NEW YORK CITY REIT, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2017
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________ to __________
Commission file number:
000-55393
American Realty Capital New York City REIT, Inc.
(Exact name of registrant as specified in its charter)
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Maryland
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46-4380248
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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405 Park Ave., 4
th
Floor, New York, NY
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10022
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(Address of principal executive offices)
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(Zip Code)
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(212) 415-6500
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||
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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(Do not check if a smaller reporting company)
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Smaller reporting company
x
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Emerging growth company
x
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||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
x
No
As of
October 31, 2017
, the registrant had
31,237,326
shares of common stock outstanding.
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
INDEX TO FINANCIAL STATEMENTS
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Page
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2
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
(In thousands, except for share and per share data)
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September 30, 2017
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December 31, 2016
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|||||||
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ASSETS
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(Unaudited)
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||||||
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Real estate investments, at cost:
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||||||||
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Land
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$
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133,380
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$
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133,380
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||
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Buildings and improvements
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510,291
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502,067
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||||
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Acquired intangible assets
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107,131
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109,498
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||||
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Total real estate investments, at cost
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750,802
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744,945
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||||
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Less accumulated depreciation and amortization
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(57,726
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)
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(37,889
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)
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||||
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Total real estate investments, net
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693,076
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707,056
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||||
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Cash and cash equivalents
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30,471
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47,671
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||||
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Restricted cash
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28,519
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2,150
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||||
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Investment securities, at fair value
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—
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477
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||||
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Prepaid expenses and other assets (including amounts
due from related parties of
$83
and $670 at
September 30, 2017 and December 31, 2016
, respectively)
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17,879
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13,017
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||||
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Deferred leasing costs, net
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5,324
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3,233
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||||
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Total assets
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$
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775,269
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$
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773,604
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LIABILITIES AND STOCKHOLDERS' EQUITY
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||||||
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Mortgage notes payable, net of deferred financing costs
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$
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233,361
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$
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191,328
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Accounts payable, accrued expenses and other liabilities (including amounts due to related parties of
$72 and
$167 at September 30, 2017 and December 31, 2016
, respectively)
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10,621
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6,580
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||||
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Below-market lease liabilities, net
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25,820
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28,528
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||||
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Deferred revenue
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5,557
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3,024
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||||
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Distributions payable
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3,873
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3,953
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||||
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Total liabilities
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279,232
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233,413
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||||
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Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued and outstanding at
September 30, 2017 and December 31, 2016
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—
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—
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||||
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Common stock, $0.01 par value, 300,000,000 shares authorized, 31,164,225 and 30,856,841 shares issued and outstanding as of
September 30, 2017 and December 31, 2016, respectively
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312
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309
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||||
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Additional paid-in capital
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687,342
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680,476
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||||
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Accumulated other comprehensive income
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—
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10
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||||
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Accumulated deficit
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(191,617
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)
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(140,604
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)
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||||
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Total stockholders' equity
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496,037
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540,191
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||||
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Total liabilities and stockholders' equity
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$
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775,269
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$
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773,604
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||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
(In thousands, except for share and per share data)
(Unaudited)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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||||||||||||||
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2017
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2016
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2017
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2016
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|||||||||||||
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Revenues:
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||||||||||||||||
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Rental income
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$
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13,345
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$
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13,441
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$
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40,009
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$
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30,759
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||||
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Operating expense reimbursements and other revenue
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1,130
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967
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3,554
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2,208
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||||||||
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Total revenues
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14,475
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14,408
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43,563
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32,967
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Operating expenses:
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|||||||||||||
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Property operating
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6,848
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6,357
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19,882
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13,871
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||||||||
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Operating fees incurred from related parties
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1,515
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1,525
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4,566
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3,676
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||||||||
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Acquisition and transaction related
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—
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24
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6
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4,327
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||||||||
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General and administrative
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2,066
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1,268
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5,634
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3,770
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||||||||
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Depreciation and amortization
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7,125
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7,272
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21,349
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16,776
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Total operating expenses
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17,554
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16,446
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51,437
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42,420
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||||||||
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Operating loss
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(3,079
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)
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(2,038
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)
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(7,874
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)
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(9,453
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)
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||||||||
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Other income (expense):
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||||||||||||||||
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Interest expense
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(2,866
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)
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(2,387
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)
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(8,365
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)
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(5,027
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)
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||||||||
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Income from investment securities and interest
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68
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56
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190
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305
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||||||||
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Gain on sale of investment securities
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—
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—
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24
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—
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||||||||
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Total other expense
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(2,798
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)
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(2,331
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)
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(8,151
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)
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(4,722
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)
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||||||||
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Net loss
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$
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(5,877
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)
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$
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(4,369
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)
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$
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(16,025
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)
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$
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(14,175
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)
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||||
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Other comprehensive income (loss):
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||||||||||||||||
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Unrealized gain on investment securities
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—
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10
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—
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32
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||||||||
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Reversal of accumulated unrealized gain on investment securities
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—
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—
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(10
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)
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—
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||||||||
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Comprehensive loss
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$
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(5,877
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)
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$
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(4,359
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)
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$
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(16,035
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)
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$
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(14,143
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)
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Basic and diluted weighted average shares outstanding
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31,106,250
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30,556,494
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30,956,152
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30,634,400
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||||||||
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Basic and diluted net loss per share
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$
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(0.19
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)
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$
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(0.14
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)
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$
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(0.52
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)
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$
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(0.46
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)
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||||
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Dividends declared per common share
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$
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0.39
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$
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0.38
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$
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1.13
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$
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1.13
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||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Nine Months Ended September 30, 2017
(In thousands, except for share data)
(Unaudited)
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Common Stock
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||||||||||||||||||||||
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Number of
Shares
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Par Value
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Additional
Paid-in
Capital
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Accumulated Other Comprehensive Income
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Accumulated Deficit
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Total Stockholders' Equity
|
|||||||||||||||||
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Balance, December 31, 2016
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30,856,841
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$
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309
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$
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680,476
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$
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10
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$
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(140,604
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)
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$
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540,191
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|||||
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Common stock issued through distribution reinvestment plan
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666,842
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7
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14,163
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—
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—
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14,170
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||||||||||
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Common stock repurchases
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(359,458
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)
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(4
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)
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(7,333
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)
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—
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—
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(7,337
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)
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||||||||||
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Share-based compensation
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—
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—
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36
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—
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—
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36
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|
||||||||||
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Distributions declared
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—
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|
—
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|
—
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|
—
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(34,988
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)
|
(34,988
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)
|
||||||||||
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Net loss
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—
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|
—
|
|
—
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|
—
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(16,025
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)
|
(16,025
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)
|
||||||||||
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Reversal of unrealized gain upon realization of investment securities
|
—
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|
—
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|
—
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(10
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)
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—
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|
(10
|
)
|
||||||||||
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Balance, September 30, 2017
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31,164,225
|
|
$
|
312
|
|
$
|
687,342
|
|
$
|
—
|
|
$
|
(191,617
|
)
|
$
|
496,037
|
|
|||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
(In thousands)
(Unaudited)
|
Nine Months Ended September 30,
|
|||||||
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2017
|
2016
|
||||||
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Cash flows from operating activities:
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|
|
|||||
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Net loss
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$
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(16,025
|
)
|
$
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(14,175
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)
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Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|||||||
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Depreciation and amortization
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21,349
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16,776
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|
|||
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Amortization of deferred financing costs
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964
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1,823
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|||
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Accretion of below- and amortization of above-market lease liabilities and assets, net
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(1,570
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)
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(1,868
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)
|
|||
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Share-based compensation
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36
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|
49
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|
|||
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Gain on sale of investment securities
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(24
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)
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—
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|
|||
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Changes in assets and liabilities:
|
|||||||
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Prepaid expenses, other assets and deferred costs
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(7,236
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)
|
(6,323
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)
|
|||
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Accounts payable, accrued expenses and other liabilities
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3,901
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|
1,399
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|
|||
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Deferred revenue
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2,533
|
|
1,732
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|
|||
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Restricted cash
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(1,549
|
)
|
—
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|
|||
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Net cash provided by (used in) operating activities
|
2,379
|
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(587
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)
|
|||
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Cash flows from investing activities:
|
|||||||
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Investments in real estate
|
—
|
|
(79,162
|
)
|
|||
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Purchase of investment securities, net
|
—
|
|
(4
|
)
|
|||
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Proceeds from the sale of investment securities
|
491
|
|
—
|
|
|||
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Capital expenditures
|
(8,084
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)
|
(12,401
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)
|
|||
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Net cash used in investing activities
|
(7,593
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)
|
(91,567
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)
|
|||
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Cash flows from financing activities:
|
|
|
|
||||
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Proceeds from mortgage note payable
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115,180
|
|
—
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|
|||
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Payment of mortgage note payable
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(96,000
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)
|
—
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|
|||
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Payments of financing costs
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(2,931
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)
|
(3,327
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)
|
|||
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Distributions paid
|
(20,898
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)
|
(18,713
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)
|
|||
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Repurchases of common stock
|
(7,337
|
)
|
(12,490
|
)
|
|||
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Restricted cash
|
—
|
|
(2,866
|
)
|
|||
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Net cash used in financing activities
|
(11,986
|
)
|
(37,396
|
)
|
|||
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Net change in cash and cash equivalents
|
(17,200
|
)
|
(129,550
|
)
|
|||
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Cash and cash equivalents, beginning of period
|
47,671
|
|
182,700
|
|
|||
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Cash and cash equivalents, end of period
|
$
|
30,471
|
|
$
|
53,150
|
|
|
|
Supplemental Disclosures:
|
|||||||
|
Cash paid for interest
|
$
|
6,976
|
|
$
|
2,914
|
|
|
|
Non-Cash Investing and Financing Activities
|
|||||||
|
Mortgage note payable used to acquire investments in real estate
|
—
|
|
99,000
|
|
|||
|
Distributions payable
|
3,873
|
|
3,800
|
|
|||
|
Accrued capital expenditures
|
140
|
|
284
|
|
|||
|
Other liabilities assumed in real estate transactions
|
—
|
|
353
|
|
|||
|
Common stock issued through distribution reinvestment plan
|
14,170
|
|
16,098
|
|
|||
|
Mortgage notes payable proceeds classified as restricted cash
|
24,820
|
|
—
|
|
|||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
American Realty Capital New York City REIT, Inc. (including, as required by context, New York City Operating Partnership, L.P., (the "OP"), and its subsidiaries, the “Company”) was formed to invest its assets in properties in the five boroughs of New York City, with a focus on Manhattan. The Company may also purchase for investment purposes certain real estate investment assets that accompany office properties, including retail spaces and amenities, as well as hospitality assets, residential assets and other property types exclusively in New York City. All such properties may be acquired and owned by the Company alone or jointly with another party. As of
September 30, 2017
, the Company owned
six
properties consisting of
1.1 million
rentable square feet, acquired for an aggregate purchase price of $
686.1 million
.
The Company was incorporated on December 19, 2013 as a Maryland corporation and elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes (“REIT”) beginning with its taxable year ended December 31, 2014. Substantially all of the Company’s business is conducted through the OP.
On April 24, 2014, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to
30.0 million
shares of common stock,
$0.01
par value per share, at a price of
$25.00
per share, subject to certain volume and other discounts, for total gross proceeds of up to
$750.0 million
. The Company closed its IPO on May 31, 2015. As of
September 30, 2017
, the Company had
31.2 million
shares of common stock outstanding, including unvested restricted shares of common stock ("restricted shares") and shares issued pursuant to a distribution reinvestment plan (the "DRIP"), and had received total gross proceeds from the IPO of
$771.6 million
, inclusive of
$60.1 million
from the DRIP and net of repurchases.
The Company first established an estimated net asset value per share of its common stock (“Estimated Per-Share NAV”) in 2016. On October 24, 2016, the Company’s board of directors approved an Estimated Per-Share NAV as of June 30, 2016 (the “2016 Estimated Per-Share NAV”), which was published on October 26, 2016 (the “NAV Pricing Date”). Prior to the NAV Pricing Date, the Company had offered shares pursuant to the DRIP and had repurchased shares pursuant to the Share Repurchase Program (“SRP”) at a price based on
$23.75
per share, the offering price in the IPO. Beginning with the NAV Pricing Date, the Company began to offer shares pursuant to the DRIP and repurchase shares pursuant to its SRP at a price based on Estimated Per-Share NAV.
On October 25, 2017, the Company's board of directors approved an Estimated Per-Share NAV as of June 30, 2017 (the "2017 Estimated Per-Share NAV"), which was published on October 26, 2017. This is the first annual update of Estimated Per-Share NAV the Company has published. The Company intends to publish subsequent valuations of Estimated Per-Share NAV at least once annually, at the discretion of the Company’s board of directors.
