Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the
quarterly period ended June 30, 2008
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the
transition period from _________ to __________
Commission
file number: 333-145949
AMERICAN
REALTY CAPITAL TRUST, INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
|
71-1036989
|
(State
or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
106
Old York Road
Jenkintown,
PA
|
|
19046
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
(215)
887-2189
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. x
Yes
¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨
|
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨
Yes
x
No
The
number of outstanding shares of the registrant’s common stock on August 13, 2008
was 1,103,915 shares.
AMERICAN
REALTY CAPITAL TRUST, INC.
INDEX
|
|
PART
I — FINANCIAL INFORMATION
|
|
|
|
Item 1.
Financial Statements
|
3
|
|
|
Consolidated
Balance Sheets as of June 30, 2008 (Unaudited) and December 31,
2007
|
3
|
|
|
Consolidated
Statement of Operations for the three and six months ended June 30,
2008
(Unaudited)
|
4
|
|
|
Consolidated
Statement of Stockholders’ Equity for the six months ended June 30, 2008
(Unaudited)
|
5
|
|
|
Consolidated
Statement of Cash Flows for the six months ended June 30, 2008
(Unaudited)
|
6
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
7
|
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
|
|
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
|
24
|
|
|
PART
II — OTHER INFORMATION
|
25
|
|
|
Item 1.
Legal Proceedings
|
|
|
|
Item
1A. Risk Factors
|
|
|
|
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
|
|
Item 3.
Defaults Upon Senior Securities
|
|
|
|
Item 4.
Submission of Matters to a Vote of Security Holders
|
|
|
|
Item 5.
Other Information
|
|
|
|
Item 6.
Exhibits
|
|
|
|
Signatures
|
26
|
PART
I - Financial Information
Item
1. Financial Statements
CONSOLIDATED
BALANCE SHEETS
|
|
June
30,
2008
(Unaudited)
|
|
December
31,
2007
|
|
ASSETS
|
|
|
|
|
|
Real
estate investments, at cost:
|
|
|
|
|
|
Land
|
|
$
|
11,641,545
|
|
$
|
—
|
|
Buildings,
fixtures and improvements
|
|
|
65,891,053
|
|
|
—
|
|
Acquired
intangible lease assets
|
|
|
7,462,915
|
|
|
—
|
|
Total
real estate investments, at cost
|
|
|
84,995,513
|
|
|
—
|
|
Less
accumulated depreciation and amortization
|
|
|
(907,960
|
)
|
|
|
|
Total real estate investments, net
|
|
|
84,087,553
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
526,669
|
|
|
—
|
|
Restricted
Cash
|
|
|
42,500
|
|
|
|
|
Prepaid
expenses and other assets
|
|
|
321,820
|
|
|
938,157
|
|
Deferred
financing costs, net
|
|
|
806,667
|
|
|
—
|
|
Total
assets
|
|
$
|
85,785,209
|
|
$
|
938,157
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
62,305,074
|
|
$
|
—
|
|
Short-term
mezzanine notes payable
|
|
|
7,948,796
|
|
|
—
|
|
Related
party revolving credit facility
|
|
|
6,500,000
|
|
|
—
|
|
Accounts
payable and accrued expenses
|
|
|
1,355,728
|
|
|
453,832
|
|
Investor contributions
held in escrow
|
|
|
472,549
|
|
|
—
|
|
Distributions
payable
|
|
|
55,044
|
|
|
—
|
|
Deferred
rent and other liabilities
|
|
|
501,040
|
|
|
—
|
|
Due
to affiliates
|
|
|
62,428
|
|
|
284,825
|
|
Total
liabilities
|
|
|
79,200,659
|
|
|
738,657
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 10,000,000 shares authorized, none
issued and
outstanding
|
|
|
—
|
|
|
—
|
|
Common
stock, $.01 par value; 240,000,000 shares authorized, 1,032,652
and 20,000
shares issued and outstanding at June 30, 2008 and December
31, 2007,
respectively
|
|
|
10,327
|
|
|
200
|
|
Additional
paid-in capital
|
|
|
7,505,884
|
|
|
199,800
|
|
Accumulated
deficit
|
|
|
(931,661
|
)
|
|
(500
|
)
|
Total
stockholders’ equity
|
|
|
6,584,550
|
|
|
199,500
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
85,785,209
|
|
$
|
938,157
|
|
See
accompanying notes to consolidated financial statements
AMERICAN
REALTY CAPITAL TRUST, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended June 30,2008
|
|
Six
Months Ended June 30, 2008
|
|
|
|
|
|
|
|
Rental
income
|
|
$
|
1,348,082
|
|
$
|
1,562,508
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
Property
management fees to affiliate
|
|
|
-
|
|
|
4,230
|
|
General
and administrative
|
|
|
83,740
|
|
|
272,599
|
|
Depreciation
and amortization
|
|
|
736,483
|
|
|
907,960
|
|
Total
operating expenses
|
|
|
820,223
|
|
|
1,184,789
|
|
Operating
income
|
|
|
527,859
|
|
|
377,719
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,180,260
|
)
|
|
(1,371,970
|
)
|
Interest
income
|
|
|
1,216
|
|
|
1,216
|
|
Other
|
|
|
196,816
|
|
|
196,816
|
|
Total
other expense
|
|
|
(982,228
|
)
|
|
(1,173,938
|
)
|
Net
loss
|
|
$
|
(454,369
|
)
|
$
|
(796,219
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average
|
|
|
|
|
|
|
|
common
shares outstanding
|
|
|
860,102
|
|
|
497,057
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.53
|
)
|
$
|
(1.60
|
)
|
See
accompanying notes to consolidated financial statements
AMERICAN
REALTY CAPITAL TRUST, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
SIX
MONTHS ENDED JUNE 30,
2008
(Unaudited)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Par
Value
|
|
Additional
Paid-In Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders’ Equity
|
|
Balance,
December 31, 2007
|
|
|
20,000
|
|
$
|
200
|
|
$
|
199,800
|
|
$
|
(500
|
)
|
$
|
199,500
|
|
Issuance
of common stock
|
|
|
1,010,272
|
|
|
10,103
|
|
|
9,121,557
|
|
|
—
|
|
|
9,131,660
|
|
Common
stock issued through dividend reinvestment program
|
|
|
2,380
|
|
|
24
|
|
|
22,584
|
|
|
—
|
|
|
22,608
|
|
Offering
costs, commissions and dealer manager fees
|
|
|
|
|
|
|
|
|
(1,838,057
|
)
|
|
|
|
|
(1,838,057
|
)
|
Distributions
declared
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(134,942
|
)
|
|
(134,942
|
)
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(796,219
|
)
|
|
(796,219
|
)
|
Balance,
June 30, 2008
|
|
|
1,032,652
|
|
$
|
10,327
|
|
$
|
7,505,884
|
|
$
|
(931,661
|
)
|
$
|
6,584,550
|
|
See
accompanying notes to consolidated financial statements
AMERICAN
REALTY CAPITAL TRUST, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended June 30,
2008
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
|
$
|
(796,219
|
)
|
Adjustments
to reconcile net loss to net cash
used
in operating activities:
|
|
|
|
|
Depreciation
|
|
|
760,540
|
|
Amortization
of intangibles
|
|
|
147,420
|
|
Amortization
of deferred finance charges
|
|
|
32,162
|
|
Gains
on derivative instruments
|
|
|
(196,816
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
Prepaid
expenses and other assets
|
|
|
(125,004
|
)
|
Accounts
payable and accrued
expenses
|
|
|
603,201
|
|
Deferred
rent and other liabilities
|
|
|
501,040
|
|
Net
cash provided by operating activities
|
|
|
926,324
|
|
Cash
flows from investing activities:
|
|
|
|
|
Investment
in real estate and related assets
|
|
|
(39,917,898
|
)
|
Net
cash used in investing activities
|
|
|
(39,917,898
|
)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
Proceeds
from notes payable
|
|
|
28,407,500
|
|
Payments
on notes payable
|
|
|
(72,426
|
)
|
Payments
of deferred financing costs
|
|
|
(838,829
|
)
|
Proceeds
from related party credit facility
|
|
|
6,500,000
|
|
Proceeds
from issuance of common stock, net
|
|
|
5,621,789
|
|
Distributions
paid
|
|
|
(57,291
|
)
|
Restricted
Cash
|
|
|
(42,500
|
)
|
Net
cash provided by financing activities
|
|
|
39,518,243
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
526,669
|
|
Cash
and cash equivalents, beginning of
period
|
|
|
-
|
|
Cash
and cash equivalents, end of period
|
|
$
|
526,669
|
|
|
|
|
|
|
Supplemental
Disclosures of Non-Cash
Investing
and Financing Activities:
|
|
|
|
|
Debt
assumed in real estate acquisitions
|
|
$
|
41,918,796
|
|
Common
share issuance in real estate
acquisition
|
|
|
2,609,971
|
|
Investor
contributions held in escrow
|
|
$
|
472,548
|
|
Non-cash
acquisition costs
|
|
$
|
76,300
|
|
Common
stock issued through dividend reinvestment plan
|
|
|
22,608
|
|
Reclassification
of deferred offering costs
|
|
$
|
938,157
|
|
See
accompanying notes to consolidated financial statements
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
Note
1 — Organization
American
Realty Capital Trust, Inc. (the “Company”), incorporated on August 17, 2007, is
a newly formed Maryland corporation that intends to qualify as a real estate
investment trust (“REIT”) for federal income tax purposes beginning with the
taxable year that will end December 31, 2008. On January 25, 2008, the
Company commenced an initial public offering on a “best efforts” basis of up to
150,000,000 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 filed with the Securities and Exchange Commission
(the “SEC”) under the Securities Act of 1933, as amended (the “Offering”). The
Registration Statement also covered up to 25,000,000 shares available
pursuant to a distribution reinvestment plan (the “DRIP”) under which our
stockholders may elect to have their distributions reinvested in additional
shares of the Company’s common stock at the greater of $9.50 per share or
95% of the estimated value of a share of common stock. The Company sold 20,000
shares to American Realty Capital II, LLC (the “Sponsor”) on August 17, 2007, at
$10.00 per share. As of June 30, 2008, the Company issued 1,032,652 shares
of
Common stock for gross offering proceeds of approximately $9.4
million, including 289,997 shares issued in connection with an
acquisition in March 2008 - see Note 3 - Real Estate Acquisitions.
