Business Context and Reporting Period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, filed November 16, 2015. The filing identifies the registrant as American Realty Capital New York City REIT, Inc. and subsidiaries, not American Strategic Investment Co. The company is a Maryland REIT focused on New York City real estate, primarily Manhattan.
As of September 30, 2015, the company owned five properties totaling 841,868 rentable square feet, with 86.2% occupancy and a weighted-average remaining lease term of 8.3 years. The portfolio included 123 William Street, acquired in March 2015 for $253.0 million.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenues | $7.9 million, compared with $0.5 million in 2014 | $18.1 million, compared with $0.6 million in 2014 |
| Operating loss | $(1.2) million; approximately a 15.5% operating margin | $(9.5) million; approximately a 52.3% operating margin |
| Net loss | $(2.3) million, or $(0.08) per share | $(11.7) million, or $(0.44) per share |
| Comprehensive loss | $(2.3) million | $(11.8) million |
| FFO | $2.5 million | $(0.1) million |
| MFFO | $0.6 million | $1.3 million |
| Distributions declared per share | $0.38 | $1.13 |
Rental income was $7.3 million for the quarter and $16.9 million for the nine-month period. Depreciation and amortization was $4.8 million and $11.6 million, respectively. Nine-month acquisition and transaction expenses were $6.0 million, primarily related to 123 William Street.
Cash and cash equivalents were $192.9 million at September 30, 2015, compared with $184.3 million at December 31, 2014. Total assets increased to $741.3 million from $458.6 million, while stockholders’ equity increased to $607.5 million from $437.4 million.
Net cash used in operating activities was $8.2 million for the nine months, compared with $1.4 million used in 2014. Net cash used in investing activities was $162.9 million, including $157.0 million for real estate acquisitions and $7.9 million for capital expenditures. Net cash provided by financing activities was $179.7 million, including $230.6 million of common-stock proceeds.
Mortgage debt was $96.0 million at September 30, 2015, versus none at year-end 2014. The debt bears interest at a variable rate based on one-month LIBOR plus 2.25%, matures in March 2017, and has a one-year extension option. A 100-basis-point change in rates would affect annual interest expense by approximately $1.0 million. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected the acquisition and operation of additional properties, especially 123 William Street.
- Property operating expenses increased to $3.5 million for the quarter and $7.6 million for the nine months, from $0.1 million and $0.1 million, respectively, in the prior periods.
- Net losses remained significant because of depreciation, amortization, acquisition expenses, general and administrative costs, and newly incurred interest expense.
- Weighted-average shares increased substantially as the company completed its IPO and issued shares through its distribution reinvestment plan. Shares outstanding increased to 30.2 million from 20.6 million at December 31, 2014.
- The company completed its IPO in May 2015 and reported cumulative gross offering proceeds of $750.5 million, including $19.2 million through the DRIP.
- Distributions paid during the nine months totaled $28.9 million, while operating cash flow was negative $8.2 million. Management disclosed that 45.1% of distributions was funded by DRIP proceeds and 54.9% by IPO proceeds.
Guidance, Outlook, Commentary, Risks and Unusual Items
No quantitative earnings or distribution guidance was provided. Management expects future property operations, remaining equity proceeds, and secured mortgage financings to fund short-term liquidity needs, and expects the portfolio to generate sufficient cash flow to support operating expenses and monthly distributions as it matures.
- Distributions are not assured and may be reduced or suspended. The company may continue funding distributions from offering proceeds or borrowings rather than operating cash flow.
- The portfolio is concentrated in only five properties and relies significantly on several major tenants. The largest disclosed tenant represented 11.2% of annualized straight-line rent, and five major tenants together represented material concentration.
- The company has no public trading market for its shares, and its shares may remain illiquid. Repurchases under the share repurchase program are discretionary and subject to limitations.
- The company is dependent on related-party entities, including its Advisor, Property Manager, and Dealer Manager, and pays them fees and reimbursements. Related-party operation fees and reimbursements were $6.6 million for the nine months.
- Beginning October 1, 2015, the company stopped issuing Class B units for asset management and began paying an asset management fee of 0.0625% of monthly asset cost in cash, shares, or a combination.
- The company announced an intended joint venture initiative with New York REIT, subject to board approval.
- ARC and Apollo terminated a proposed transaction involving ARC’s asset-management business; management stated this would not affect the company’s current management team.
- The Massachusetts Securities Division filed an administrative complaint against the Dealer Manager. Neither the company nor its Advisor was named, and the filing did not specifically allege misconduct involving the company’s proxy solicitations.
- The company reported no material pending legal proceedings, no material environmental claims, and effective disclosure controls and procedures.
Most Important Facts to Verify
- Confirm that the intended issuer is American Realty Capital New York City REIT, Inc., because the supplied metadata names a different company.
- Assess whether distributions are sustainable without continued equity issuance or additional borrowing, given negative operating cash flow and distributions exceeding operating cash generation.
- Review occupancy, lease expirations, tenant credit quality, and concentration at 123 William Street and across the five-property portfolio.
- Evaluate refinancing and interest-rate risk associated with the $96.0 million variable-rate mortgage maturing in 2017.
- Reconcile GAAP losses with FFO and MFFO and consider the effect of acquisition costs, straight-line rent, and depreciation adjustments.
- Review related-party fees, conflicts of interest, the new asset-management fee structure, and the Dealer Manager regulatory complaint.