The Company has
no
employees. New York City Advisors, LLC (the "Advisor") has been retained by the Company to manage the Company's affairs on a day to-day basis. The Company has retained New York City Properties, LLC (the “Property Manager”) to serve as the Company's property manager. The Advisor and Property Manager are under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global"), the parent of the Company's sponsor, American Realty Capital III, LLC (the "Sponsor"), as a result of which they are related parties, and each of these entities has received or will receive compensation, fees and expense reimbursements for services related to the IPO and the investment and management of the Company's assets.
The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP (“OP units”). The Advisor contributed
$2,020
to the OP in exchange for
90
OP units, which represents a nominal percentage of the aggregate OP ownership. A holder of OP units has the right to convert OP units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP, provided, however, that such OP units must have been outstanding for at least one year. The remaining rights of the limited partners in the OP are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
7
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The accompanying consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the
nine months ended
September 30, 2017
are not necessarily indicative of the results for the entire year or any subsequent interim period.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended
December 31, 2016
, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 28, 2017. There have been no significant changes to the Company's significant accounting policies during the
nine months ended
September 30, 2017
, other than the updates described below:
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes
a comprehensive model for entities to use in accounting for revenue arising from contracts with customers
. Under ASC 606, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A reporting entity may apply the amendments in ASC 606 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. The Company will adopt this guidance effective January 1, 2018 and currently expects to utilize the modified retrospective approach upon adoption and does not expect that this will result in a significant cumulative-effect adjustment to equity.
The Company has progressed in its project plan in evaluating its various revenue streams in order to identify any differences in the timing, measurement or presentation of revenue recognition under ASC 606 and ASC Topic 842,
Leases
(“ASC 842”). Based on the Company’s evaluation of its various revenue streams, the Company believes that gains on sales of real estate could be impacted by adoption of ASC 606. The Company expects that this standard could have an impact on the timing of gains on certain sales of real estate as a result of more transactions generally qualifying as sales of real estate and revenue being recognized at an earlier date than under current accounting guidance. Specifically, the Company expects that this would impact partial sales of real estate in situations where the Company no longer retains a controlling financial interest. If the Company were to enter into partial sales of real estate, the Company would derecognize the real estate asset consistent with the principles outlined in ASC 606 and any retained non-controlling ownership interest would be measured at fair value consistent with the guidance on noncash consideration in ASC 606. The Company has not entered into any partial sales of real estate.
The Company is continuing to evaluate any differences in the timing, measurement, or presentation of revenue recognition and the impact on the Company's consolidated financial statements and internal accounting processes resulting from ASC 606 as well as ASC 842,
Leases
as discussed below.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. The Company is currently evaluating the impact of the new guidance.
In February 2016, the FASB issued an update to ASU 2016-02 establishing ASC 842, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASC 842 supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. ASC 842 will impact the lease accounting model for both lessees and lessors. The Company will adopt this guidance effective January 1, 2019.
8
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The Company is a lessee for a property in which it has a ground lease as of September 30, 2017. For this lease, the Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining lease payments upon adoption of this update. The new standard requires lessees to apply a dual lease classification approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.
From a lessor perspective the Company expects that the new standard will impact the presentation of lease and non-lease components of revenue such as rent, and operating expense reimbursements including common area maintenance, taxes, and insurance from leases for which the Company is a lessor. The Company does not expect this guidance to impact its existing lessor revenue recognition pattern. The Company anticipates that it will elect the following practical expedients, which must be elected as a package and applied consistently by an entity to all of its leases, which allow the Company to not have to reassess the following upon adoption: (i) whether any expired or existing contract contains a lease, (ii) lease classification related to expired or existing leases, or (iii) whether costs incurred on existing leases qualify as initial direct costs. The Company is continuing to evaluate any differences in the timing, measurement, or presentation of lessor revenues as well as the impact of the new lessee accounting model on the Company’s consolidated financial position, results of operations and disclosures.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In November 2016, the FASB issued guidance on the classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In May 2017, the FASB issued guidance that clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update states that modification accounting should be used unless the fair value of the award, the vesting terms of the award and the classification of the award as either equity or liability, does not change as a result of the modification. The revised guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for reporting periods for which financial statements have not yet been issued. The Company is currently evaluating the impact of this new guidance.
9
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Recently Adopted Accounting Pronouncements
In October 2016, the FASB issued guidance where a reporting entity will need to evaluate if it should consolidate a variable interest entity ("VIE"). The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company has adopted the provisions of this guidance beginning January 1, 2017 and determined that there is no impact to the Company's consolidated financial position, results of operations and cash flows.
In January 2017, the FASB issued guidance that revises the definition of a business. This new guidance is applicable when evaluating whether an acquisition should be treated as either a business acquisition or an asset acquisition. Under the revised guidance, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single asset or group of similar assets, the assets acquired (or disposed of) would not be considered a business. The revised guidance is effective for reporting periods beginning after December 15, 2017, and the amendments will be applied prospectively. Early application is permitted only for transactions that have not previously been reported in issued financial statements. The Company has assessed this revised guidance and expects, based on historical acquisitions, future properties acquired to qualify as an asset acquisition rather than a business acquisition, which would result in the capitalization of related transaction costs. The Company adopted this guidance for the
nine months ended
September 30, 2017
. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
10
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
There were no real estate assets acquired or liabilities assumed during the
nine months ended
September 30, 2017
. On June 15, 2016, the Company, through a wholly-owned subsidiary of the OP, completed its acquisition of the leasehold interest in an institutional-quality office building located at 1140 Avenue of the Americas in Manhattan, New York ("1140 Avenue of the Americas"). 1140 Avenue of the Americas comprises
249,703
square feet and is subject to a ground lease held by 1140 Sixth Avenue LLC. The contract purchase price for 1140 Avenue of the Americas was
$180.0 million
, exclusive of closing costs.
The following table presents the allocation of the real estate assets acquired and liabilities assumed during the nine months ended September 30, 2016:
|
Nine Months Ended September 30,
|
||||
|
2016
|
||||
|
(Dollar amounts in thousands)
|
Total Assets Acquired
|
|||
|
Real estate investments, at cost:
|
||||
|
Land
|
$
|
—
|
|
|
|
Building and improvements
|
148,647
|
|
||
|
Total tangible assets
|
148,647
|
|
||
|
Acquired intangibles:
|
||||
|
In-place leases
|
27,433
|
|
||
|
Above-market lease assets
|
5,230
|
|
||
|
Other intangibles
|
—
|
|
||
|
Below-market lease liabilities
|
(5,277
|
)
|
||
|
Below-market ground lease asset
|
2,482
|
|
||
|
Total intangible assets, net
|
29,868
|
|
||
|
Total assets acquired, net
|
178,515
|
|
||
|
Mortgage notes payable used to acquire real estate investments
|
(99,000
|
)
|
||
|
Premiums on mortgages assumed
|
—
|
|
||
|
Other assets acquired
|
—
|
|
||
|
Other liabilities assumed
|
(353
|
)
|
||
|
Cash paid for acquired real estate investment
|
$
|
79,162
|
|
|
|
Number of properties purchased
|
1
|
|
||
Future Minimum Cash Rent
The following table presents future minimum base cash rental payments due to the Company subsequent to
September 30, 2017
. These amounts exclude contingent rent payments, as applicable, that may be collected based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes, among other items.
|
(In thousands)
|
Future Minimum Base Cash Rent Payments
|
|||
|
2017
|
$
|
11,180
|
|
|
|
2018
|
48,411
|
|
||
|
2019
|
47,063
|
|
||
|
2020
|
43,039
|
|
||
|
2021
|
39,069
|
|
||
|
Thereafter
|
139,430
|
|
||
|
|
$
|
328,192
|
|
|
11
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Significant Tenant
As of
September 30, 2017
and
2016
, there were no tenants whose annualized rental income on a straight-line basis, based on leases signed, represented greater than 10% of total annualized rental income for all portfolio properties on a straight-line basis.
Intangible Assets and Liabilities
Acquired intangible assets and lease liabilities consist of the following as of
September 30, 2017
and
December 31, 2016
:
|
September 30, 2017
|
||||||||||||
|
(In thousands)
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
|||||||||
|
Intangible assets:
|
||||||||||||
|
In-place leases
|
$
|
63,177
|
|
$
|
19,918
|
|
$
|
43,259
|
|
|||
|
Other intangibles
|
31,447
|
|
3,475
|
|
27,972
|
|
||||||
|
Below-market ground lease
|
2,482
|
|
64
|
|
2,418
|
|
||||||
|
Above-market leases
|
10,025
|
|
2,719
|
|
7,306
|
|
||||||
|
Acquired intangible assets
|
$
|
107,131
|
|
$
|
26,176
|
|
$
|
80,955
|
|
|||
|
Intangible liabilities:
|
||||||||||||
|
Below-market lease liabilities
|
$
|
34,069
|
|
$
|
8,249
|
|
$
|
25,820
|
|
|||
|
December 31, 2016
|
||||||||||||
|
(In thousands)
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
|||||||||
|
Intangible assets:
|
||||||||||||
|
In-place leases
|
$
|
65,544
|
|
$
|
14,045
|
|
$
|
51,499
|
|
|||
|
Other intangibles
|
31,447
|
|
2,601
|
|
28,846
|
|
||||||
|
Below-market ground lease
|
2,482
|
|
27
|
|
2,455
|
|
||||||
|
Above-market leases
|
10,025
|
|
1,618
|
|
8,407
|
|
||||||
|
Acquired intangible assets
|
$
|
109,498
|
|
$
|
18,291
|
|
$
|
91,207
|
|
|||
|
Intangible liabilities:
|
||||||||||||
|
Below-market lease liabilities
|
$
|
34,471
|
|
$
|
5,943
|
|
$
|
28,528
|
|
|||
The following table discloses amounts recognized within the consolidated statements of operations and comprehensive loss related to amortization of in-place leases and other intangibles and amortization and accretion of above- and below-market lease assets and liabilities, net, for the periods presented:
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
|
(In thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||
|
Amortization of in-place leases and other intangibles
(1)
|
$
|
2,877
|
|
$
|
3,607
|
|
$
|
9,113
|
|
$
|
8,642
|
|
||||
|
Amortization and (accretion) of above- and below-market leases, net
(2)
|
$
|
(512
|
)
|
$
|
(631
|
)
|
$
|
(1,607
|
)
|
$
|
(1,882
|
)
|
||||
|
Amortization of below-market ground lease
(3)
|
$
|
13
|
|
$
|
14
|
|
$
|
37
|
|
$
|
14
|
|
||||
_______________
|
(1)
|
Reflected within depreciation and amortization expense.
|
|
(2)
|
Reflected within rental income.
|
|
(3)
|
Reflected within property operating expense.
|
12
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The following table provides the projected amortization expense and adjustments to revenues for the next five years as of
September 30, 2017
:
|
(In thousands)
|
October 1, 2017- December 31, 2017
|
2018
|
2019
|
2020
|
2021
|
|||||||||||||||
|
In-place leases
|
$
|
2,576
|
|
$
|
9,372
|
|
$
|
8,588
|
|
$
|
6,718
|
|
$
|
5,332
|
|
|||||
|
Other intangibles
|
291
|
|
1,165
|
|
1,165
|
|
1,165
|
|
937
|
|
||||||||||
|
Total to be included in depreciation and amortization
|
$
|
2,867
|
|
$
|
10,537
|
|
$
|
9,753
|
|
$
|
7,883
|
|
$
|
6,269
|
|
|||||
|
Above-market lease assets
|
$
|
(366
|
)
|
$
|
(1,369
|
)
|
$
|
(1,305
|
)
|
$
|
(1,164
|
)
|
$
|
(1,064
|
)
|
|||||
|
Below-market lease liabilities
|
874
|
|
3,435
|
|
3,092
|
|
2,679
|
|
2,371
|
|
||||||||||
|
Total to be included in rental income
|
$
|
508
|
|
$
|
2,066
|
|
$
|
1,787
|
|
$
|
1,515
|
|
$
|
1,307
|
|
|||||
As of
September 30, 2017
, the Company had
no
investment in equity securities. As of
December 31, 2016
, the Company had an investment in an equity security with a fair value of
$0.5 million
. This investment was considered to be an available-for-sale security and therefore increases or decreases in the fair value of this investment were recorded in accumulated other comprehensive income (loss) as a component of equity on the consolidated balance sheets unless the security was considered to be other-than-temporarily impaired, at which time the losses would be reclassified to expense. In addition, the unrealized gain or loss recorded in accumulated other comprehensive income (loss) were reversed on the date of the sale. On June 15, 2017, the Company redeemed its investment in equity securities at approximately
$491,000
with a cost basis of approximately
$467,000
and realized approximately
$24,000
gain as of
September 30, 2017
.
