Business Context and Reporting Period
American Realty Capital New York City REIT, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The request identifies American Strategic Investment Co.; however, the filing’s registrant is American Realty Capital New York City REIT, Inc. The company is a non-listed New York City-focused REIT that owned six properties totaling 1.09 million rentable square feet, with an aggregate acquisition cost of $686.1 million.
Portfolio occupancy was 85.5% at June 30, 2017. The 9 Times Square property remained the principal leasing challenge, with occupancy of 58.3%.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $14.5 million, versus $10.1 million | $29.1 million, versus $18.6 million |
| Operating loss | $2.6 million, versus $5.1 million | $4.8 million, versus $7.4 million |
| Net loss | $5.4 million, or $0.17 per share | $10.1 million, or $0.33 per share |
| Cash provided by operating activities | Not separately presented for the quarter | $3.5 million, versus $1.9 million used |
| Cash NOI | $7.0 million | $13.8 million |
| MFFO | $0.7 million | $2.0 million |
Rental income increased 46% in the quarter and 54% in the six-month period, primarily because 1140 Avenue of the Americas contributed a full comparable period in 2017. The six-month operating loss improved despite higher property expenses, related-party fees, depreciation and interest expense. Depreciation and amortization was $14.2 million for the six months, and interest expense was $5.5 million.
At June 30, 2017, total assets were $786.4 million, including $697.5 million of net real estate investments, $43.5 million of cash and cash equivalents, and $30.6 million of restricted cash. Mortgage notes payable totaled $239.0 million before deferred financing costs, with a weighted-average effective interest rate of 4.61% and maturities in 2026 and 2027. The company was in compliance with its debt covenants.
Six-month capital expenditures were $5.1 million. Cash used in investing activities was $4.6 million, while cash used in financing activities was $3.0 million. Cash distributions declared were $23.1 million, substantially exceeding operating cash flow. The company issued $9.6 million of common stock through its distribution reinvestment plan and repurchased $5.6 million of common stock during the period.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because 1140 Avenue of the Americas was owned throughout the 2017 comparison period; the property contributed approximately $8.9 million of the six-month rental-income increase.
- Operating loss improved by $2.5 million for the quarter and $2.6 million for the six months, partly because 2016 included approximately $4.3 million of acquisition and transaction-related expenses for 1140 Avenue of the Americas.
- Property operating expenses increased by $2.4 million for the quarter and $5.5 million for the six months, primarily due to the 1140 property and higher costs across the six-property portfolio.
- Interest expense increased by $1.4 million for the quarter and $2.9 million for the six months, reflecting the company’s increased debt financing.
- Cash from operations improved from $1.9 million used in the first six months of 2016 to $3.5 million provided in 2017, but remained below distributions paid.
- Mortgage debt increased from $191.3 million net of deferred financing costs at December 31, 2016 to $233.2 million at June 30, 2017, primarily following a $140.0 million refinancing of 123 William Street and repayment of its prior $96.0 million mortgage.
Guidance, Outlook, Risks and Unusual Items
Management stated that it does not expect 2017 operating cash flow to be sufficient to fund distributions at the current level. Future distributions may require cash on hand, DRIP proceeds, mortgage financing or other liquidity sources, and the board may reduce or suspend distributions.
Management expects leasing activity and revenue at 9 Times Square to improve during the remainder of 2017, citing stronger interest from prospective office and retail tenants. There is no assurance that the property will be leased successfully or that portfolio stabilization will occur on schedule.
Effective July 14, 2017, the amended share repurchase program generally limited eligible repurchases to requests following a stockholder’s death or qualifying disability. In July 2017, the board approved repurchases of 79,379 shares for approximately $1.7 million at $21.25 per share. The company had cumulatively repurchased 922,537 shares through June 30, 2017.
Related-party arrangements remain material. Six-month operating fees incurred from related parties were $3.1 million, and professional-fee and other reimbursements were $1.7 million. The company has no employees and depends on its advisor and affiliates for asset management, property management and administrative services.
Other risks include limited operating history and diversification, tenant and New York City market concentration, vacancies and leasing costs, illiquidity of the non-listed shares, conflicts of interest involving AR Global affiliates, REIT qualification requirements, and the possibility that additional financing will not be available on favorable terms. The company reported no material pending legal proceedings and no material off-balance-sheet arrangements.
The company redeemed its remaining investment security for approximately $491,000, recognizing a $24,000 gain. It also adopted new guidance on variable-interest entities and the definition of a business without a material financial statement impact.
Important Facts for Investors to Verify
- Confirm the registrant identity: the filing is for American Realty Capital New York City REIT, Inc., not a registrant named American Strategic Investment Co.
- Assess whether occupancy and leasing at 9 Times Square improve sufficiently to support management’s stabilization expectations.
- Compare ongoing operating cash flow with the $23.2 million of distributions paid during the first six months and evaluate reliance on cash reserves, DRIP proceeds and debt.
- Review the $239.0 million mortgage balance, fixed-rate maturities, lender reserves and property-level debt covenants.
- Evaluate the amended share repurchase program and the limited liquidity available to stockholders of the non-listed shares.
- Review related-party fees, reimbursements, conflicts of interest and the company’s dependence on its advisor and property manager.
- Consider the effect of future tenant improvements, leasing commissions, ground-lease obligations and capital expenditures on liquidity.