Substantially
all of the Company’s business is conducted through American Realty Capital
Operating Partnership, L.P. (the “OP”), a Delaware limited partnership. The
Company is the sole general partner of and owns a 99.0% partnership interest
in
the OP. American Realty Capital Advisors, LLC (the “Advisor”), the Company’s
affiliated advisor, is the sole limited partner and owner of 1.0% (minority
interest) of the partnership interests of the OP. In March 2008, the OP issued
to the Company 20,000 Operating Partnership units in exchange for $200,000.
Additionally, in April 2008, the Advisor contributed $2,000 to the Operating
Partnership in exchange for a 0.99% limited partner interest in the Operating
Partnership. The limited partner interests have the right to convert Operating
Partnerships units into cash or, at the option of the Company, an equal number
of common shares of the Company, as allowed by the limited partnership
agreement. The remaining rights of the limited partner interests are limited,
however, and do not include the ability to replace the general partner or to
approve the sale, purchase or refinancing of the Operating Partnership’s
assets.
The
Company acquires and operates primarily commercial properties. All such
properties may be acquired and operated by the Company alone or jointly with
another party. As of June 30, 2008, the Company owned 34 properties comprising
approximately 354,000 square feet of freestanding, single tenant commercial
space concentrated in Pennsylvania and Massachusetts. As of June 30, 2008,
these
properties were 100% occupied. The Company may also acquire mortgages secured
by
real estate, with a view towards acquiring such real estate.
The
Company is managed by the Advisor and American Realty Capital Properties, LLC,
which serves as the Company’s property manager (“Property Manager”). Realty
Capital Securities, LLC (“Dealer Manager”), an affiliate of the Sponsor, serves
as the dealer manager of the Company’s Offering. These related parties receive
compensation and fees for services related to the Offering and for the
investment and management of the Company’s assets. These entities receive fees
during the offering, acquisition, operational and liquidation stages. The
compensation levels during the offering, acquisition and operational stages
are
discussed in Note 6 — Related Party Transactions.
The
Company’s stock is not currently listed on a national securities exchange. The
Company may seek to list its stock for trading on a national securities exchange
only if a majority of its independent directors believe listing would be in
the
best interest of its stockholders. The Company does not intend to list its
shares at this time. The Company does not anticipate that there would be any
market for its common stock until its shares are listed for trading. In the
event it does not obtain listing prior to the tenth anniversary of the
completion or termination of the Offering, its charter requires that it either:
(i) seek stockholder approval of an extension or amendment of this listing
deadline; or (ii) seek stockholder approval to adopt a plan of liquidation
of the corporation.
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
Note
2 — Summary of Significant Accounting Policies
Basis
of Presentation
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or consolidated pursuant to the
rules and regulations of the Securities and Exchange Commission. Management
believes, however, that the disclosures are adequate to make the information
presented not misleading. The unaudited interim consolidated financial
statements should be read in conjunction with the audited financial statements
and the notes thereto included in the Company’s annual report on Form S-11 for
the period from August 17, 2007 (date of inception) to December 31, 2007.
In management’s opinion, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position
of
the Company and the consolidated results of its operations and its cash flows,
are included. The results of operations for such interim periods are not
necessarily indicative of the results for the full year.
Basis
of Accounting
The
accompanying consolidated financial statements of the Company are prepared
on
the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America.
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management makes significant estimates regarding revenue recognition,
investments in real estate, purchase price allocations and derivative financial
instruments and hedging activities, as applicable.
Reclassifications
Certain
amounts in the prior fiscal period have been reclassified to conform with the
presentation adopted in the current fiscal period.
Real
Estate Investments
The
Company records acquired real estate at cost and makes assessments as to the
useful lives of depreciable assets. The Company considers the period of future
benefit of the asset to determine the appropriate useful lives. Depreciation
is
computed using a straightline method over the estimated useful life of 40 years
for buildings, five to ten years for building fixtures and improvements and
the
remaining lease term for acquired intangible lease assets.
Allocation
of Purchase Price of Acquired Assets
Upon
the
acquisition of real properties, it is the Company’s policy to allocate the
purchase price of properties to acquired tangible assets, consisting of land,
building, fixtures and improvements, and identified intangible lease assets
and
liabilities, consisting of the value of above-market and below-market leases,
as
applicable, other value of in-place leases and value of tenant relationships,
based in each case on their fair values. The Company utilizes independent
appraisals and information management obtained on each property as a result
of
pre-acquisition due diligence, as well as subsequent marketing and leasing
activities, as applicable, to determine the fair values of the tangible assets
of an acquired property (which includes land and building), amongst other market
data.
The
fair
values of above-market and below-market in-place lease values are recorded
based
on the present value (using an interest rate which reflects the risks associated
with the leases acquired) of the difference between (a) the contractual amounts
to be paid pursuant to the in-place leases and (b) an estimate of fair market
lease rates for the corresponding in-place leases, which is generally obtained
from independent appraisals, measured over a period equal to the remaining
non-cancelable term of the lease. The above-market and below-market lease values
are capitalized as intangible lease assets or liabilities and amortized as
an
adjustment of rental income over the remaining terms of the respective
leases.
The
fair
values of in-place leases include direct costs associated with obtaining a
new
tenant, opportunity costs associated with lost rentals which are avoided by
acquiring an in-place lease, and tenant relationships. Direct costs associated
with obtaining a new tenant include commissions, tenant improvements, and other
direct costs and are estimated based on independent appraisals and management’s
consideration of current market costs to execute a similar lease. These direct
costs are included in acquired intangible lease assets in the accompanying
consolidated balance sheet and are amortized to expense over the remaining
terms
of the respective leases. The value of opportunity costs is calculated using
the
contractual amounts to be paid pursuant to the in-place leases over a market
absorption period for a similar lease. Customer relationships are valued based
on expected renewal of a lease or the likelihood of obtaining a particular
tenant for other locations. These intangibles will be included in intangible
lease assets in the balance sheet and are amortized to expense over the
remaining term of the respective leases.
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
The
determination of the fair values of the assets and liabilities acquired requires
the use of significant assumptions with regard to the current market rental
rates, rental growth rates, discount rates and other variables. The use of
inappropriate estimates would result in an incorrect assessment of the purchase
price allocations, which could impact the amount of the Company’s reported net
income. Initial purchase price allocations are subject to change until all
information is finalized, which is generally within one year of the acquisition
date.
As
of
June 30, 2008, acquired lease intangible assets consist only of in-place lease
intangibles totaling $7,462,915 with accumulated amortization of
$147,420.
Derivative
Instruments
The
Company may use derivative financial instruments to hedge all or a portion
of
the interest rate risk associated with its borrowings. Certain of the
techniques
used to hedge exposure to interest rate fluctuations may also be used
to protect
against declines in the market value of assets that result from general
trends
in debt markets. The principal objective of such agreements is to minimize
the
risks and/or costs associated with the Company’s operating and financial
structure as well as to hedge specific anticipated transactions.
In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended and interpreted (“SFAS No. 133”), the Company measures each
derivative instrument (including certain derivative instruments embedded
in
other contracts) at fair value and records such amounts in its consolidated
balance sheets as either an asset or liability. The accounting for changes
in
the fair value of derivatives depends on the intended use of the derivative
and
the resulting designation. Derivatives
used to hedge 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 used to hedge the
exposure
to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. For
derivatives designated as fair value hedges or for derivatives not designated
as
hedges, the changes in fair value of both the derivative instrument and
the
hedged item are recorded in earnings. For derivatives designated as cash
flow
hedges, the changes in the fair value of the effective portions of the
derivative are reported in other comprehensive income and subsequently
reclassified to earnings when the hedged transaction affects earnings.
The
ineffective portion of the changes in fair value of the derivative
is recorded in earnings immediately.
Impairment
of Long Lived Assets
The
Company follows SFAS No.144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” which establishes a single accounting model for the
impairment or disposal of long-lived assets. SFAS No.144 requires that the
operations related to properties that have been sold or properties that are
intended to be sold be presented as discontinued operations in the statement
of
operations for all periods presented, and properties intended to be sold
to be
designated as “held for sale” on the balance sheet.
When
circumstances indicate the carrying value of a property may not be recoverable,
the Company reviews the asset for impairment. This review is based on an
estimate of the future undiscounted cash flows, excluding interest charges,
expected to result from the property’s use and eventual disposition. These
estimates consider factors such as expected future operating income, market
and
other applicable trends and residual value, as well as the effects of leasing
demand, competition and other factors. If impairment exists, due to the
inability to recover the carrying value of a property, an impairment loss is
recorded to the extent that the carrying value exceeds the estimated fair value
of the property for properties to be held and used. For properties held for
sale
the impairment loss is the adjustment to fair value less estimated cost to
dispose of the asset. These assessments have a direct impact on net income
because recording an impairment loss results in an immediate negative adjustment
to net income.
Investor
contributions held in Escrow
The
Company is currently engaged in a public offering of its common stock. Included
in investor contributions held in escrow on the accompanying balance sheet
is
$472,549 of offering proceeds for which shares of common stock had not been
issued as of June 30, 2008.
Revenue
Recognition
Upon
the
acquisition of real estate, certain properties will have leases where minimum
rent payments increase during the term of the lease. The Company will record
rental revenue for the full term of each lease on a straightline basis. When
the
Company acquires a property, the term of existing leases is considered to
commence as of the acquisition date for the purposes of this calculation. In
accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in
Financial Statements,” the Company will defer the recognition of contingent
rental income, such as percentage rents, until the specific target that triggers
the contingent rental income is achieved. Cost recoveries from tenants are
included in tenant reimbursement income in the period the related costs are
incurred, as applicable.
The
Companies’ 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 straightline basis over the initial term of the lease. Since many of the
leases provide for rental increases at specified intervals, straightline basis
accounting requires the Company to record a receivable, and include in revenues,
unbilled rent receivables that the Company will only receive if the tenant
makes
all rent payments required through the expiration of the initial term of the
lease.
The
Company continually reviews receivables related to rent and unbilled rent
receivables and determines collectibility 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
collectibility of a receivable is in doubt, the Company will record an increase
in the allowance for uncollectible accounts or record a direct write-off of
the
receivable in the consolidated statements of operations.