The following table details the unrealized gains and losses on the investment security by security type as of
December 31, 2016
:
|
(In thousands)
|
Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
||||||||||||
|
December 31, 2016
|
||||||||||||||||
|
Equity security
|
$
|
467
|
|
$
|
10
|
|
$
|
—
|
|
$
|
477
|
|
||||
13
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 5 — Mortgage Notes Payable
The Company's mortgage notes payable as of
September 30, 2017
and
December 31, 2016
are as follows:
|
Outstanding Loan Amount
|
||||||||||||||||||
|
Portfolio
|
Encumbered Properties
|
September 30,
2017 |
December 31,
2016 |
Effective Interest Rate
|
Interest Rate
|
Maturity
|
||||||||||||
|
(In thousands)
|
(In thousands)
|
|||||||||||||||||
|
123 William Street
(1)
|
1
|
$
|
140,000
|
|
$
|
96,000
|
|
4.73
|
%
|
Fixed
|
Mar. 2027
|
|||||||
|
1140 Avenue of the Americas
|
1
|
99,000
|
|
99,000
|
|
4.17
|
%
|
Fixed
|
Jul. 2026
|
|||||||||
|
Less: deferred financing costs, net
|
(5,639
|
)
|
(3,672
|
)
|
||||||||||||||
|
Mortgage note payable, net of deferred financing costs
|
2
|
$
|
233,361
|
|
$
|
191,328
|
|
4.61
|
%
|
|||||||||
|
(1)
|
The Company entered into a loan agreement with Barclays Bank PLC, in the amount of
$140.0 million
, on March 6, 2017. A portion of the proceeds from the loan was used to repay the outstanding principal balance of approximately
$96.0 million
on the existing mortgage loan secured by the property. At closing, the lender placed
$24.8 million
of the proceeds in escrow, to be released to the Company in accordance with the conditions under the loan, in connection with leasing activity, tenant improvements, leasing commissions and free rent obligations related to this property. As of
September 30, 2017
, the
$24.8 million
of the proceeds remained in escrow and is included in restricted cash on the unaudited consolidated balance sheet.
|
Real estate assets of
$447.5 million
, at cost (net of below-market lease liabilities), at
September 30, 2017
have been pledged as collateral to the Company's mortgage note payable and are not available to satisfy the Company's other obligations unless first satisfying the mortgage note payable on the property. The Company is required to make payments of interest on its mortgage note payable on a monthly basis.
The following table summarizes the scheduled aggregate principal payments subsequent to
September 30, 2017
:
|
(In thousands)
|
Future Minimum Principal Payments
|
|||
|
2017
|
$
|
—
|
|
|
|
2018
|
—
|
|
||
|
2019
|
—
|
|
||
|
2020
|
—
|
|
||
|
2021
|
—
|
|
||
|
Thereafter
|
239,000
|
|
||
|
Total
|
$
|
239,000
|
|
|
The Company's mortgage notes payable require compliance with certain property-level debt covenants. As of
September 30, 2017
, the Company was in compliance with the debt covenants under its mortgage note agreements.
14
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the instrument. This alternative approach also reflects the contractual terms of the instrument, as applicable, including the period to maturity, and may use observable market-based inputs, including interest rate curves and implied volatilities, and unobservable inputs, such as expected volatility. The guidance defines three levels of inputs that may be used to measure fair value.
|
Level 1
|
—
|
Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
|
|
|
Level 2
|
—
|
Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
|
|
|
Level 3
|
—
|
Unobservable inputs that reflect the entity's own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
|
|
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
See Note 4 — Investment Securities. The Company redeemed its investment in an equity security on June 15, 2017. As of
December 31, 2016
, the Company had an investment in a real estate income fund that was traded in active markets and therefore, due to the availability of quoted market prices in active markets, classified this investment as Level 1 in the fair value hierarchy.
The following table presents information about the Company's assets measured at fair value on a recurring basis as of
December 31, 2016
, aggregated by the level in the fair value hierarchy within which that instrument falls.
|
Quoted Prices in Active Markets
|
Significant Other Observable Inputs
|
Significant Unobservable Inputs
|
||||||||||||||
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
December 31, 2016
|
||||||||||||||||
|
Investment Securities
|
$
|
477
|
|
$
|
—
|
|
$
|
—
|
|
$
|
477
|
|
||||
There were no transfers between levels of the fair value hierarchy during
2016
.
Financial instruments not carried at fair value
The Company is required to disclose at least annually the fair value of financial instruments for which it is practicable to estimate the value. The fair value of short-term financial instruments such as cash and cash equivalents, prepaid expenses and other assets, accounts payable and distributions payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's financial instruments that are not reported at fair value on the consolidated balance sheet are reported below:
|
September 30, 2017
|
December 31, 2016
|
|||||||||||||||||
|
(In thousands)
|
Level
|
Gross Principal Balance
|
Fair Value
|
Gross Principal Balance
|
Fair Value
|
|||||||||||||
|
Mortgage note payable — 123 William Street
|
3
|
$
|
140,000
|
|
$
|
145,483
|
|
*
|
*
|
|||||||||
|
Mortgage note payable — 1140 Avenue of the Americas
|
3
|
$
|
99,000
|
|
$
|
98,721
|
|
$
|
99,000
|
|
$
|
98,000
|
|
|||||
* The fair value of the mortgage note payable is estimated to be equivalent to its carrying value because it bears interest at a variable rate that fluctuates with market and there has been no significant change in the credit risk. This mortgage note payable was repaid on March 6, 2017.
15
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
As of
September 30, 2017
, the Company had
31.2 million
shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from public offerings of
$771.6 million
, inclusive of
$60.1 million
from the DRIP and net of repurchases. As of
December 31, 2016
, the Company had
30.9 million
shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds of
$764.8 million
, inclusive of
$46.0 million
from the DRIP and net of repurchases.
In May 2014, the board of directors of the Company authorized, and the Company began paying, a monthly distribution equivalent to
$1.5125
per annum, per share of common stock. The distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
The Company has a Share Repurchase Program ("SRP") that enables stockholders, subject to certain conditions and limitations, to sell their shares to the Company. Under the SRP stockholders may request that the Company repurchase all or any portion of their shares of common stock, if such repurchase does not impair the Company's capital or operations.
On January 25, 2016, the Company's board of directors approved an amendment of the SRP to supersede and replace the existing SRP effective beginning on February 28, 2016. Under the SRP, as amended, repurchases of shares of the Company's common stock, when requested, are at the sole discretion of the Company's board of directors and generally will be made semiannually (each six-month period ending June 30 or December 31, a "fiscal semester").
On October 24, 2016, the Company's board of directors approved the 2016 Estimated Per-Share NAV, and, on October 25, 2017, the Company's board of directors approved the 2017 Estimated Per-Share NAV.
On June 14, 2017, the Company announced that its board of directors had adopted an amendment and restatement of the SRP that superseded and replaced the existing SRP effective as of July 14, 2017. Under the amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of the Company’s common stock or received their shares from the Company (directly or indirectly) through one or more non-cash transactions would be considered for repurchase. Other terms and provisions of the amended and restated SRP remained consistent with the existing SRP.
In cases of requests for death and disability, the repurchase price is equal to then-current Estimated Per-Share NAV at the time of repurchase. Prior to the establishment of Estimated Per-Share NAV, the repurchase price in these circumstances was equal to the price paid to acquire the shares.
Prior to the establishment of Estimated Per-Share NAV, the purchase price per share for requests other than for death or disability under the SRP depended on the length of time investors had held such shares as follows (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations):
|
•
|
after one year from the purchase date - the lower of
$23.13
and
92.5%
of the amount they actually paid for each share; and,
|
|
•
|
after two years from the purchase date - the lower of
$23.75
and
95.0%
of the amount they actually paid for each share.
|
Following the establishment of Estimated Per-Share NAV, the purchase price per share for requests other than for death or disability under the SRP depended on the length of time investors had held such shares as follows (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations):
|
•
|
after one year from the purchase date -
92.5%
of the Estimated Per-Share NAV;
|
|
•
|
after two years from the purchase date -
95.0%
of the Estimated Per-Share NAV;
|
|
•
|
after three years from the purchase date -
97.5%
of the Estimated Per-Share NAV; and,
|
|
•
|
after four years from the purchase date -
100.0%
of the Estimated Per-Share NAV.
|
16
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Repurchases for any fiscal semester are limited to a maximum of
2.5%
of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of
5.0%
of the weighted average number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, the Company is only authorized to repurchase shares in a given fiscal semester up to the amount of proceeds received from the DRIP in that same fiscal semester, as well as any reservation of funds the Company's board of directors, may, in its sole discretion, make available for this purpose. If the establishment of an Estimated Per-Share NAV occurs during any fiscal semester, any repurchase requests received during such fiscal semester will be paid at the Estimated Per-Share NAV applicable on the last day of the fiscal semester.
When a stockholder requests a repurchase and the repurchase is approved by the Company's board of directors, the Company will reclassify such obligation from equity to a liability based on the value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. The following table reflects the number of shares repurchased cumulatively through
September 30, 2017
.
_____________________
|
Numbers of Shares Repurchased
|
Weighted-Average Price per Share
|
||||||
|
Cumulative repurchases as of December 31, 2016
|
645,335
|
|
$
|
23.63
|
|
||
|
Nine months ended September 30, 2017
(1)
|
359,458
|
|
20.41
|
|
|||
|
Cumulative repurchases as of September 30, 2017
|
1,004,793
|
|
$
|
22.48
|
|
||
|
(1)
|
Includes (i)
276,624
shares repurchased during the
three months ended March 31, 2017
for approximately
$5.6 million
at a weighted average price per share of
$20.15
, (ii)
578
shares repurchased during the
three months ended
June 30, 2017
for approximately
$13.7 thousand
at a weighted average price per share of
$23.68
and (iii)
82,256
shares repurchased during the
three months ended
September 30, 2017
, for approximately
$1.7 million
at a weighted average price per share of
$21.25
. Excludes rejected repurchase requests received during 2016 with respect to
902,420
shares for
$18.1 million
at an average price per share of
$20.03
. During the
three months ended
September 30, 2017
, following the effectiveness of the amendment and restatement of the SRP, the board of directors approved
100%
of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to June 30, 2017, which were fulfilled during the
three months ended
September 30, 2017
. No repurchases have been or will be made with respect to requests received during 2017 that are not valid requests in accordance with the amended and restated SRP.
|
Ground Lease
The Company entered into a ground lease agreement related to the acquisition of 1140 Avenue of the Americas under a leasehold interest arrangement. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter:
|
(In thousands)
|
Future Minimum Base Cash Rent Payments- Ground Lease
|
|||
|
2017
|
1,187
|
|
||
|
2018
|
4,746
|
|
||
|
2019
|
4,746
|
|
||
|
2020
|
4,746
|
|
||
|
2021
|
4,746
|
|
||
|
Thereafter
|
221,484
|
|
||
|
Total
|
$
|
241,655
|
|
|
The Company incurred ground rent expense of
$1.2 million
and
$3.6 million
during the three and nine months ended September 30, 2017, respectively. The Company incurred ground rent expense of
$1.2 million
and
$1.4 million
during the three and nine months ended September 30, 2016, respectively.
17
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. As of
September 30, 2017
, the Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
Note 9 — Related Party Transactions and Arrangements
As of
September 30, 2017
, an entity wholly owned by the Sponsor owned
8,888
shares of the Company’s outstanding common stock.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO, which was ongoing from April 2014 to May 2015, and, together with its affiliates, continued to provide the Company with various services through December 31, 2015. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was also under common control with AR Global, the parent of the Sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name, Aretec Group, Inc. On March 8, 2017, the creditor trust established in connection with the RCAP bankruptcy filed suit against AR Global, the Advisor, advisors of other entities sponsored by AR Global, and AR Global’s principals (including Mr. Weil, the Company's Executive Chairman, Chief Executive Officer, President and Secretary). The suit alleges, among other things, certain breaches of duties to RCAP. The Company is not named in the suit, nor are there allegations related to the services the Advisor provides to the Company. On May 26, 2017, the defendants moved to dismiss. The Advisor has informed the Company that the Advisor believes the suit is without merit and intends to defend against it vigorously.
