Business Context and Reporting Period
The filing is the unaudited Form 10-Q of American Realty Capital New York City REIT, Inc. for the quarter and six months ended June 30, 2018. The filing identifies the registrant as American Realty Capital New York City REIT, Inc., although the request metadata refers to American Strategic Investment Co.
The company is a non-listed Maryland REIT focused on New York City properties, particularly Manhattan. At June 30, 2018, it owned six properties totaling approximately 1.1 million rentable square feet, acquired for an aggregate purchase price of $686.1 million. Portfolio occupancy was 89.8%, compared with 85.5% at June 30, 2017 and 88.3% at December 31, 2017.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $15.2 million in 2018; $14.5 million in 2017 | $30.4 million in 2018; $29.1 million in 2017 |
| Net loss | $(6.5) million; $(5.4) million in 2017 | $(13.1) million; $(10.1) million in 2017 |
| Net loss per share | $(0.21); $(0.17) in 2017 | $(0.42); $(0.33) in 2017 |
| Operating loss | $(3.2) million; $(2.6) million in 2017 | $(7.1) million; $(4.8) million in 2017 |
| Cash NOI | $7.1 million; $7.0 million in 2017 | $13.8 million; $13.8 million in 2017 |
| FFO | $1.0 million; $1.9 million in 2017 | $2.2 million; $4.1 million in 2017 |
| MFFO | $(0.3) million; $0.7 million in 2017 | $(0.9) million; $2.0 million in 2017 |
Revenue increased primarily because of higher occupancy. Expenses increased faster than revenue, including depreciation and amortization, property operating costs, general and administrative expenses, and interest expense. The filing does not present a conventional operating or net profit margin, but GAAP operating and net margins remained negative.
At June 30, 2018, total assets were $780.1 million, including $676.7 million of net real estate investments and $70.5 million of cash and cash equivalents. Restricted cash was $7.2 million, resulting in cash, cash equivalents and restricted cash of $77.7 million.
Gross mortgage debt was $289.0 million, or $281.5 million net of deferred financing costs, with a weighted-average effective interest rate of 4.51%. All scheduled principal payments are due thereafter, with no scheduled principal maturities through 2022. The company was in compliance with its debt covenants.
Cash Flow, Liquidity and Capital Structure
- Net cash used in operating activities was $2.9 million for the six months ended June 30, 2018, compared with $7.2 million provided in the prior-year period.
- Net cash used in investing activities was $2.3 million, primarily for capital expenditures, compared with $4.6 million in 2017.
- Net cash provided by financing activities was $35.6 million, primarily reflecting $50.0 million of new mortgage proceeds, partially offset by distributions, financing costs and share repurchases.
- The company entered into a $50.0 million secured loan in April 2018 at a fixed 4.516% interest rate, maturing May 1, 2028. The loan is interest-only and is secured by two previously unencumbered properties.
- Management expects cash flow and available capital to meet operating needs over the next year, but notes that additional financing may not be available on favorable terms or at all.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 4.6% for the quarter and 4.6% for the six-month period, while net loss increased to $6.5 million and $13.1 million, respectively.
- Interest expense increased by $0.5 million for the quarter and $0.7 million for the six-month period, primarily because of the new $50.0 million loan.
- General and administrative expense increased by $0.5 million for the quarter and $2.0 million for the six-month period, driven by higher professional, legal and proxy-related costs.
- Cash NOI was essentially flat for the six-month period, while FFO and MFFO declined substantially from the prior-year period.
- The sole tenant at 421 W. 54th Street terminated its lease early and vacated during the second quarter. The property was 0% occupied at June 30, 2018, and the company recorded $0.3 million of accelerated amortization expense.
- The board suspended common-stock distributions effective March 1, 2018. Distributions declared were $0.24 per share for the six months ended June 30, 2018, compared with $0.75 in the prior-year period.
- The company repurchased 109,314 shares during the six months at an average price of $20.26 per share. A separate June tender offer subsequently accepted 210,014 shares for approximately $2.7 million.
Outlook, Commentary, Risks and Unusual Items
Management intends to retain cash from the distribution suspension to fund operations, tenant improvements, leasing commissions, capital expenditures, potential acquisitions and other corporate needs. The board expects to reassess its distribution policy no sooner than February 2019, but the filing provides no assurance that distributions will resume at the prior level or at all.
Management plans to increase indebtedness toward approximately 40% to 50% of the aggregate fair market value of assets. The company continues repositioning and leasing initiatives, particularly at 9 Times Square, where occupancy increased to 74.4% from 58.3% a year earlier. Management cautions that lease-up, repositioning and the achievement of rental-rate objectives are not assured.
- Revenue is concentrated in six New York City properties and depends on tenant performance, renewals and leasing conditions.
- The portfolio has limited diversification and no tenant represented more than 10% of annualized rental income.
- The company has no public trading market for its common stock, and the share repurchase program is limited and was suspended during the June tender offer.
- The company is dependent on its external advisor and related-party service providers and incurred $5.9 million of related-party operating fees and reimbursements during the first six months.
- The company remains exposed to conflicts of interest involving its advisor and affiliates, New York City market conditions, financing availability, interest rates, REIT qualification and the ability to fund leasing and capital requirements.
- Future minimum base rental payments due to the company totaled $332.7 million, while future ground lease payments totaled $238.1 million.
- The filing reports no material pending legal or regulatory proceedings and no material off-balance-sheet arrangements.
After quarter-end, the company accepted 210,014 shares under the June tender offer. On August 13, 2018, it also amended and restated its bylaws, including changes to special-meeting thresholds, director elections, advance-notice provisions, exclusive forum provisions and the maximum number of directors.
Investor Verification Items
- Verify the registrant identity, because the filing names American Realty Capital New York City REIT, Inc., not American Strategic Investment Co.
- Assess whether the distribution suspension, negative operating cash flow and negative MFFO affect the sustainability of future distributions and liquidity.
- Review debt collateral, covenants, interest-only structure, refinancing exposure and the company’s planned increase in leverage.
- Evaluate the leasing outlook for the vacant 421 W. 54th Street property and remaining vacancy at 9 Times Square and other properties.
- Reconcile reported FFO, MFFO and Cash NOI to GAAP results and review the non-GAAP adjustments.
- Review related-party fees, advisor dependence and governance changes in the amended bylaws and indemnification agreements.