the current
maximum availability of credit thereunder from $50.0 million to $75.0 million.
The Line of Credit was arranged by Capital One, N.A. as administrative agent,
and Branch Banking and Trust Company as an additional lender. Citizens Bank of
Pennsylvania also joined the Line of Credit as an additional lender. All other
terms of the agreement remained the same.
Fixed-Rate Long-Term Notes Payable
KeyBank: On April 5, 2012, through wholly-owned subsidiaries, we borrowed $19.0
million pursuant to a long-term note payable from KeyBank National Association,
which is collateralized by security interests in four of our properties. The
note accrues interest at a fixed rate of 6.1% per year and we may not repay this
note prior to the last three months of the term, or we would be subject to a
substantial prepayment penalty. The note has a maturity date of May 1, 2022. We
used the proceeds from this note for future acquisitions and working capital.
City National Bank: On May 16, 2012, through a wholly-owned subsidiary, we
borrowed $2.94 million pursuant to a long-term note payable from City National
Bank, which is collateralized by a security interest in one of our properties.
The note accrues interest at a fixed rate of 4.3% per year for the first five
years, and resets at five year intervals thereafter. We may repay this note
after five years and would not be subject to any prepayment penalty. The note
has a maturity date of December 31, 2026. We used the proceeds from this note
for future acquisitions and working capital.
Modern Woodmen of America: On May 30, 2012, through a wholly-owned subsidiary,
we borrowed $5.0 million pursuant to a long-term note payable from Modern
Woodmen of America, which is collateralized by a security interest in one of our
properties. The note accrues interest at a fixed rate of 6.5% per year and we
may not repay this note prior to the last nine months of the term, or we would
be subject to a substantial prepayment penalty. The note has a maturity date of
May 10, 2027. We used the proceeds from this note for future acquisitions and
working capital.
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Citigroup: On June 21, 2012, through a wholly-owned subsidiary, we borrowed
$4.75 million pursuant to a long-term note payable from Citigroup, which is
collateralized by a security interest in one of our properties. The note accrues
interest at a rate of fixed 5.05% per year and we may not repay this note prior
to the last two months of the term, or we would be subject to a substantial
prepayment penalty. The note has a maturity date of July 6, 2022. We used the
proceeds from this note to purchase the property located in Columbus, Georgia
discussed above.
American Equity Investment Life Insurance Company: On June 27, 2012, through a
wholly-owned subsidiary, we borrowed $2.0 million pursuant to a long-term note
payable from American Equity Investment Life Insurance Company, which is
collateralized by a security interest in one of our properties. The note accrues
interest at a fixed rate of 5.1% per year and we may not repay this note prior
to the last five years of the term, or we would be subject to a substantial
prepayment penalty. The note has a maturity date of July 1, 2029. We used the
proceeds from this note for future acquisitions and working capital.
American National Insurance Company: On July 24, 2012, through a wholly-owned
subsidiary, we borrowed $9.8 million pursuant to a long-term note payable from
American National Insurance Company, which is collateralized by a security
interest in one of our properties. The note accrues interest at a fixed rate of
5.6% per year and we may not repay this note during the first five years of the
term; however, we may repay the note during the last five years of the term
although we would be subject to a prepayment penalty. The note has a maturity
date of August 1, 2022. We used the proceeds from this note for both a future
acquisition and working capital.
Farmers Citizens Bank: On August 3, 2012, through a wholly-owned subsidiary, we
borrowed $3.0 million pursuant to a long-term note payable from Farmers Citizens
Bank, which is collateralized by a security interest in one of our properties.
The note accrues interest at a fixed rate of 5.0% per year and we may repay this
note during the first five years of the term although we would be subject to a
prepayment penalty; however, we may repay the note during the last five years of
the term without penalty. The note has a maturity date of July 31, 2022. We used
the proceeds from this note for working capital.
Midland National Life Insurance Company: On September 26, 2012, through a
wholly-owned subsidiary, we assumed $10.8 million pursuant to a long-term note
payable from Midland National Life Insurance Company, in connection with the
acquisition of our property in Jupiter, Florida on the same date. The note
accrues interest at a fixed rate of 5.75% per year and we may not repay this
note prior to the last three months of the term, or we would be subject to a
prepayment penalty. The note has a maturity date of July 1, 2018.
KeyBank: On October 1, 2012, through certain of our wholly-owned subsidiaries,
we borrowed $34.0 million, pursuant to a long-term note payable from KeyBank
National Association, which is collateralized by security interests in seven of
our properties. The note accrues interest at a fixed rate of 4.86% per year and
we may not repay this note prior to the last three months of the term, or we
would be subject to a prepayment penalty. The note has a maturity date of
October 1, 2022. We used the proceeds of this note, along with existing cash on
hand, to repay our $45.2 million mortgage, which, with extension options, was
due October 1, 2013. We repaid the mortgage in full on October 1, 2012 without
incurring any exit fees.
American United Life Insurance Company: On November 8, 2012, through a
wholly-owned subsidiary, we assumed $14.2 million pursuant to a long-term note
payable from American United Life Insurance Company, in connection with the
acquisition of our property in Fort Worth, Texas on the same date. The note
accrues interest at a fixed rate of 5.69% per year and we may not repay this
note prior to the last two months of the term, or we would be subject to a
prepayment penalty. The note has a maturity date of February 1, 2027.
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Cantor Commercial Real Estate: On November 21, 2012, through a wholly-owned
subsidiary, we borrowed $19.0 million pursuant to a long-term note payable from
Cantor Commercial Real Estate, in connection with the acquisition of our
property in Columbia, South Carolina on the same date. The note accrues interest
at a fixed rate of 4.04% per year and we may not repay this note prior to the
last three months of the term, or we would be subject to a prepayment penalty.
The note has a maturity date of December 6, 2022.
2012 Leasing Activities
San Antonio, Texas: On February 14, 2012, we extended the lease with the tenant
occupying our property located in San Antonio, Texas. The lease covering this
property was extended for an additional eight-year period, through November
2021. The lease was originally set to expire in February 2014. The lease
provides for prescribed rent escalations over the life of the lease, with
annualized straight line rents of approximately $0.8 million. Furthermore, the
lease grants the tenant two options to extend the lease for a period of five
years each. In connection with the extension of the lease and the modification
of certain terms under the lease, we provided a tenant allowance of $0.6
million, payable over two years, and paid $0.3 million in leasing commissions.