Organization,
Offering, and Related Costs
Organization
and offering costs (other than selling commissions and the dealer manager fee)
of the Company may be paid by the Advisor, the Dealer Manager or their
affiliates on behalf of the Company. Such organization and offering costs
include all expenses to be paid by the Company in connection with the Offering,
including but not limited to (i) legal, accounting, printing, mailing, and
filing fees; (ii) escrow related fees; (iii) reimbursement of the
Dealer Manager for amounts it may pay to reimburse the bona fide diligence
expenses of broker-dealers; and (iv) reimbursement to the Advisor for the
salaries of its employees and other costs in connection with preparing
supplemental sales materials. Pursuant to the Advisory Agreement and the Dealer
Manager Agreement, the Company is obligated to reimburse the Advisor or its
affiliates, as applicable, for organization and offering costs paid by them
on
behalf of the Company, provided that the Advisor is obligated to reimburse
the
Company to the extent selling commissions, the dealer manager fee and other
organization and offering costs incurred by the Company in the Offering exceed
15% of gross offering proceeds.
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
As
a
result, these costs are only a liability of the Company to the extent selling
commissions, the dealer manager fee and other organization and offering costs
do
not exceed 15% of the gross proceeds of the Offering. Through June 30, 2008,
the
Company had issued 1,032,652 shares for gross offering proceeds of approximately
$9.4 million and recorded offering costs of $1,800,851 and
selling commissions and dealer manager fees of $37,206. The total shares
issued
include 289,997 shares issued in connection with an acquisition - see Note
3. Organization costs are expensed as incurred within general and administrative
expenses, and offering costs, which include selling commissions and dealer
manager fees, are charged to stockholders’ equity as such amounts are reimbursed
from the gross proceeds of the Offering.
Reportable
Segments
The
Financial Accounting Standards Board (“FASB”) issued SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information,” which
establishes standards for reporting financial and descriptive information about
an enterprise’s reportable segments. The Company determined that it has one
reportable segment, with activities related to investing in real estate. The
Company’s investments in real estate generate rental revenue and other income
through the leasing of properties, which comprised 100% of our total
consolidated revenues for the six-month period ended June 30, 2008. Although
the
Company’s investments in real estate will be geographically diversified
throughout the United States, management evaluates operating performance on
an
individual property level. The Company’s properties have been aggregated into
one reportable segment.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
(“SFAS No. 157”), which addresses how companies should measure fair value
when they are required to use a fair value measure for recognition or disclosure
purposes under Generally Accepted Accounting Principles (“GAAP”). As a result of
SFAS No. 157 there is now a common definition of fair value to be used
throughout GAAP. The FASB believes that the new standard will make the
measurement of fair value more consistent and comparable and improve disclosures
about those measures. The effective date of SFAS No. 157 is delayed for one
year for certain nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements
on a
recurring basis (at least annually). Certain provisions of SFAS No. 157 are
effective for the Company beginning in the first quarter of 2008. The adoption
of SFAS No. 157 for financial assets and liabilities in the first quarter
of 2008 did not have a material effect on the Company’s results of operations
and financial position. The Company is currently evaluating the impact of
adoption SFAS No. 157 for nonfinancial assets and liabilities, on its
results of operations and financial position.
In
February 2007, the FASB issued SFAS No. 159, “Fair Value Option for
Financial Assets and Financial Liabilities,” (“SFAS No. 159”), which
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at
fair
value. The objective of SFAS No. 159 is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 was
effective for the Company beginning in the first quarter of 2008. The adoption
of SFAS No. 159 did not have a material impact on the Company’s financial
position, results of operations or cash flows in the first quarter of
2008.
In
December 2007, the FASB issued SFAS No. 141, (revised 2007), “Business
Combinations,” (“SFAS No. 141(R)”), which continues the evolution toward
fair value reporting and significantly changes the accounting for acquisitions
that close beginning in 2009, both at the acquisition date and in subsequent
periods. SFAS No. 141(R) introduces new accounting concepts and valuation
complexities, and many of the changes have the potential to generate greater
earnings volatility after the acquisition. SFAS No. 141(R) applies to
acquisitions on or after January 1, 2009 and will impact the Company’s
reporting prospectively only.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51,” (“SFAS No. 160”), which requires companies to measure an
acquisition of noncontrolling (minority) interest at fair value in the equity
section of the acquiring entity’s balance sheet. The objective of SFAS
No. 160 is to improve the comparability and transparency of financial data
as well as to help prevent manipulation of earnings. The changes introduced
by
the new standards are likely to affect the planning and execution, as well
as
the accounting and disclosure, of merger transactions. The effective date to
adopt SFAS No. 160 for the Company is January 1, 2009. The adoption of
SFAS No. 160 is not expected to have a material effect on its results of
operations and financial position.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities,” an amendment of FASB Statement
No. 133 “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS No. 161”) requires entities to provide greater transparency about
how and why an entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for under SFAS No. 133, and how
derivative instruments and related hedged items affect an entity’s financial
position, results of operations, and cash flows. The statement is effective
for
financial statements issues for fiscal years and interim periods beginning
after
November 15, 2008, and is not expected to have a significant impact on the
Company’s results of operations, financial condition or liquidity.
In
April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3,
which amends the factors that must be considered in developing renewal or
extension assumptions used to determine the useful life over which to amortize
the cost of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.” The FSP requires an entity to consider its own
assumptions about renewal or extension of the term of the arrangement,
consistent with its expected use of the asset, and is an attempt to improve
consistency between the useful life of a recognized intangible asset under
SFAS
No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141, “Business Combinations.” The FSP is
effective for fiscal years beginning after December 15, 2008, and the
guidance for determining the useful life of a recognized intangible asset must
be applied prospectively to intangible assets acquired after the effective
date.
The FSP is not expected to have a significant impact on the Company’s results of
operations, financial condition or liquidity.
In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles” (“SFAS No. 162”). The statement is
intended to improve financial reporting by identifying a consistent hierarchy
for selecting accounting principles to be used in preparing financial statements
that are prepared in conformance with generally accepted accounting principles.
Unlike Statement on Auditing Standards (“SAS”) No. 69, “The Meaning of
Present in Conformity With GAAP,” SFAS No. 162 is directed to the entity
rather than the auditor. The statement is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board
(“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly
in Conformity with GAAP,” and is not expected to have any impact on the
Company’s results of operations, financial condition or liquidity.
In
June 2008, the FASB issued FSP Emerging Issues Task Force
(EITF) No. 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.” Under the FSP,
unvested share-based payment awards that contain rights to receive
nonforfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those years, and is not expected to have a significant impact
on
the Company’s results of operations, financial condition or liquidity.
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
During
the three months and six months ended June 30, 2008, the Company acquired 18
and
16 properties, respectively. The following table presents the allocation of
the
assets acquired and liabilities assumed during the period:
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
2008
|
|
Real
estate investments, at cost:
|
|
|
|
|
|
Land
|
|
$
|
4,542,596
|
|
|
11,641,545
|
|
Buildings,
fixtures and improvements
|
|
|
25,722,211
|
|
|
65,891,053
|
|
|
|
|
30,264,807
|
|
|
77,532,598
|
|
|
|
|
|
|
|
|
|
Intangibles
and other assets:
|
|
|
|
|
|
|
|
In-place
leases
|
|
|
2,868,489
|
|
|
7,462,915
|
|
|
|
|
|
|
|
|
|
Total
assets acquired
|
|
|
33,133,296
|
|
|
84,995,513
|
|
|
|
|
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
|
|
|
|
Mortgage
notes
|
|
|
— |
|
|
(37,965,000
|
)
|
Mezzanine
financing
|
|
|
— |
|
|
(3,953,796
|
)
|
Investor
contributions held in escrow
|
|
|
— |
|
|
(472,548
|
)
|
Other
liabilities
|
|
|
(76,300
|
) |
|
(76,300
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities assumed:
|
|
|
(76,300
|
)
|
|
(42,467,644
|
)
|
|
|
|
|
|
|
|
|
Issuance
of common shares
|
|
|
— |
|
|
2,609,971
|
|
|
|
|
|
|
|
|
|
Cash
paid
|
|
|
33,056,996
|
|
|
39,917,898
|
|
|
|
|
|
|
|
|
|
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
During
the six months ended June 30, 2008, the Company acquired the following
properties:
Seller
/ Property Name
|
|
Acquisition
Date
|
|
No.
of Buildings
|
|
Square
Feet
|
|
Purchase
Price (1)
|
|
|
|
|
|
|
|
|
|
Federal
Express Distribution Center
|
|
March
2008
|
|
1
|
|
55,440
|
|
$10,198,996
|
Harleysville
National Bank Portfolio
|
|
March
2008
|
|
15
|
|
177,774
|
|
41,663,221
|
Rockland
Trust Company Portfolio
|
|
May
2008
|
|
18
|
|
121,057
|
|
33,133,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
34
|
|
354,271
|
|
$84,995,513
|
________________________
|
(1)
|
-
Includes all acquisition costs, the value of acquired intangible
lease
assets and assumed liabilities.
|
In
March
2008, the Company acquired a Federal Express Distribution center located in
Pennsylvania from a related party - see Note 6. In connection with this
transaction, the Company assumed a mortgage note obligation of $6,965,000,
which
bears interest at a fixed effective rate of 6.29%. This note is interest only
through September 1, 2014 and then amortizes through September 1, 2037, with
a
final balloon payment due on such date. This property was acquired in
exchange for 342,502 shares of common stock valued at approximately $3,083,000,
of which, 289,997 shares were issued and outstanding as of June 30, 2008. The
remainder of the shares was recorded as investor contributions held in escrow
on
the accompanying balance sheet and are expected to be issued within the next
twelve months. The lease expires on November 30, 2018 and includes renewal
options.
In
March
2008, the Company acquired a fifteen building portfolio 100% leased to
Harleysville National Bank from a related party - see Note 6. These properties
are all located in Pennsylvania. In connection with this transaction, the
Company assumed a mortgage note obligation of $31,000,000, which bears interest
at a fixed effective rate of 6.59%. This note is interest only through January
1, 2011 and then amortizes through January 1, 2018, with a final balloon payment
due on such date. In addition, the Company assumed a mezzanine financing
obligation of approximately $3,954,000. This obligation bears interest at a
fixed effective rate of 12.49% and matures in January 2009. The Company
borrowed $4,000,000 from the Advisor under its short-term revolving credit
facility in connection with this acquisition- see Note 4. The initial term
of
the master lease expires on December 31, 2022 and includes renewal
options.
