The Offering

Company Overview

Four Springs Capital Trust is an internally managed REIT focused on acquiring, owning, and actively managing a portfolio of single-tenant, income producing industrial, medical, service/necessity retail and office properties throughout the United States that are subject to long-term net leases.

Portfolio data as of 15 Nov 2021, Source: Company Website

Key Highlights

Uses of Fund:  The net proceeds from this offering will be approximately $231.4 million, or approximately $266.5 million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $14.00 per share (midpoint of the price range set). The trust intends to use a portion of the net proceeds from this offering to (1) consummate the Pending Acquisitions and (2) repay amounts outstanding under the M&T Credit Facility and the Mezzanine Loan, including a prepayment fee of $1.8 million. The remaining net proceeds will be used for general corporate purposes, including potential future acquisitions.

Dividend policy: Following completion of this offering, the trust intends to make regular monthly distributions to holders of its common shares. The trust intends to make a pro rata distribution based on a monthly distribution rate of $0.040833 per common share upon completion of this offering and ending on February 28, 2022. This would be around $0.49/share on an annualized basis along with the annual distribution rate of ~3.50% as per the midpoint price range of $14.00 set for the IPO.

Diversified and stable tenant base:  The trust’s property portfolio has a stable and diversified tenant base. As of December 15, 2021, the trust’s properties were 99.8% leased to 68 tenants operating in 37 different industries, with approximately 42.5% tenants that have an investment grade credit rating from a major rating agency.

As of December 15, 2021, the trust’s portfolio constitutes 41 industrial properties, 52 medical office properties & 61 retail properties with expected post-syndication pro rata share basis of 40.7%, 21.8% & 30.2% of the Annualized Base Rent (ABR) respectively.

Source: IPO prospectus 

Stable and Predictable Cash Flows with Embedded Contractual Rent Growth: The trust’s properties were 99.8% leased as of December 15, 2021 and had a weighted average remaining lease term of 10.0 years (based on ABR on an expected post-syndication pro rata share basis). The trust has no lease expirations through 2021 and only 21.3% of leases will expire during the next five calendar years. Moreover, entire lease categorized as net lease, where tenants essentially need to pay for substantial operating expenses associated with property, which encompasses real estate taxes, utilities, maintenance, and insurance, as well as certain capital expenditures.

Robust Acquisition Track Record: Since 2012, the trust has acquired 184 net lease properties in 97 transactions through December 15, 2021. The trust has developed a reputation as a credible and active buyer of single-tenant net lease real estate within the industry. This incredible reputation provides trust to gain access into other acquisition opportunities that may not be available to its peers.

Strong competitive edge – collecting 100% rents from tenants: During the year ended December 31, 2020, on an expected post-syndication pro rata share basis, the trust has collected 99.4% of rent, with collections of 99.6% for the second quarter of 2020 and 99.4% for the third quarter of 2020. From January 1, 2021, through December 15, 2021, the trust has collected 100.0% of rents. The collection rates are an example of how proactive management is and reflects a competitive strength when compared with other owners of net leased real estate

Financial Highlights (Figures in US Dollar)

Source: IPO Prospectus

• Topline performance: For the nine months ended September 30, 2021, the company reported that revenue has increased by 50% to ~$38.96 million from ~$25.95 million reported in the comparable period of FY20, primarily driven by the net growth in the size of the real estate portfolio which generated additional rental revenues, as well as from an increase in tenant reimbursements. Pro Forma revenue of the trust for the nine months ended stood at $53.51 million.
• Growth in size of portfolio: The trust’s real estate portfolio, including real estate investments held for sale and lease intangibles, increased from $372.7 million in real estate representing 99 properties as of September 30, 2020, to $781.3 million in real estate representing 136 properties as of September 30, 2021.
• Total expenses increased: Total operating cost for the nine months ended September 30, 2021, stood at $53.28 million against $25.76 million reported in the same period of the previous financial year. Pro forma total operating costs for nine months ended September 30, 2021, stood at $53.89 million.
• Bottom line performance: During the nine months ended September 30, 2021, the trust reported a pro forma net earnings of $4.7 million. However, on historical basis it reported a net loss of $21.01 million compared to $15.58 million reported in the same period of the previous financial year.
• Balance sheet highlights. Pro forma total assets as of September 30, 2021, stood at $984.09 million with cash and cash equivalents of $91.99 million. Pro forma total liabilities as of September 30, 2021, stood at $322.77 million, respectively.

Key Management Highlights

Source: IPO prospectus

Risk Associated (Moderate to High)

Investment in the IPO of "FSPR" is exposed to a variety of risks such as:

• Interest rate risk: One of the primary risks for any REIT is an increase in interest rates; thus, diminishing demand for REITs. An investor would generally prefer a safer investment instrument, such as government bonds, in an environment where the interest rates rise. Treasuries are government-guaranteed securities that typically pay a fixed rate of interest.
• Decline in occupancy risk: Four Springs Capital Trust is also exposed to decline in occupancy level on back of changes in the financial health of its tenants. A lower occupancy could have a weigh on the REITs financial performance.
• Default risk: The company is also exposed to default risk from its tenants in case of rental payment fraud.
• Leverage risk: Leverage risk occurs when a REIT decide to use borrowed money to purchase more properties. The use of leverage causes the REIT to incur additional expenses and increase the fund’s losses in case of underperformance by the underlying investments.

Conclusion

Four Springs Capital Trust has maintained a disciplined investment approach and rigorous underwriting processes to enhance its real estate portfolio. Moreover, to reduce the risks associated with adverse developments affecting a particular tenant, industry, geography or property type, the Trust will maintain a diversified portfolio. The management has taken a proactive approach towards their asset and property management which has helped them enhance the performance of their real estate portfolio through risk mitigation strategies and opportunistic sales. This proactive approach was critical for their performance during the COVID-19 pandemic. For the year ended December 31, 2020, on an expected post-syndication pro-rata share basis, the Trust has collected 99.4% of the rent, with collections of 99.6% for the second quarter of 2020 and 99.4% for the third quarter of 2020. From January 1, 2021, through December 15, 2021, the Trust has collected 100.0% of the rent. The collection rates entail how proactive management is and reflect a competitive strength compared with other net leased real estate owners.

Therefore, given the Trust’s competitive advantage of collecting 100% rents from its tenants, a diversified portfolio base, and the associated risks, we believe the IPO of Four Springs Capital Trust to be “Attractive” only for investors with moderate to high-risk appetite.