American Realty Capital New York City REIT, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; filed November 13, 2017. The source filing identifies the registrant as American Realty Capital New York City REIT, Inc., not American Strategic Investment Co. The company is a non-listed Maryland REIT focused on New York City real estate.
Business Context and Portfolio
- Owned six properties totaling approximately 1.1 million rentable square feet, acquired for an aggregate purchase price of $686.1 million.
- Portfolio occupancy was 87.1% at September 30, 2017, including 57.9% occupancy at 9 Times Square.
- Weighted-average remaining lease term was 6.4 years. No tenant represented more than 10% of annualized rental income.
- The company had 31.2 million common shares outstanding and no preferred shares outstanding.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $14.5 million | $14.4 million | $43.6 million | $33.0 million |
| Operating loss | $(3.1) million | $(2.0) million | $(7.9) million | $(9.5) million |
| Net loss | $(5.9) million | $(4.4) million | $(16.0) million | $(14.2) million |
| Net loss per share | $(0.19) | $(0.14) | $(0.52) | $(0.46) |
| Cash flow from operations | Not separately stated | Not separately stated | $2.4 million | $(0.6) million |
- Q3 revenue was essentially flat year over year, while the net loss increased by $1.5 million. The approximate net margin was negative 40.6% in Q3 2017 versus negative 30.3% in Q3 2016.
- Nine-month revenue increased 32.1%, primarily because 1140 Avenue of the Americas contributed for a full comparable period. The nine-month net loss increased by $1.9 million.
- Nine-month FFO was $5.3 million and MFFO was $1.4 million. Q3 MFFO was negative $0.6 million.
- Nine-month Cash NOI was $19.6 million; Q3 Cash NOI was $5.8 million.
- Cash and cash equivalents were $30.5 million at September 30, 2017, compared with $47.7 million at December 31, 2016. Restricted cash increased to $28.5 million from $2.2 million.
- Total assets were $775.3 million and stockholders’ equity was $496.0 million at September 30, 2017.
Debt, Liquidity and Capital Allocation
- Mortgage notes payable had a principal balance of $239.0 million, net carrying value of $233.4 million, a weighted-average effective interest rate of 4.61%, and maturities in 2026 and 2027.
- Debt consisted of fixed-rate secured mortgages on 123 William Street and 1140 Avenue of the Americas. The company was in compliance with its debt covenants.
- Debt fair value was $244.2 million. A 100-basis-point increase in market rates was estimated to reduce debt fair value by $17.4 million; a 100-basis-point decrease was estimated to increase it by $19.0 million.
- Operating activities provided $2.4 million during the first nine months, compared with distributions paid of $35.1 million, including $14.2 million reinvested through the DRIP. Distribution coverage therefore depended substantially on DRIP proceeds, cash on hand and financing proceeds.
- Investing activities used $7.6 million, primarily for $8.1 million of capital expenditures. Financing activities used $12.0 million, including $20.9 million of cash distributions and $7.3 million of share repurchases.
- All remaining IPO proceeds had been used by September 30, 2017. Management stated that it did not expect 2017 operating cash flow to fund distributions at the current level.
Material Changes Versus Prior Comparable Period
- Nine-month revenue rose $10.6 million, principally from the 1140 Avenue of the Americas property, while property operating expenses rose $6.0 million and depreciation and amortization rose $4.6 million.
- Nine-month interest expense increased $3.4 million to $8.4 million, reflecting the 1140 Avenue mortgage and the March 2017 refinancing of 123 William Street.
- General and administrative expense increased $1.8 million to $5.6 million, driven primarily by higher related-party reimbursements, audit, legal and proxy costs.
- Mortgage principal increased from $195.0 million at September 30, 2016 to $239.0 million at September 30, 2017.
- The board amended the share repurchase program effective July 14, 2017. Subject to conditions, repurchases are now generally limited to requests following death or qualifying disability, materially reducing ordinary liquidity for stockholders.
- The estimated per-share NAV declined from $21.25 as of June 30, 2016 to $20.26 as of June 30, 2017.
Outlook, Commentary, Risks and Unusual Items
- Management expected revenue at 9 Times Square to improve during the remainder of 2017 based on leasing interest, including a lease covering three floors; two floors were not yet included in occupancy at quarter-end.
- Management expected 2017 capital expenditures to be below 2016 levels; $8.1 million had been funded through September 30, 2017.
- Distributions were maintained at an annualized rate of $1.5125 per share, but the board may reduce or suspend them. The filing provides no assurance that the current distribution level can continue.
- Key risks include limited operating history and diversification, concentration in New York City, 9 Times Square vacancy and lease-up risk, tenant credit and economic conditions, dependence on related-party service providers, conflicts of interest, illiquidity of the shares, limited repurchase rights, financing availability, REIT qualification and potential inability to fund distributions.
- The company has a ground lease at 1140 Avenue of the Americas requiring future payments totaling $241.7 million, including $221.5 million after 2021.
- The company reported no material pending legal or regulatory proceedings and no material environmental claims. A related-party parent entity and affiliates were defendants in litigation brought by an RCAP creditor trust; the company was not named.
- The company planned to adopt ASC 606 on January 1, 2018 using the modified retrospective method and did not expect a significant cumulative equity adjustment. ASC 842 lease accounting was scheduled for adoption on January 1, 2019 and will require recognition of a right-of-use asset and lease liability for the ground lease.
- Nicholas Radesca announced his retirement as chief financial officer and treasurer. Katie P. Kurtz was elected as his successor, effective upon his resignation, expected November 15, 2017.
Investor Verification Priorities
- Confirm the registrant name and ticker or security identification because the provided request names American Strategic Investment Co., while the filing names American Realty Capital New York City REIT, Inc.
- Reconcile distributions of $35.1 million with only $2.4 million of nine-month operating cash flow and verify the expected funding sources for future distributions.
- Review 9 Times Square leasing progress, occupancy, tenant improvements, leasing commissions and expected stabilization timing.
- Assess debt maturities, fixed-rate terms, covenant compliance, restricted cash and refinancing requirements after 2026.
- Review the valuation methodology supporting the $20.26 estimated NAV per share and compare it with the prior $21.25 NAV.
- Evaluate related-party fees and reimbursements, including $8.4 million of operating fees and reimbursements during the first nine months of 2017.
- Verify the impact of the amended share repurchase program on shareholder liquidity and the treatment of previously rejected requests.
- Monitor the CFO transition, pending related-party litigation and future adoption of revenue and lease accounting standards.