In
May
2008, the Company acquired an eighteen building portfolio 100% leased to
Rockland Trust Company. Independent Bank Corp. operates as the holding company
for Rockland Trust Company. These properties are all located throughout
Southeastern Massachusetts and Cape Cod. In connection with this transaction,
the Company financed a portion of the purchase price with a mortgage note
obligation of $24,412,500, which bears interest at 30 day LIBOR plus 1.375%.
The
Company entered into a rate lock agreement to limit its interest rate exposure.
The LIBOR floor and cap are 3.54% and 4.125% (initial year), respectively.
This
note amortizes through May 1, 2013 on a 25-year schedule, with a final balloon
payment due on such date. In addition, the Company funded a portion of the
acquisition with a mezzanine financing obligation of $3,995,000. This obligation
bears interest at a fixed effective rate of 14.27% and matures in April,
2009. The Company borrowed $2,500,000 from the Advisor under its short-term
revolving credit facility in connection with this acquisition - see Note 4.
The
lease expiration varies on a per property basis, expiring either on April 30,
2018 or April 30, 2023, with a weighted average initial term of 13.1 years,
excluding renewal options.
Note
4 — Mortgage and Other Notes Payable
As
of
June 30, 2008, the Company had total mortgage and other notes payable of
$70,253,870. During the six months ended June 30, 2008, the Company incurred,
or
assumed, the following mortgage notes payable in connection with the real estate
acquisitions described in Note 3 above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
Encumbered
Properties
|
|
Loan
Amount
|
|
Effective
Interest Rate
|
|
|
|
Interest
Rate
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Express Distribution Center
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
$
|
6,965,000
|
|
|
6.29
|
%
|
|
|
|
|
Fixed
|
|
|
September
2037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harleysville
National Bank Portfolio
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
31,000,000
|
|
|
6.59
|
%
|
|
(1
)
|
|
|
Fixed
|
|
|
January
2018
|
|
Mezzanine financing
|
|
|
|
|
|
3,953,796
|
|
|
12.49
|
%
|
|
|
|
|
Fixed
|
|
|
January
2009
|
|
Rockland
Trust Company Portfolio
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
24,340,074
|
|
|
3.90
|
%
|
|
(2
)
|
|
|
Variable
|
|
|
May
2013
|
|
Mezzanine financing
|
|
|
|
|
|
3,995,000
|
|
|
14.27
|
%
|
|
|
|
|
Fixed
|
|
|
April
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
70,253,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________
(1) |
-
The effective interest rate resets at the end of year five to the
then
current 5-year Treasury rate plus 2.25%, but in no event will be
less than
6.5%.
|
(2) |
-
The Company limited its interest rate exposure by entering into a
rate
lock agreement with a LIBOR floor and cap of 3.54% and 4.125% (initial
year), respectively.
|
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
In
addition, during the six months ended June 30, 2008, the OP entered into a
revolving credit facility with the Advisor whereby the OP can borrow from
the Advisor up to $10 million from time to time as needed to provide
short-term financing relating to property acquisitions. Such borrowings need
to
be repaid within a six month period and will accrue interest at a commercially
reasonable rate. In connection with the acquisition of the Harleysville National
Bank and the Rockland Trust Company portfolios outlined in Note 3, the Company
borrowed $4.0 and $2.5 million respectively, accruing interest at an annual
rate
of 8.0% and can be paid off without penalty.
The
following table summarizes the scheduled aggregate principal repayments for
the
five years subsequent to June 30, 2008:
|
|
|
Mortgage
Notes
|
|
|
Short-Term
Mezzanine Notes
|
|
|
Related
Party Revolving Credit Facility
|
|
|
Total
|
|
2008
|
|
$
|
217,278
|
|
$
|
-
|
|
$
|
6,500,000
|
|
$
|
6,717,278
|
|
2009
|
|
|
452,420
|
|
|
7,948,796
|
|
|
-
|
|
|
8,401,216
|
|
2010
|
|
|
480,320
|
|
|
-
|
|
|
-
|
|
|
480,320
|
|
2011
|
|
|
1,291,491
|
|
|
-
|
|
|
-
|
|
|
1,291,491
|
|
2012
|
|
|
1,375,288
|
|
|
-
|
|
|
-
|
|
|
1,375,288
|
|
2003
and thereafter
|
|
|
58,488,277
|
|
|
-
|
|
|
-
|
|
|
58,488,277
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
Total
|
|
$
|
62,305,074
|
|
$
|
7,948,796
|
|
$
|
6,500,000
|
|
$
|
76,753,870
|
|
As
of
June 30, 2008, the Company was in compliance with the debt covenants under
our
loan agreements.
Note
5 — Interest Rate Risk And Derivative Instruments
The
primary market risk to the Company is interest rate risk. Interest
rates are highly sensitive to many factors, including governmental monetary
and
tax policies, domestic and international economic and political considerations
and other factors beyond the Company’s control. Changes in the
general level of interest rates can affect net interest income, which
is the
difference between the interest income earned on interest-earning assets
and the
interest expense incurred in connection with the interest-bearing liabilities,
by affecting the spread between the interest-earning assets and interest-bearing
liabilities. Changes in the level of interest rates also can affect
the value of the Company’s interest-earning assets and the Company’s ability to
realize gains from the sale of these assets. A decline in the value
of the Company’s interest-earning assets pledged as collateral for borrowings
under repurchase agreements could result in the counterparties demanding
additional collateral pledges or liquidation of some of the existing
collateral
to reduce borrowing levels.
The
Company seeks to manage the extent to which net income changes as a function
of
changes in interest rates by matching adjustable-rate assets with variable-rate
borrowings. During periods of changing interest rates, interest rate
mismatches could negatively impact the Company’s consolidated financial
condition, consolidated results of operations and consolidated cash
flows. In addition, the Company mitigates the potential impact on net
income of periodic and lifetime coupon adjustment restrictions in its
investment
portfolio by entering into interest rate hedging agreements such as interest
rate collars.
At
June
30, 2008, the Company had one interest rate collar contract outstanding
whereby
the Company’s exposure to variable interest rates is limited by locking in a
ceiling and floor for the underlying interest rate, one-month LIBOR,
of 4.125%
and 3.54%, respectively. The aggregate notional amount of these contracts
was
approximately $24.3 million at June 30, 2008.
The
estimated fair value of the Company’s interest rate collar was $196,816 as of
June 30, 2008, and is included within prepaid expenses and other assets
in the
accompanying balance sheet.
Note
6 — Fair Value of Financial Instruments
Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157
which did
not have a material effect on the Company’s consolidated financial
statements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
The
SFAS No. 157 framework for measuring fair value requires an entity
to maximize
the use of observable inputs and minimize the use of unobservable inputs
when
measuring fair value. The Company determines fair value based on quoted
prices
when available or through the use of alternative approaches, such as
discounting
the expected cash flows using market interest rates commensurate with
the credit
quality and duration of the investment. This alternative approach
also reflects the contractual terms of the derivatives, including the
period to
maturity, and uses observable market-based inputs, including interest
rate
curves, and implied volatilities. SFAS No. 157’s hierarchy defines three levels
of inputs that may be used to measure fair value:
Level
1
- Quoted prices in active markets for identical assets and liabilities
that the
reporting entity has the ability to access at the measurement
date.
Level
2
- Inputs other than quoted prices included within Level 1 that are
observable
for the asset and liability or can be corroborated with observable
market data
for substantially the entire contractual term of the asset or
liability.
Level
3
- Unobservable inputs that reflect the entity’s own assumptions about the
assumptions that market participants would use in the pricing of the
asset or
liability and are consequently not based on market activity, but rather
through
particular valuation techniques.
The
determination of where an asset or liability falls in the hierarchy
requires
significant judgment and considers factors specific to the asset or
liability. In
instances where the determination of the fair value measurement is
based on
inputs from different levels of the fair value hierarchy, the level
in the fair
value hierarchy within which the entire fair value measurement falls
is based on
the lowest level input that is significant to the fair value measurement
in its
entirety. The
Company evaluates its hierarchy disclosures each quarter; and depending
on
various factors, it is possible that an asset or liability may be classified
differently from quarter to quarter. However, the Company expects
that changes in classifications between levels will be rare.
Although
the Company has determined that the majority of the inputs used to
value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with those derivatives utilize Level 3
inputs, such as estimates of current credit spreads to evaluate the
likelihood
of default by the Company and its counterparties. However, as of June
30, 2008, the Company has assessed the significance of the impact of
the credit
valuation adjustments on the overall valuation of its derivative positions
and
has determined that the credit valuation adjustments are not significant
to the
overall valuation of the Company’s derivatives. As a result, the
Company has determined that its derivative valuations in their entirety
are
classified in Level 2 of the fair value hierarchy.
The
following table presents information about the Company’s assets (including
derivatives that are presented net) measured at fair value on a recurring
basis
as of June 30, 2008, aggregated by the level in the fair value hierarchy
within
with those instruments fall.
|
|
Quoted
Prices in Active Markets
Level
1
|
|
|
Significant
Other Observable Inputs
Level
2
|
|
|
Significant
Unobservable Inputs
Level
3
|
|
|
Balance
as of
June
30, 2008
|
|
Derivatives,
net
|
|
$
|
—
|
|
|
$
|
196,816
|
|
|
$
|
|
|
|
$
|
196,816
|
|
Total
|
|
$
|
|
|
|
$
|
196,816
|
|
|
$
|
|
|
|
$
|
196,816
|
|
Note 7
— Derivative Financial Instruments
The
Company may use derivative financial instruments. Including interest
rate swaps,
caps, options, floors and other interest rate derivative contracts,
to hedge all
or a portion of the interest rate risk associated with our borrowings.