Roseville, Minnesota: On February 27, 2012, we extended the lease with the
tenant occupying our property located in Roseville, Minnesota. The new lease
covers approximately one-third of this property and was extended for an
additional five year period, through December 2017. The lease was originally set
to expire in December 2012. The tenant in this property paid rent on the entire
building through 2012, and we continue to search for new tenants to lease the
remainder of the building. The new lease provides for prescribed rent
escalations over the life of the lease, with annualized straight line rents of
$1.2 million. Furthermore, the lease grants the tenant one option to extend the
lease for a period of five years. In connection with the extension of the lease
and the modification of certain terms under the lease, we provided a tenant
allowance of $0.4 million, payable over two years, and paid $0.8 million in
leasing commissions.
Hialeah, Florida: On June 29, 2012, we extended the lease with the tenant
occupying our property located in Hialeah, Florida. The lease covering this
property was extended for an additional five-year period, through March
2027. The lease was originally set to expire in March 2022. The lease provides
for prescribed rent escalations over the life of the lease, with annualized
straight line rents of approximately $1.1 million. In connection with the
extension of the lease and the modification of certain terms under the lease, we
provided a tenant allowance of $0.3 million.
Wichita, Kansas: On August 7, 2012, we extended the lease with the tenant
occupying our property located in Wichita, Kansas. The lease covering this
property was extended for an additional five-year period, through September
2017. The lease was originally set to expire in September 2012. The lease
provides for prescribed rent escalations over the life of the lease, with
annualized straight line rents of approximately $0.8 million. In connection with
the extension of the lease and the modification of certain terms under the
lease, we paid $0.2 million in leasing commissions.
South Hadley, Massachusetts: On September 10, 2012, we extended the lease with
the tenant occupying our property located in South Hadley, Massachusetts. The
lease covering this property was extended for an additional one-year period,
through January 2014. The lease was originally set to expire in February
2013. The lease provides for annual rents of approximately $0.3 million.
Mason, Ohio: On September 11, 2012, we extended the lease with the tenant
occupying our property located in Mason, Ohio. The lease covering this property
was extended for an additional seven-year period, through June 2020. The lease
was originally set to expire in January 2013. The lease provides for prescribed
rent escalations over the life of the lease, with annualized straight line rents
of approximately $0.6 million. In connection with the extension of the lease and
the modification of certain terms under the lease, we provided a tenant
allowance of $0.5 million, and paid $0.3 million in leasing commissions.
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Arlington, Texas: On September 27, 2012, our tenant in our property located in
Arlington, Texas exercised their right to extend the lease covering this
property for an additional five-year period, through March 2018. The lease was
originally set to expire in April 2013. The lease provides that the option
period rent be at fair market rent, but not less than the current rental rate.
Concord Township, Ohio: On October 5, 2012, we modified and extended the lease
with the tenant occupying our property located in Concord Township, Ohio. The
lease covering this property was extended for an additional six-year period,
through August 2034, in exchange for a reduction in rent over the next two
years. The lease was originally set to expire in March 2028. The lease provides
for prescribed rent escalations over the life of the lease, with annualized
straight line rents of approximately $1.7 million. In connection with the
extension of the lease and the modification of certain terms under the lease, we
provided a tenant allowance of $0.2 million.
Big Flats, New York: On November 8, 2012, we extended the lease with the tenant
occupying our property located in Big, Flats, New York. The lease covering this
property was extended for an additional 10 years, through September 2023. The
lease was originally set to expire in September 2013. The lease provides for
prescribed rent escalations over the life of the lease, with annualized straight
line rents of approximately $0.5 million. In connection with the extension of
the lease and the modification of certain terms under the lease, we paid $0.2
million in leasing commissions.
2013 Leasing Activities
Champaign, Illinois: On January 14, 2013, we extended the lease with the tenant
occupying our property located in Champaign, Illinois. The lease covering this
property was extended for an additional 11 years, through December 2024. The
lease was originally set to expire in December 2013. The lease provides for
prescribed rent escalations over the life of the lease, with annualized straight
line rents of approximately $1.4 million. In connection with the extension of
the lease and the modification of certain terms under the lease, we paid $0.4
million in leasing commissions.
2012 Equity Activities
The equity issuances summarized below were issued under our effective shelf
registration statement (File No. 333-169290) on file with the Securities and
Exchange Commission.
Preferred Equity: In February 2012, we completed a public offering of 1,540,000
shares of our Series C Term Preferred Stock at a public offering price of $25.00
per share. Gross proceeds of the offering totaled $38.5 million, and net
proceeds, after deducting underwriting discounts and offering expenses borne by
us, were $36.7 million, which were used to repay a portion of outstanding
borrowings under our Line of Credit, for acquistions of real estate and for
working capital. The shares are traded under the ticker symbol GOODN on the
NASDAQ Global Select Market, or the NASDAQ. The Term Preferred Stock is not
convertible into our common stock or any other security. Generally, we may not
redeem shares of the Term Preferred Stock prior to January 31, 2016, except in
limited circumstances to preserve our status as a Real Estate Investment Trust,
or REIT. On or after January 31, 2016, we may redeem the shares at a redemption
price of $25.00 per share, plus any accumulated and unpaid dividends to and
including the date of redemption. The shares of the Term Preferred Stock have a
mandatory redemption date of January 31, 2017. In accordance with Accounting
Standards Codification, or ASC, 480, "Distinguishing Liabilities from Equity,"
mandatorily redeemable financial instruments should be classified as liabilities
in the balance sheet and therefore we recorded the Term Preferred Stock as a
liability and the related dividend payments as a component of interest expense
in the statement of operations.
