Business Context and Reporting Period
The filing is the Form 10-Q of American Realty Capital New York City REIT, Inc., not American Strategic Investment Co., for the three months ended March 31, 2015. The company is a non-listed REIT focused on New York City real estate, primarily Manhattan. It owned five properties totaling 841,857 rentable square feet, with 88.9% occupancy and an 8.1-year weighted-average remaining lease term.
The company commenced real estate operations in June 2014; therefore, the March 31, 2014 comparison period largely predates operations and is not directly comparable.
Key Financial Metrics
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 |
|---|---|---|
| Total revenue | $2.8 million | $0 |
| Rental income | $2.6 million | $0 |
| Operating loss | $(7.2) million | $(16,000) |
| Net loss | $(7.2) million | $(16,000) |
| Basic and diluted loss per share | $(0.32) | $(1.80) |
| Net cash used in operating activities | $(5.4) million | $0 |
| Net cash used in investing activities | $(156.0) million | $0 |
| Net cash provided by financing activities | $87.0 million | $14,000 |
| Cash and cash equivalents at period end | $109.9 million | $14,000 |
Reported operating margin was approximately (257.5%) and net margin was approximately (258.2%), driven principally by $5.9 million of acquisition and transaction-related expenses associated with the 123 William Street acquisition. Management reported FFO of $(5.4) million and modified FFO of $116,000 for the quarter; these are non-GAAP measures and should not be viewed as substitutes for GAAP earnings or operating cash flow.
Balance Sheet, Debt and Liquidity
- Total assets were $656.5 million at March 31, 2015, compared with $458.6 million at December 31, 2014.
- Net real estate investments increased to $536.5 million from $268.1 million.
- Total liabilities were $136.2 million, including a $96.0 million mortgage note payable; the company had no mortgage debt at December 31, 2014.
- The mortgage bears interest at one-month LIBOR plus 2.25%, had an effective rate of 2.46% at quarter-end, and matures in March 2017, with a one-year extension option. Real estate investments with a cost of $267.4 million secured the loan.
- The company was in compliance with its debt covenants. A 100-basis-point change in variable interest rates was estimated to change annual interest expense by approximately $1.0 million.
- Common shares outstanding increased to 25.1 million from 20.6 million at year-end. Gross IPO and DRIP proceeds totaled $622.6 million at March 31, 2015.
Material Changes Versus the Prior Comparable Period
- The company acquired 123 William Street, a Manhattan office building, on March 27, 2015, for a purchase price of $253.0 million. The transaction was funded with $157.0 million of cash and $96.0 million of mortgage debt.
- Real estate investments approximately doubled from year-end 2014, while cash declined by $74.4 million to $109.9 million.
- Revenue, property operating expenses, depreciation and amortization, interest expense and acquisition costs all increased because the company had no operating properties during the 2014 comparison quarter.
- Net loss increased to $7.2 million from $16,000, although loss per share improved because of the substantial increase in weighted-average shares.
- During the quarter, the company issued 4.4 million shares and received $108.9 million of proceeds, paid $14.2 million of offering costs, and paid $3.9 million of cash distributions. Total distributions, including DRIP reinvestments, were $7.9 million.
- As of April 30, 2015, shares outstanding had increased to 26.6 million and cumulative gross IPO and DRIP proceeds had reached $659.3 million.
Outlook, Commentary, Risks and Unusual Items
Management provided no conventional earnings or revenue guidance. It expected to continue raising capital through the IPO and DRIP and to use offering proceeds and secured financings for additional New York City property acquisitions. The IPO was scheduled to continue until the earlier of the sale of 40.0 million shares or May 31, 2015.
- Management expected future property cash flows to support operating expenses and monthly distributions as the portfolio matured, but acknowledged that current operating cash flows were insufficient to fund distributions.
- All $7.9 million of first-quarter distributions were funded from offering proceeds or DRIP proceeds; none were funded by operating cash flow. The company stated that distributions may be reduced or suspended.
- The company has limited diversification, with only five properties. Four major tenants represented at least 5% of annualized straight-line rental income; the largest tenant represented 11.7%.
- The 123 William Street portfolio includes a tenant cancellation right if a specified property is not sold by July 31, 2015.
- The company is dependent on its Advisor, Property Manager and other affiliates, which receive acquisition, financing, offering, asset management and other fees. Related-party fees and reimbursements for operating services totaled approximately $6.0 million during the quarter.
- The company had no material pending legal proceedings, no material off-balance-sheet arrangements and reported effective disclosure controls as of March 31, 2015.
- The company intends to qualify as a REIT but cautioned that failure to meet REIT requirements could result in adverse tax and operating consequences. Its shares had no public trading market and may remain illiquid.
Important Facts for Investors to Verify
- Confirm that the filing registrant is American Realty Capital New York City REIT, Inc., rather than American Strategic Investment Co.
- Assess the sustainability of distributions given $5.4 million of operating cash outflow, $7.2 million of net loss and 100% distribution funding from offering or DRIP proceeds.
- Review the March 2017 maturity and variable-rate exposure of the $96.0 million mortgage, including refinancing and interest-rate risks.
- Evaluate tenant concentration, occupancy, lease expirations and the cancellation right associated with 123 William Street.
- Reconcile the acquisition economics and the $5.9 million expensed transaction costs with reported FFO and MFFO.
- Review related-party compensation arrangements and cumulative offering costs of $69.8 million.
- Consider the company’s limited operating history, limited property diversification, lack of a public market for its shares and dependence on continued capital raising.