Business Context and Reporting Period
Filing: Form 10-K for the fiscal year ended December 31, 2017. The source filing identifies the registrant as American Realty Capital New York City REIT, Inc., not American Strategic Investment Co.; investors should verify the entity and any subsequent name change.
The company is a non-listed REIT focused on income-producing commercial real estate in New York City, principally Manhattan. At year-end, it owned six properties totaling 1,085,084 rentable square feet, acquired for an aggregate purchase price of $686.1 million. The portfolio was 88.3% leased, compared with 89.8% at December 31, 2016.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $58.4 million | $47.6 million | +$10.8 million |
| Operating loss | $(12.1) million | $(12.7) million | Loss narrowed by $0.6 million |
| Net loss | $(23.1) million | $(19.8) million | Loss increased by $3.3 million |
| Basic and diluted loss per share | $(0.74) | $(0.64) | Worsened by $0.10 |
| Cash flow from operations | $2.3 million | $4.1 million | Down $1.8 million |
| Cash used in investing activities | $(10.3) million | $(95.9) million | Lower investment spending |
| Cash flow from financing activities | $5.5 million | $(41.1) million | Improved by $46.6 million |
| Cash and cash equivalents | $39.6 million | $47.7 million | Down $8.1 million |
| Total assets | $760.5 million | $773.6 million | Down $13.2 million |
| Total stockholders’ equity | $481.5 million | $540.2 million | Down $58.7 million |
Rental income increased to $53.9 million from $44.2 million, primarily because 1140 Avenue of the Americas contributed a full year of operations. Property operating expenses rose to $26.8 million from $20.9 million, related-party operating fees rose to $6.0 million from $5.2 million, general and administrative expense rose to $8.1 million from $4.9 million, and depreciation and amortization rose to $29.5 million from $25.6 million.
Reported 2017 funds from operations were $6.5 million and modified funds from operations were $0.9 million. Cash NOI was $25.9 million. These are non-GAAP measures and should not be viewed as substitutes for GAAP net loss or operating cash flow.
Debt, Liquidity and Distributions
- Gross mortgage debt was $239.0 million at year-end, compared with $195.0 million in 2016; net mortgage notes payable were $233.5 million.
- The debt consisted of fixed-rate loans secured by 123 William Street and 1140 Avenue of the Americas, with a weighted-average effective interest rate of 4.61%. Maturities are March 2027 and July 2026, respectively, with no scheduled principal payments before maturity.
- Interest expense increased to $11.2 million from $7.4 million. The company reported compliance with property-level debt covenants.
- Restricted cash was $7.6 million, including $4.9 million remaining in escrow for leasing activity, tenant improvements, leasing commissions and free rent obligations related to 123 William Street.
- 2017 distributions declared were $46.9 million and distributions paid were $46.8 million, while operating cash flow was only $2.3 million. Management disclosed that distributions were funded partly with cash on hand, DRIP proceeds and secured mortgage financing.
- All 2017 distributions, totaling $1.51 per share, were characterized for federal income tax purposes as a return of capital.
Material Changes Versus the Prior Comparable Period
- Revenue grew 22.6%, primarily due to the full-year contribution from 1140 Avenue of the Americas, acquired in June 2016.
- No properties were acquired in 2017. Capital expenditures were $10.8 million, down from $16.7 million in 2016, primarily for building and tenant improvements.
- The company refinanced 123 William Street in March 2017 with a $140.0 million loan, repaying approximately $96.0 million of prior debt.
- Net loss widened despite higher revenue because of increased interest, depreciation, administrative and property-level expenses.
- Occupancy at 9 Times Square improved to 63.9% from 56.0%, but remained materially below the portfolio average.
- The board approved an estimated NAV of $20.26 per share as of June 30, 2017, compared with the prior estimated NAV of $21.25 per share as of June 30, 2016.
- The amended share repurchase program became substantially limited to requests associated with death or qualifying disability. The company repurchased 359,458 shares for $7.3 million during 2017; cumulative repurchases totaled 1,004,793 shares.
Guidance, Outlook, Risks and Unusual Items
Management expected revenue from 9 Times Square to increase during the remainder of 2018 based on leasing interest in vacant office and retail space. Management also expected retained cash from the later suspension of distributions to support tenant improvements, leasing commissions, repositioning and potential acquisitions. The filing does not provide formal earnings or revenue guidance.
- On February 27, 2018, the board suspended distributions effective March 1, 2018 and stated that it would assess the distribution policy no sooner than February 2019. Resumption at the prior level is not assured.
- The company used its remaining IPO proceeds during the third quarter of 2017, eliminating that source of liquidity.
- On January 29, 2018, Comrit commenced an unsolicited offer for up to 124,844 shares at $16.02 per share. The company subsequently offered to purchase up to 140,000 shares at $17.03 per share, or approximately $2.4 million, and suspended the SRP during the offer period.
- The portfolio is geographically concentrated in the New York metropolitan area and has limited diversification; the two largest assets represented approximately 72% of square footage and 77% of revenue.
- Major tenant exposures included City National Bank at 7.6% and Planned Parenthood Federation of America at 6.4% of annualized straight-line rental income. Lease expirations in 2021 and 2022 each represented approximately 13% of portfolio annualized cash rent.
- The company has no employees and depends on its Advisor and affiliated Property Manager, which receive management fees and expense reimbursements. Related-party operating fees and reimbursements totaled $11.3 million in 2017.
- The company remains exposed to lease-up risk at 9 Times Square, refinancing and balloon-payment risk, tenant credit risk, interest-rate and real estate market risk, conflicts of interest, illiquidity of the common stock and possible failure to maintain REIT qualification.
- The company has a long-term ground lease associated with 1140 Avenue of the Americas requiring total future minimum payments of $240.5 million, including $216.7 million after 2022.
- No material litigation, environmental claims, off-balance-sheet arrangements or real estate impairment charges were reported at December 31, 2017.
Most Important Facts to Verify
- Confirm that the filing’s registrant, American Realty Capital New York City REIT, Inc., corresponds to the requested American Strategic Investment Co. entity.
- Review post-year-end filings for the effective outcome of the distribution suspension, tender offers and SRP suspension.
- Assess whether 9 Times Square leasing progress and portfolio occupancy improved as management expected.
- Reconcile operating cash flow with distributions and determine the sustainability of distributions after the IPO and DRIP funding sources ended.
- Review debt maturities, refinancing requirements, escrow releases, covenant compliance and the long-term ground lease obligations.
- Evaluate the effect of related-party fees, Advisor dependence and conflicts of interest on cash flow and stockholder returns.
- Review the latest estimated NAV and compare it with the company’s tender offer prices and any available secondary-market transaction prices.