The
principal objective of such arrangements is to minimize the risks
and/or costs
associated with the Company’s operating and financial structure as well as to
hedge specific anticipated transactions. The Company does not intend
to utilize
derivatives for speculative or others purposes other than interest
rate risk
management. The use of derivative financial instruments carries certain
risks,
including the risk that the counterparties to these contractual arrangements
are
not able to perform under the agreements. To mitigate this risk,
the Company
only enters into derivative financial instruments with counterparties
with high
credit ratings and with major financial institutions with which the
Company and
its affiliates may also have other financial relationships. The Company
does not
anticipate that any of the counterparties will fail to meet their
obligations.
As
of
June 30, 2008, the Company had one interest rate collar contract
used to hedge
interest rate exposure on its indebtedness. At inception, there was
no premium
exchanged and the interest rate collar effectively had a fair value
equal to
zero. This interest rate collar was not able to be designated under
SFAS No. 133
as it does not qualify for hedge accounting based on the results
of the net
written option test. As such, all changes in the fair value of the
interest rate
collar have been included in the Company’s statement of operations for the
quarter ended June 30, 2008. As of June 30, 2008, no derivatives
were designated
as fair value or cash flow hedges.
The
table
below summarizes the aggregate notional amount and estimated net
fair value of
our derivative instruments as of June 30, 2008:
|
|
As
of June 30, 2008
|
|
|
|
Notional
|
|
Fair Value
|
|
Derivatives:
|
|
|
|
|
|
|
|
Interest
rate collar
|
|
$
|
24,340,074
|
|
$
|
196,816
|
|
The
following table summarizes by derivative instrument type the effect
on income
for the following periods:
|
|
For the Quarter Ended
June 30, 2008
|
|
Type
of Derivative
|
|
Amounts Reclassified
to
Earnings for
Effective
Hedges -
Gains
(Losses)
|
|
Amounts
Reclassified
to
Earnings
for
Hedge
Ineffectiveness -
Gains
(Losses)
|
|
Interest
rate collar
|
|
$
|
—
|
|
$
|
196,816
|
|
Amounts
reclassified to earnings associated with ineffective cash flow
hedges are
reported in other income and the fair value of these hedge agreements
is
included in prepaid expenses and other assets.
Note 8
— Commitments and Contingencies
Litigation
In
the
ordinary course of business, the Company may become subject to litigation or
claims. There are no material legal proceedings pending or known to be
contemplated against us.
Environmental
Matters
In
connection with the ownership and operation of real estate, the Company may
potentially be liable for costs and damages related to environmental matters.
The Company has not been notified by any governmental authority of any
non-compliance, liability or other claim, and the Company is not aware of any
other environmental condition that it believes will have a material adverse
effect on the consolidated results of operations.
Note 9
— Related-Party Transactions and Arrangements
Certain
affiliates of the Company receive, and will continue to receive, fees and
compensation in connection with the sale of the Company’s common stock, and the
acquisition, management and sale of the assets of the Company. The Dealer
Manager receives, and will continue to receive, a selling commission of up
to
7.0% of gross offering proceeds before reallowance of commissions earned by
participating broker-dealers. The Dealer Manager reallows, and intends to
continue to reallow, 100% of commissions earned to participating broker-dealers.
In addition, the Dealer Manager will receive up to 3.0% of the gross proceeds
from the Offering, before reallowance to participating broker-dealers, as a
dealer-manager fee. The Dealer Manager, in its sole discretion, may reallow
all
or a portion of its dealer-manager fee to such participating broker-dealers,
based on such factors as the volume of shares sold by such participating
broker-dealers and marketing support incurred as compared to those of other
participating broker-dealers. No selling commissions or dealer-manager fees
are
paid to the Dealer Manager in respect of shares sold under the DRIP. During
the
three and six months ended June 30, 2008, the Company paid $37,206 and $0,
respectively, to the Dealer Manger for commissions and dealer manager fees,
of
which $0 was reallowed to participating broker-dealers.
All
organization and offering expenses associated with the sale of the Company’s
common stock (excluding selling commissions and the dealer-manager fee) are
paid
for by the Advisor or its affiliates and are reimbursed by the Company up to
1.5% of gross offering proceeds. The Advisor receives an acquisition and
advisory fee of 1.0% of the contract purchase price of each acquired property
and will be reimbursed for acquisition costs incurred in the process of
acquiring properties, but not to exceed 0.5% of the contract purchase price.
In
no event will the total of all fees and acquisition expenses payable with
respect to a particular property or investment exceed 4.0% of the contract
purchase price. During the three months ended June 30, 2008, the Company
reimbursed the Advisor $0 and $160,940 for organizational and offering expenses
and acquisition costs, respectively. Organization and offering expenses were
waived by the Advisor during the three months ended June 30, 2008. During the
six months ended June 30, 2008, the Company reimbursed the Advisor $119,207
and
$160,940 for organizational and offering expenses and acquisition costs,
respectively. The Company incurred acquisition advisory fees of $321,880 and
$832,117 during the three and six months ended June 30, 2008, all of which
were
paid as of June 30, 2008.
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
The
Advisor receives a financing coordination fee equal to 1.0% of the amount
available under such financing. During the three and six months ended June
30,
2008, the Company incurred finance coordination fees of $244,125 and $623,775,
respectively, paid to the Advisor.
The
Company pays its affiliated Property Manager fees for the management and leasing
of the Company’s properties. Such fees equal 2.0% of gross revenues from our
single tenant properties and 4.0% of the gross revenues from our multi-tenant
properties, plus reimbursement of the Property Managers’ costs of managing the
properties. In the event that the Property Manager assists a tenant with tenant
improvements, a separate fee may be charged to the tenant by the Property
Manager at a fee not to exceed 5.0% of the cost of such tenant improvements.
The
Property Manager will be paid leasing commissions at prevailing market rates
and
may also receive a fee for the initial leasing of newly constructed properties,
which generally would equal one month’s rent. The aggregate of all property
management and leasing fees paid to affiliates plus all payments to third
parties will not exceed the amount that other nonaffiliated management and
leasing companies generally charge for similar services in the same geographic
location. The Property Manager may subcontract its duties for a fee that may
be
less than the fee provided for in the property management agreement. During
the
three and six months ended June 30, 2008, the Company paid the Property Manager
$0 and $1,001 for property management fees, respectively. In addition, the
Property Manager earned an additional property management fee of $3,262, which
remained unpaid as of June 30, 2008. The Property Manager has elected to waive
its management fee for the three months ended June 30, 2008.
The
Company pays the Advisor an annualized asset management fee of 1.0% based on
the
aggregate contract purchase price of all properties. The asset management fee
is
payable quarterly in advance on the first day of the month following the end
of
each calendar quarter end. The Advisor has elected to waive its asset management
fee for the six months ended June 30, 2008.
If
the
Advisor or its affiliates provides a substantial amount of services, as
determined by the Company’s independent directors, in connection with the sale
of property, the Company will pay the Advisor a brokerage commission not to
exceed the lesser of one-half of a reasonable, customary and competitive real
estate commission or 3.0% of the contract price for the property sold, inclusive
of any commission paid to outside brokers provided, however, in no event may
the
real estate commissions paid to the Advisor, its affiliates or unaffiliated
third-parties exceed 6% of the contract price. In addition, after investors
have
received a return of their net capital contributions and a 6.0% annual
cumulative, non-compounded return, then the Advisor is entitled to receive
15.0%
of remaining net sale proceeds. During the six months ended June 30, 2008,
the
Company did not pay any fees or amounts to the Advisor relating to the sale
of
properties.
In
the
event the Company’s common stock is listed in the future on a national
securities exchange, a subordinated incentive listing fee equal to 15.0% of
the
amount by which the market value of the Company’s outstanding stock plus all
distributions paid by the Company prior to listing, exceeds the sum of the
total
amount of capital raised from investors plus an amount equal to a 6.0% annual
cumulative, non-compounded return to investors will be paid to the
Advisor.
In
the
event that the advisory agreement with the Advisor is terminated upon a change
of control of the Company, by the Company without cause, or by the Advisor
for
good reason (as such terms may be defined in the definitive agreement
memorializing the engagement of the Advisor by the Company), the Company shall
pay the Advisor a termination fee not to exceed 15.0% of the amount, if any,
by
which the appraised value of the properties owned by the Company on the date
of
such termination, less amounts of all indebtedness secured by such properties
exceeds the dollar amount equal to the sum of a 6.0% cumulative non-compound
return on the Company's stockholders' net investment plus the amount of such
investment.
The
Company may reimburse the Advisor for all expenses it paid or incurred in
connection with the services provided to the Company, subject to the limitation
that the Company does not reimburse for any amount by which its operating
expenses (including the asset management fee) at the end of the four preceding
fiscal quarters exceeds the greater of (i) 2.0% of average invested assets,
or (ii) 25% of net income other than any additions to reserves for depreciation,
bad debts or other similar non-cash reserves and excluding any gain from the
sale of assets for that period. The Company will not reimburse for personnel
costs in connection with services for which the Advisor receives acquisition
fees or real estate commissions. During the six months ended June 30, 2008,
the
Company did not reimburse the Advisor for any such costs.
During
the six months ended June 30, 2008, the OP entered into a revolving credit
facility with the Advisor whereby the OP can borrow from the Advisor up to
$10,000,000 from time to time as needed to provide short-term financing relating
to property acquisitions. Such borrowings need to be repaid within a six month
period and will accrue interest at a commercially reasonable rate. In connection
with the acquisition of the Harleysville National Bank and the Rockland Trust
Company portfolios outlined in Note 3, the Company borrowed $4.0 and $2.5
million respectively, accruing interest at an annual rate of 8.0%. Such
borrowings can be paid off, at any time, without penalty. During the three
and
six months ended June 30, 2008, the Company incurred related party interest
expense of $112,658 and $130,192, respectively. As of June 30, 2008, $59,178
remained unpaid and is included in due to affiliates in the accompanying balance
sheets.
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
At
June
30, 2008 and December 31, 2007, the Company had approximately $62,000 and
$285,000, respectively, due to affiliates, which is included in due to
affiliates in the accompanying consolidated balance sheets and is payable
primarily to the Advisor. At June 30, 2008, amounts due to affiliates consisted
of amounts payable to the Advisor for interest.
The
Company acquired 16 properties in two separate transactions during the six
months ended June 30, 2008 from related parties. A Federal Express distribution
center was acquired on March 5, 2008. A sale leaseback transaction involving
15
properties 100% occupied by Harleysville National Bank occurred on March 12,
2008. These acquisitions were approved by the Company’s Board of Trustees; with
two inside directors abstaining because the acquisition was an affiliated
transaction. The Company acquired these assets at sellers’ cost, which did not
exceed the fair market value of the properties as determined by a qualified
independent appraiser.
