Business Context and Reporting Period
This unaudited Form 10-Q covers the three months ended March 31, 2016. The filing identifies the registrant as American Realty Capital New York City REIT, Inc., not American Strategic Investment Co.; investors should verify the intended issuer. The company is a Maryland REIT focused on New York City real estate, particularly Manhattan. At quarter-end, it owned five properties totaling 841,868 rentable square feet, with 89.2% occupancy and a 7.7-year weighted-average remaining lease term.
The company had 30.6 million shares outstanding and had received $760.1 million of cumulative IPO and DRIP proceeds. It had no employees and relied on related-party affiliates for advisory and property-management services.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $8.5 million | $2.8 million | +$5.7 million |
| Operating loss | $(2.3) million | $(7.2) million | Improved by $4.9 million |
| Net loss | $(3.4) million | $(7.2) million | Improved by $3.8 million |
| Net loss per share | $(0.11) | $(0.32) | Improved by $0.21 |
| Cash flow from operations | $1.3 million | $(5.4) million | Improved by $6.7 million |
| FFO | $1.4 million | Not provided in the filing excerpt | Not clearly comparable |
| MFFO | $(0.4) million | Not provided in the filing excerpt | Not clearly comparable |
Rental income was $8.0 million, compared with $2.6 million in the prior-year quarter. Management attributed approximately $5.3 million of the increase to the March 2015 acquisition of 123 William Street. Operating expense reimbursements increased to $0.5 million from $0.2 million.
Total operating expenses were $10.8 million versus $10.0 million. Depreciation and amortization increased to $4.8 million from $1.8 million, while related-party operating fees increased to $1.1 million from none reported in the prior-year quarter. Acquisition and transaction expenses declined sharply to $40,000 from $5.9 million. Interest expense increased to $1.2 million from $56,000 due to mortgage debt incurred in connection with the 123 William Street acquisition.
Based on reported figures, the operating margin was approximately negative 27.3% in Q1 2016 versus negative 257.5% in Q1 2015, and the net margin was approximately negative 40.0% versus negative 258.2%. These comparisons were materially affected by the prior-year acquisition expenses and the addition of 123 William Street.
| Balance-sheet metric | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Total assets | $717.2 million | $726.4 million |
| Cash and cash equivalents | $153.1 million | $182.7 million |
| Real estate investments, net | $533.2 million | $532.3 million |
| Mortgage note payable, net | $93.7 million | $93.2 million |
| Stockholders’ equity | $586.8 million | $596.1 million |
Cash Flow, Liquidity, Debt and Distributions
Operating activities generated $1.3 million of cash, but investing activities used $23.4 million, primarily for an $18.0 million nonrefundable deposit on the planned 1140 Avenue of the Americas acquisition and $5.4 million of capital expenditures. Financing activities used $7.5 million, including $5.9 million of distributions and $1.6 million of share repurchases. Cash declined by $29.6 million to $153.1 million.
The company had a $96.0 million variable-rate mortgage secured by 123 William Street, with a 2.73% effective rate at quarter-end and maturity in March 2017, subject to a one-year extension option. The company was in compliance with its debt covenants. A 100-basis-point change in rates was estimated to change annual interest expense by approximately $1.0 million.
Distributions declared were $0.38 per share for the quarter. Total distributions to common stockholders were approximately $11.5 million, of which $5.6 million was reinvested through the DRIP. Operating cash flow covered only 11.4% of distributions; DRIP proceeds covered 35.0% and IPO proceeds covered 53.6%. Management stated that 2016 operating cash flow is not expected to be sufficient to fund distributions at the current level.
Material Changes, Outlook and Risks
- On March 18, 2016, the company agreed to purchase the leasehold interest in 1140 Avenue of the Americas for $180.0 million, excluding closing costs, and paid an $18.0 million nonrefundable deposit. The transaction was expected to close in the second quarter, subject to due diligence, financing and other conditions.
- The company expected to spend $10.0 million to $15.0 million during 2016 on improvements, tenant improvements and leasing commissions related to repositioning 9 Times Square, which was 52.6% occupied at quarter-end.
- The board amended the share repurchase program effective February 28, 2016. Repurchases are discretionary, generally semiannual, and limited by DRIP proceeds and stated percentage caps. A total of 3,575 accrued repurchase requests were completed in April 2016.
- The company expected to establish an estimated per-share NAV no later than October 26, 2016. No NAV was reported in this filing.
- Beginning October 2015, the company paid cash asset-management fees to its Advisor; $1.0 million was paid in Q1 2016. Total related-party operating fees and reimbursements were $1.6 million.
- Transfer-agent responsibilities shifted after an affiliate-linked transfer agent, American National Stock Transfer, announced its wind-down. The company entered into a direct agreement with DST Systems on March 10, 2016.
- RCS Capital Corporation, the parent of the former dealer manager and certain affiliates, filed for Chapter 11 bankruptcy protection in January 2016. The filing states that no RCS Advisory services had been provided since November 2015.
- Key risks include limited operating history and diversification, tenant concentration and leasing risk, New York City market exposure, variable-rate debt, dependence on related-party service providers, conflicts of interest, potential inability to fund distributions from operations, illiquidity of the shares, and the risk of losing REIT qualification.
- No material legal or regulatory proceedings were pending, no material changes to previously disclosed risk factors were reported, and management concluded that disclosure controls were effective.
Most Important Facts for Investors to Verify
- Confirm that this filing belongs to the requested company, because the registrant named in the document is American Realty Capital New York City REIT, Inc.
- Verify whether the $180.0 million 1140 Avenue of the Americas acquisition closed and how it was financed after March 31, 2016.
- Assess the company’s ability to refinance or repay the $96.0 million mortgage maturing in March 2017.
- Review the sustainability of the $1.5125 annualized distribution given only $1.3 million of quarterly operating cash flow against $11.5 million of distributions.
- Monitor 9 Times Square leasing progress and the expected $10.0 million to $15.0 million of 2016 capital expenditures.
- Review related-party fees, conflicts of interest, service-provider dependencies and the effect of the former dealer manager’s bankruptcy.
- Confirm the initial estimated NAV per share and the resulting share-repurchase pricing once established.