American Strategic Investment Co. — 2018 Form 10-K Summary
Filing context: The supplied filing is for New York City REIT, Inc., formerly American Realty Capital New York City REIT, Inc.; the company changed its name to New York City REIT, Inc. in March 2019. The filing covers the fiscal year ended December 31, 2018, including fourth-quarter results. It is not filed under the name American Strategic Investment Co. in the provided text.
Business context and reporting period
The company is an externally managed, non-listed REIT focused on office, retail, parking and other real estate assets in New York City, particularly Manhattan. At December 31, 2018, it owned seven properties totaling 1,102,584 rentable square feet, acquired for an aggregate purchase price of $702.0 million. The portfolio was 93.7% occupied, compared with 88.3% at December 31, 2017.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $62.4 million | $58.4 million | +$4.0 million |
| Operating loss | $(11.3) million | $(12.1) million | Improved by $0.9 million |
| Net loss | $(24.1) million | $(23.1) million | Worsened by $1.0 million |
| Basic and diluted loss per share | $(0.77) | $(0.74) | Worsened by $0.03 |
| Cash flow from operations | $(7.1) million | $2.3 million | Decrease of $9.4 million |
| FFO | $5.6 million | $6.5 million | Down $0.9 million |
| MFFO | $(0.5) million | $0.9 million | Down $1.4 million |
| Cash NOI | $27.5 million | $25.9 million | Up $1.6 million |
Calculated margins were approximately 82.0% for total operating expenses as a percentage of revenue, negative 18.0% for operating margin and negative 38.6% for net margin. FFO and MFFO are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.
- Revenue composition: Rental income was $57.1 million, up from $53.9 million. Operating expense reimbursements and other revenue were $5.3 million, up from $4.5 million.
- Balance sheet: Total assets were $773.7 million, including $684.3 million of net real estate investments. Stockholders’ equity was $443.7 million, compared with $481.5 million at year-end 2017.
- Liquidity: Cash and cash equivalents were $48.0 million, compared with $39.6 million at year-end 2017. Including restricted cash, year-end cash was $54.8 million.
- Debt: Gross mortgage debt was $299.0 million, or $291.7 million net of deferred financing costs, compared with $239.0 million gross debt in 2017. All outstanding mortgage debt was fixed-rate, with a weighted-average effective rate of 4.54% and maturities from 2026 through 2028.
- Leverage: Management stated that it intended to increase borrowings toward 40% to 50% of the fair value of assets. The filing does not provide a clear debt-to-total-assets ratio based on fair value.
- Distributions: Distributions were suspended effective March 1, 2018. Distributions declared were $0.25 per share for 2018, versus $1.51 in 2017; all 2018 distributions were characterized for U.S. federal income tax purposes as return of capital.
- Estimated NAV: The board-approved estimated NAV was $20.26 per share as of June 30, 2018, unchanged from the 2017 estimated NAV. The NAV is not a market price and is based on valuation assumptions.
Fourth-quarter 2018 results
| Metric | Q4 2018 |
|---|---|
| Total revenue | $16.2 million |
| Net loss | $(5.1) million |
| Basic and diluted loss per share | $(0.17) |
Material changes versus the prior comparable period
- Revenue increased 6.9%, principally from higher occupancy at 9 Times Square and the October 2018 acquisition of 8713 Fifth Avenue.
- Portfolio occupancy increased to 93.7% from 88.3%. Occupancy at 9 Times Square rose to 84.3% from 63.9%, and occupancy at 123 William Street rose to 98.3% from 92.7%.
- Operating expenses increased 4.5% to $73.7 million. Property operating expenses increased to $28.4 million, general and administrative expenses increased to $9.0 million, and related-party asset and property management fees increased to $6.2 million.
- Interest expense increased to $13.3 million from $11.2 million, primarily because of a new $50.0 million loan secured by two previously unencumbered properties.
- Cash flow from operations turned negative, from $2.3 million provided in 2017 to $7.1 million used in 2018, partly because of increases in unbilled rent receivables, deferred leasing costs and other prepaid assets.
- The company acquired 8713 Fifth Avenue for a base purchase price of $15.9 million, funded in part with a $10.0 million mortgage.
- The company repurchased 254,941 shares during 2018 at a weighted-average price of $20.26. It also completed two tender offers, purchasing 139,993 shares at $17.03 per share and 210,014 shares at $12.95 per share.
- In November 2018, the company amended its advisory and property management agreements. The revised advisory agreement eliminated acquisition and financing coordination fees but established new base and variable management fee provisions and retained significant termination economics.
Guidance, outlook, risks and unusual items
- Management expected cash on hand, property operations and additional financing to fund operating needs, capital expenditures and leasing costs over the following year, but acknowledged that additional financing may not be available on favorable terms or at all.
- Management planned continued leasing and repositioning efforts, particularly at 9 Times Square, and intended to seek replacement tenants and evaluate alternatives for 421 W. 54th Street after its sole tenant terminated early and vacated in 2018.
- The company had $382.2 million of future minimum base rental payments from tenants, including $53.3 million due in 2019. It also had $235.7 million of future ground lease payments related to 1140 Avenue of the Americas.
- All mortgage principal of $299.0 million was contractually due after 2023, creating substantial refinancing or disposition risk at maturity. The company stated that it was in compliance with its debt covenants at year-end.
- Major risks include concentration in the New York metropolitan area, limited diversification, dependence on tenants and several major properties, lease expirations, tenant credit risk, illiquidity of the non-listed shares, suspended distributions and reliance on affiliated external managers.
- Two properties, 123 William Street and 1140 Avenue of the Americas, represented approximately 71% of portfolio square footage and 73% of annualized straight-line rent.
- The company recognized an additional $0.3 million of amortization in 2018 after the sole tenant at 421 W. 54th Street terminated its lease early.
- No impairment charges or material legal or regulatory proceedings were reported for 2018. The company reported no material off-balance-sheet arrangements.
- The company adopted the new lease standard prospectively on January 1, 2019 and expected to record a right-of-use asset and lease liability of approximately $50.0 million to $55.7 million for its ground lease.
Important facts for investors to verify
- Confirm the issuer identity and subsequent corporate history, because the supplied filing is for New York City REIT, Inc., not American Strategic Investment Co.
- Review the audited financial statements and notes for debt maturities, covenant requirements, reserve restrictions and refinancing obligations.
- Assess whether negative operating cash flow and continued net losses are consistent with the company’s ability to resume distributions.
- Evaluate the sustainability of occupancy gains, especially at 9 Times Square, and the leasing outlook for 421 W. 54th Street.
- Review tenant concentration and upcoming lease expirations, including the 2022–2025 expirations representing significant portions of annualized rent.
- Compare the $20.26 estimated NAV with any subsequent valuation, tender-offer price or transaction price, recognizing that the shares had no established public market.
- Examine related-party fees, the amended advisory agreement, potential termination fees and the conflicts arising from the external management structure.