As of June 30, 2016, the Company had
$0.5 million
invested in a mutual fund managed by an affiliate of the Sponsor. There is no obligation to purchase any additional shares and the shares can be sold at any time. The Company sold its investment in a mutual fund during the fourth quarter of 2016. The Company recognized income from investment securities managed by an affiliate of the Sponsor of approximately
$4,000
during the three and six months ended June 30, 2016.
Fees and Participations Paid in Connection With the Operations of the Company
The Advisor is paid an acquisition fee of
1.5%
of (A) the contract purchase price of each acquired property and (B) the amount advanced for a loan or other investment. The Advisor is also reimbursed for expenses incurred related to selecting, evaluating and acquiring assets on the Company's behalf, regardless of whether the Company actually acquires the related assets. These acquisition expenses may also include insourced expenses for services performed by the Advisor or its affiliates. Such insourced expenses are fixed initially at and may not exceed
0.50%
of the contract purchase price of each property and
0.50%
of the amount advanced for each loan or other investment, which is paid at the closing of each such investment. The Advisor is also reimbursed for legal expenses incurred in the process of acquiring properties, in an amount not to exceed
0.10%
of the contract purchase price. In addition, the Company also pays third parties, or reimburses the Advisor for any investment-related expenses due to third parties. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees (as described below) payable with respect to the Company's portfolio of investments exceed
4.5%
of (A) the contract purchase price or (B) the amount advanced for all loans or other investments. Once the proceeds from the primary offering have been fully invested, the aggregate amount of acquisition fees and any financing coordination fees may not exceed
1.5%
of (A) the contract purchase price and (B) the amount advanced for a loan or other investment, as applicable, for all the assets acquired. The Company incurred
no
acquisition fees and acquisition expense reimbursements to the Advisor during the
three and nine months ended
September 30, 2017
. The Company incurred
no
acquisition fees and acquisition expense reimbursements to the Advisor during the
three months ended
September 30, 2016
and
$3.6 million
during the
nine months ended
September 30, 2016
.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company pays the Advisor a financing coordination fee equal to
0.75%
of the amount made available or outstanding under such financing, subject to certain limitations.
18
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Until September 30, 2015, for its asset management services, the Company issued to the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based, restricted, forfeitable partnership units in the OP designated as “Class B Units” on a quarterly basis in an amount equal to: (i) the product of (y)
0.1875%
multiplied by (z) the cost of the Company's assets divided by (ii) the value of one share of common stock as of the last day of such calendar quarter, which is equal initially to
$22.50
(the primary offering price minus selling commissions and dealer manager fees). The Class B Units are intended to be profits interests and will vest, and no longer be subject to forfeiture, at such time as: (a) the value of the OP's assets plus all distributions made by the Company to its stockholders equals or exceeds the total amount of capital contributed by investors plus a
6.0%
cumulative, pretax, non-compounded annual return thereon, or the "economic hurdle;" (b) any one of the following events occurs concurrently with or subsequently to the achievement of the economic hurdle described above: (i) a listing of the Company's common stock on a national securities exchange; (ii) a transaction to which the Company or the OP is a party, as a result of which OP units or the Company's common stock are or will be exchanged for or converted into the right, or the holders of such securities will otherwise be entitled, to receive cash, securities or other property or any combination thereof; or (iii) the termination of the advisory agreement without cause by an affirmative vote of a majority of the Company's independent directors after the economic hurdle has been met; and (c) the Advisor pursuant to the advisory agreement is providing services to the Company immediately prior to the occurrence of an event of the type described in clause (b) above (the "performance condition"). The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. As of
September 30, 2017
, the Company cannot determine the probability of achieving the performance condition. The Advisor receives distributions on Class B Units, whether vested or unvested, at the same rate as distributions received on the Company's common stock. Such distributions on issued Class B Units are expensed in the consolidated statements of operations and comprehensive loss until the performance condition is considered probable to occur. As of
September 30, 2017
, the Company's board of directors had approved the issuance of
159,159
Class B Units in connection with the arrangement. Beginning on October 1, 2015, and in lieu of the asset management subordinated participation, the Company began paying an asset management fee in cash to the Advisor or its assignees as compensation for services rendered in connection with the management of the Company’s assets. The asset management fee is payable on the first business day of each month in the amount of
0.0625%
multiplied by (i) the cost of the Company's assets for the preceding monthly period or (ii) during the period of time after the Company publishes Estimated Per-Share NAV, the lower of the cost of assets and the estimated fair market value of the Company’s assets as reported in the applicable periodic or current report filed with the SEC disclosing the fair market value. The Company paid
$1.4 million
and
$4.1 million
in cash asset management fees during the
three and nine months ended
September 30, 2017
, respectively. The Company paid
$1.3 million
and
$3.3 million
in cash asset management fees during the
three and nine months ended
September 30, 2016
, respectively.
Unless the Company contracts with a third party, the Company pays the Property Manager a property management fee equal to: (i) for non-hotel properties,
4.0%
of gross revenues from the properties managed, plus market-based leasing commissions; and (ii) for hotel properties, a market-based fee based on a percentage of gross revenues. The Company also reimburses the Property Manager for property-level expenses. The Property Manager may subcontract the performance of its property management and leasing services duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracts for these services. The Company incurred approximately
$145,000
and
$470,000
in property management fees during the
three and nine months ended
September 30, 2017
, respectively. The Company incurred
$183,000
and
$345,000
in property management fees during the
three and nine months ended
September 30, 2016
, respectively.
The Company reimburses the Advisor’s costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a)
2.0%
of average invested assets and (b)
25.0%
of net income other than any additions to reserves for depreciation, bad debt, impairments or other similar non-cash expenses and excluding any gain from the sale of assets for that period, unless the Company's independent directors determine that such excess was justified based on unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the Advisor in subsequent periods. Additionally, the Company reimburses the Advisor for personnel costs in connection with other services; however, the Company may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expense reimbursements or real estate commissions and no reimbursement shall be made for salaries, bonuses or benefits to be paid to the Company's executive officer. Total reimbursement of costs and expenses for the
three and nine months ended
September 30, 2017
were
$1.0 million
and
$2.5 million
, respectively. Total reimbursement of costs and expenses for the
three and nine months ended
September 30, 2016
were
$0.5 million
and
$1.3 million
, respectively.
19
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The predecessor to the parent of the Sponsor was party to a services agreement with RCS Advisory Services, LLC ("RCS Advisory"), a subsidiary of RCAP, pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by the Sponsor with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to the parent of the Sponsor instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory.
The Company was also party to a transfer agency agreement with American National Stock Transfer, LLC ("ANST"), a subsidiary of RCAP, pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end Internal Revenue Service ("IRS") reporting and other services), and supervisory services overseeing the transfer agency services performed by DST Systems, Inc. ("DST"), a third-party transfer agent. The Sponsor received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. DST continued to provide the Company with transfer agency services and, on March 10, 2016, the Company entered into a definitive agreement with DST to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services). For the
three and nine months ended
September 30, 2017
and
2016
, the fees for services from DST are included in general and administrative expenses on the consolidated statements of operations and comprehensive loss during the period in which the service was provided.
The following table details amounts incurred in connection with the Company's operations-related services described above as of and for the periods presented:
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
Payable (receivable) as of
|
|||||||||||||||||||||||||
|
(In thousands)
|
2017
|
2016
|
2017
|
2016
|
September 30, 2017
|
December 31, 2016
|
|||||||||||||||||||||
|
Acquisition fees and reimbursements:
|
|||||||||||||||||||||||||||
|
Acquisition fees and related cost reimbursements
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,600
|
|
$
|
—
|
|
$
|
(646
|
)
|
|||||||||
|
Financing coordination fees
|
—
|
|
—
|
|
1,050
|
|
743
|
|
—
|
|
—
|
|
|||||||||||||||
|
Ongoing fees:
|
|
|
|||||||||||||||||||||||||
|
Operating fees incurred from related parties
|
1,515
|
|
1,525
|
|
4,566
|
|
3,676
|
|
(77
|
)
|
(1)
|
(24
|
)
|
||||||||||||||
|
Professional fees and other reimbursements
|
988
|
|
460
|
|
2,644
|
|
1,286
|
|
66
|
|
(2)
|
167
|
|
||||||||||||||
|
Distributions on Class B units
|
61
|
|
60
|
|
180
|
|
180
|
|
—
|
|
—
|
|
|||||||||||||||
|
Total related party operation fees and reimbursements
|
$
|
2,564
|
|
$
|
2,045
|
|
$
|
8,440
|
|
$
|
9,485
|
|
$
|
(11
|
)
|
$
|
(503
|
)
|
|||||||||
_____________________
|
(1)
|
Represents a receivable balance of approximately
$83,000
related to property management fees, offset with a payable balance of approximately
$6,000
related to asset management fees. The receivable balance is included in prepaid expenses and other assets on the unaudited consolidated balance sheet. The payable balance is included in accounts payable, accrued expense and other liabilities on the unaudited consolidated balance sheet.
|
(2) The payable balance is included in accounts payable, accrued expense and other liabilities on the unaudited consolidated balance sheet.
Fees and Participations Paid in Connection with Liquidation or Listing
The Company will pay to the Advisor an annual subordinated performance fee calculated on the basis of the Company’s return to stockholders, payable annually in arrears, such that for any year in which investors receive payment of
6.0%
per annum, the Advisor will be entitled to
15.0%
of the excess return, provided that the amount paid to the Advisor does not exceed
10.0%
of the aggregate return for such year, and that the amount paid to the Advisor will not be paid unless investors receive a return of capital contributions. This fee will be paid only upon the sale of assets, distributions or other event which results in the return on stockholders’ capital exceeding
6.0%
per annum.
No
subordinated performance fees were incurred during the
three and nine months ended
September 30, 2017
and
2016
.
20
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The Company will pay a brokerage commission to the Advisor or its affiliates on the sale of properties, not to exceed the lesser of
2.0%
of the contract sale price of the property and
50.0%
of the total brokerage commission paid if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of
6.0%
of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale.
No
such fees were incurred during the
three and nine months ended
September 30, 2017
and
2016
.
Upon a liquidation or sale of all or substantially all assets, including through a merger or sale of stock of the Company, the Special Limited Partner will be entitled to receive a subordinated distribution from the OP equal to
15.0%
of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of an annual
6.0%
cumulative, pre-tax non-compounded return on the capital contributed by investors. The Special Limited Partner will not be entitled to the subordinated participation in net sale proceeds unless the Company’s investors have received a return of their capital plus a
6.0%
cumulative non-compounded annual return on their capital contributions.
No
such participation in net sales proceeds became due and payable during the
three and nine months ended
September 30, 2017
and
2016
.
If the Company’s shares of common stock are listed on a national exchange, the Special Limited Partner will be entitled to receive a promissory note as evidence of its right receive subordinated incentive listing distributions from the OP equal to
15.0%
of the amount by which the Company’s market value plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a
6.0%
cumulative, pre-tax non-compounded annual return to investors. The Special Limited Partner will not be entitled to the subordinated incentive listing distributions unless investors have received a
6.0%
cumulative, pre-tax non-compounded annual return on their capital contributions.
No
such distributions were incurred during the
three and nine months ended
September 30, 2017
and
2016
.
Upon termination or non-renewal of the advisory agreement with or without cause, the Special Limited Partner will be entitled to receive a promissory note as evidence of its right to receive subordinated termination distributions from the OP equal to
15.0%
of the amount, calculated as of the termination date, by which the sum of the Company’s market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual
6.0%
cumulative, pre-tax, non-compounded annual return to investors. The Special Limited Partner will not be entitled to the subordinated incentive listing distribution unless investors have received a
6.0%
cumulative, pre-tax non-compounded annual return on their capital contributions. The Special Limited Partner may elect to defer its right to receive the subordinated termination distribution until either a listing on a national securities exchange or other liquidity event occurs, subsequently, in which case the Company's market value will be calculated as of the date of the applicable listing or liquidity event.
No
such distributions were incurred during the
three and nine months ended
September 30, 2017
and
2016
.
The Special Limited Partner and its affiliates can earn only one of the subordinated distribution from the OP described above.
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company including accounting services, transaction management and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that the Advisor and its affiliates are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Restricted Share Plan
The Company has an employee and director incentive restricted share plan (as amended to date, the “RSP”). Until an amendment to the RSP in August 2017 (the “RSP Amendment”), the RSP provided for the automatic grant of
1,333
restricted shares of common stock (“restricted shares”) to each of the independent directors. Following the RSP Amendment, the number of restricted shares to be issued automatically in those circumstances is equal to $30,000 divided by the then-current Estimated
21
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Per-Share NAV. In November 2017, the RSP was amended and restated to reflect the RSP Amendment and certain clarifying changes.
