American Strategic Investment Co. quarterly report, Q2 FY2016

American Realty Capital New York City REIT, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2016. The filing identifies the registrant as American Realty Capital New York City REIT, Inc.; the request metadata refers to American Strategic Investment Co. The financial statements are unaudited and prepared under U.S. GAAP.

Business Context

The company is a non-listed Maryland REIT focused on office, retail, parking, residential and related real estate assets in New York City, particularly Manhattan. As of June 30, 2016, it owned six properties totaling 1.09 million rentable square feet, with portfolio occupancy of 89.3% and a weighted-average remaining lease term of 6.8 years. The company had 30.4 million common shares outstanding and no employees; its Advisor and Property Manager are related parties under common control with AR Global.

Financial Results and Key Metrics

Metric	Three Months Ended June 30	Six Months Ended June 30
Total revenue	$10.1 million, versus $7.5 million	$18.6 million, versus $10.3 million
Rental income	$9.4 million, versus $7.0 million	$17.3 million, versus $9.6 million
Operating loss	$(5.1) million, versus $(1.0) million	$(7.4) million, versus $(8.3) million
Net loss	$(6.4) million, or $(0.21) per share	$(9.8) million, or $(0.32) per share
Cash flow from operations	$(3.3) million	$(1.9) million, versus $(4.8) million
FFO	$(1.7) million	$(0.3) million
MFFO	$0.7 million	$0.3 million

Six-month operating expenses were $26.0 million, including $9.5 million of depreciation and amortization, $4.3 million of acquisition and transaction expenses, $2.2 million of related-party operating fees, and $2.5 million of general and administrative expenses. The filing does not provide a conventional net profit margin because the company reported losses; the six-month net margin was approximately negative 52.8% based on reported revenue.

At June 30, 2016, total assets were $804.8 million, including $715.6 million of net real estate investments and $73.3 million of cash and cash equivalents. Total liabilities were $241.2 million and stockholders’ equity was $563.5 million.

Debt, Liquidity and Capital Resources

• Mortgage debt was $195.0 million of principal, or $190.0 million net of deferred financing costs, compared with $96.0 million of principal at December 31, 2015.
• The debt consisted of a $96.0 million variable-rate loan secured by 123 William Street, maturing in March 2017 with a one-year extension option, and a $99.0 million fixed-rate loan secured by 1140 Avenue of the Americas, maturing in July 2026.
• The weighted-average effective interest rate was 3.56%. Management reported compliance with debt covenants.
• Cash declined to $73.3 million from $182.7 million at year-end 2015. Six-month investing cash outflows were $88.2 million, primarily for the 1140 Avenue acquisition and capital expenditures; financing cash outflows were $19.3 million.
• The company paid $23.2 million of distributions during the six months, of which $11.0 million was reinvested through the DRIP. Management stated that distributions were funded by IPO and DRIP proceeds, not operating cash flow.

Material Changes Versus the Prior Comparable Period

• Revenue increased substantially due to the 2015 acquisition of 123 William Street, lease commencements at existing properties, and the June 2016 acquisition of 1140 Avenue of the Americas.
• On June 15, 2016, the company acquired the 249,703-square-foot leasehold interest in 1140 Avenue of the Americas for approximately $178.5 million, funded partly with a $99.0 million mortgage loan. The acquisition generated $4.3 million of expensed acquisition costs.
• Six-month net loss increased modestly from $9.4 million to $9.8 million, although operating cash outflow improved from $4.8 million to $1.9 million.
• Related-party operating fees began affecting results more significantly after the company shifted to cash asset-management fees in October 2015. Six-month related-party operating fees and reimbursements were $7.4 million, including acquisition and financing-related fees.
• Capital expenditures increased to $9.0 million from $3.7 million, primarily for building and tenant improvements.
• The company adopted the revised presentation of debt issuance costs, reclassifying deferred financing costs as a reduction of mortgage debt.

Guidance, Outlook, Risks and Unusual Items

• Management expected to establish estimated net asset value per share no later than October 26, 2016. No NAV value was provided in this filing.
• Management expected additional 2016 capital expenditures of $7.5 million to $12.5 million for improvements, tenant work and leasing commissions, particularly at 9 Times Square.
• The company stated that it did not expect 2016 operating cash flow to be sufficient to fund distributions at the current level and could use cash on hand, DRIP proceeds, borrowings, asset sales or other sources to support distributions. Future distributions are not assured.
• 9 Times Square was only 52.6% occupied. Management cited construction delays and excess retail capacity in the Times Square submarket as risks to leasing and financial performance.
• Interest-rate exposure is material: a 100-basis-point change would affect annual interest expense on the variable-rate debt by approximately $1.0 million. A 100-basis-point increase would reduce the estimated fair value of fixed-rate debt by approximately $1.0 million.
• The company had limited diversification, dependence on tenants and related-party service providers, conflicts of interest involving the Advisor, no public trading market for its shares, and risks associated with maintaining REIT qualification.
• In July 2016, the company repurchased 451,071 shares for $10.7 million, while requests for 881,693 additional shares totaling $20.5 million were not fulfilled. This indicates that repurchase capacity was constrained.
• No material legal or regulatory proceedings were pending, and management reported effective disclosure controls with no material change in internal control over financial reporting.

Most Important Facts for Investors to Verify

• Whether operating cash flow becomes positive and sufficient to support the $1.5125 annualized distribution rate.
• The timing and valuation of the initial estimated NAV per share and its relationship to repurchase pricing.
• Refinancing or extension plans for the $96.0 million loan maturing in March 2017.
• Leasing progress, capital requirements and tenant demand at 9 Times Square and other partially occupied properties.
• The effect of related-party fees, acquisition expenses and Advisor dependence on sustainable operating performance.
• Whether the company can maintain liquidity after distributions, capital expenditures, debt service and share repurchases.