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Common Equity: During November and December 2012, we raised approximately $2.4
million in net proceeds under our ATM program with Jefferies & Company, Inc., or
Jefferies. Under this agreement we may, from time to time, offer to sell shares
of our common stock with an aggregate sales price of up to $25.0 million on the
open market through Jefferies, as agent, or to Jefferies, as principal based
upon our instructions (including any price, time or size limits or other
customary parameters or conditions that we may impose). Sales of shares of our
common stock through Jefferies will be executed by means of ordinary brokers'
transactions on the NASDAQ or otherwise at market prices, in privately
negotiated transactions, crosses or block transactions, as may be agreed between
us and Jefferies, including a combination of any of these transactions. We will
pay Jefferies a commission equal to 2.0% of the gross sales proceeds of any
common stock sold through Jefferies as agent under the ATM program.
Senior Common Equity: During 2011 and 2012, we have sold 118,738 shares of our
senior common stock at $15.00 per share in an ongoing best-efforts public
offering and issued 1,395 shares of our senior common stock under the Dividend
Reinvestment Program, or DRIP program. The net proceeds, after deducting the
underwriting discount and commission were $1.6 million. We can issue up to
3,000,000 shares of senior common stock and the offering will continue until the
earlier of March 28, 2013 or the date on which 3,000,000 shares of senior common
stock are sold. We have used the proceeds of the offering for general corporate
purposes.
Diversity of Our Portfolio
Gladstone Management Corporation, or our Adviser, seeks to diversify our
portfolio to avoid dependence on any one particular tenant, industry or
geographic market. By diversifying our portfolio, our Adviser intends to reduce
the adverse effect on our portfolio of a single under-performing investment or a
downturn in any particular industry or geographic market. The table below
reflects the breakdown of our total rental income by tenant industry
classification for the years ended December 31, 2012, 2011 and 2010,
respectively (dollars in thousands):
For the year ended December 31,
2012 2011 2010
Percentage of Percentage of Percentage of
Industry Classification Rental Income Rental
Income Rental Income Rental Income Rental Income
Rental Income
Telecommunications $ 7,351 14.4 % $ 6,206 14.1 % $ 5,447 13.3 %
Electronics 6,189 12.3 6,046 13.9 6,164 15.0
Healthcare 5,228 10.3 4,108 9.4 3,787 9.2
Diversified/Conglomerate Manufacturing 3,664 7.2 3,664 8.4 3,664 8.9
Chemicals, Plastics & Rubber 3,153 6.2 3,146 7.2 3,130 7.6
Beverage, Food & Tobacco 2,844 5.6 2,271 5.2 2,189 5.3
Personal & Non-Durable Consumer Products 2,507 4.9 2,316 5.3 1,228 3.0
Personal, Food & Miscellaneous Services 2,479 4.9 649 1.5 575 1.4
Containers, Packaging & Glass 2,344 4.6 2,339 5.4 2,331 5.7
Machinery 2,259 4.4 2,256 5.2 2,332 5.7
Buildings and Real Estate 2,144 4.2 2,120 4.9 2,076 5.0
Education 2,138 4.2 1,775 4.1 1,775 4.3
Automobile 1,944 3.8 1,168 2.7 1,168 2.8
Printing & Publishing 1,894 3.7 1,979 4.5 2,188 5.3
Oil & Gas 1,271 2.5 1,271 2.9 1,283 3.1
Diversified/Conglomerate Services 1,244 2.4 1,001 2.3 308 0.7
Banking 1,149 2.3 204 0.5 - 0.0
Childcare 583 1.1 583 1.3 583 1.4
Home & Office Furnishings 530 1.0 530 1.2 530 1.3
Insurance - 0.0 - 0.0 422 1.0
$ 50,915 100.0 % $ 43,632 100.0 % $ 41,180 100.0 %
Our Adviser and Administrator
Our Adviser is led by a management team which has extensive experience
purchasing real estate and originating mortgage loans. Our Adviser is controlled
by Mr. David Gladstone, our chairman and chief executive officer. Mr. Gladstone
is also the chairman and chief executive officer of our Adviser. Terry Lee
Brubaker, our vice chairman, chief operating officer and a director, is a member
of the Board of Directors of our Adviser as well as its vice chairman and chief
operating officer. Gladstone Administration, LLC, or our Administrator, employs
our chief financial officer and treasurer, chief compliance officer, internal
counsel and their respective staffs.
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Our Adviser and Administrator also provide investment advisory and
administrative services, respectively, to our affiliates, including, but not
limited to, Gladstone Capital Corporation and Gladstone Investment Corporation,
both publicly-traded business development companies, as well as Gladstone Land
Corporation, a publicly traded real estate company. With the exception of
Danielle Jones, our chief financial officer and treasurer, and Robert Cutlip,
our president, all of our executive officers serve as either directors or
executive officers, or both, of Gladstone Capital Corporation and Gladstone
Investment Corporation. In addition, with the exception of our president, all of
our officers and eight of our nine directors are also officers and directors of
Gladstone Land. In the future, our Adviser may provide investment advisory
services to other funds, both public and private.
Advisory and Administration Agreements
We are externally managed pursuant to contractual arrangements with our Adviser
and our Administrator. Our Adviser and Administrator employ all of our personnel
and pay their payroll, benefits and general expenses directly. We have an
investment advisory agreement with our Adviser, or the Advisory Agreement, and
an administration agreement with our Administrator, or the Administration
Agreement.
Under the terms of the Advisory Agreement, we are responsible for all expenses
incurred for our direct benefit. Examples of these expenses include legal,
accounting, interest on short-term debt and mortgages, tax preparation,
directors' and officers' insurance, stock transfer services, stockholder-related
fees, consulting and related fees. In addition, we are also responsible for all
fees charged by third parties that are directly related to our business, which
include real estate brokerage fees, mortgage placement fees, lease-up fees and
transaction structuring fees (although we may be able to pass some or all of
such fees on to our tenants and borrowers).
Management Services and Fees under the Advisory Agreement
The Advisory Agreement provides for an annual base management fee equal to 2.0%
of our total stockholders' equity, less the recorded value of any preferred
stock, or total common stockholders' equity, and for an incentive fee based on
funds from operations, or FFO. Our Adviser does not charge acquisition or
disposition fees when we acquire or dispose of properties as is common with
other externally-advised REITs. Furthermore, there are no fees charged when our
Adviser secures long or short term credit or arranges mortgage loans on our
properties; however, our Adviser may earn fee income from our borrowers or
tenants or other sources.