These automatic grants are made without any further approval by the Company’s board of directors or the stockholders, after initial election to the board of directors and after each annual stockholder meeting, with such restricted shares vesting annually over a
five
-year period following the grant date in increments of
20.0%
per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of shares granted as awards under the RSP shall not exceed
5.0%
of the Company’s outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed
1.5 million
shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. For restricted share awards granted prior to July 1, 2015, such awards would typically be forfeited with respect to the unvested restricted shares upon the termination of the recipient's employment or other relationship with the Company. For restricted share awards granted on or after July 1, 2015, such awards provide for accelerated vesting of the portion of the unvested restricted shares scheduled to vest in the year of the recipient's voluntary termination or the failure to be re-elected to the board. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares receive cash distributions on the same basis as distributions paid on shares of common stock prior to the time that the restrictions on the restricted shares have lapsed and thereafter. Any distributions payable in shares of common stock will be subject to the same restrictions as the underlying restricted shares.
The following table displays restricted share award activity during the
nine months ended
September 30, 2017
:
|
Number of
Restricted Shares |
Weighted-Average Issue Price
|
||||||
|
Unvested, December 31, 2016
|
9,065
|
|
$
|
22.50
|
|
||
|
Granted
|
—
|
|
—
|
|
|||
|
Vested
|
(2,133
|
)
|
22.50
|
|
|||
|
Forfeited
|
—
|
|
—
|
|
|||
|
Unvested, September 30, 2017
|
|
6,932
|
|
$
|
22.50
|
|
|
As of
September 30, 2017
, the Company had
$0.1 million
of unrecognized compensation cost related to unvested restricted share awards granted under the RSP. That cost is expected to be recognized over a weighted-average period of
3.1
years. Restricted share awards are expensed in accordance with the service period required. Compensation expense related to restricted share awards was approximately
$12,000
and
$36,000
for the
three and nine months ended
September 30, 2017
, respectively. Compensation expense related to restricted share awards was approximately
$29,000
and
$49,000
for the
three and nine months ended
September 30, 2016
, respectively. Compensation expense related to restricted share awards is recorded as general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at the respective director's election. There are no restrictions on the shares issued. There were no shares of common stock issued in lieu of cash during the
three and nine months ended
September 30, 2017
or
2016
.
22
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The following is a summary of the basic and diluted net loss per share computation for the periods presented:
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
|
2017
|
2016
|
2017
|
2016
|
|||||||||||||
|
Net loss
(in thousands)
|
$
|
(5,877
|
)
|
$
|
(4,369
|
)
|
$
|
(16,025
|
)
|
$
|
(14,175
|
)
|
||||
|
Basic and diluted weighted average shares outstanding
|
31,106,250
|
|
30,556,494
|
|
30,956,152
|
|
30,634,400
|
|
||||||||
|
Basic and diluted net loss per share
|
$
|
(0.19
|
)
|
$
|
(0.14
|
)
|
$
|
(0.52
|
)
|
$
|
(0.46
|
)
|
||||
The Company had the following potentially dilutive securities as of
September 30, 2017
and
2016
, which were excluded from the calculation of diluted net loss per share attributable to stockholders as the effect would have been antidilutive:
|
Nine Months Ended September 30,
|
||||||
|
2017
|
2016
|
|||||
|
Unvested restricted shares
|
6,932
|
|
10,131
|
|
||
|
OP units
|
90
|
|
90
|
|
||
|
Class B units
|
159,159
|
|
159,159
|
|
||
|
Total potentially dilutive securities
|
166,181
|
|
169,380
|
|
||
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements, except for the following disclosures:
Election of Katie P. Kurtz as Chief Financial Officer and Treasurer
On October 5, 2017, Nicholas Radesca notified the Company's board of directors that he intends to retire and therefore resign from his positions as chief financial officer and treasurer of the Company, the Advisor and the Property Manager. Mr. Radesca's resignations will be effective on the later of (i) November 15, 2017 and (ii) the day after the Company files its Quarterly Report on Form 10-Q for the quarter ended September 30, 2017. There were no disagreements between Mr. Radesca and the Company or the Advisor.
On October 9, 2017, the Company's board of directors unanimously elected Katie P. Kurtz as chief financial officer and treasurer of the Company, effective upon the effectiveness of Mr. Radesca’s resignation. Ms. Kurtz has also been appointed as chief financial officer and treasurer of the Advisor and the Property Manager, effective upon the effectiveness of Mr. Radesca's resignation.
23
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Realty Capital New York City REIT, Inc. (including, as required by context, New York City Operating Partnership, L.P. (the "OP") and its subsidiaries, the "Company," "we," "our" or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
|
•
|
We have a limited operating history which makes our future performance difficult to predict;
|
|
•
|
All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in our advisor, New York City Advisors, LLC (our "Advisor") and other entities affiliated with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global"); as a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investor entities advised by AR Global affiliates and conflicts in allocating time among these entities and us, which could negatively impact our operating results;
|
|
•
|
We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants;
|
|
•
|
We may not be able to achieve our rental rate objectives on new and renewal leases and our expenses could be greater, which may impact operations;
|
|
•
|
We do not expect to generate sufficient cash flow from operations in 2017 to fund distributions at our current level. There can be no assurance that additional liquidity will be available to us on favorable terms, or at all, in sufficient amounts to maintain distributions at our current levels. There can be no assurance we will be able to continue paying cash distributions at our current level or at all;
|
|
•
|
Our properties may be adversely affected by economic cycles and risks inherent to the New York metropolitan statistical area, especially New York City;
|
|
•
|
We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates;
|
|
•
|
We may fail to continue to qualify to be treated as a real estate investment trust for United States federal income tax purposes ("REIT");
|
|
•
|
Because investment opportunities that are suitable for us may also be suitable for other AR Global-advised programs or investors, our Advisor and its affiliates may face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders;
|
|
•
|
No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid;
|
|
•
|
Our stockholders are limited in their ability to sell their shares pursuant to our share repurchase program (the “SRP”) and may have to hold their shares for an indefinite period of time;
|
|
•
|
If we and our Advisor are unable to find suitable investments, then we may not be able to achieve our investment objectives, or pay distributions with cash flows from operations;
|
|
•
|
We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus subject to regulation under the Investment Company Act; and
|
|
•
|
As of
September 30, 2017
, we owned only
six
properties and therefore have limited diversification.
|
24
Overview
We were formed to invest our assets in properties in the five boroughs of New York City, with a focus on Manhattan. We may also purchase certain real estate assets that accompany office properties, including retail spaces and amenities, as well as hospitality assets, residential assets and other property types exclusively in New York City. As of
September 30, 2017
, we owned
six
properties consisting of
1,085,084
rentable square feet acquired for an aggregate purchase price of
$686.1 million
.
We were incorporated on December 19, 2013 as a Maryland corporation and elected and qualified to be taxed as a REIT beginning with our taxable year ended December 31, 2014. Substantially all of our business is conducted through the OP.
On April 24, 2014, we commenced our initial public offering ("IPO") on a "reasonable best efforts" basis of up to
30.0 million
shares of common stock,
$0.01
par value per share, at a price of
$25.00
per share, subject to certain volume and other discounts, for total gross proceeds of up to
$750.0 million
. We closed our IPO on May 31, 2015. As of
September 30, 2017
, we had
31.2 million
shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO and the DRIP of
$771.6 million
, inclusive of
$60.1 million
from the DRIP and net of repurchases.
We first established an estimated net asset value per share of our common stock (“Estimated Per-Share NAV”) in 2016. On October 24, 2016, our board of directors approved an Estimated Per-Share NAV of $21.25 as of June 30, 2016 (the “2016 Estimated Per-Share NAV”), which was published on October 26, 2016 (the “NAV Pricing Date”). Prior to the NAV Pricing Date, we had offered shares pursuant to the DRIP and had repurchased shares pursuant to the Share Repurchase Program (“SRP”) at a price based on $23.75 per share, the offering price in the IPO. Beginning with the NAV Pricing Date, we began to offer shares pursuant to the DRIP and repurchase shares pursuant to its SRP at a price based on Estimated Per-Share NAV.
On October 25, 2017, our board of directors approved an Estimated Per-Share NAV of $20.26 as of June 30, 2017 (the "2017 Estimated Per-Share NAV"), based on an estimated fair value of our assets less the estimated fair value of our liabilities, divided by 31,029,865 shares of common stock outstanding on a fully diluted basis as of June 30, 2017, which was published on October 26, 2017. We intend to publish subsequent valuations of Estimated Per-Share NAV at least once annually. We offer shares pursuant to the DRIP and repurchase shares pursuant to our SRP at a price based on Estimated Per-Share NAV.
We have no employees. Our Advisor manages our affairs on day-to-day basis. We have retained New York City Properties, LLC (our "Property Manager") to serve as our property manager. The Advisor and Property Manager are under common control with AR Global, the parent of our Sponsor, as a result of which they are related parties and each of these entities has received or will receive compensation, fees and expense reimbursements for services related to our IPO and, the investment and management of our assets. We are the sole general partner and hold substantially all of the units of limited partner interests in the OP, entitled "OP units" (“OP units”). The Advisor contributed
$2,020
to the OP in exchange for
90
OP units, which represents a nominal percentage of the aggregate OP ownership. A holder of OP units has the right to convert OP units for the cash value of a corresponding number of shares of our common stock or, at the option of the OP, a corresponding number of shares of our common stock, in accordance with the limited partnership agreement of the OP, provided, however, that such OP units must have been outstanding for at least one year. The remaining rights of the limited partners in the OP are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
25
Offering and Related Costs
All offering costs incurred by us, our Advisor and its affiliates on our behalf are charged to additional paid-in capital on the consolidated balance sheets. Offering and related costs include all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the dealer manager fees) include costs that may be paid by the Advisor, the Former Dealer Manager or their affiliates on our behalf. These costs include but are not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Former Dealer Manager for amounts it may pay to reimburse itemized and detailed due diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. We are obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor is obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by us in our IPO exceeded
2.0%
of gross offering proceeds in the IPO. As a result, these costs are our liability to the extent aggregate selling commissions, the dealer manager fee and other organization and offering costs are less than
12.0%
of the gross proceeds determined at the end of the IPO. As of the end of the IPO, aggregate selling commissions, dealer manager fees and other offering costs did not exceed 12.0% of the gross proceeds received in the IPO.
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Because many of our leases provide for rental increases at specified intervals, accounting principles generally accepted in the United States ("GAAP") require us to record a receivable, and include in revenues on a straight-line basis, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. We defer the revenue related to lease payments received from tenants in advance of their due dates. When we acquire a property, the acquisition date is considered to be the commencement date for the purposes of this calculation.
Rental revenue recognition commences when the tenant takes possession of or controls the physical use of the leased space. For the tenant to take possession, the leased space must be substantially ready for its intended use. To determine whether the leased space is substantially ready for its intended use, we evaluate whether we own or if the tenant owns the tenant improvements. When we are the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of the finished space, which is when such improvements are substantially complete. When we conclude that the tenant is the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of or controls the space.
When we conclude that we are the owner of tenant improvements, we capitalize the cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants. When we conclude that the tenant is the owner of tenant improvements for accounting purposes, we record our contribution towards those improvements as a lease incentive, which is included in deferred leasing costs, net on the consolidated balance sheets and amortized as a reduction to rental income on a straight-line basis over the term of the lease.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we will record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations.
We may own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, we defer the recognition of contingent rental income until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. If we own certain properties with leases that include these provisions, contingent rental income will be included in rental income on the consolidated statements of operations and comprehensive loss.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Investments in Real Estate
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statement of operations. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
26
We allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities and non-controlling interests based on their respective estimated fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets or liabilities may include the value of in-place leases, above- and below-market leases and other identifiable intangible assets or liabilities based on lease or property specific characteristics.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the comparable fair market lease rate, measured over the remaining term of the lease. The fair value of other intangible assets, such as real estate tax abatements and signage rights, are recorded based on the present value of the expected benefit and amortized over the expected useful life including any below-market fixed rate renewal options for below-market leases.
Fair values of assumed mortgages, if applicable, are recorded as debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above- or below-market interest rates.
Non-controlling interests in property owning entities are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
We use a number of sources in making our estimates of fair values for purposes of allocating purchase price, including real estate valuations prepared by independent valuation firms. We also consider information and other factors including: market conditions, the industry in which the tenant operates, characteristics of the real estate such as location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business.