Note 10
— Economic Dependency
Under
various agreements, the Company has engaged or will engage the Advisor and
its
affiliates to provide certain services that are essential to the Company,
including asset management services, supervision of the management and leasing
of properties owned by the Company, asset acquisition and disposition decisions,
the sale of shares of the Company’s common stock available for issue, as well as
other administrative responsibilities for the Company including accounting
services and investor relations.
As
a
result of these relationships, the Company is dependent upon the Advisor and
its
affiliates. In the event that these companies were unable to provide the Company
with the respective services, the Company would be required to find alternative
providers of these services.
Note 11
— Independent Directors’ Stock Option Plan
The
Company has a stock option plan (the “Plan”), which authorizes the grant of
nonqualified stock options to the Company’s independent directors, subject to
the absolute discretion of the board of directors and the applicable limitations
of the Plan. The Company intends to grant options under the Plan to each
qualifying director annually. The exercise price for all stock options granted
under the Plan will be fixed at $10.00 per share until the termination of our
initial public offering, and thereafter the exercise price for stock options
granted to our independent directors will be equal to the fair market value
of a
share on the last business day preceding the annual meeting of stockholders.
As
of June 30, 2008, the Company had granted options to purchase 9,000 shares
at
$10.00 per share, each with a two year vesting period. A total of 1,000,000
shares have been authorized and reserved for issuance under the Plan. The
Company accounts for the issuance of stock options under SFAS No. 123R,
“Share-Based Payment,” which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors, including stock options related to the Plan, based on estimated
fair
values.
During
the six months ended June 30, 2008, 9,000 were granted and no options were
forfeited, became vested, or were exercised. As of June 30, 2008, unvested
options to purchase 9,000 shares at $10.00 per share remained outstanding with
a
weighted average contractual remaining life of approximately ten years. The
total compensation charge relating to these option grants under SFAS No. 123R
is
immaterial.
Note 12
— Net Income (Loss) Per Share
The
following is a reconciliation of the numerator and denominator of the basic
and
diluted net income (loss) per share computation for the three and six months
ended June 30, 2008:
|
|
|
Basic
and Diluted
|
|
|
Basic
and Diluted
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months
Ended
|
|
|
|
|
June
30, 2008
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(454,369
|
)
|
|
(796,219
|
)
|
Total
weighted average common shares outstanding
|
|
|
860,102
|
|
|
497,057
|
|
Loss
per share
|
|
$
|
(0.53
|
)
|
|
(1.60
|
)
|
AMERICAN
REALTY CAPITAL TRUST, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
Note
13 — Subsequent Events
Sale
of Shares of Common Stock
As
of
August 13 , 2008, the Company had raised approximately $10,015,000
million of gross proceeds through the issuance of approximately 1,104,000
shares of its common stock under the Offering (including shares sold under
the
DRIP). As of August 13, 2008, approximately $1,239 million
(124 million shares) remained available for sale to the public under the
Initial Offering, exclusive of shares available under the
DRIP.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis should be read in conjunction with the
accompanying financial statements of American Realty Capital Trust, Inc. and
the
notes thereto. As used herein, the terms “we,” “our” and “us” refer to American
Realty Capital Trust, Inc., a Maryland corporation, and, as required by context,
American Realty Capital Operating Partnership, L.P., a Delaware limited
partnership, which we refer to as the “Operating Partnership” and to their
subsidiaries. American Realty Capital Trust, Inc. is externally managed by
the
American Realty Capital Advisors, LLC (a Delaware limited liability company)
or
the “Advisor.”
Forward-Looking
Statements
Certain
statements included in this quarterly report on Form 10-Q are forward-looking
statements. Those statements include statements regarding the intent, belief
or
current expectations of American Realty Capital Trust, Inc. and members of
our
management team, as well as the assumptions on which such statements are based,
and generally are identified by the use of words such as “may,” “will,” “seeks,”
“anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should”
or similar expressions. Actual results may differ materially from those
contemplated by such forward-looking statements. Further, forward-looking
statements speak only as of the date they are made, and we undertake no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time, unless required by law.
Following
are some of the risks and uncertainties, although not all risks and
uncertainties, that could cause our actual results to differ materially from
those presented in our forward-looking statements:
|
•
|
|
Neither
we nor our Advisor have a prior operating history and our Advisor
does not
have any experience operating a public company. This inexperience
makes
our future performance difficult to
predict.
|
|
•
|
|
All
of our executive officers are also officers, managers and/or holders
of a
direct or indirect controlling interest in our Advisor, our dealer
manager
and other affiliated entities. As a result, our executive officers,
our
Advisor and its affiliates face conflicts of interest, including
significant conflicts created by our Advisor’s compensation arrangements
with us and other investors advised by American Realty Capital affiliates
and conflicts in allocating time among us and these other investors.
These
conflicts could result in unanticipated
actions.
|
|
•
|
|
Because
investment opportunities that are suitable for us may also be suitable
for
other American Realty Capital-advised investors, our Advisor and
its
affiliates face conflicts of interest relating to the purchase of
properties and such conflicts may not be resolved in our favor, meaning
that we could invest in less attractive properties, which could reduce
the
investment return to our
stockholders.
|
|
•
|
|
If
we raise substantially less than the maximum offering in our ongoing
initial public offering, we may not be able to invest in a diverse
portfolio of real estate assets and the value of an investment in
us may
vary more widely with the performance of specific
assets.
|
|
•
|
|
While
we are raising capital and investing the proceeds of our ongoing
initial
public offering, the high demand for the type of properties we desire
to
acquire may cause our distributions and the long-term returns of
our
investors to be lower than they otherwise
would.
|
|
•
|
|
We
depend on tenants for our revenue, and, accordingly, our revenue
is
dependent upon the success and economic viability of our
tenants.
|
|
•
|
|
Increases
in interest rates could increase the amount of our debt payments
and limit
our ability to pay distributions to our
stockholders.
|
All
forward-looking statements should be read in light of the risks identified
in
our Registration Statement on Form S-11 for the period from August 17, 2007
(dated of inception) to December 31, 2007, filed with the SEC and the risks
identified in this quarterly report.
Overview
We
are a
Maryland corporation that will elect to be taxed as a real estate investment
trust, or REIT, beginning with the taxable year ending December 31, 2008.
On September 10, 2007, we filed a registration statement on Form S-11 with
the
SEC to offer a minimum of 750,000 shares and a maximum of 150,000,000 shares
of
common stock for sale to the public. The SEC declared the registration statement
effective on January 25, 2008, at which time we launched our ongoing initial
public offering. On March 11, 2008, we broke escrow in our ongoing initial
public offering and then commenced our real estate operations. As of June 30,
2008, we had issued 1,032,652 shares of common stock in our ongoing public
offering for gross offering proceeds of approximately $9.4 million
including 289,997 shares of common stock issued in connection with the
acquisition of a property. As of June 30, 2008, we had not redeemed any shares
sold in our ongoing initial public offering pursuant to our share repurchase
program. We are dependent upon the net proceeds from the offering to conduct
our
proposed operations.
We
intend
to use the proceeds of our ongoing initial public offering 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 as well as
certain other real-estate related investments. We plan to own substantially
all
of our assets and conduct our operations through our Operating Partnership,
of
which we are the sole general partner. We have no paid employees. Our advisor,
American Realty Capital Advisors, LLC, conducts our operations and manages
our
portfolio of real estate investments.
As
of
June 30, 2008, we owned 34 properties compromising approximately 354,000 square
feet, 100% leased with an initial weighted average remaining lease term of
13.5
years. In constructing our portfolio, we intend to target and derive
approximately 50% to 60% of our revenues from investment-grade tenants.
Additionally, we intend to target approximately 50% of our revenues from
financial institutions.
We
intend
to continue our strategy of acquiring high quality, single tenant properties
through sale leaseback transactions and marketed transactions with in-place
long-term leases, and to finance our acquisitions with a combination of equity
and debt. 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.
Real
estate-related investments are higher-yield and higher-risk investments that
our
advisor will actively manage. 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 expect that the majority of these
investments will consist of mezzanine loans and B-note obligations.
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
straightline basis over the initial term of the lease. Since many of our leases
provide for rental increases at specified intervals, straightline 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 collectibility 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 collectibility 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
straightline method over the estimated useful life of up to 40 years for
buildings and 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
follow
Statement of Financial Accounting Standards (SFAS) No.144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” which established a single
accounting model for the impairment or disposal of long-lived assets including
discontinued operations. SFAS No.144 requires that the operations related to
properties that have been sold or properties that are intended to be sold be
presented as discontinued operations in the statement of operations for all
periods presented, and properties intended to be sold to be 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.
Events
or
changes in circumstances that could cause an evaluation for impairment include
the following:
|
•
|
|
a
significant decrease in the market price of a long-lived
asset;
|
|
|
|
•
|
|
a
significant adverse change in the extent or manner in which a long-lived
asset is being used or in its physical condition;
|
|
|
|
•
|
|
a
significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset, including an adverse
action or assessment by a regulator;
|
|
|
|
•
|
|
an
accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset;
and
|
|
|
|
•
|
|
a
current-period operating or cash flow loss combined with a history
of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset.
|
We
review
our portfolio on an on-going basis to evaluate the existence of any of the
aforementioned events or changes in circumstances that would require us to
test
for recoverability. In general, our review of recoverability is based on an
estimate of the future undiscounted cash flows, excluding interest charges,
expected to result from the property’s use and eventual disposition. These
estimates consider factors such as expected future operating income, market
and
other applicable trends and residual value expected, as well as the effects
of
leasing demand, competition and other factors. If impairment exists due to
the
inability to recover the carrying value of a property, an impairment loss is
recorded to the extent that the carrying value exceeds the estimated fair value
of the property. We are required to make subjective assessments as to whether
there are impairments in the values of our investments in real estate. These
assessments have a direct impact on our net income because recording an
impairment loss results in an immediate negative adjustment to net
income.