For purposes of calculating the incentive fee, FFO includes any realized capital
gains and capital losses, less any distributions paid on preferred stock and
senior common stock, but FFO does not include any unrealized capital gains or
losses. The incentive fee would reward our Adviser if our quarterly FFO, before
giving effect to any incentive fee, or pre-incentive fee FFO, exceeds 1.75%, or
the hurdle rate, of total common stockholders' equity. We pay our Adviser an
incentive fee with respect to our pre-incentive fee FFO quarterly as follows:
• no incentive fee in any calendar quarter in which our pre-incentive fee
FFO does not exceed the hurdle rate of 1.75% (7% annualized);
• 100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% in any calendar quarter (8.75% annualized);
and
• 20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any
calendar quarter (8.75% annualized).
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Quarterly Incentive Fee Based on FFO
Pre-incentive fee FFO
(expressed as a percentage of total common stockholders' equity)
[[Image Removed: LOGO]]
Percentage of pre-incentive fee FFO allocated to the incentive fee
The incentive fee may be reduced because of a covenant which exists in our Line
of Credit agreement which limits distributions to our stockholders to 95% of FFO
with acquisition-related costs that are required to be expensed under ASC 805,
Business Combinations, added back to FFO. In order to comply with this covenant,
our Board of Directors accepted our Adviser's offer to unconditionally,
irrevocably and voluntarily waive on a quarterly basis a portion of the
incentive fee for the years ended December 31, 2012, 2011 and 2010, which
allowed us to maintain the current level of distributions to our stockholders.
These waived fees may not be recouped by our Adviser in the future. Our Adviser
has indicated that it intends to continue to waive all or a portion of the
incentive fee in order to support the current level of distributions to our
stockholders; however, our Adviser is not required to issue any such waiver,
either in whole or in part.
Administration Agreement
Pursuant to the Administration Agreement, we pay for our allocable portion of
our Administrator's overhead expenses incurred while performing its obligations
to us, including, but not limited to, rent and the salaries and benefits
expenses of our personnel, including our chief financial officer and treasurer,
chief compliance officer, internal counsel, investor relations department and
their respective staffs. Our allocable portion of expenses is generally derived
by multiplying our Administrator's total expenses by the percentage of our total
assets at the beginning of each quarter in comparison to the total assets of all
companies managed by our Adviser under similar agreements.
Critical Accounting Policies
The preparation of our financial statements in accordance with Generally
Accepted Accounting Principles in the United States, or GAAP, requires
management to make judgments that are subjective in nature in order to make
certain estimates and assumptions. Application of these accounting policies
involves the exercise of judgment regarding the use of assumptions as to future
uncertainties, and as a result, actual results could materially differ from
these estimates. A summary of all of our significant accounting policies is
provided in Note 1 to our consolidated financial statements included elsewhere
in this Form 10-K. Below is a summary of accounting polices involving estimates
and assumptions that require complex, subjective or significant judgments in
their application and that materially affect our results of operations.
Allocation of Purchase Price
When we acquire real estate, we allocate the purchase price to (i) the acquired
tangible assets and liabilities, consisting of land, building, tenant
improvements and long-term debt and (ii) the identified intangible assets and
liabilities, consisting of the value of above-market and below-market leases,
in-place leases, unamortized lease origination costs, tenant relationships and
capital lease obligations, based in each case on their fair values. All expenses
related to the acquisition are expensed as incurred, rather than capitalized
into the cost of the acquisition as had been required by the previous
accounting.
Our Adviser estimates value using methods similar to those used by independent
appraisers (e.g., discounted cash flow analysis). Factors considered by
management in its analysis include an estimate of carrying costs during
hypothetical expected lease-up periods, considering current market conditions
and costs to execute similar leases. Our Adviser also consider information
obtained about each property as a
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result of our pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets and liabilities
acquired. In estimating carrying costs, management also includes real estate
taxes, insurance and other operating expenses and estimates of lost rentals at
market rates during the hypothetical expected lease-up periods, which primarily
range from 9 to 18 months, depending on specific local market conditions. Our
Adviser also estimates costs to execute similar leases, including leasing
commissions, legal and other related expenses to the extent that such costs are
not already incurred in connection with a new lease origination as part of the
transaction. Our Adviser also considers the nature and extent of our existing
business relationships with the tenant, growth prospects for developing new
business with the tenant, the tenant's credit quality and management's
expectations of lease renewals (including those existing under the terms of the
lease agreement), among other factors. A change in any of the assumptions above,
which are very subjective, could have a material impact on our results of
operations.
The allocation of the purchase price directly affects the following in our
consolidated financial statements:
• The amount of purchase price allocated to the various tangible and
intangible assets on our balance sheet;
• The amounts allocated to the value of above-market and below-market lease
values are amortized to rental income over the remaining non-cancelable
terms of the respective leases. The amounts allocated to all other
tangible and intangible assets are amortized to depreciation or
amortization expense. Thus, depending on the amounts allocated between
land and other depreciable assets, changes in the purchase price
allocation among our assets could have a material impact on our FFO, a metric which is used by many REIT investors to evaluate our operating
performance; and
• The period of time over which tangible and intangible assets are depreciated varies greatly, and thus, changes in the amounts allocated to
these assets will have a direct impact on our results of operations.
Intangible assets are generally amortized over the respective life of the
leases, which normally range from 10 to 15 years. Also, we depreciate our
buildings over 39 years, but do not depreciate our land. These differences
in timing could have a material impact on our results of operations.
Asset Impairment Evaluation
We periodically review the carrying value of each property to determine if
circumstances that indicate impairment in the carrying value of the investment
exist or that depreciation periods should be modified. In determining if
impairment exists, our Adviser considers such factors as our tenants' payment
histories, the financial condition of our tenants, including calculating the
current leverage ratios of tenants, the likelihood of lease renewal, business
conditions in the industries in which our tenants operate and whether the
carrying value of our real estate has decreased. If any of the factors above
indicate the possibility of impairment, we prepare a projection of the
undiscounted future cash flows, without interest charges, of the specific
property and determine if the carrying amount of such property is recoverable.