Disposals of real estate investments that represent a strategic shift in operations that will have a major effect on our operations and financial results are presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all periods presented; otherwise, we continue to report these properties' operations within continuing operations. Properties that are intended to be sold will be designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs for all periods presented when they meet specific criteria to be presented as held for sale. Properties are no longer depreciated when they are classified as held for sale.
Restricted Cash
Restricted cash consists of mortgage lender required reserves for maintenance, real estate tax, structural, debt service, lease, tenant improvement and leasing commission cost.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to
40
years for buildings,
15
years for land improvements,
five
to
seven
years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Acquired above-market leases are amortized as a reduction of rental income over the remaining terms of the respective leases. Acquired below-market leases are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above and below-market in-place leases, is amortized to depreciation and amortization expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts, if applicable, are amortized as a reduction or increase to interest expense over the remaining term of the respective mortgages.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If such estimated cash flows are less than the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is based on the adjustment to estimated fair value less estimated cost to dispose of the asset. Generally, we determine estimated fair value for properties held for sale based on the agreed-upon selling price of an asset. These assessments may result in the immediate recognition of an impairment loss resulting in a reduction to net income (loss).
27
Recent Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes
a comprehensive model for entities to use in accounting for revenue arising from contracts with customers
. Under ASC 606, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A reporting entity may apply the amendments in ASC 606 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. We will adopt this guidance effective January 1, 2018 and currently expect to utilize the modified retrospective approach upon adoption and do not expect that this will result in a significant cumulative-effect adjustment to equity.
We have progressed in our project plan in evaluating our various revenue streams in order to identify any differences in the timing, measurement or presentation of revenue recognition under ASC 606 and ASC Topic 842,
Leases
(“ASC 842”). Based on our evaluation of our various revenue streams, we believe that gains on sales of real estate could be impacted by adoption of ASC 606. We expect that this standard could have an impact on the timing of gains on certain sales of real estate as a result of more transactions generally qualifying as sales of real estate and revenue being recognized at an earlier date than under current accounting guidance. Specifically, we expect that this would impact partial sales of real estate in situations where we no longer retain a controlling financial interest. If we were to enter into partial sales of real estate, we would derecognize the real estate asset consistent with the principles outlined in ASC 606 and any retained non-controlling ownership interest would be measured at fair value consistent with the guidance on noncash consideration in ASC 606.
We are continuing to evaluate any differences in the timing, measurement, or presentation of revenue recognition and the impact on our consolidated financial statements and internal accounting processes resulting from ASC 606 as well as ASC 842, Leases as discussed below.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. We are currently evaluating the impact of the new guidance.
In February 2016, the FASB issued an update to ASU 2016-02 establishing ASC 842, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASC 842 supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. ASC 842 will impact the lease accounting model for both lessees and lessors. We will adopt this guidance effective January 1, 2019.
We are a lessee for a property in which we have a ground lease as of September 30, 2017. For this lease, we will be required to record a right-of-use asset and lease liability equal to the present value of the remaining lease payments upon adoption of this update. The new standard requires lessees to apply a dual lease classification approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.
From a lessor perspective we expect that the new standard will impact the presentation of lease and non-lease components of revenue such as rent, and operating expense reimbursements including common area maintenance, taxes, and insurance from leases for which we are a lessor. We do not expect this guidance to impact its existing lessor revenue recognition pattern. We anticipate that it will elect the following practical expedients, which must be elected as a package and applied consistently by an entity to all of its leases, which allow us to not have to reassess the following upon adoption: (i) whether any expired or existing contract contains a lease, (ii) lease classification related to expired or existing leases, or (iii) whether costs incurred on existing leases qualify as initial direct costs. We are continuing to evaluate any differences in the timing, measurement, or presentation of lessor revenues as well as the impact of the new lessee accounting model on our consolidated financial position, results of operations and disclosures.
28
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In November 2016, the FASB issued guidance on the classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In May 2017, the FASB issued guidance that clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update states that modification accounting should be used unless the fair value of the award, the vesting terms of the award and the classification of the award as either equity or liability, does not change as a result of the modification. The revised guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for reporting periods for which financial statements have not yet been issued. We are currently evaluating the impact of this new guidance.
Recently Adopted Accounting Pronouncements
In October 2016, the FASB issued guidance where a reporting entity will need to evaluate if it should consolidate a variable interest entity ("VIE"). The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We adopted the provisions of this guidance beginning January 1, 2017 and determined that there is no impact to our consolidated financial position, results of operations and cash flows.
In January 2017, the FASB issued guidance that revises the definition of a business. This new guidance is applicable when evaluating whether an acquisition should be treated as either a business acquisition or an asset acquisition. Under the revised guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not be considered a business. The revised guidance is effective for reporting periods beginning after December 15, 2017, and the amendments will be applied prospectively. Early application is permitted only for transactions that have not previously been reported in issued financial statements. We have assessed this revised guidance and expect, based on historical acquisitions, future properties acquired to qualify as an asset acquisition rather than a business acquisition, which would result in the capitalization of related transaction costs. We adopted this guidance for the
nine months ended
September 30, 2017
and have had no acquisition to apply the new standard.
Properties -
The following table presents certain information about the investment properties we owned as of
September 30, 2017
:
|
Portfolio
|
Acquisition Date
|
Rentable Square Feet
|
Occupancy
|
Remaining Lease Term
(1)
|
||||||
|
421 W. 54th Street - Hit Factory
|
Jun. 2014
|
12,327
|
|
100.0
|
%
|
3.0
|
||||
|
400 E. 67th Street - Laurel Condominium
|
Sept. 2014
|
58,750
|
|
100.0
|
%
|
6.5
|
||||
|
200 Riverside Boulevard - ICON Garage
|
Sept. 2014
|
61,475
|
|
100.0
|
%
|
20.0
|
||||
|
9 Times Square
|
Nov. 2014
|
167,390
|
|
57.9
|
%
|
5.3
|
||||
|
123 William Street
|
Mar. 2015
|
542,676
|
|
92.1
|
%
|
8.0
|
||||
|
1140 Avenue of the Americas
|
Jun. 2016
|
242,466
|
|
89.1
|
%
|
4.5
|
||||
|
1,085,084
|
|
87.1
|
%
|
6.4
|
||||||
(1) Remaining lease term in years as of
September 30, 2017
, calculated on a weighted-average basis, as applicable.
29
Results of Operations
As of
September 30, 2017
and
September 30, 2016
, we owned
six
properties, comprising five properties purchased prior to January 1, 2016 (our "Initial Five Properties"), and one property we acquired in June 2016 located at 1140 Avenue of the Americas in Manhattan, New York (our "1140 Property"). Due to our 1140 Property, our results of operations for the
nine months ended
September 30, 2017
as compared to the
nine months ended
September 30, 2016
, reflect significant increases in most categories.
As of
September 30, 2017
, our overall portfolio occupancy was
87.1%
notwithstanding the fact that occupancy at our property located at 9 Times Square was
57.9%
and 56.0% as of
September 30, 2017
and
December 31, 2016
, respectively. In August, we entered into a lease with a tenant for three full floors at 9 Times Square totaling approximately 26,000 square feet. Terms for two of the three floors representing approximately 18,000 square feet had not commenced as of
September 30, 2017
, and, as a result were not included in our occupancy as of that date. However, if the term for the 18,000 square feet comprising these two floors had commenced during the quarter ended
September 30, 2017
, the occupancy for 9 Times Square as of
September 30, 2017
would have been 68.4%.
During the three months ended
September 30, 2017
, six leases with six different tenants totaling approximately 51,000 square feet expired, although a new lease was executed by one of those tenants with respect to approximately 41,000 square feet in connection with the expiration of the existing lease.
The following table is a summary of our quarterly leasing activity for the
nine months ended
September 30, 2017
:
__________________________________
|
Q3 2017
|
Q2 2017
|
Q1 2017
|
|||||||||
|
Leasing activity:
|
|||||||||||
|
Lease executed
|
2
|
|
3
|
|
2
|
|
|||||
|
Total square feet leased
|
9,983
|
|
23,579
|
|
21,701
|
|
|||||
|
Annualized straight-line rent
(1)
|
$
|
80.95
|
|
$
|
49.65
|
|
$
|
44.78
|
|
||
|
Weighted average lease term (years)
|
10.74
|
|
9.2
|
|
5.8
|
|
|||||
|
Replacement leases:
(2)
|
|
|
|||||||||
|
Replacement leases executed
|
2
|
|
2
|
|
2
|
|
|||||
|
Square feet
|
48,519
|
|
19,639
|
|
21,701
|
|
|||||
|
Tenant improvements on replacement leases per square foot
(3)
|
$
|
40.00
|
|
$
|
60.00
|
|
$
|
14.04
|
|
||
|
Leasing commissions on replacement leases per square foot
(3)
|
$
|
36.04
|
|
$
|
19.73
|
|
$
|
14.42
|
|
||
(1) Represents the GAAP basis weighted average rent per square feet that is recognized over the term on the respective leases, includes free rent and periodic rent increases, excludes recoveries.
(2) Replacement leases are for spaces that were leased during the period and also have been leased at some time during the prior twelve months.
(3) Presented as if tenant improvements and leasing commissions were incurred in the period in which the lease was signed, which may be different than the period in which these amounts were actually paid.
Subsequent to the acquisition of 9 Times Square in November 2014, we allowed leases to expire and terminate as part of the implementation of our repositioning, redeveloping and remarketing plan with respect to the property. This effort has taken longer than anticipated, however, as of
September 30, 2017
, we have substantially completed our repositioning and redevelopment plan and are working to lease the remaining vacant space at the property. Although this effort has taken longer than originally anticipated and the overall New York City leasing market has not been as strong as expected through September 30, 2017, during the third quarter of 2017, and continuing into the fourth quarter of 2017, we have seen strong interest in the leasing of the vacant space at the property. We are also working with several prospective tenants interested in office space and existing tenants interested in expanding the office space they currently occupy, and we are expecting these positive leasing trends to continue. In addition to the positive leasing trends with respect to the office space, we have seen an increase in interest in leasing the retail space at the property since engaging new leasing brokers as of March 30, 2017 to re-engage and refresh the marketing for this space. Although we continue to experience vacancies at the property, given the trends that we are seeing at the property, we expect revenue generated by the property to increase during the remainder of 2017.
30
Comparison of
Three Months Ended
September 30, 2017
to
Three Months Ended
September 30, 2016
Rental Income
Rental income decreased
$0.1 million
to
$13.3 million
for the
three months ended
September 30, 2017
, from
$13.4 million
for the
three months ended
September 30, 2016
, due to a slight decrease in occupancy.
Operating Expense Reimbursements
Operating expense reimbursements increased
$0.1 million
to
$1.1 million
for the
three months ended
September 30, 2017
, compared to
$1.0 million
for the
three months ended
September 30, 2016
, primarily due to an increase in real estate tax reimbursements.
Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of certain property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for most operating costs of the respective properties. Therefore, operating expense reimbursements are directly affected by changes in property operating expenses, although not all increases in property operating expenses may be reimbursed by our tenants. Operating expense reimbursements primarily relate to costs associated with maintaining our properties including utilities, repairs and maintenance and real estate taxes incurred by us and subsequently reimbursed by the tenant.
Property Operating Expenses
Property operating expenses increased
$0.4 million
to
$6.8 million
for the
three months ended
September 30, 2017
from
$6.4 million
for the
three months ended
September 30, 2016
. The increase is primarily due the increase in property operating expense relates to the increased costs of maintaining our six properties including the costs of real estate taxes, utilities, and repairs and maintenance.
Operating Fees incurred from Related Parties
We incurred
$1.5 million
and $
1.5 million
in fees for asset and property management services from our Advisor and Property Manager for the
three months ended
September 30, 2017
and
2016
, respectively
.
Please see
Note 9 — Related Party Transactions and Arrangements
for more information on fees incurred from our Advisor.
Acquisition and Transaction Related Expenses
We incurred
no
acquisition and transaction related expenses for the
three months ended
September 30, 2017
. We incurred $24,000 in acquisition and transaction related expenses for the
three months ended
September 30, 2016
.
General and Administrative Expenses
General and administrative expenses increased
$0.8 million
to
$2.1 million
for the
three months ended
September 30, 2017
compared to
$1.3 million
for the
three months ended
September 30, 2016
, primarily related to an increase in general and administrative expense reimbursements incurred from our Advisor, as well as an increase in audit, legal and proxy fees. General and administrative expense reimbursements incurred from our Advisor increased
$0.5 million
to
$1.0 million
for the
three months ended
September 30, 2017
compared to
$0.5 million
for the
three months ended
September 30, 2016
. Audit, legal and proxy fees contributed $0.3 million to the increase.