Purchase
Price Allocation
Pursuant
to SFAS No.141, “Business Combinations,” we follow the purchase method of
accounting for all business combinations. To ensure that intangible assets
acquired and liabilities assumed in a purchase method business combination
can
be recognized and reported apart from goodwill, we ensure that the applicable
criteria specified in SFAS No.141 are met.
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, buildings, equipment 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 acquired leases for above- and below-market lease rates,
the value of in-place leases, and the value of customer
relationships.
Amounts
allocated to land, buildings, equipment and fixtures are based on cost
segregation studies performed by independent third-parties or on our analysis
of
comparable properties in our portfolio. Depreciation is computed using the
straightline method over the estimated life of 40 years for buildings, five
to
ten years for building equipment and fixtures, and the lesser of the useful
life
or the remaining lease term for tenant improvements.
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 values are amortized as a reduction of rental income over the remaining
non-cancelable terms of the respective leases. The capitalized below-market
lease values are amortized as an increase to rental income over the initial
term
and any fixed-rate renewal periods in the respective leases. 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 18 months. We also
estimate costs to execute similar leases including leasing commissions, legal
and other related expenses.
The
aggregate value of intangibles assets related to customer relationship 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 2 to 20 years. The value of
customer relationship intangibles 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.
Results
of Operations
Three
Months Ended June 30, 2008
As
of
June 30, 2008, the Company owned 34 properties which are 100% leased. The
Company acquired 18 properties in one transaction during the quarter ended
June
30, 2008. A sale leaseback transaction involving 18 properties 100% occupied
by
Rockland Trust Company occurred on May 2, 2008. The property operating results
outlined below include the partial period we owned these investment assets
during the period.
Rental
Income
Rental
income of approximately $1,348,000 was recognized during the three months ended
June 30, 2008. This rental income includes a partial quarter of revenue derived
from the properties we acquired in May 2008.
Property
Management Fees to Affiliate
American
Realty Capital Properties, LLC has elected to waive the property management
fees
for the three months ended June 30, 2008. Such fees represent amounts paid
to
our affiliated property manager, American Realty Capital Properties, LLC, to
manage and lease our properties.
General
and Administrative Expenses
General
and administrative expenses of approximately $84,000 were incurred during the
three months ended June 30, 2008. The majority of such expenses included $48,000
of insurance expense amortization of our directors and officers’ insurance
policy, $20,000 of board member compensation and $13,000 of professional
fees.
Depreciation
and Amortization Expense
Depreciation
and amortization expense of approximately $736,000 was recognized during the
three months ended June 30, 2008. This expense includes a partial quarter of
depreciation and amortization incurred from the properties we acquired in May
2008.
Interest
Expense
Interest
expense of approximately $1,180,000 was recognized during the three months
ended
June 30, 2008. Such amount includes a partial quarter of interest expense
relating to the debt incurred to fund a portion of the properties we acquired
in
May 2008.
Our
property acquisitions during the three months ended June 30, 2008 were financed
in part with short-term and long-term notes payable as discussed in Note 4
to
our consolidated financial statements. Our interest expense in future periods
will vary based on our level of future borrowings, which will depend on the
level of proceeds raised in the Offering, the cost of borrowings, and the
opportunity to acquire real estate assets which meet our investment
objectives.
Other
Income
During
the three months ended June 30, 2008, the Company recorded $197,000 of
gains
related to marking its derivative instruments to market.
Funds
From Operations
We
consider funds from operations (“FFO”) a useful indicator of the performance of
a REIT. Because FFO calculations exclude such factors as depreciation and
amortization of real estate assets and gains or losses from sales of operating
real estate assets (which can vary among owners of identical assets in similar
conditions based on historical cost accounting and useful-life estimates),
they
facilitate comparisons of operating performance between periods and between
other REITs in our peer group. Accounting for real estate assets in accordance
with generally accepted accounting principles in the United States (“GAAP”)
implicitly assumes that the value of real estate assets diminishes
predictability over time. Since real estate values have historically risen
or
fallen with market conditions, many industry investors and analysts have
considered the presentation of operating results for real estate companies
that
use historical cost accounting to be insufficient by themselves. As a result,
we
believe that the use of FFO, together with the required GAAP presentations,
provide a more complete understanding of our performance relative to our peers
and a more informed and appropriate basis on which to make decisions involving
operating, financing, and investing activities. Other REITs may not define
FFO
in accordance with the current National Association of Real Estate Investment
Trust’s (“NAREIT”) definition (as we do) or may interpret the current NAREIT
definition differently than we do. Consequently, our presentation of FFO may
not
be comparable to other similarly titled measures presented by other REITs.
FFO
is a
non-GAAP financial measure and does not represent net income as defined by
GAAP.
FFO does not represent cash flows from operations as defined by U.S. GAAP,
it is
not indicative of cash available to fund all cash flow needs and liquidity,
including our ability to pay distributions and should not be considered as
an
alternative to net income, as determined in accordance with U.S. GAAP, for
purposes of evaluating our operating performance.
FFO
is
presented in the following table for the period ended as
indicated:
|
|
Three
Months Ended June
30, 2008
|
|
Net
loss
|
|
$
|
(454,369
|
)
|
Add:
|
|
|
|
|
Depreciation
of real estate assets
|
|
|
616,517
|
|
Amortization
of intangible lease assets
|
|
|
119,966
|
|
Mark-to-market
adjustment (1)
|
|
|
(196,816
|
)
|
FFO
|
|
$
|
85,298
|
|
|
|
|
|
|
Dividends
paid (2)
|
|
$
|
79,899
|
|
|
|
|
|
|
FFO
coverage ratio
|
|
|
106.8
|
%
|
FFO
payout ratio
|
|
|
93.7
|
%
|
___________________________
(1)
- the
Company excludes non-cash mark-to-market adjustments from its FFO
calculation.
(2)
-
includes shares issued under the DRIP.
Six
Months Ended June 30, 2008
As
of
June 30, 2008, the Company owned 34 properties which are 100% leased. We
acquired a Federal Express distribution center on March 5, 2008. A sale
leaseback transaction involving 15 properties 100% occupied by Harleysville
National Bank occurred on March 12, 2008. A sale leaseback transaction involving
18 properties 100% occupied by Rockland Trust Company occurred on May 2, 2008.
The property operating results outlined below relate to the partial period
we
owned these investment assets during the period.
Rental
Income
Rental
income of approximately $1,563,000 was recognized during the six months ended
June 30, 2008. This rental income is derived from the leased properties we
acquired in March and May 2008.
Property
Management Fees to Affiliate
Property
management fees to affiliate of approximately $4,000 were incurred during the
six months ended June 30, 2008. Such fees represent amounts paid to our
affiliated property manager, American Realty Capital Properties, LLC, to manage
and lease our properties. American Realty Capital Properties, LLC has elected
to
waive the property management fees for the three months ended June 30,
2008.
General
and Administrative Expenses
General
and administrative expenses of approximately $273,000 were incurred during
the
six months ended June 30, 2008. The majority of such expenses included $119,000
reimbursed to the Advisor relating to various organizational costs, $79,000
of
insurance expense amortization of our directors and officers’ insurance policy,
$39,000 of board member compensation and $24,000 of professional
fees.
Depreciation
and Amortization Expense
Depreciation
and amortization expense of approximately $908,000 was recognized during the
six
months ended June 30, 2008. This expense relates to depreciation and
amortization incurred from the properties we acquired in March and May
2008.
Interest
Expense
Interest
expense of approximately $1,372,000 was recognized during the six months ended
June 30, 2008. Such amount relates to interest expense incurred on debt
obligations borrowed to fund a portion of the properties we acquired in March
and May 2008.
Our
property acquisitions during the six months ended June 30, 2008 were financed
in
part with short-term and long-term notes payable as discussed in Note 4 to
our
consolidated financial statements. Our interest expense in future periods will
vary based on our level of future borrowings, which will depend on the level
of
proceeds raised in the Offering, the cost of borrowings, and the opportunity
to
acquire real estate assets which meet our investment objectives.
Other
Income
During
the six months ended June 30, 2008, the Company recorded $197,000 of gains
related to marking its derivative instruments to market.
Cash
Flows for the Six Months Ended June 30, 2008
During
the six months ended June 30, 2008, net cash provided by operating activities
was approximately $926,000. The level of cash flows provided by operating
activities is affected by both the timing of interest payments and amount of
borrowings outstanding during the period. It is also affected by the receipt
of
scheduled rent payments and disbursement of deposits required in connection
with
property acquisitions. Prepaid expenses and other assets increased by
approximately $125,000 principally resulting from payments relating to annual
Board of Trustee retainers and the partial funding of our Directors and
Officers’ insurance policy. This amount is offset by the increase in accounts
payable and accrued expenses of approximately $603,000, the majority of which
relates to professional fees, accrued interest and finance coordination fees,
as
well as an increase in deferred rent and liabilities of approximately $501,000,
primarily representing rent payments received in advance of the respective
due
date.
Net
cash
used in investing activities during the six months ended June 30, 2008 totaled
approximately $39,518,000 relating to investment properties acquired during
the
period.
Net
cash
provided by financing activities totaled approximately $39,518,000 during the
six months ended June 30, 2008. Such amount consisted primarily of net proceeds
from notes payable and our related party credit facility of approximately
$28,335,000 and $6,500,000, respectively. During the period, we issued 1,012,652
shares of common stock which generated approximately $6,522,000 of gross
proceeds, reduced by approximately $900,000 of related offering costs and
commissions. Net cash was reduced by approximately $43,000 related to restricted
cash.
Liquidity
and Capital Resources
We
expect
to continue to raise capital through the sale of our common stock and to utilize
the net proceeds from the sale of our common stock and proceeds from secured
financings to complete future property acquisitions. As of June 30, 2008, we
had
received and accepted subscriptions for 1,032,652 shares of common stock in
our
Offering for gross proceeds of approximately $9.4 million.
The
amount of distributions payable to our stockholders is determined by our board
of directors and is dependent on a number of factors, including funds available
for distribution, financial condition, capital expenditure requirements, as
applicable and annual distribution requirements needed to qualify and maintain
our status as a REIT under the Code. Operating cash flows are expected to
increase as additional properties are acquired in our investment
portfolio.