In preparing the projection of undiscounted future cash flows, we estimate the
holding periods of the properties and cap rates using information that we obtain
from market comparability studies and other comparable sources. If impairment
were indicated, the carrying value of the property would be written down to its
estimated fair value based on our best estimate of the property's discounted
future cash flows using assumptions from market participants. Any material
changes to the estimates and assumptions used in this analysis could have a
significant impact on our results of operations, as the changes would impact our
determination of whether impairment is deemed to have occurred and the amount of
impairment loss that we would recognize.
Using the methodology discussed above and in light of the current economic
conditions discussed above in "Overview-Business Environment," we evaluated our
entire portfolio as of December 31, 2012 for any impairment indicators and
performed an impairment analysis on those select properties that had an
indication of impairment. As a result of this analysis, we concluded that none
of our properties were impaired and we will continue to monitor our portfolio
for any indicators of impairment.
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Results of Operations
The weighted-average yield on our total portfolio was 9.3% as of December 31,
2012. The weighted-average yield on our portfolio is calculated by taking the
annualized straight-line rents, reflected as rental income on our consolidated
statements of operations, of each acquisition as a percentage of the
acquisition. The weighted-average yield does not account for the interest
expense incurred on the mortgages placed on our properties.
A comparison of our operating results for the years ended December 31, 2012 and
2011 is below (dollars in thousands):
For the year ended December 31,
2012 2011 $ Change % Change
Operating revenues
Rental income $ 50,915 $ 43,632 $ 7,283 17 %
Tenant recovery revenue 355 344 11 3 %
Total operating revenues 51,270 43,976 7,294 17 %
Operating expenses
Depreciation and amortization 16,831 14,149 2,682 19 %
Property operating expenses 1,588 986 602 61 %
Due diligence expense 949 700 249 36 %
Base management fee 1,467 1,629 (162 ) -10 %
Incentive fee 3,569 3,398 171 5 %
Administration fee 1,118 1,024 94 9 %
General and administrative 1,594 1,497 97 6 %
Total operating expenses before credit from
Adviser 27,116 23,383 3,733 16 %
Credit to incentive fee (2,221 ) (2,113 ) 108 5 %
Total operating expenses 24,895 21,270 3,625 17 %
Other income (expense)
Interest expense (20,226 ) (17,076 ) 3,150 18 %
Distributions attributable to mandatorily
redeemable preferred stock (2,515 ) - 2,515 NM
Other income 127 84 43 51 %
Total other expense (22,614 ) (16,992 ) (5,622 ) 33 %
Net income 3,761 5,714 (1,953 ) -34 %
Distributions attributable to preferred
stock (4,093 ) (4,094 ) (1 ) 0 %
Distributions attributable to senior common
stock (113 ) (62 ) 51 82 %
Net (loss) income available to common
stockholders $ (445 ) $ 1,558 $ (2,003 ) -129 %
Net (loss) income available to common
stockholders per weighted average share of
common stock-diluted $ (0.04 ) $ 0.00 $ (0.04 ) NM
FFO available to common stockholders $ 16,386$ 15,707$ 679
4 %
Diluted FFO per weighted average share of
common stock $ 1.48 $ 1.53 $ (0.05 ) -4 %
NM = Not meaningful
Operating Revenues
Rental income increased for the year ended December 31, 2012, as compared to the
year ended December 31, 2011, because of the eight properties acquired during
2012.
Tenant recovery revenue increased for the year ended December 31, 2012, as
compared to the year ended December 31, 2011. There was an increase in insurance
premiums from 2011, resulting in increased reimbursements from our tenants
coupled with an increase in insurance reimbursements we received from certain of
our tenants at our properties acquired during 2012.
Operating Expenses
Depreciation and amortization expenses increased for the year ended December 31,
2012, as compared to the year ended December 31, 2011, because of the eight
properties acquired during 2012.
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Property operating expenses consist of franchise taxes, management fees,
insurance, ground lease payments and overhead expenses paid on behalf of certain
of our properties. Property operating expenses increased for the year ended
December 31, 2012, as compared to the year ended December 31, 2011, primarily
because of ground lease payments we are responsible for paying at two of our
properties acquired in the fourth quarter of 2011, coupled with an increase in
overhead expenses and franchise taxes paid at certain of our vacant properties.
Due diligence expense primarily consists of legal fees and fees incurred for
third-party reports prepared in connection with potential acquisitions and our
due diligence analyses related thereto. Due diligence expense increased for the
year ended December 31, 2012, as compared to the year ended December 31, 2011,
as a result of costs incurred related to the eight properties acquired during
2012 coupled with costs incurred for other potential acquisitions, partially
offset by an out of period adjustment of $250,000 recorded during the year ended
December 31, 2011, related to the acquisition of the property in Orange City,
Iowa in December 2010.
The base management fee decreased for the year ended December 31, 2012, as
compared to the year ended December 31, 2011, due to a decrease in total common
stockholders' equity, the main component of the calculation. The calculation of
the base management fee is described in detail above under "Advisory and
Administration Agreements."
The incentive fee increased for the year ended December 31, 2012, as compared to
the year ended December 31, 2011, because of an increase in pre-incentive fee
FFO. The increase in pre-incentive fee FFO was due to an increase in rental
revenues from the eight acquisitions made in 2012, which was partially offset by
an increase in property operating, due diligence and interest expenses during
the year ended December 31, 2012, as compared to the year ended December 31,
2011.
The incentive fee credit increased slightly for the year ended December 31,
2012, as compared to the year ended December 31, 2011, because of the increase
in the amount of common dividends paid for 2012, which resulted in a larger
portion of the incentive fee which was credited. The calculation of the
incentive fee is described in detail above within "Advisory and Administration
Agreements."
The administration fee increased for the year ended December 31, 2012, as
compared to the year ended December 31, 2011, primarily as a result of an
increase in the amount of the total expenses our Administrator incurred during
2012. The calculation of the administration fee is described in detail above
within "Advisory and Administration Agreements."
General and administrative expenses increased for the year ended December 31,
2012, as compared to the year ended December 31, 2011, primarily due to increase
in legal fees incurred at certain of our properties for various projects at
those properties coupled with an increase in stockholder related expenses.