Depreciation and Amortization
Depreciation and amortization expenses decreased
$0.2 million
to
$7.1 million
for the
three months ended
September 30, 2017
, compared to
$7.3 million
for the
three months ended
September 30, 2016
. The decrease is due to the expiration of several leases during the period that had been amortizing.
Interest Expense
Interest expense increased
$0.5 million
to
$2.9 million
for the
three months ended
September 30, 2017
, from
$2.4 million
for the
three months ended
September 30, 2016
, primarily due to the refinancing of 123 William Street. As of
September 30, 2017
, we had two loans outstanding with a combined balance of
$239.0 million
and a weighted average effective interest rate of
4.61%
. As of
September 30, 2016
, we had two loans outstanding with a combined balance of $195.0 million and a weighted average effective interest rate of 3.58%.
Income from Investment Securities and Interest
Income from investment securities and interest increased approximately
$12,000
to approximately
$68,000
for the
three months ended
September 30, 2017
, compared to approximately
$56,000
three months ended
September 30, 2016
. The income primarily related to interest earned on our cash balance during the period.
31
Comparison of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016
Rental Income
Rental income increased
$9.2 million
to
$40.0 million
for the
nine months ended
September 30, 2017
, from
$30.8 million
for the
nine months ended
September 30, 2016
, primarily due to our 1140 Property, which contributed $8.9 million to the increase and our Initial Five Properties provided $0.3 million of the increase in rental income.
Operating Expense Reimbursements
Operating expense reimbursements increased
$1.4 million
to
$3.6 million
for the
nine months ended
September 30, 2017
, compared to
$2.2 million
for the
nine months ended
September 30, 2016
, primarily due to the acquisition of our 1140 Property on June 15, 2016, which contributed to $0.9 million of the increase. Our Initial Five Properties provided $0.4 million of the increase.
Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of certain property operating expenses, in addition to base rent, whereas under certain other lease agreements, the tenants are directly responsible for most operating costs of the respective properties. Therefore, operating expense reimbursements are directly affected by changes in property operating expenses, although not all increases in property operating expenses may be reimbursed by our tenants. Operating expense reimbursements primarily relate to costs associated with maintaining our properties including utilities, repairs and maintenance and real estate taxes incurred by us and subsequently reimbursed by the tenant.
Property Operating Expenses
Property operating expenses increased
$6.0 million
to
$19.9 million
for the
nine months ended
September 30, 2017
from
$13.9 million
for the
nine months ended
September 30, 2016
primarily due to our 1140 Property, which contributed $5.0 million to the increase. Our Initial Five Properties provided $1.0 million of the increase. The increase in property operating expenses primarily related to the increased costs of maintaining our six properties including the costs of real estate taxes, condominium fees, utilities, repairs and maintenance and property insurance.
Operating Fees incurred from Related Parties
We incurred
$4.6 million
and
$3.7 million
in fees for asset and property management services from our Advisor and Property Manager for the
nine months ended
September 30, 2017
and 2016, respectively. Cash asset management fees increased in direct correlation with the increase in cost of assets, as a result of the acquisition of our 1140 Property. We paid
$4.1 million
and
$3.3 million
in cash for asset management fees for the
nine months ended
September 30, 2017
and 2016, respectively. Property management fees increased in direct correlation with gross revenue and amounted to
$0.5 million
and
$0.3 million
for the
nine months ended
September 30, 2017
and 2016, respectively. Please see
Note 9 — Related Party Transactions and Arrangements
for more information on fees incurred from our Advisor.
Acquisition and Transaction Related Expenses
We incurred approximately
$6,000
of acquisition and transaction related expenses for the
nine months ended
September 30, 2017
related to a dead deal cost. For the
nine months ended
September 30, 2016
, we incurred approximately
$4.3 million
of acquisition and transaction related expenses in connection with acquiring our 1140 Property.
General and Administrative Expenses
General and administrative expenses increased
$1.8 million
to
$5.6 million
for the
nine months ended
September 30, 2017
compared to
$3.8 million
for the
nine months ended
September 30, 2016
, primarily related to an increase in general and administrative expense reimbursements incurred from our Advisor, as well as an increase in audit, legal fees and proxy services. General and administrative expense reimbursements incurred from our Advisor increased
$1.2 million
to
$2.5 million
for the
nine months ended
September 30, 2017
compared to
$1.3 million
for the
nine months ended
September 30, 2016
. Audit, legal and proxy fees contributed $0.5 million of the increase.
Depreciation and Amortization
Depreciation and amortization expenses increased
$4.5 million
to
$21.3 million
for the
nine months ended
September 30, 2017
, compared to
$16.8 million
for the
nine months ended
September 30, 2016
, primarily due to our 1140 Property, which contributed to $4.7 million of the increase.
Interest Expense
Interest expense increased
$3.4 million
to
$8.4 million
for the
nine months ended
September 30, 2017
, from
$5.0 million
for the
nine months ended
September 30, 2016
, due to the closing of the loan on our 1140 Property on June 15, 2016 and refinancing of 123 William Street on March 6, 2017. As of
September 30, 2017
, we had two loans outstanding with a combined balance of
$239.0 million
and a weighted average effective interest rate of
4.61%
. As of
September 30, 2016
, we had two loans outstanding with a combined balance of $195.0 million and a weighted average effective interest rate of 3.58%.
32
Income from Investment Securities and Interest
Income from investment securities and interest decreased
$0.1 million
to
$0.2 million
for the
nine months ended
September 30, 2017
, compared to approximately
$0.3 million
nine months ended
September 30, 2016
. The income is primarily related to interest earned on our cash balance during the period.
Gain on Sale of Investment Securities
Gain on sale of investment securities increased approximately
$24,000
for the
nine months ended
September 30, 2017
, which resulted from the sale of investment in equity securities with a cost basis of approximately
$467,000
for approximately
$491,000
. No investment in equity securities was sold during the
nine months ended
September 30, 2016
.
Cash Flows for the
Nine Months Ended
September 30, 2017
During the
nine months ended
September 30, 2017
, net cash provided by operating activities was approximately
$2.4 million
, compared to net cash used of
$0.6 million
during
nine months ended
September 30, 2016
. The increase is primarily due to the acquisition of our 1140 Property, acquired in June 2016.
The level of cash flows provided by or used in operating activities is affected by the volume of acquisition activity, restricted cash we are required to maintain, the timing of interest payments, the receipt of scheduled rent payments and the level of property operating expenses.
Net cash provided by operating activities was
$2.4 million
during the
nine months ended
September 30, 2017
and consisted of a net loss of
$16.0 million
, adjusted for depreciation and amortization for tangible and intangible assets and other non-cash expenses of
$20.8 million
, which resulted in cash inflows of
$4.8 million
. Net cash provided by operating activities included net cash inflows of
$2.5 million
for an increase in deferred rent related to payments received from tenants in advance of their due dates and other liabilities, as well as a
$3.9 million
increase related to accounts payable and accrued expenses associated with operating activities. These operating cash inflows were partially offset by a decrease in prepaid expenses and other assets of
$7.2 million
primarily related to an increase in unbilled rent receivables recorded in accordance with accounting for rental income on a straight-line basis and restricted cash of
$1.5 million
reserved for ground rent and real estate taxes required by the mortgage lender for the property at 1140 Avenue of the Americas.
Net cash used in investing activities of
$7.6 million
during the
nine months ended
September 30, 2017
related to payments of capital expenditures of
$8.1 million
relating to building and tenant improvements at 9 Times Square, 123 William Street and 1140 Avenue of the Americas, offset by the proceeds received from the sale of investment securities of
$0.5 million
.
Net cash used in financing activities of
$12.0 million
during the
nine months ended
September 30, 2017
related to the proceeds from mortgage note payable of
$115.2 million
, which include
$140.0 million
of mortgage note payable, net
$24.8 million
of restricted cash required by the mortgage lender for leasing, tenant improvement and leasing commission reserves, partially offset by payment of mortgage note payable of
$96.0 million
, distributions to stockholders of
$20.9 million
, payments of
$2.9 million
relating to financing costs and repurchases of common stock of
$7.3 million
.
Cash Flows for the
Nine Months Ended
September 30, 2016
During the nine months ended September 30, 2016, net cash used in operating activities was $0.6 million, compared to $8.2 million of net cash used in operating activities during nine months ended September 30, 2015. Net cash used in operating activities contained acquisition and transaction related expenses of approximately $4.3 million and $6.0 million, respectively, for the nine months ended September 30, 2016 and 2015.
The level of cash flows used in operating activities is affected by the volume of acquisition activity, the timing of interest payments, the receipt of scheduled rent payments and the level of property operating expenses. Notwithstanding a net loss of $14.2 million, net cash used in operating activities included adjustments for depreciation and amortization of tangible and intangible assets and other non-cash expenses of $16.8 million, which resulted in cash outflows of $2.6 million. Net cash used in operating activities also included net cash inflows of $1.7 million for an increase in deferred rent related to payments received from tenants in advance of their due dates and other liabilities.
Net operating cash outflows primarily related to an increase in prepaid expenses and other assets of $6.3 million primarily related to an increase in unbilled rent receivables recorded in accordance with accounting for rental income on a straight-line basis as well as a $1.4 million decrease related to accounts payable and accrued expenses associated with operating activities.
Net cash used in investing activities during the nine months ended September 30, 2016 was $91.6 million, primarily related to the acquisition of 1140 Avenue of the Americas for $79.2 million, consisting of a purchase price of $178.5 million, net of purchase price adjustments, partially funded with a mortgage note payable of $99.0 million. Net cash used in investing activities also related to payment of capital expenditures of $12.4 million relating to building and tenant improvements at 9 Times Square and 123 William Street.
33
Net cash used in financing activities of $37.4 million during the nine months ended September 30, 2016 consisted primarily of distributions to stockholders of $18.7 million, payments of $3.3 million relating to financing costs, repurchases of common stock of $12.5 million and an increase in restricted cash of $2.9 million.
Liquidity and Capital Resources
As of
September 30, 2017
, we had cash and cash equivalents of
$30.5 million
as compared to $43.5 million as of
June 30, 2017
. Our principal demands for cash are to fund acquisitions, including the purchase price of any properties, loans and securities we acquire, improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations, distributions to our stockholders and repurchases under our SRP.
We expect to fund our future short-term operating liquidity requirements, including distributions, through a combination of net cash provided by our current property operations and the operations of properties to be acquired in the future, proceeds from secured mortgage financings and proceeds from reinvestments under the DRIP.
Management expects that, as our portfolio of investments stabilizes, specifically 9 Times Square, cash flow from our properties will be sufficient to fund operating expenses and a larger portion of the payment of our monthly distributions. There can be no assurance, however, that this stabilization will occur on a timely basis, or at all.
Other potential future sources of capital include proceeds from secured and unsecured financings from banks or other lenders, proceeds from future offerings, proceeds from the sale of properties and cash flows from operations to the extent we have cash flow in excess of the amount needed to fund distributions to our stockholders.
As with prior periods, for the three and nine months ended September 30, 2017, our cash flows from operations was less than the amount we distributed to our stockholders. We do not expect to generate sufficient cash flow from operations in 2017 to fund distributions at our current level. To pay distributions in future periods, as we have in prior periods, we expect to use cash on hand, proceeds from the sale of our shares through DRIP and proceeds from secured mortgages financings. In prior periods, we have also used remaining proceeds from the IPO to fund distributions, but this source will not be available to us in future periods as we used the remaining $2.4 million proceeds we received from the IPO during the nine months ended
September 30, 2017
. If these sources are insufficient to fund distributions, we may seek to obtain additional liquidity from other sources, such as borrowings other than secured mortgage financings, to fund distributions. Management expects that, as our portfolio of investments stabilizes, specifically 9 Times Square, cash flow from our properties will be sufficient to fund operating expenses and a larger portion of the payment of our monthly distributions. There can be no assurance, however, that this stabilization will occur on a timely basis, or at all. A decrease in the level of stockholder participation in our DRIP or continued cash flow less than the amount distributed or need to use cash flow that we may generate in the future for other purposes could have an adverse impact on our ability to meet these expectations. To the extent we are required to borrow additional amounts to pay distributions, we may not be able to do so on favorable terms or at all. There can be no assurance we will be able to continue paying cash distributions at our current level or at all.