Our
principal demands for funds will continue to be for property acquisitions,
either directly or through investment interests, for the payment of operating
expenses and distributions, and for the payment of interest on our outstanding
indebtedness and other investments. Generally, cash needs for items other than
property acquisitions are expected to be met from operations, and cash needs
for
property acquisitions are expected to be met from the public offering of our
shares. However, there may be a delay between the sale of our shares and our
purchase of properties, which could result in a delay in the benefits to our
stockholders, if any, of returns generated from our operations. Our Advisor
evaluates potential acquisitions of real estate and real estate related assets
and engages in negotiations with sellers and borrowers on our behalf. Investors
should be aware that after a purchase contract is executed that contains
specific terms, the property will not be purchased until the successful
completion of due diligence and negotiation of final binding agreements. During
this period, we may decide to temporarily invest any unused proceeds from the
Offering in certain investments that could yield lower returns than the
properties. These lower returns may affect our ability to make
distributions.
We
expect
to meet our future short-term operating liquidity requirements through net
cash
provided by our current property operations and the operations of properties
to
be acquired in the future. Management also expects that our properties will
generate sufficient cash flow to cover operating expenses and the payment of
a
monthly distribution. Other potential future sources of capital include proceeds
from secured or unsecured financings from banks or other lenders, proceeds
from
the sale of properties and undistributed funds from operations.
On
February 25, 2008, the Board of Directors declared a dividend for each monthly
period commencing 30 days subsequent to acquiring our initial portfolio of
real
estate investments, payable in cash on the 21st day following each month end
to
stockholders of record at the close of business each day during the applicable
period. The dividend will be calculated based on stockholders of record each
day
during the applicable period at a rate of $0.00178082191 per day, and will
equal
a daily amount that, if paid each day for a 365-day period, would equal a 6.5%
annualized rate based on the share price of $10.00.
The
Company, our Board of Directors and Advisor share a similar philosophy with
respect to paying our dividend. The dividend should principally be derived
from
cash flows generated from real estate operations. During the three months ended
June 30, 2008, dividends paid totaled $79,899, inclusive of $22,608 of common
shares issued under the DRIP. Our related party Advisor has agreed to waive
certain fees during the current period which resulted in the Company’s FFO fully
covering the dividends that were paid out during such period. These waived
fees
included asset management and property management of $129,630 and $26,154,
respectively. In addition, the Advisor waived reimbursement it was entitled
to
during the period for organizational and offering expenses which totaled
$55,657. The fees and reimbursement that were waived relating to the activity
during the three months ended June 30, 2008 are not deferrals and accordingly,
will not be paid by the Company.
The
payment terms of our loan obligations vary. In general, principal and interest
is payable monthly with all unpaid principal and interest due at maturity.
Certain of our mortgage loans have initial payments of interest only but require
principal repayment in subsequent years. Our loan agreements stipulate that
we
comply with specific reporting and financial covenants. As of June 30, 2008,
we
were in compliance with the debt covenants under our loan
agreements.
Our
Advisor may, with approval from our independent board of directors, seek to
borrow short-term capital that, combined with secured mortgage financing,
exceeds our targeted leverage ratio. Such short-term borrowings may be derived
from the $10.0 million revolving credit facility established between the Advisor
and the O.P. as described in Note 6 of our financial statements— Related-Party
Transactions and Arrangements. In addition, short-term borrowings 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 borrowings as an efficient and accretive means of acquiring
real estate in advance of raising equity capital. Accordingly, we can take
advantage of buying opportunities as we expand our fund raising activities.
As
additional equity capital is obtained, these short-term borrowings will be
repaid. As of June 30, 2008, we had $6.5 million of advances outstanding under
our related party revolving credit facility in addition to approximately $8.0
million of mandatorily redeemable preferred equity, which is characterized
as
mezzanine financing. Excluding such short-term borrowings, our leverage ratio
approximated 73% (secured mortgage notes payable as a percentage of total real
estate investments, at cost) as of June 30, 2008.
As
of
June 30, 2008, we had cash and cash equivalents of approximately $569,000,
which
we expect to be used primarily to invest in additional real estate, pay
operating expenses and pay stockholder distributions.
Contractual
Obligations
The
following is a summary of our contractual obligations as of June 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due During the Years Ending December 31
|
|
Contractual
Obligations
|
|
Total
|
|
Remainder of 2008
|
|
2009-2010
|
|
2011-2012
|
|
Thereafter
|
|
Outstanding
notes obligations (1)
|
|
$
|
62,305,074
|
|
$
|
217,278
|
|
$
|
932,740
|
|
$
|
2,666,779
|
|
$
|
58,488,277
|
|
Outstanding
short-term mezzanine notes payable (1)
|
|
|
7,948,796
|
|
|
—
|
|
|
7,948,796
|
|
|
—
|
|
|
—
|
|
Related
party revolving credit facility (1)
|
|
|
6,500,000
|
|
|
6,500,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchase
obligations
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
76,753,870
|
|
$
|
6,717,278
|
|
$
|
8,881,536
|
|
$
|
2,666,779
|
|
$
|
58,488,277
|
|
___________________________
(1)
|
Amounts
include principal payments only. We incurred interest expense of
approximately $1,340,000 excluding amortization of deferred financing
costs, during the six months ended June 30, 2008, and expect to incur
interest in future periods on outstanding debt
obligations.
|
Election
as a REIT
We
will
elect to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code commencing with our taxable year ending December 31, 2008. If
we qualify for taxation as a REIT, we generally will not be subject to federal
corporate income tax to the extent we distribute our REIT taxable income to
our
stockholders, and so long as we distribute at least 90% of our REIT taxable
income. REITs are subject to a number of other organizational and operational
requirements. Even if we qualify for taxation as a REIT, we may be subject
to
certain state and local taxes on our income and property, and federal income
and
excise taxes on our undistributed income. We believe we are organized and
operating in such a manner as to qualify to be taxed as a REIT for the taxable
year ending December 31, 2008.
Inflation
Some
of
our leases contain provisions designed to mitigate the adverse impact of
inflation. These provisions generally increase rental rates during the terms
of
the leases either at fixed rates or indexed escalations (based on the Consumer
Price Index or other measures). We may be adversely impacted by inflation on
the
leases that do not contain indexed escalation provisions. In addition, our
net
leases require the tenant to pay its allocable share of operating expenses,
including common area maintenance costs, real estate taxes and insurance. This
may reduce our exposure to increases in costs and operating expenses resulting
from inflation.
Related-Party
Transactions and Agreements
We
have
entered into agreements with American Realty Capital II, LLC and its
wholly-owned affiliates, whereby we pay certain fees or reimbursements to our
Advisor or its affiliates for acquisition fees and expenses, organization and
offering costs, sales commissions, dealer manager fees, asset and property
management fees and reimbursement of operating costs. See Note 6 to our
consolidated financial statements included in this report for a discussion
of
the various related-party transactions, agreements and fees.
Off-Balance
Sheet Arrangements
We
have
no off-balance sheet arrangements that are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
We
are
exposed to interest rate changes primarily as a result of long-term debt used
to
acquire properties. Our interest rate risk management objectives are to
limit the impact of interest rate changes on earnings and cash flows and to
lower overall borrowing costs. To achieve these objectives, we may borrow at
fixed rates or variable rates with the lowest margins available and in some
cases, the ability to convert variable rates to fixed rates. With regard to
variable rate financing, we will assess interest rate cash flow risk by
continually identifying and monitoring changes in interest rate exposures that
may adversely impact expected future cash flows and by evaluating hedging
opportunities. At June 30, 2008, our interest rate exposure was mitigated
by a rate lock agreement that established a floor and ceiling for our variable
rate debt - See Note 4.
We
do not
have any foreign operations and thus we are not exposed to foreign currency
fluctuations.
PART
II
OTHER
INFORMATION
Item
1. Legal Proceedings
We
are
not a party to, and none of our properties are subject to, any material pending
legal proceedings.
Item
1A. Risk Factors
There
have been no material changes from the risk factors set forth in our Annual
Report on Form S-11 for period from August 17, 2007 (date of inception)
to June 30, 2008.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Share
Redemption Program
Our
board
of directors has adopted a share repurchase program that enables our
stockholders to sell their shares to us in limited circumstances. In order
to
provide stockholders with the benefit of interim liquidity, stockholders who
have held their shares for at least one year and who purchased their shares
from
us or received the shares through a non-cash transaction, not in the secondary
market, may present all or a portion of the holder’s shares to us for
repurchase. At that time, we may, subject to the conditions and limitations,
redeem the shares presented for repurchase for cash to the extent that we have
sufficient funds available to us to fund such repurchase. Upon the death or
disability of a stockholder, upon request, we will waive the one-year holding
requirement. Shares repurchased in connection with the death or disability
of a
stockholder will be repurchased at a purchase price equal to the price actually
paid for the shares during the offering, or if not engaged in the offering,
the
current net asset value of the shares if higher. During any calendar year,
the
number of shares we will repurchase will be limited to the proceeds in the
distribution reinvestment plan; provided, however, that shares subject to a
repurchase requested upon the death or disability of a stockholder will not
be
subject to this cap. The cash available for repurchase of our shares will be
limited to the proceeds from the sale of shares pursuant to our distribution
reinvestment plan legally available for the repurchase of our
stock.
No
shares
were redeemed under this program during the quarter ended June 30,
2008.
Item
3. Defaults Upon Senior Securities
Item
4. Submission of Matters to a Vote of Security Holders
Item
5.
Other Information
Item
6.
Exhibits
The
exhibits listed on the Exhibit Index (following the signatures section of
this report) are included, or incorporated by reference, in this quarterly
report.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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American
Realty Capital Trust, Inc.
(Registrant)
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By:
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/s/
Nicholas S. Schorsch
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Nicholas
S. Schorsch
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Chief
Executive Officer and President
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By:
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/s/
Brian S. Block
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Brian
S. Block
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Senior
Vice President and Chief Financial Officer
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Date:
August 14, 2008
EXHIBIT
INDEX
The
following exhibits are included, or incorporated by reference, in this Quarterly
Report on Form 10-Q for the quarter ended March 31, 2008 (and are numbered
in
accordance with Item 601 of Regulation S-K).
Exhibit
No.
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Description
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31.1
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Certification
of the Principal Executive Officer of the Company pursuant to Securities
Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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31.2
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Certification
of the Principal Financial Officer of the Company pursuant to Securities
Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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32
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Written
statements of the Principal Executive Officer and Principal Financial
Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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