Other Income and Expense
Interest expense increased for the year ended December 31, 2012, as compared to
the year ended December 31, 2011. This increase was primarily a result of
interest on the $124.4 million of mortgage debt assumed and issued during 2012,
partially offset by reduced interest expense on our long-term financings from
amortizing and balloon principal payments made during the last 12 months.
Distributions on our mandatorily redeemable preferred stock for the year ended
December 31, 2012, are from the public offering of 1,540,000 shares of our
7.125% Series C Term Preferred Stock completed in February 2012. Gross proceeds
of the offering totaled $38.5 million, and net proceeds were $36.7 million.
There were no distributions on our mandatorily redeemable preferred stock for
the year ended December 31, 2011 as there was none outstanding.
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Other income increased during the year ended December 31, 2012, as compared to
the year ended December 31, 2011, because of an easement payment and a
bankruptcy settlement from a former tenant received in 2012 related to our
property located in Sterling Heights, Michigan. This was partially offset by
lower interest income on employee loans during the year ended December 31, 2012,
as compared to the year ended December 31, 2011 due to principal repayments made
by employees of our Adviser during 2012.
Net (Loss) Income Available to Common Stockholders
Net (loss) income available to common stockholders decreased for the year ended
December 31, 2012, as compared to the year ended December 31, 2011, primarily
because of increased interest expense and increased distributions to our
preferred stockholders from the issuance of our Term Preferred Stock, partially
offset by an increase in rental income earned from the eight properties acquired
in 2012.
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A comparison of our operating results for the years ended December 31, 2011 and
2010 is below (dollars in thousands):
For the year ended December 31,
2011 2010 $ Change % Change
(Dollars in Thousands)
Operating revenues
Rental income $ 43,632 $ 41,180 $ 2,452 6 %
Interest income from mortgage note
receivable - 421 (421 ) -100 %
Tenant recovery revenue 344 327 17 5 %
Total operating revenues 43,976 41,928 2,048 5 %
Operating expenses
Depreciation and amortization 14,149 13,264 885 7 %
Property operating expenses 986 971 15 2 %
Due diligence expense 700 412 288 70 %
Base management fee 1,629 1,199 430 36 %
Incentive fee 3,398 3,480 (82 ) -2 %
Administration fee 1,024 1,063 (39 ) -4 %
General and administrative 1,497 3,408 (1,911 ) -56 %
Total operating expenses before credit from
Adviser 23,383 23,797 (414 ) -2 %
Credit to base management fee - (225 ) 225 100 %
Credit to incentive fee (2,113 ) (158 ) (1,955 ) 1237 %
Total operating expenses 21,270 23,414 (2,144 ) -9 %
Other income (expense)
Interest expense (17,076 ) (17,063 ) (13 ) 0 %
Other income 84 3,477 (3,393 ) -98 %
Total other expense (16,992 ) (13,586 ) (3,406 ) 25 %
Net income 5,714 4,928 786 16 %
Distributions attributable to preferred
stock (4,094 ) (4,094 ) - 0 %
Distributions attributable to senior common
stock (62 ) (20 ) (42 ) 210 %
Net income available to common stockholders $ 1,558$ 814$ 744
91 %
Diluted net income per weighted average
share of common $ 0.15 $ 0.09 $ 0.06 60 %
FFO available to common stockholders $ 15,707$ 14,078$ 1,629
12 %
Diluted FFO per weighted average share of
common stock $ 1.53 $ 1.64 $ (0.11 ) -7 %
Operating Revenues
Rental income increased for year ended December 31, 2011, as compared to the
year ended December 31, 2010, because of the seven properties acquired during
2011 and the full year of income from our property acquired in December 2010,
partially offset by the lost rental income from two of our properties, which
became vacant in 2010.
Interest income from mortgage notes receivable decreased for the year ended
December 31, 2011, as compared to the year ended December 31, 2010, as our only
mortgage loan was fully repaid in July 2010.
Tenant recovery revenue increased slightly for the year ended December 31, 2011,
as compared to the year ended December 31, 2010, because of an increase in
insurance premiums from 2010, resulting in increased reimbursements from our
tenants.
Operating Expenses
Depreciation and amortization expenses increased for the year ended December 31,
2011, as compared to the year ended December 31, 2010, because we acquired seven
properties in 2011 and a full year of depreciation was recorded from our
property acquired in December 2010.
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Property operating expenses consist of franchise taxes, management fees,
insurance, ground lease payments and overhead expenses paid on behalf of certain
of our properties. Property operating expenses increased during the year ended
December 31, 2011, as compared to the year ended December 31, 2010, because of
overhead expenses for which we became responsible, which were previously paid
directly by our tenants, at our two vacant properties.
Due diligence expense primarily consists of legal fees and fees incurred for
third-party reports prepared in connection with potential acquisitions and our
due diligence analyses related thereto. Due diligence expense increased for the
year ended December 31, 2011, as compared to the year ended December 31, 2010,
as a result of costs incurred related to the seven properties acquired during
2011, partially offset by an out of period adjustment of $250,000 recorded
during 2011 related to the acquisition of the property in Orange City, Iowa in
December 2010.
The base management fee increased for the year ended December 31, 2011, as
compared to the year ended December 31, 2010, due to an increase in total common
stockholders' equity from the issuance of common stock during 2011, the main
component of the calculation. There was no base management fee credit in 2011,
as there was in 2010, and we currently do not anticipate having credits to the
base management fee in the future. The calculation of the base management fee is
described in detail above under "Advisory and Administration Agreements."
The incentive fee decreased for the year ended December 31, 2011, as compared to
the year ended December 31, 2010, due to the increase in common stockholders'
equity from the issuance of common stock during 2011, resulting in a higher
hurdle rate to overcome, which is the main component of the calculation.
The incentive fee credit increased for the year ended December 31, 2011, as
compared to the year ended December 31, 2010, because of the increase in the
amount of common stock dividends paid in 2011, which resulted in a larger
portion of the incentive fee which was credited. The calculation of the
incentive fee is described in the detail above under "Advisory and
Administration Agreement."
