Business Context and Reporting Period
American Realty Capital New York City REIT, Inc. and subsidiaries filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company is a non-listed Maryland REIT focused on office, retail, parking, residential, hospitality and other real estate assets in New York City, principally Manhattan. At June 30, 2015, it owned five properties totaling 841,868 rentable square feet, with 87.9% occupancy and an 8.0-year weighted-average remaining lease term.
The company completed its initial public offering on May 31, 2015, subject to processing of subscriptions in progress. It had 29.2 million shares outstanding and $725.0 million of cumulative gross offering proceeds at June 30, 2015.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Rental income | $7.0 million | $9.6 million |
| Operating expense reimbursements | $0.5 million | $0.7 million |
| Total revenues | $7.5 million | $10.3 million |
| Operating loss | $(1.0) million | $(8.3) million |
| Net loss | $(2.2) million | $(9.4) million |
| Net loss per share | $(0.08) | $(0.38) |
| FFO | $2.8 million | $(2.6) million |
| MFFO | $0.6 million | $0.7 million |
Depreciation and amortization was $4.9 million in the quarter and $6.8 million for the six months. Acquisition and transaction-related expenses were $6.0 million for the six-month period, primarily related to the March 2015 acquisition of 123 William Street.
Cash and cash equivalents were $189.3 million at June 30, 2015, compared with $184.3 million at December 31, 2014. Total assets increased to $735.5 million from $458.6 million, while stockholders’ equity increased to $598.1 million from $437.4 million.
Net cash used in operating activities was $4.8 million for the six months, compared with $0.4 million used in the prior-year period. Investing activities used $158.6 million, including $157.0 million for real estate acquisitions and $3.7 million of capital expenditures. Financing activities provided $168.4 million, primarily from $209.6 million of common-stock proceeds, partly offset by offering costs, financing costs, distributions and repurchases.
The company declared distributions of $0.38 per share for the quarter and $0.75 per share for the six months. Six-month distributions to common stockholders totaled $17.7 million, of which approximately $8.8 million, or 49.8%, was funded through DRIP proceeds and $8.9 million, or 50.2%, through offering proceeds; none was funded by operating cash flow.
Debt, Liquidity and Capital Structure
- The company had a $96.0 million variable-rate mortgage secured by 123 William Street, bearing interest at one-month LIBOR plus 2.25%, or 2.47% at June 30, 2015.
- The mortgage matures in March 2017, with a one-time one-year extension option. The company was in compliance with its debt covenants.
- A 100-basis-point increase in variable interest rates would increase annual interest expense by approximately $1.0 million.
- Real estate investments with a cost of $267.6 million were pledged as collateral.
- The company had no material off-balance-sheet arrangements and no material pending legal proceedings.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially as the portfolio expanded: quarterly revenue rose from $43,000 to $7.5 million, and six-month revenue rose from $43,000 to $10.3 million.
- The company acquired 123 William Street for $253.0 million on March 27, 2015. The acquisition added 542,676 rentable square feet and was partially funded with the $96.0 million mortgage.
- Real estate investments, net, increased from $268.1 million at year-end 2014 to $533.9 million at June 30, 2015.
- Net loss increased to $9.4 million for the six months from $0.2 million in the prior-year period, primarily because of the larger portfolio, depreciation and amortization, acquisition costs and new interest expense.
- Six-month acquisition and transaction expenses increased to $6.0 million from $142,000, while depreciation and amortization increased to $6.8 million from $43,000.
- The company increased common shares outstanding from 20.6 million at December 31, 2014 to 29.2 million at June 30, 2015, and cumulative gross offering proceeds increased from $509.9 million to $725.0 million.
Outlook, Commentary, Risks and Unusual Items
Management expects future short-term liquidity to come from property operations, additional equity proceeds and secured mortgage financings. Management stated that cash flow from properties is expected to become sufficient to fund operating expenses and monthly distributions as the portfolio matures, but the filing provides no assurance that this will occur.
Distributions are not assured and may be reduced or suspended. The company has not generated sufficient operating cash flow to fund distributions and expects that offering proceeds, DRIP proceeds, borrowings or other sources may continue to be used. This reduces funds available for acquisitions and may represent a return of capital.
The portfolio remains concentrated: five major tenants each represented at least 5% of annualized straight-line rental income, and Planned Parenthood Federation of America and The People of the State of New York represented 11.1% and 10.5%, respectively. Tenant termination, delinquency or non-renewal could materially affect revenue.
Other significant risks include the lack of a public trading market and potential illiquidity of the shares, limited diversification, conflicts involving the external advisor and related parties, dependence on affiliates for essential services, variable-rate interest exposure, REIT qualification requirements, and the possibility that distributions will not be sustainable.
Subsequent to quarter-end, the company reported $10.8 million of additional common-stock proceeds from July 1 through July 31, 2015, bringing total gross proceeds to approximately $735.9 million and shares outstanding to approximately 29.7 million. The filing also disclosed a proposed transaction under which the sponsor’s asset-management business would be transferred to AR Global, with Apollo-related interests; the transaction was subject to customary closing conditions.
Investor Verification Priorities
- Verify current occupancy, lease expirations, tenant credit quality and concentration at 123 William Street and the broader five-property portfolio.
- Assess whether operating cash flow can cover the stated distribution policy without continued reliance on offering proceeds, DRIP proceeds or debt.
- Review the March 2017 mortgage maturity, extension option, refinancing requirements and sensitivity to LIBOR increases.
- Reconcile the $253.0 million purchase price of 123 William Street with the $157.0 million cash acquisition outlay and $96.0 million mortgage financing.
- Monitor acquisition, offering and related-party fees, including cumulative offering costs of $81.8 million and six-month related-party acquisition and financing fees of approximately $5.9 million.
- Confirm the status and impact of the proposed sponsor and dealer-manager transactions disclosed after June 30, 2015.
- Review future NAV disclosures and liquidity provisions, as no public market currently exists and the first NAV pricing date was not expected later than October 26, 2016.