Business Context and Reporting Period
The filing is the unaudited Form 10-Q of American Realty Capital New York City REIT, Inc. for the quarter and nine months ended September 30, 2014, filed November 13, 2014. The request metadata identifies American Strategic Investment Co.; that name does not match the registrant named in the filing.
The company was incorporated in December 2013, commenced its initial public offering in April 2014, acquired its first property in June 2014, and intends to qualify as a real estate investment trust for the year ending December 31, 2014. As of September 30, 2014, it owned three New York City properties totaling 132,552 rentable square feet, 100% leased, with a 10.6-year weighted-average remaining lease term.
Financial Highlights
| Metric | Three months ended September 30, 2014 | Nine months ended September 30, 2014 |
|---|---|---|
| Total revenue | $0.5 million | $0.6 million |
| Rental income | $0.5 million | $0.6 million |
| Total expenses | $2.8 million | $3.0 million |
| Acquisition and transaction expenses | $2.0 million | $2.2 million |
| Net loss | $(2.2) million | $(2.5) million |
| Net loss per share | $(0.26) | $(0.79) |
| Cash flow from operations | $(0.9) million | $(1.4) million |
Approximate net margins were negative 414% for the quarter and negative 423% for the nine-month period, reflecting the company’s early operating stage and acquisition-related costs. Depreciation and amortization were $0.5 million for both the quarter and nine-month period.
- Liquidity: Cash was $207.7 million at September 30, 2014, compared with no cash at December 31, 2013. Total assets were $311.9 million and stockholders’ equity was $300.0 million.
- Capital raising: Gross IPO proceeds totaled $342.6 million through September 30, 2014; cumulative offering costs were $36.7 million.
- Investing: The company invested $92.1 million in three properties and $0.5 million in investment securities during the nine months.
- Debt: The company had no debt financing outstanding at September 30, 2014.
- Distributions: Total distributions were $2.0 million, including $0.7 million paid in cash and $1.3 million reinvested through the DRIP. None were covered by operating cash flow; 63.6% was funded through DRIP-related offering proceeds and 36.4% through other IPO proceeds.
- Investment securities: The company held $0.5 million of an affiliated real estate income fund, with a $14,000 unrealized loss recorded in other comprehensive loss.
Material Changes Versus the Prior Comparable Period
Meaningful year-over-year comparisons are not available because the company was formed in December 2013, had no shares or assets at December 31, 2013, and began real estate operations only in June 2014.
- Real estate investments increased from none at December 31, 2013 to $99.7 million net at September 30, 2014.
- Common shares outstanding increased from none to 13.9 million at September 30, 2014.
- The company shifted from development-stage activities to operating real estate activities after its first acquisition in June 2014.
- Revenue reflects only a partial operating period, while acquisition and offering costs were incurred during the launch and portfolio-building phase.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects to use additional equity proceeds and secured financing to acquire New York City properties. It expects property cash flows to support operating expenses and monthly distributions after IPO proceeds are substantially invested, but provides no quantified earnings or distribution guidance.
- The board may reduce or suspend distributions, and distributions are not assured. Management explicitly states that distributions may continue to be funded from offering proceeds or other sources rather than operating cash flow.
- The company expects to incur debt in the future. Its charter generally limits indebtedness to approximately 300% of net assets, while management currently intends to limit aggregate borrowings to 40%–50% of asset fair value, subject to exceptions.
- The portfolio is concentrated: five tenants represented 44.5%, 18.6%, 15.3%, 10.9%, and 10.7% of annualized rental income, respectively. Loss or deterioration of any major tenant could materially affect results.
- The company is externally managed and dependent on affiliates for advisory, property management, offering, accounting, and administrative services. Related-party fees include acquisition fees, offering costs, property management fees, and other reimbursements.
- The company has a limited operating history, limited property diversification, no public trading market for its shares, and no established NAV pricing until the specified post-April 2016 filing period.
- Broker-dealer participation in the offering was temporarily affected by accounting-error disclosures involving American Realty Capital Properties, which management stated could impair the company’s ability to raise additional capital.
- Subsequent to quarter-end, the company raised additional capital and, on November 5, 2014, acquired a Times Square office building at a contract price of $170.3 million. The property was 76% leased at acquisition, with the Carlyle Group representing approximately 66% of annualized cash rental income.
- Edward M. Weil, Jr. resigned as treasurer and secretary on November 11, 2014; existing executives assumed those responsibilities. The filing states the resignation was not due to disagreement.
- No material litigation, environmental claims, off-balance-sheet arrangements, or control deficiencies were reported.
Important Facts for Investors to Verify
- Confirm the registrant identity because the filing is for American Realty Capital New York City REIT, Inc., not American Strategic Investment Co.
- Verify the extent to which distributions are funded by operating cash flow versus IPO and DRIP proceeds.
- Review tenant concentration, lease expirations, rent collections, and the credit quality of the five major tenants.
- Assess the effect of the November 2014 $170.3 million acquisition on liquidity, leverage, occupancy, and future operating cash flow.
- Review related-party compensation arrangements and cumulative offering costs, including the 15% offering-cost cap.
- Monitor future debt financings, interest-rate exposure, and compliance with the company’s stated leverage objectives.
- Evaluate the company’s ability to qualify as a REIT and sustain distributions while it remains in an early acquisition and capital-raising phase.