Business Context and Reporting Period
American Realty Capital New York City REIT, Inc. (the registrant identified in the filing; the request metadata references American Strategic Investment Co.) filed this unaudited Form 10-Q for the three months ended March 31, 2018. The company is a non-listed REIT focused on New York City real estate, primarily Manhattan. It owned six properties totaling approximately 1.1 million rentable square feet, acquired for an aggregate purchase price of $686.1 million. Portfolio occupancy was 88.0%, compared with 86.7% a year earlier.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $15.2 million | $14.5 million | +$0.7 million |
| Rental income | $14.0 million | $13.0 million | +$1.0 million |
| Operating loss | $(3.8) million | $(2.2) million | Worsened by $1.7 million |
| Net loss | $(6.6) million | $(4.8) million | Worsened by $1.8 million |
| Net loss per share | $(0.21) | $(0.16) | Worsened by $0.05 |
| Cash flow from operations | $(2.3) million | $1.5 million | Declined by $3.8 million |
| Capital expenditures | $0.1 million | $2.0 million | Declined by $1.9 million |
| Cash, cash equivalents and restricted cash | $35.1 million | $78.1 million | Declined by $43.0 million |
Operating expenses were $19.1 million, or approximately 125% of revenue, producing an operating margin of approximately negative 25%. Net loss represented approximately 43% of revenue. Depreciation and amortization was $7.7 million, interest expense was $2.8 million, and cash NOI was $6.7 million. Reported FFO was $1.1 million, while MFFO was negative $0.6 million; these are non-GAAP measures and are not substitutes for operating cash flow.
At March 31, 2018, total assets were $741.7 million and stockholders’ equity was $466.9 million. Gross mortgage debt was $239.0 million, or approximately 4.50% weighted-average effective interest, with maturities in 2026 and 2027. Net mortgage debt was $233.6 million. The company was in compliance with its property-level debt covenants and had no scheduled principal payments through 2022. Cash and cash equivalents were $26.9 million, plus $8.2 million of restricted cash.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of higher occupancy and rental income; overall occupancy rose to 88.0% from 86.7%.
- Operating loss and net loss deteriorated despite higher revenue. General and administrative expense increased to $3.0 million from $1.6 million, primarily because of higher advisor reimbursements and legal and proxy costs.
- Property operating expenses increased to $6.9 million from $6.6 million, while related-party operating fees remained approximately $1.5 million.
- Operating cash flow changed from a $1.5 million inflow to a $2.3 million outflow, reflecting the net loss, lower accrued liabilities and higher prepaid expenses and unbilled rent receivables.
- The company declared distributions of $0.24 per share for the quarter, but the board suspended common-stock distributions effective March 1, 2018. The company stated that the policy would be reassessed no sooner than February 2019.
- The company accepted 139,993 shares in a tender offer at $17.03 per share, for approximately $2.4 million. The offer payment occurred in April 2018, and the share repurchase program was reactivated on April 26, 2018.
- 9 Times Square occupancy improved to 69.1% from 56.0% a year earlier and 63.9% at December 31, 2017. Two leases covering 34,789 square feet commenced during the quarter.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings or occupancy guidance. It expects retained cash from the distribution suspension to support tenant improvements, leasing commissions, repositioning and potential acquisitions. Management stated that it expects current property operations, future financing and other capital sources to satisfy operating liquidity needs over the next year, but noted that additional financing may not be available on favorable terms or at all.
On April 13, 2018, subsequent to quarter-end, the company entered into a $50.0 million fixed-rate loan at 4.516%, maturing May 1, 2028. The loan is secured by two previously unencumbered properties and provided approximately $47.1 million of net proceeds for general corporate purposes, including potential acquisitions. This increased leverage and added debt-service obligations after the reporting date.
- Liquidity risk is elevated because operating cash flow was negative and distributions had historically been funded from cash and financing proceeds rather than current-period operating cash flow.
- The portfolio is concentrated in only six New York City properties, with 9 Times Square still materially under-occupied.
- There is no public market for the common stock, and the share repurchase program is restricted and discretionary, limiting investor liquidity.
- The company depends on related-party advisors and property managers and incurred $2.7 million of related-party operating fees and reimbursements in the quarter.
- Future results depend on tenant demand, leasing success, rental rates, operating costs, New York City market conditions and the company’s ability to obtain financing.
- The company remains exposed to REIT qualification requirements, including distribution of at least 90% of annual REIT taxable income when applicable.
- No material pending legal or regulatory proceedings were reported. The filing states that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Confirm the registrant’s identity, because the filing is for American Realty Capital New York City REIT, Inc., not an entity named American Strategic Investment Co.
- Verify the timing and permanence of the distribution suspension and whether distributions resume after the company’s planned review.
- Assess the effect of the April 2018 $50.0 million loan on leverage, liquidity, collateral coverage and future interest expense.
- Monitor leasing progress and tenant improvements at 9 Times Square and the portfolio’s overall occupancy.
- Reconcile negative operating cash flow with reported FFO, MFFO and cash NOI, recognizing that these non-GAAP measures do not represent cash available for distributions.
- Review related-party fees, expense reimbursements and the company’s dependence on its advisor and property manager.
- Evaluate the reliability and timing of the company’s estimated NAV of $20.26 per share, which was based on a June 30, 2017 valuation and was intended to be updated at least annually.