Business Context and Reporting Period
The filing is an annual Form 10-K for the fiscal year ended December 31, 2015, with quarterly information for the three months ended December 31, 2015. The filing registrant is American Realty Capital New York City REIT, Inc., not American Strategic Investment Co.; investors should verify the requested company identity.
The company is a non-traded New York City-focused REIT investing primarily in office and related real estate. At year-end it owned five properties totaling 841,868 rentable square feet, leased at 89.2%, with a weighted-average remaining lease term of 7.8 years. The company had no direct employees and was managed by affiliated entities.
Financial Results and Key Metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $26.4 million | $2.9 million |
| Operating loss | $12.4 million | $6.5 million |
| Net loss | $15.8 million | $6.5 million |
| Net loss per share | $0.57 | $0.95, revised |
| Cash flow used in operations | $5.2 million | $5.0 million |
| Cash flow used in investing | $169.2 million | $256.6 million |
| Cash flow provided by financing | $172.7 million | $445.9 million |
| Total assets | $729.2 million | $458.6 million |
| Total equity | $596.1 million | $437.4 million |
Revenue consisted primarily of $24.5 million of rental income and $2.0 million of operating expense reimbursements and other revenue. Operating expenses were $38.8 million, including $16.8 million of depreciation and amortization, $11.3 million of property operating expenses, $6.0 million of acquisition and transaction expenses, $3.6 million of general and administrative expenses, and $1.1 million of related-party operating fees.
Funds from operations was $1.0 million and modified funds from operations was $0.8 million. These are non-GAAP measures and are not substitutes for GAAP net loss or operating cash flow.
Cash and cash equivalents were $182.7 million at year-end. The company had $96.0 million of variable-rate mortgage debt secured by 123 William Street, bearing an effective rate of 2.52% and maturing in March 2017, with a one-year extension option. A 100-basis-point change in rates was estimated to affect annual interest expense by approximately $1.0 million.
The company declared $41.8 million and paid $40.4 million of distributions during 2015. Distributions were funded entirely from IPO proceeds and DRIP proceeds: 56.3% from IPO proceeds and 43.7% from DRIP proceeds. Cash flow from operations did not fund the distributions.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $23.6 million, primarily because the company acquired its initial four properties in 2014 and 123 William Street in March 2015.
- Real estate investments at cost increased from $270.1 million to $550.4 million, while total assets rose 59% to $729.2 million.
- The company added $96.0 million of mortgage debt in connection with the 123 William Street acquisition; it had no mortgage debt at December 31, 2014.
- Net loss increased substantially in absolute dollars, although reported loss per share improved to $0.57 from a revised $0.95 because the weighted-average share count increased to 27.6 million from 6.8 million.
- Operating cash outflow remained negative at $5.2 million despite the larger portfolio.
- Cash distributions increased to $40.4 million from $7.8 million in 2014, but remained unsupported by operating cash flow.
- In 2015, the company acquired 123 William Street for $253.0 million, funded partly with the $96.0 million mortgage loan, and incurred $14.2 million of capital expenditures.
- 9 Times Square remained materially under-occupied at 52.6% at year-end as the company pursued a repositioning and remarketing strategy.
Guidance, Outlook, Risks and Unusual Items
- Management stated that it did not expect operating cash flow in 2016 to cover distributions at the current level and may continue using cash on hand, IPO proceeds, DRIP proceeds, borrowings, additional securities issuance, or other sources.
- The company expected to incur approximately $10 million to $15 million of additional 2016 capital expenditures for building improvements, tenant improvements and leasing commissions at 9 Times Square.
- The portfolio is geographically concentrated in New York City and has limited diversification. The two largest assets, 123 William Street and 9 Times Square, represented approximately 84% of portfolio square footage.
- Planned Parenthood Federation of America represented 10.7% of annualized straight-line rental income at year-end. The five largest tenants collectively represented significant rent exposure, including government entities, Cornell University and Planned Parenthood.
- The company’s shares had no established public market and the company had no current plans to list them. The share repurchase program was subject to holding-period, funding and annual volume limits; the board declined to accept all repurchase requests in the fourth quarter.
- On January 25, 2016, the board amended the repurchase program. Effective February 28, 2016, repurchases generally became semiannual and were limited to 2.5% per fiscal semester and 5.0% per year, generally funded by DRIP proceeds.
- RCS Capital Corporation, the parent of the former dealer manager and certain service providers, filed for Chapter 11 bankruptcy protection in January 2016. The company subsequently replaced American National Stock Transfer with DST Systems as transfer agent.
- The company recognized a $0.1 million other-than-temporary impairment on an investment security managed by an affiliate of the sponsor.
- The company identified and corrected a historical error in 2014 weighted-average shares and loss per share; the revised 2014 loss per share was $0.95 versus $1.44 as originally reported.
- The company intends to maintain REIT status but must satisfy complex income, asset, ownership and distribution requirements. Failure to qualify could result in corporate-level taxation and reduced distributions.
Important Facts for Investors to Verify
- Confirm whether this filing belongs to American Strategic Investment Co. or to American Realty Capital New York City REIT, Inc.
- Review the source and sustainability of distributions, given $40.4 million of 2015 distributions versus $5.2 million of operating cash outflow.
- Assess the 2017 maturity and variable-rate exposure of the $96.0 million mortgage loan, including refinancing and extension risks.
- Evaluate the leasing plan, capital requirements and downside risk for 9 Times Square, which was only 52.6% leased at year-end.
- Review tenant concentration, lease expirations and the ability to renew or replace tenants in the New York City market.
- Verify the terms, funding capacity and fulfillment record of the amended share repurchase program and the timing of the first NAV publication, expected on or before October 26, 2016.
- Review related-party fees, reimbursements, allocation conflicts and the effect of sponsor and advisor relationships on investment decisions.