The administration fee decreased for the year ended December 31, 2011, as
compared to the year ended December 31, 2010, primarily as a result of a
decrease in the amount of the total expenses allocated from our Administrator
during the periods, partially offset by an increase in our allocable portion of
the total expenses. The calculation of the administration fee is described in
detail above under "Advisory and Administration Agreements."
General and administrative expenses decreased for the year ended December 31,
2011, as compared to the year ended December 31, 2010, primarily due to the
write-off of approximately $1.6 million of fees and expenses incurred in
relation to the termination of the private offering of unregistered senior
common stock in 2010.
Other Income and Expense
Interest expense increased for the year ended December 31, 2011, as compared to
the year ended December 31, 2010. This increase was primarily a result of an
increase in the rate on our $45.2 million mortgage loan in October 2011 of 0.18%
when the mortgage loan was renewed coupled with interest on the $31.7 million of
mortgage debt assumed and issued during 2011. This was partially offset by a
decrease of 2.3% in the interest rate charged on our $45.2 million mortgage loan
that was renewed in September 2010, and reduced interest expense on our
long-term financings from amortizing principal payments made during 2010 and
2011.
Other income decreased during the year ended December 31, 2011, as compared to
the year ended December 31, 2010, because of $3.3 million in additional income
and prepayment fees we received in connection with the early repayment of our
mortgage loan in July 2010 coupled with a decrease in interest income from
employee loans during the year ended December 31, 2011, as compared to the year
ended December 31, 2010. This decrease was a result of loan payoffs made by
employees of our Adviser during 2010 and 2011, coupled with other principal
repayments made during the periods.
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Net Income Available to Common Stockholders
Net income available to common stockholders increased for the year ended
December 31, 2011, as compared to the year ended December 31, 2010, primarily
because of the write-off of $1.6 million of fees related to the termination of
the private offering of unregistered senior common stock in 2010 and income
earned from the seven properties acquired during 2011, partially offset by the
$3.3 million in additional income that was recognized during 2010 related to the
early repayment of our mortgage loan.
Liquidity and Capital Resources
Overview
Our sources of liquidity include cash flows from operations, cash and cash
equivalents, borrowings under our Line of Credit, obtaining mortgages on our
unencumbered properties and issuing additional equity securities. Our available
liquidity at December 31, 2012, was $10.8 million, including $5.5 million in
cash and cash equivalents and an available borrowing capacity of $5.3 million
under our Line of Credit.
Future Capital Needs
We actively seek conservative investments that are likely to produce income to
pay distributions to our stockholders. We intend to use the proceeds received
from future equity raised and debt capital borrowed to continue to invest in
industrial, commercial and retail real property, make mortgage loans, or pay
down outstanding borrowings under our Line of Credit. Accordingly, to ensure
that we are able to effectively execute our business strategy, we routinely
review our liquidity requirements and continually evaluate all potential sources
of liquidity. Our short-term liquidity needs include proceeds necessary to fund
our distributions to stockholders, pay the debt service costs on our existing
long-term mortgages, and fund our current operating costs. Our long-term
liquidity needs include proceeds necessary to grow and maintain our portfolio of
investments.
We believe that our available liquidity is sufficient to fund our distributions
to stockholders, pay the debt service costs on our existing long-term mortgages
and fund our current operating costs in the near term. We further believe that
our cash flow from operations coupled with the financing capital available to us
in the future are sufficient to fund our long-term liquidity needs.
Additionally, to satisfy either our short-term or long-term obligations, or
both, we may require credits to our management fees that are issued from our
Adviser, although our Adviser is under no obligation to provide any such
credits, either in whole or in part.
Equity Capital
During 2012, we raised $2.5 million of common equity under our ATM program, or
$2.4 million in net proceeds, at an average share price of $17.79. We also
raised $1.6 million in net proceeds of senior common equity. Additionally, we
raised $36.7 million of mandatorily redeemable preferred equity, net of offering
costs, in February 2012. We used these proceeds to repay a portion of the
outstanding balance of the Line of Credit, to acquire additional properties and
the remainder for general corporate and working capital needs.
We have also raised $2.4 million of additional common equity thus far in 2013
under our ATM program, or $2.3 million in net proceeds, at an average share
price of $18.49.
As of December 31, 2012, we have the ability to raise up to $214.2 million of
additional equity capital through the sale and issuance of securities that are
registered under our universal shelf registration statement on Form S-3 (File
No. 333-169290), or the Universal Shelf, in one or more future public offerings.
Of the $214.2 million of available capacity under our Universal Shelf, $18.9
million of common
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stock is reserved for additional sales under our ATM Program, which we recently
extended through November 2014, and $50.7 million is reserved for sales of our
senior common stock. Our Universal Shelf expires in September 2013; however, we
intend to file a new registration statement in order to continue to raise equity
capital.
Debt Capital
As of December 31, 2012, we had 30 fixed-rate mortgage notes payable in the
aggregate principal amount of $358.3 million, collateralized by a total of 64
properties with terms at issuance ranging from 5 years to 17 years. The
weighted-average interest rate on the mortgage notes payable as of December 31,
2012 was 5.64%.
The CMBS market has returned, see the discussion in "Overview-Business
Environment" above. Specifically, we continue to see banks and other non-bank
lenders willing to issue 10-year mortgages. Consequently, we are focused on
obtaining mortgages through regional banks, non-bank lenders and CMBS.
We have mortgage debt in the aggregate principal amount of $15.6 million payable
during 2013 and $24.4 million payable during 2014. The 2013 and 2014 principal
amounts payable includes both amortizing principal payments and balloon
principal payments due in December of 2013 of $8.5 million and June of 2014 of
$17.3 million; however, we are initiating conversations with these lenders in
advance of these maturities and anticipate being able to extend the maturity
dates or refinance with new lenders. We intend to pay the 2013 and 2014 debt
amortization payments from operating cash flow and borrowings under our Line of
Credit.
Our Line of Credit matures in December 2013. We are currently in discussions
with both our existing lender and various other lenders to either renew our
existing line or to implement a new line of credit. We anticipate being able to
extend or issue a new line in advance of the maturity of our existing line in an
amount similar to our existing Line of Credit.
