Business Context and Reporting Period
American Realty Capital New York City REIT, Inc. (the filing registrant; the request metadata identifies American Strategic Investment Co.) filed this Form 10-K for the fiscal year ended December 31, 2016. The company is a non-listed Maryland REIT focused on income-producing commercial real estate in New York City, particularly Manhattan. It conducts substantially all operations through New York City Operating Partnership, L.P., has no employees, and relies on its Advisor and Property Manager.
At December 31, 2016, the company owned six properties totaling 1,091,571 rentable square feet, acquired for an aggregate purchase price of $686.1 million. Portfolio occupancy was 89.8%, with a weighted-average remaining lease term of 6.2 years. The company had approximately 30.9 million shares outstanding and no established public trading market.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $47.6 million | $26.4 million | +$21.2 million |
| Rental income | $44.2 million | $24.5 million | +$19.8 million |
| Operating expenses | $60.3 million | $38.8 million | +$21.5 million |
| Operating loss | $(12.7) million | $(12.4) million | Wider by $0.3 million |
| Net loss | $(19.8) million | $(15.8) million | Wider by $4.0 million |
| Net loss per share | $(0.64) | $(0.57) | Worse by $0.07 |
| Cash flow from operations | $2.0 million | $(5.2) million | Improved by $7.2 million |
| FFO | $5.8 million | Not clearly provided in the filing text | — |
| MFFO | $5.1 million | Not clearly provided in the filing text | — |
Revenue growth was driven primarily by the 2015 acquisition of 123 William Street and the June 2016 acquisition of 1140 Avenue of the Americas. Operating expenses included $25.6 million of depreciation and amortization, $20.9 million of property operating expenses, $5.2 million of related-party operating fees, $3.7 million of acquisition and transaction expenses, and $4.9 million of general and administrative expenses.
The company’s reported operating margin was approximately negative 26.7% and its net margin was approximately negative 41.5%. These margins are significantly affected by depreciation, amortization, acquisition expenses, and other non-cash items.
Balance Sheet, Debt and Liquidity
- Total assets were $773.6 million, including $707.1 million of net real estate investments, $47.7 million of cash and cash equivalents, and $2.2 million of restricted cash.
- Total liabilities were $233.4 million and stockholders’ equity was $540.2 million.
- Mortgage debt had a principal balance of $195.0 million, or $191.3 million net of deferred financing costs, at year-end. The debt consisted of $96.0 million of variable-rate debt secured by 123 William Street and $99.0 million of fixed-rate debt secured by 1140 Avenue of the Americas.
- The weighted-average effective interest rate was 3.61%. A 100-basis-point increase in variable rates would have increased annual interest expense by approximately $1.0 million based on year-end exposure.
- Capital expenditures were $16.7 million, including approximately $7.1 million for 9 Times Square and $9.7 million for 123 William Street and 1140 Avenue of the Americas.
- The company paid or declared approximately $46.4 million of distributions in 2016. Cash distributions were funded 77.2% from cash on hand, 18.5% from DRIP proceeds, and 4.3% from operating cash flow.
Material Changes Versus the Prior Comparable Period
- The acquisition of 1140 Avenue of the Americas for approximately $178.5 million increased the portfolio by 249,703 square feet and was funded partly with a $99.0 million mortgage.
- Revenue increased approximately 80%, but operating expenses increased approximately 55%, and the net loss widened approximately 25%.
- Operating cash flow improved from an outflow of $5.2 million to an inflow of $2.0 million, although the 2016 amount included a $2.8 million increase in accounts payable and accrued expenses. Excluding that increase, operating cash flow would have been approximately $2.8 million lower.
- Cash and cash equivalents declined from $182.7 million to $47.7 million, primarily because of the 2016 acquisition, capital expenditures, distributions, and share repurchases.
- Related-party operating fees increased from $1.1 million to $5.2 million, including $4.7 million of cash asset-management fees compared with $1.0 million in 2015.
- The company repurchased 461,555 shares for $10.9 million in 2016. Its amended repurchase program accepted only 23% of requests submitted during the second half of 2016.
Guidance, Outlook, Risks and Unusual Items
Management stated that it did not expect operating cash flow in 2017 to fund distributions at the current level. The company expected to rely on cash on hand, proceeds from the DRIP, and excess proceeds from refinancing 123 William Street to support distributions and other cash requirements. Management also expected 2017 capital expenditures to be lower than 2016 and primarily related to tenant improvements.
9 Times Square was only 56.0% leased at year-end after repositioning and redevelopment activity. Management reported that the repositioning was substantially complete but that lease-up had taken longer than anticipated. The property remains a material source of occupancy, cash-flow, and valuation risk.
1140 Avenue of the Americas is subject to a ground lease whose annual rent increased from $0.3 million to $4.7 million beginning January 1, 2017, and is scheduled to increase to $5.1 million after December 2041. This creates a significant future increase in property operating expenses.
On March 6, 2017, the company refinanced the $96.0 million 123 William Street mortgage with a $140.0 million fixed-rate loan at 4.67%, maturing in March 2027. The refinancing funded repayment of the prior loan and established reserves of $20.0 million for leasing-related requirements and $4.8 million for tenant improvements, leasing commissions, and free rent.
Other key risks include geographic and asset concentration in New York City, tenant credit and lease-renewal risk, interest-rate exposure, limited operating history, illiquidity of the shares, dependence on related-party service providers, substantial related-party fees, conflicts of interest, the ability to maintain REIT status, and the possibility that distributions may not be sustainable. The filing also discloses litigation against AR Global and affiliated parties related to the bankruptcy of RCS Capital Corporation; the company is not named in that action.
Most Important Facts for an Investor to Verify
- Verify the registrant’s subsequent name and corporate history, because the filing uses American Realty Capital New York City REIT, Inc., while the request metadata identifies American Strategic Investment Co.
- Assess whether operating cash flow can become sufficient to fund the $1.5125-per-share annual distribution without using cash reserves, DRIP proceeds, borrowings, or other non-operating sources.
- Review lease-up progress, capital requirements, and valuation assumptions for 9 Times Square.
- Evaluate the effect of the 1140 Avenue of the Americas ground-rent escalation on property-level cash flow and valuation.
- Review debt maturities, refinancing terms, reserve restrictions, covenants, and exposure to variable interest rates.
- Compare the $21.25 estimated NAV per share, based on June 30, 2016 valuations, with current asset values and repurchase pricing; the filing cautions that NAV may not represent realizable market value.
- Review related-party compensation, acquisition fees, asset-management fees, conflicts of interest, and the company’s dependence on its Advisor and Property Manager.
- Confirm tenant concentration and lease-expiration exposure, including $49.7 million of annualized cash rent scheduled to expire through 2026.