Business Context and Reporting Period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2016. The filing registrant is American Realty Capital New York City REIT, Inc., not American Strategic Investment Co. The company is a non-listed Maryland REIT focused on New York City real estate, particularly Manhattan. As of September 30, 2016, it owned six properties totaling 1,091,571 rentable square feet, with 89.8% occupancy and a 6.6-year weighted-average remaining lease term.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $14.4 million, compared with $7.9 million | $33.0 million, compared with $18.1 million |
| Operating loss | $(2.0) million, compared with $(1.2) million | $(9.5) million, compared with $(9.5) million |
| Net loss | $(4.4) million, or $(0.14) per share | $(14.2) million, or $(0.46) per share |
| Net loss margin | Approximately negative 30% | Approximately negative 43% |
| FFO | $2.9 million | $2.6 million |
| MFFO | $2.3 million | $2.7 million |
For the nine months, rental income increased to $30.8 million from $16.9 million, while operating expense reimbursements increased to $2.2 million from $1.2 million. Depreciation and amortization was $16.8 million, interest expense was $5.0 million, and acquisition and transaction expenses were $4.3 million.
Cash and cash equivalents were $53.2 million at September 30, 2016, down from $182.7 million at December 31, 2015. Restricted cash was $2.9 million. Net cash used in operating activities was $0.6 million, compared with $8.2 million used in the prior-year period. Investing activities used $91.6 million, principally for the acquisition of 1140 Avenue of the Americas and capital expenditures. Financing activities used $37.4 million, including $18.7 million of distributions and $12.5 million of share repurchases.
Mortgage debt, net of deferred financing costs, was $190.7 million, compared with $93.2 million at year-end 2015. Gross principal outstanding was $195.0 million, consisting of a $96.0 million variable-rate loan maturing in March 2017, subject to a one-year extension option, and a $99.0 million fixed-rate loan maturing in July 2026. The weighted-average effective interest rate was 3.58%. The company was in compliance with its debt covenants.
Total assets were $785.2 million and stockholders’ equity was $552.5 million at September 30, 2016. Dividends declared were $0.38 per share for the quarter and $1.13 per share for the nine months.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, primarily because of the acquisition of 1140 Avenue of the Americas in June 2016 and the full-period contribution of earlier acquisitions.
- The company acquired the 249,703-square-foot 1140 Avenue of the Americas leasehold interest for approximately $178.5 million, funded partly with a $99.0 million mortgage. The acquisition generated $4.3 million of transaction expenses.
- Revenue growth was accompanied by higher property operating costs, related-party operating fees, depreciation, amortization and interest expense.
- Cash declined by $129.6 million during the nine months, reflecting real estate investment, capital expenditures, distributions, repurchases and financing costs.
- Related-party operating fees and reimbursements increased to $9.5 million from $6.8 million for the nine-month comparable period, including $3.3 million of cash asset-management fees.
- The company repurchased 461,555 shares for $10.9 million during the nine months. Requests for 874,782 additional shares totaling $20.3 million were not fulfilled.
Guidance, Outlook, Risks and Unusual Items
Management stated that it does not expect cash flow from operations in 2016 to be sufficient to fund distributions at the current level. Nine-month distributions to common stockholders were approximately $34.8 million, while operating cash flow was negative $0.6 million. Distributions were funded substantially through offering and DRIP proceeds, and management indicated that future distributions may require cash on hand, additional DRIP proceeds, borrowings, asset sales or other sources. Distributions are not guaranteed and may be reduced or suspended.
Management expects additional 2016 capital expenditures of approximately $2.5 million to $3.0 million for improvements, tenant improvements and leasing commissions, particularly at 9 Times Square. The property was 56.0% occupied at quarter-end; management cited slower-than-expected retail leasing, construction delays and excess retail capacity as risks, although office leasing activity was described as positive.
The company published an estimated net asset value per share as of June 30, 2016 on October 26, 2016. Following that date, DRIP issuances and share repurchases are generally priced by reference to estimated NAV, subject to holding-period adjustments and program limits.
Key risks include limited operating history and diversification, tenant and New York City market concentration, interest-rate exposure, refinancing of the $96.0 million loan maturing in 2017, reliance on related-party advisors and property managers, conflicts of interest, illiquidity of the shares, distribution sustainability and continued qualification as a REIT. A 100-basis-point change in variable rates would affect annual interest expense by approximately $1.0 million.
The filing reports no material pending legal proceedings, no material off-balance-sheet arrangements and effective disclosure controls. The company is evaluating several new accounting standards, including revenue recognition, leases, credit losses and cash-flow presentation.
Most Important Facts to Verify
- Confirm that the intended filing is for American Realty Capital New York City REIT, Inc., because the supplied metadata names a different company.
- Verify the company’s ability to refinance or repay the $96.0 million mortgage scheduled for 2017.
- Assess whether property-level cash flow can replace offering and DRIP proceeds as the primary source of distributions.
- Review occupancy, leasing progress and required capital expenditures at 9 Times Square and 1140 Avenue of the Americas.
- Confirm the estimated NAV per share published after quarter-end and its effect on DRIP issuances and share repurchases.
- Evaluate related-party fees, conflicts of interest and the company’s dependence on its Advisor and Property Manager.