American Strategic Investment Co. quarterly report, Q1 FY2017

Business Context and Reporting Period

American Realty Capital New York City REIT, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2017. The filing identifies the registrant as American Realty Capital New York City REIT, Inc.; the request metadata identifies the company as American Strategic Investment Co.

The company is a Maryland REIT focused on commercial real estate in New York City, particularly Manhattan. At March 31, 2017, it owned six properties totaling 1.09 million rentable square feet, acquired for an aggregate purchase price of $686.1 million. Portfolio occupancy was 86.7%, with 9 Times Square at 56.0% leased.

Financial Highlights

MetricQ1 2017Q1 2016Change
Total revenue$14.5 million$8.5 million+$6.0 million
Rental income$13.0 million$8.0 million+$5.1 million
Operating loss$(2.2) million$(2.3) millionImproved by $0.2 million
Net loss$(4.8) million$(3.4) millionWorsened by $1.4 million
Net loss per share$(0.16)$(0.11)Worsened by $0.05
Net cash from operating activities$(0.1) million$1.3 millionDeclined by $1.4 million
FFO$2.2 millionNot provided in filing textPrior-period value unclear
MFFO$1.2 millionNot provided in filing textPrior-period value unclear

Revenue increased primarily because 1140 Avenue of the Americas, acquired in June 2016, contributed $4.7 million of additional rental income. Approximate operating and net margins were negative 14.9% and negative 32.9%, respectively, based on GAAP results.

At March 31, 2017, total assets were $799.4 million, including $701.9 million of net real estate investments, $49.6 million of unrestricted cash and $28.6 million of restricted cash. Total liabilities were $276.3 million and stockholders’ equity was $523.2 million.

Mortgage notes payable had a gross principal balance of $239.0 million, consisting of $140.0 million secured by 123 William Street and $99.0 million secured by 1140 Avenue of the Americas. The weighted-average effective interest rate was 4.61%, and the loans mature in 2026 and 2027. The company reported compliance with its debt covenants.

Material Changes Versus the Prior Comparable Period

  • Revenue rose 71% year over year, primarily from the 1140 Avenue of the Americas acquisition.
  • Property operating expenses increased to $6.6 million from $3.5 million, mainly because of the additional property and higher operating costs.
  • Depreciation and amortization increased to $7.0 million from $4.8 million, primarily due to 1140 Avenue of the Americas.
  • Interest expense increased to $2.7 million from $1.2 million, reflecting increased mortgage borrowings.
  • Operating cash flow declined from $1.3 million provided to $0.1 million used. The filing attributes the change partly to higher unbilled rent receivables, restricted cash reserves and property-related cash requirements.
  • On March 6, 2017, the company obtained a $140.0 million mortgage on 123 William Street and repaid approximately $96.0 million of the prior mortgage.
  • Capital expenditures were $2.0 million, compared with $5.4 million in the prior-year quarter.
  • The company repurchased 276,624 shares at a weighted-average price of $20.15. An additional 902,420 requested shares, representing $18.1 million, were rejected or remained unfulfilled.

Liquidity, Distributions and Outlook

Cash and cash equivalents increased to $49.6 million from $47.7 million at December 31, 2016, while restricted cash increased to $28.6 million from $2.2 million. Net cash used in investing activities was $2.0 million, and net cash provided by financing activities was $4.0 million.

The company declared approximately $11.5 million of distributions for the quarter, equal to $0.38 per common share. Approximately $4.8 million was reinvested through the distribution reinvestment plan. Management stated that distributions were funded entirely from available cash on hand and that operating cash flow was negative for the quarter.

Management does not expect operating cash flow in 2017 to be sufficient to fund distributions at the current level. It expects to use cash on hand, DRIP proceeds and potentially secured financings, property-sale proceeds or other capital sources. There is no assurance that distributions will continue at the current rate.

Management expects 2017 capital expenditures to be lower than in 2016 and primarily related to tenant improvements and leasing activity. The company is continuing efforts to lease vacant space at 9 Times Square, but stated that the repositioning and lease-up process has taken longer than anticipated.

Risks, Contingencies and Unusual Items

  • The portfolio is concentrated in only six New York City properties, and 9 Times Square remains materially underoccupied.
  • Revenue depends on tenant financial condition, lease renewals, rental rates and the economic health of the New York metropolitan area.
  • The company has no employees and depends on its Advisor, Property Manager and other related parties for essential services. Related-party operating fees and reimbursements totaled $3.4 million in the quarter.
  • The company’s shares are not listed on a national securities exchange and may remain illiquid. The share repurchase program is discretionary and subject to significant limits.
  • Distributions exceed current operating cash generation and may require continued use of cash reserves or other financing sources.
  • The company is subject to fixed-rate mortgage debt, ground lease obligations totaling $244.0 million and future debt principal and interest obligations totaling $343.8 million.
  • A creditor trust connected with the former RCAP organization filed a lawsuit against AR Global, the Advisor and related principals. The company is not named, and management stated that the Advisor believes the suit is without merit.
  • The company reported no material pending legal or regulatory proceedings, no material environmental claims and no material off-balance-sheet arrangements.
  • The company adopted new variable-interest-entity and business-definition accounting guidance during the quarter; management reported no material impact.

Most Important Facts to Verify

  • Whether occupancy and leasing progress at 9 Times Square improve sufficiently to support revenue and distributions.
  • Whether operating cash flow becomes positive and increasingly covers the current distribution rate.
  • The sustainability of cash reserves after distributions, capital expenditures, share repurchases and restricted lender reserves.
  • Debt covenant compliance, refinancing requirements and the effect of interest rates on financing capacity and asset values.
  • The status and potential implications of the RCAP-related litigation involving the Advisor and AR Global affiliates.
  • Whether the reported company name and legal registrant have changed since this 2017 filing.