If we cannot find replacement financing, we would not have enough existing
liquidity to continue our existing operations. If that were to happen,
management would pursue and expect to obtain an extension from the current
lender in order to provide additional time to obtain replacement financing. In
the unlikely scenario that we are unable to find replacement financing,
management has reviewed its cash uses and sources and has identified plans that
could be implemented to continue operations despite the maturity of the Line of
Credit. These steps could include suspension of capital spending, cost
reductions, an equity raise and possible asset disposals. Additionally
management has assessed that the remaining assets in the portfolio would produce
sufficient cash flows to fund operating cash needs and meet remaining debt
service requirements in the near term.
Operating Activities
Net cash provided by operating activities during the year ended December 31,
2012, was $23.4 million, as compared to net cash provided by operating
activities of $19.7 million for the year ended December 31, 2011. This increase
was primarily a result of rental income received from the eight properties
acquired in 2012, partially offset by $1.7 million of leasing commissions paid
for renewing existing leases. The majority of cash from operating activities is
generated from the rental payments that we receive from our tenants. We utilize
this cash to fund our property-level operating expenses and use the excess cash
primarily for debt and interest payments on our mortgage notes payable, interest
payments on our Line of Credit, distributions to our stockholders, management
fees to our Adviser, and other entity-level expenses.
Investing Activities
Net cash used in investing activities during the year ended December 31, 2012,
was $92.0 million, which primarily consisted of the acquisition of eight
properties during 2012, coupled with tenant improvements performed at certain of
our properties and net payments to our lenders for reserves, as compared to net
cash
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used in investing activities during the year ended December 31, 2011, of $46.0
million, which primarily consisted of the acquisition of seven properties,
coupled with tenant improvements performed at certain of our properties and net
payments to our lenders for reserves.
Financing Activities
Net cash provided by financing activities during the year ended December 31,
2012, was $70.8 million, which primarily consisted of proceeds from the sale of
our Term Preferred Stock, common stock, net borrowings on our Line of Credit and
proceeds from the issuance of mortgage notes payable, partially offset by
distributions paid to our stockholders and principal repayments on mortgage
notes payable. Net cash provided by financing activities for the year ended
December 31, 2011, was $22.6 million, which primarily consisted of proceeds from
the sale of our common stock and proceeds from the issuance of mortgage notes
payable, partially offset by distributions paid to our stockholders, principal
repayments on mortgage notes payable and net repayments on our Line of Credit.
Line of Credit
In December 2010, we procured a $50.0 million Line of Credit maturing on
December 28, 2013, with Capital One, N.A. serving as a revolving lender, a
letter of credit issuer and an administrative agent and Branch Banking and Trust
Company serving as a revolving lender and letter of credit issuer. The Line of
Credit originally provided for a senior secured revolving credit facility of up
to $50.0 million, with a standby letter of credit sublimit of up to $20.0
million. In January 2012, the Line of Credit was expanded to $75.0 million and
Citizens Bank of Pennsylvania was added as a revolving lender and letter of
credit issuer. The interest rate per annum applicable to the Line of Credit is
equal to the London Interbank Offered Rate, or LIBOR, plus an applicable margin
of up to 3.00% depending upon our leverage. Our leverage ratio used in
determining the applicable margin for interest on the Line of Credit is
recalculated quarterly. We are subject to an annual maintenance fee of 0.25% per
year. Our ability to access this source of financing is subject to our continued
ability to meet customary lending requirements such as compliance with financial
and operating covenants and our meeting certain lending limits. One such
covenant requires us to limit distributions to our stockholders to 95% of our
FFO, with acquisition-related costs required to be expensed under ASC 805 added
back to FFO for covenant purposes. In addition, the maximum amount that we may
draw under this agreement is based on a percentage of the value of properties
pledged as collateral to the banks, which must meet agreed upon eligibility
standards. Currently, 14 of our properties are pledged as collateral under our
Line of Credit.
When we are able to procure mortgages for these pledged properties, the banks
will release the properties from the Line of Credit and reduce the availability
under the Line of Credit by the advanced amount of the released property.
Conversely, as we purchase new properties meeting the eligibility standards, we
may pledge these new properties to obtain additional advances under the Line of
Credit. Our availability under the Line of Credit will also be reduced by
letters of credit used in the ordinary course of business. We may use the
advances under the Line of Credit for both general corporate purposes and the
acquisition of new investments.
As of February 19, 2013, there was $19.7 million outstanding under the Line of
Credit at an interest rate of approximately 3.0% and $6.1 million outstanding
under letters of credit at a weighted average interest rate of 3.0%. As of
February 19, 2013, the remaining borrowing capacity available under the Line of
Credit was $10.6 million. Our ability to increase the availability under our
Line of Credit is dependent upon our pledging additional properties as
collateral. Traditionally, we have pledged new properties to the Line of Credit
as we arrange for long-term mortgages for these pledged properties. Currently,
only 16 of our properties do not have long-term mortgages, and 14 of those are
pledged as collateral under our Line of Credit. Accordingly, we have only 2
properties which are unencumbered. We were in compliance with all covenants
under the Line of Credit as of December 31, 2012.
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Contractual Obligations
The following table reflects our material contractual obligations as of
December 31, 2012 (in thousands):
Payments Due by Period
Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
Debt Obligations (1) $ 421,790 $ 40,602 $ 65,572 $ 183,107 $ 132,509
Interest on Debt Obligations (2) 120,497 23,777 41,984 24,803 29,933
Operating Lease Obligations (3) 7,400 413 826 829 5,332
Total $ 549,687 $ 64,792 $ 108,382 $ 208,739 $ 167,774
(1) Debt obligations represent borrowings under our Line of Credit, which
represents $25.0 million of the debt obligation due in 2013, mortgage notes
payable that were outstanding as of December 31, 2012 and amounts due to the
holders of our Term Preferred Stock.
(2) Interest on debt obligations includes estimated interest on our borrowings
under our Line of Credit, mortgage notes payable and interest due to the
holders of our Term Preferred Stock. The balance and interest rate on our
Line of Credit is variable; thus, the amount of interest calculated for
purposes of this table was based upon rates and balances as of December 31,
2012.
(3) Operating lease obligations represent the ground lease payments due on our
Tulsa, Oklahoma, Dartmouth, Massachusetts, and Springfield, Missouri
properties.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2012.
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