Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2014, for American Realty Capital New York City REIT, Inc. The supplied request metadata identifies American Strategic Investment Co.; the filing text identifies the registrant as American Realty Capital New York City REIT, Inc., so the entity should be verified.
The company was formed in December 2013 and began its initial public offering in April 2014. It invests primarily in commercial real estate in New York City, with a focus on Manhattan. It owned four properties at year-end, totaling 299,191 rentable square feet, 75.5% leased, with a 7.3-year weighted-average remaining lease term.
Financial Metrics
| Metric | Year ended December 31, 2014 | Prior comparable period |
|---|---|---|
| Total revenue | $2.851 million | $0; inception period from December 19, 2013 |
| Operating loss | $(6.535) million | $0 |
| Net loss | $(6.519) million | $0 |
| Net loss per share | $(1.44) | Not applicable |
| Cash flow from operations | $(4.965) million | $0 |
| Cash flow from investing | $(256.567) million | $0 |
| Cash flow from financing | $445.873 million | $0 |
| Cash and cash equivalents | $184.341 million | $0 |
| Total assets | $458.565 million | $0.035 million |
| Total liabilities | $21.159 million | $0.035 million |
| Total equity | $437.406 million | $0 |
| Debt | None at December 31, 2014 | None reported |
Revenue consisted primarily of $2.661 million of rental income and $0.190 million of operating expense reimbursements. Operating expenses included $6.148 million of acquisition and transaction costs, $2.015 million of depreciation and amortization, $0.688 million of property operating expenses and $0.535 million of general and administrative expenses.
Based on reported revenue, the operating margin was approximately negative 229% and the net margin was approximately negative 229%. These margins were heavily affected by acquisition-related expenses and depreciation and amortization during the company’s initial investment period.
Distributions paid totaled $7.846 million, including $3.320 million in cash and $4.526 million reinvested through the DRIP. None of the distributions were covered by cash flow from operations; 42.3% was funded from IPO proceeds and 57.7% from IPO proceeds reinvested through the DRIP. From a tax perspective, 100% of distributions, or $0.84 per share, represented a return of capital for the reported period.
The company raised $509.9 million of gross IPO proceeds, including $4.5 million through the DRIP, and incurred $55.6 million of offering costs. Net tangible book value was $18.75 per share compared with the $25.00 primary offering price. The company reported $0.5 million of investment securities at fair value, with a $24,000 unrealized loss.
Material Changes Versus the Prior Comparable Period
- The company moved from a pre-operating state in 2013 to owning four New York City properties by year-end 2014.
- Real estate investments at cost reached $270.083 million, with $268.113 million net of accumulated depreciation and amortization.
- Cash increased to $184.341 million, primarily from equity issuance, while $256.567 million was invested in real estate and related assets.
- The company incurred significant initial acquisition and offering expenses, resulting in a $6.519 million net loss and negative operating cash flow.
- At December 31, 2014, the portfolio was concentrated: Cornell University represented 26.0% of annualized rental income, TD Bank represented 10.9%, and six tenants collectively represented substantial rental-income exposure.
Guidance, Outlook, Risks and Unusual Items
Management expected to continue raising equity, acquire additional New York City properties and eventually use secured financing. Its stated target leverage after substantial investment of IPO proceeds was 40% to 50% of asset value, although no debt existed at year-end. Management expected future property cash flow to eventually fund operating expenses and monthly distributions, but provided no assurance that distributions would be maintained.
The IPO was being conducted on a reasonable-best-efforts basis, and management expected to reach its target offering proceeds and close the IPO by May 31, 2015. On February 6, 2015, the board approved reallocating 10.0 million shares from the DRIP to the primary offering.
On March 27, 2015, after year-end, the company acquired 123 William Street in Downtown Manhattan for a contract purchase price of $253.0 million, funded with IPO proceeds and a $95.2 million mortgage note. The filing states that the seller was affiliated with a joint venture in which New York REIT, Inc. held a preferred equity interest; the sponsor and advisor relationships were under common control.
- The company has limited operating history and limited diversification, with only four properties at year-end.
- The shares had no established public market, and the company had no current plans to list them on a national exchange.
- Distributions were not funded by operating cash flow and may continue to depend on offering proceeds, borrowings, asset sales, fee waivers or other sources.
- Rental income was concentrated among major tenants, including Cornell University, TD Bank, Quik Park East 67th Street, NY Loves Us, Gibson Guitar and 200 Riverside Parking.
- The portfolio was concentrated in New York City and exposed to local market conditions, tenant defaults, vacancies, lease expirations, interest rates and property values.
- The company depended on its external advisor, property manager, dealer manager and other related parties, creating conflicts of interest and related-party fee exposure.
- The filing discusses adverse developments involving American Realty Capital Properties, Inc., including corrected financial statements, disclosed control weaknesses and governmental inquiries, which affected broker-dealer participation in the IPO.
- The company intended to qualify as a REIT but warned that failure to satisfy REIT requirements could result in corporate-level taxation and reduced distributions.
- Cash deposits exceeded FDIC insurance limits: $184.1 million of the $184.3 million cash balance was reported as uninsured.
Most Important Facts for Investors to Verify
- Confirm the correct registrant, because the filing names American Realty Capital New York City REIT, Inc., not American Strategic Investment Co.
- Verify the sustainability and funding sources of distributions, particularly the lack of operating cash-flow coverage.
- Review the acquisition, financing and related-party disclosures for 123 William Street and other sponsor-affiliated transactions.
- Assess tenant concentration, occupancy, lease expirations and the credit quality of the largest tenants.
- Reconcile the $25.00 offering price with the reported $18.75 net tangible book value per share and the absence of an established trading market.
- Monitor future leverage, interest expense, refinancing requirements and compliance with the company’s debt policies.
- Review IPO costs, advisor and affiliate fees, fee waivers and potential dilution from future equity issuance.
- Confirm the company’s continued REIT qualification and the impact of any taxable income, return-of-capital distributions or future tax changes.