Business Context and Reporting Period
American Realty Capital New York City REIT, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company invested exclusively in New York City real estate, primarily Manhattan, and owned six properties totaling approximately 1.1 million rentable square feet at quarter-end. The filing predates the company’s later name as American Strategic Investment Co.
The portfolio was 90.3% occupied at September 30, 2018, compared with 87.1% at September 30, 2017 and 88.3% at December 31, 2017. The company had no employees and relied on related-party entities for advisory, property-management and administrative services.
Financial Highlights
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| 2018 revenue | $15.7 million | $46.2 million |
| 2017 revenue | $14.5 million | $43.6 million |
| 2018 net loss | $5.9 million | $19.0 million |
| 2017 net loss | $5.9 million | $16.0 million |
| 2018 net loss per share | $0.19 | $0.61 |
| Cash flow from operations | Not separately provided for the quarter | $(4.2) million |
| Cash NOI | $6.7 million | $20.5 million |
| FFO | Not separately presented for the quarter in the filing’s annual comparison table | $3.4 million |
| MFFO | $(0.4) million | $(1.3) million |
Revenue increased approximately 8.7% year over year in the third quarter and 6.0% for the nine-month period. Based on reported figures, the third-quarter operating margin was approximately negative 15.7% and the net margin was approximately negative 37.3%; nine-month operating and net margins were approximately negative 20.7% and negative 41.1%, respectively. These margins reflect substantial depreciation and amortization, property expenses, general and administrative costs and interest expense.
- Rental income increased to $14.2 million in the quarter and $42.3 million for the nine months, primarily from higher occupancy.
- Operating expenses were $18.2 million in the quarter and $55.7 million for the nine months.
- Interest expense rose to $3.5 million in the quarter and $9.7 million for the nine months.
- Cash NOI increased to $20.5 million for the nine months from $19.6 million in the comparable 2017 period, but quarterly cash NOI increased to $6.7 million from $5.8 million.
Balance Sheet, Debt and Liquidity
| Metric | September 30, 2018 | December 31, 2017 |
|---|---|---|
| Total assets | $772.1 million | $760.5 million |
| Real estate investments, net | $672.6 million | $688.9 million |
| Cash and cash equivalents | $64.1 million | $39.6 million |
| Restricted cash | $5.7 million | $7.6 million |
| Mortgage notes payable, net | $281.8 million | $233.5 million |
| Stockholders’ equity | $448.9 million | $481.5 million |
Gross mortgage debt was $289.0 million at September 30, 2018, with a weighted-average effective interest rate of 4.51%. The company added a $50.0 million fixed-rate loan in April 2018, secured by the Laurel Condominium and Riverside Garage, maturing in May 2028. Existing secured loans mature in 2026 and 2027. No scheduled principal payments were due through 2022; the filing reports $289.0 million of scheduled principal thereafter.
Net cash used in operating activities was $4.2 million, compared with $3.9 million of cash provided in the prior-year period. Investing activities used $6.1 million, primarily for capital expenditures. Financing activities provided $32.9 million, principally from the new mortgage loan, partially offset by distributions, financing costs and share repurchases. Ending cash, cash equivalents and restricted cash totaled $69.8 million.
Management stated that it expected available cash flow and financing capacity to meet operating needs over the following year, while noting that additional financing might not be available on favorable terms or at all. Debt covenants were reported as satisfied at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue increased, supported by improved occupancy, particularly at 9 Times Square, where occupancy rose to 74.6% from 57.9% year over year.
- Net loss widened to $19.0 million for the nine months from $16.0 million, primarily reflecting higher general and administrative expenses, depreciation and amortization, and interest expense.
- General and administrative expense increased to $7.8 million from $5.6 million, driven by higher professional and advisory reimbursements and increased legal and proxy costs.
- Interest expense increased by $1.3 million for the nine months because of the additional $50.0 million loan.
- Operating cash flow declined from a $3.9 million inflow to a $4.2 million outflow, partly due to higher unbilled rent receivables and lower accounts payable and accrued expenses.
- Capital expenditures declined to $6.1 million from $8.1 million.
- The company suspended regular cash distributions effective March 1, 2018. Distributions declared were $0.24 per share for the nine months, compared with $1.13 per share in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management expected to reassess the distribution policy no sooner than February 2019, but gave no assurance that distributions would resume at the prior level or at all.
- The company planned to increase borrowings toward approximately 40% to 50% of the aggregate fair market value of assets, subject to market conditions and asset values.
- The sole tenant at 421 W. 54th Street terminated its lease early and vacated during the second quarter. The property was 0% occupied at September 30, 2018; the company was seeking replacement tenants and evaluating strategic alternatives.
- The company’s six-property concentration, exposure to New York City real estate conditions, tenant credit and leasing risk, and limited diversification remained significant risks.
- The shares had no public market and were illiquid. The share repurchase program was suspended after a limited reactivation period and was expected to remain suspended until regular cash distributions resumed.
- The company paid approximately $2.4 million and $2.7 million for shares accepted under February and June tender offers, respectively. It also repurchased 145,627 shares for approximately $3.0 million on October 9, 2018.
- On October 17, 2018, the company acquired a medical office building for $15.9 million, funded with $10.0 million of mortgage debt and the balance from cash.
- Future minimum base rental payments totaled $336.0 million, while future ground-lease payments totaled $236.9 million.
- The company reported no material pending legal proceedings, no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Most Important Facts for Investors to Verify
- Whether occupancy improvements, especially at 9 Times Square and 123 William Street, translate into sustained cash NOI and operating cash flow.
- The leasing and redevelopment plan, expected costs and timing for the vacant 421 W. 54th Street property.
- The duration of the distribution suspension and the company’s ability to fund capital expenditures, debt service and any future distributions without operating cash flow.
- Debt maturities, refinancing risk, covenant compliance and the potential impact of management’s targeted 40% to 50% leverage range.
- The assumptions supporting the $20.26 estimated net asset value per share approved as of June 30, 2018, including property valuations and lease assumptions.
- The economic effect of related-party advisory, property-management and reimbursement fees, which totaled $8.7 million for the nine months.
- The effect of the October 2018 acquisition and additional $10.0 million mortgage debt on leverage, liquidity and future results.
- The filing’s non-GAAP FFO, MFFO and Cash NOI measures should be reconciled to GAAP results and should not be treated as available cash for distributions.