We have used mortgage financing to acquire two of our properties and expect to continue to use debt financing as a source of capital. Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total "net assets" (as defined in our charter) as of the date of any borrowing, which is generally equal to 75% of the cost of our investments. We may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, we intend to limit our aggregate borrowings to 40% to 50% of the aggregate fair market value of our assets, which would be an aggregate borrowing of approximately
$322.4 million
to
$403.1 million
, respectively. As of
September 30, 2017
, our aggregate borrowings were
$239.0 million
. We may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation will be calculated once we have invested substantially all the proceeds of our IPO and will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
Share Repurchase Program
Our board of directors has adopted the SRP that enables stockholders, subject to certain conditions and limitations, to sell their shares to us. Due to these conditions and limitations, there can be no assurance that all, or any, shares submitted validly for repurchase will be repurchased under the SRP.
On June 14, 2017, we announced that our board of directors had adopted an amendment and restatement of the SRP that superseded and replaced the existing SRP effective as of July 14, 2017. Under the amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of our common stock or received their shares from us (directly or indirectly) through one or more non-cash transactions would be
34
considered for repurchase. Other terms and provisions of the amended and restated SRP remained consistent with the existing SRP.
Under the SRP in effect prior to this amendment and restatement, repurchases of shares of our common stock, when requested, are at the sole discretion of our board of directors and generally will be made semiannually (each six-month period ending June 30 or December 31, a "fiscal semester"). Repurchases for any fiscal semester were limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, we are only authorized to repurchase shares in a given fiscal semester up to the amount of proceeds received from the DRIP in that same fiscal semester, as well as any reservation of funds our board of directors may, in its sole discretion, make available for this purpose. Since we established the 2016 Estimated Per-Share NAV during the second fiscal semester of 2016, any repurchase requests received during the second fiscal semester of 2016 were paid at the Estimated Per-Share NAV. The SRP amendment became effective on February 28, 2016, and we published the 2017 Estimated Per-Share NAV in the second fiscal semester, after the repurchases with respect to the first fiscal semester of 2017 had been completed. Any shares repurchased with respect to the second fiscal semester of 2017 will be at the 2017 Estimated Per-Share NAV.
If a stockholder requests a repurchase and the repurchase is approved by our board of directors, we will reclassify such obligation from equity to a liability based on the value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. The following table reflects the number of shares repurchased cumulatively through
September 30, 2017
:
_____________________
|
Numbers of Shares Repurchased
|
Weighted-Average Price per Share
|
||||||
|
Cumulative repurchases as of December 31, 2016
|
645,335
|
|
$
|
23.63
|
|
||
|
Nine months ended September 30, 2017
(1)
|
359,458
|
|
20.41
|
|
|||
|
Cumulative repurchases as of September 30, 2017
|
1,004,793
|
|
$
|
22.48
|
|
||
|
(1)
|
Includes (i)
276,624
shares repurchased during the
three months ended March 31, 2017
for approximately
$5.6 million
at a weighted average price per share of
$20.15
, (ii)
578
shares repurchased during the
three months ended
June 30, 2017
for approximately
$13.7 thousand
at a weighted average price per share of
$23.68
and (iii)
82,256
shares repurchased during the
three months ended
September 30, 2017
, for approximately
$1.7 million
at a weighted average price per share of
$21.25
. Excludes rejected repurchase requests received during 2016 with respect to
902,420
shares for
$18.1 million
at an average price per share of
$20.03
. During the
three months ended
September 30, 2017
, following the effectiveness of the amendment and restatement of the SRP, the board of directors approved
100%
of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to June 30, 2017, which were fulfilled during the
three months ended
September 30, 2017
. No repurchases have been or will be made with respect to requests received during 2017 that are not valid requests in accordance with the amended and restated SRP.
|
Capital Expenditures
We may fund additional capital expenditures if we believe doing so will enhance the value of our investments. Additionally, many of our lease agreements with tenants require us to fund tenant improvement allowances.
As previously noted, subsequent to the acquisition of 9 Times Square in November 2014, we allowed leases to expire and terminate as part of the implementation of our repositioning, redeveloping and remarketing plan with respect to the property. As a result of these initiatives, we funded approximately $7.1 million of capital expenditures in 2016 related to building improvements, tenant improvements and leasing commissions. While we have substantially completed our repositioning and redevelopment plan with respect to 9 Times Square and are currently working to lease the remaining vacant space at the property, there can be no assurance that we will be successful in lease-up of this property or effectively repositioning or remarketing any other property we may acquire for these purposes, including increasing the occupancy rate. We expect capital expenditures in 2017 to be less than 2016 and consist primarily of tenant requested improvements incurred in connection with our leasing efforts. The remainder of $9.7 million in capital expenditures for
the year ended December 31, 2016
related to building and tenant improvements at 123 William Street and 1140 Avenue of the Americas. For the
nine months ended
September 30, 2017
, we have funded
$8.1 million
of capital expenditures.
35
Non-GAAP Financial Measures
This section reports non-GAAP financial measures, including funds from operations ("FFO"), modified funds from operations ("MFFO") and cash net operating income ("Cash NOI"). A description of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure, which is net income (loss), is provided below.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
The National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as FFO, which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and, when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the “IPA”), an industry trade group, has published a standardized measure of performance known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year over year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisitions fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses, amounts relating to deferred rent receivables and amortization of above-and below-market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
36
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
None of the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guideline or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
The table below reflects the items deducted or added to net loss in our calculation of FFO and MFFO for the periods presented.
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(In thousands)
|
March 31, 2017
|
June 30, 2017
|
September 30, 2017
|
September 30, 2017
|
||||||||||||
|
Net loss (in accordance with GAAP)
|
$
|
(4,786
|
)
|
$
|
(5,362
|
)
|
$
|
(5,877
|
)
|
$
|
(16,025
|
)
|
||||
|
Depreciation and amortization
|
6,997
|
|
7,227
|
|
7,125
|
|
21,349
|
|
||||||||
|
FFO
|
2,211
|
|
1,865
|
|
1,248
|
|
5,324
|
|
||||||||
|
Acquisition and transaction related
|
6
|
|
—
|
|
—
|
|
6
|
|
||||||||
|
Accretion of below- and amortization of above-market lease liabilities and assets, net
|
(539
|
)
|
(532
|
)
|
(499
|
)
|
(1,570
|
)
|
||||||||
|
Straight-line rent
|
(618
|
)
|
(603
|
)
|
(1,365
|
)
|
(2,586
|
)
|
||||||||
|
Straight-line ground rent
|
27
|
|
27
|
|
28
|
|
82
|
|
||||||||
|
Loss on extinguishment of debt
|
131
|
|
—
|
|
—
|
|
131
|
|
||||||||
|
Gain on sale of investment securities
|
$
|
—
|
|
$
|
(24
|
)
|
$
|
—
|
|
$
|
(24
|
)
|
||||
|
MFFO
|
$
|
1,218
|
|
$
|
733
|
|
$
|
(588
|
)
|
$
|
1,363
|
|
||||
Cash Net Operating Income
Cash NOI is a non-GAAP financial measure equal to net income (loss), the most directly comparable GAAP financial measure, less income from investment securities and interest, plus general and administrative expenses, acquisition and transaction-related expenses, depreciation and amortization, other non-cash expenses and interest expense. In calculating Cash NOI, we also eliminate the effects of straight-lining of rent and the amortization of above and below market leases. Cash NOI should not be considered an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity.
37
We use Cash NOI internally as a performance measure and believe Cash NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Therefore, we believe Cash NOI is a useful measure for evaluating the operating performance of our real estate assets and to make decisions about resource allocations. Further, we believe Cash NOI is useful to investors as performance measures because, when compared across periods, Cash NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition activity on an unlevered basis. Cash NOI excludes certain components from net income in order to provide results that are more closely related to a property's results of operations. For example, interest expense is not linked to the operating performance of a real estate asset and Cash NOI is not affected by whether the financing is at the property level or corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. Cash NOI presented by us may not be comparable to Cash NOI reported by other REITs that define Cash NOI differently. We believe that in order to facilitate a clear understanding of our operating results, Cash NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements.
The table below reflects the items deducted or added to net loss in our calculation of Cash NOI for the periods presented.
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(In thousands)
|
March 31, 2017
|
June 30, 2017
|
September 30, 2017
|
September 30, 2017
|
||||||||||||
|
Net loss (in accordance with GAAP)
|
$
|
(4,786
|
)
|
$
|
(5,362
|
)
|
$
|
(5,877
|
)
|
$
|
(16,025
|
)
|
||||
|
Income from Investment Securities and Interest
|
(49
|
)
|
(73
|
)
|
(68
|
)
|
(190
|
)
|
||||||||
|
General and administrative
|
1,576
|
|
1,992
|
|
2,066
|
|
5,634
|
|
||||||||
|
Operating fees incurred from related parties
|
1,538
|
|
1,513
|
|
1,515
|
|
4,566
|
|
||||||||
|
Acquisition and transaction related
|
6
|
|
—
|
|
—
|
|
6
|
|
||||||||
|
Depreciation and amortization
|
6,997
|
|
7,227
|
|
7,125
|
|
21,349
|
|
||||||||
|
Interest Expense
|
2,665
|
|
2,834
|
|
2,866
|
|
8,365
|
|
||||||||
|
Gain on sale of investment securities
|
—
|
|
(24
|
)
|
—
|
|
(24
|
)
|
||||||||
|
Accretion of below- and amortization of above-market lease liabilities and assets, net
|
(539
|
)
|
(532
|
)
|
(499
|
)
|
(1,570
|
)
|
||||||||
|
Straight-line rent
|
(618
|
)
|
(603
|
)
|
(1,365
|
)
|
(2,586
|
)
|
||||||||
|
Straight-line ground rent
|
27
|
|
27
|
|
28
|
|
82
|
|
||||||||
|
Cash NOI
|
$
|
6,817
|
|
$
|
6,999
|
|
$
|
5,791
|
|
$
|
19,607
|
|
||||
Distributions
In May 2014, our board of directors authorized, and we began paying monthly distributions to stockholders of record at a rate equal to
$1.5125
per annum, per share of common stock. We continue to pay monthly distributions at this rate, but we do not expect to generate sufficient cash flow from operations in 2017 to fund distributions at our current level. There can be no assurance that additional liquidity will be available to us, on favorable terms, or at all, in sufficient amounts to maintain distributions at our current levels. Our board of directors may reduce the amount of distributions paid or suspend distribution payments and therefore the amount and timing of future distribution payments, if any, are not assured.
Both the amount and timing of future distributions to our stockholders will be determined by our board of directors and are dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). Distribution payments are dependent on the availability of funds.
As with prior periods, for the three and
nine months ended
September 30, 2017
, our cash flows from operations was less than the amount distributed, and we do not expect to generate sufficient cash flow from operations in
2017
to fund distributions at our current level. No assurance as to cash flows from operations can be made with respect to future years. The amount of cash available for distributions is affected by many factors, such as rental income from acquired properties, our operating expense levels, the amount of our cash and many other variables. Actual cash available for distributions may vary substantially from estimates. We cannot give any assurance that rents from the properties we have acquired will increase, or that future acquisitions of real properties will increase our cash available for distributions to stockholders. Management expects that, as our portfolio of investments stabilizes, specifically 9 Times Square, cash flow from our properties will be sufficient to fund operating expenses and a larger portion of the payment of our monthly distributions. There can be no assurance, however, that this stabilization will occur on a timely basis, or at all. Our actual results may differ significantly from the assumptions used by our board of directors in establishing a distribution rate to stockholders.
During the
nine months ended
September 30, 2017
, distributions paid to common stockholders totaled
$35.1 million
. Of that amount,
$14.2 million
was reinvested in shares of our common stock pursuant to the DRIP. During the
three months ended
September 30, 2017
, we funded distributions from cash provided by operations, cash proceeds received from common stock issued under the DRIP and cash on hand which represented the remaining $2.4 million in proceeds from the IPO and proceeds from secured financings.
38
To pay distributions in future periods, we expect to use cash on hand, proceeds from the sale of our shares through DRIP and proceeds from secured mortgages financings. A decrease in the level of stockholder participation in our DRIP or continued cash flow less than the amount distributed or need to use cash flow that we may generate in the future for other purposes could have an adverse impact on our ability to meet these expectations. To the extent we are required to borrow additional amounts to pay distributions, we may not be able to do so on favorable terms or at all. If these sources are insufficient, we may use other sources, such as from borrowings other than secured mortgage financings, to fund distributions. There can be no assurance we will be able to continue paying cash distributions at our current level or at all.
The following table shows the sources for the payment of distributions to common stockholders for the periods presented:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
March 31, 2017
|
June 30, 2017
|
September 30, 2017
|
September 30, 2017
|
|||||||||||||||||||||||||
|
(In thousands)
|
Percentage of Distributions
|
Percentage of Distributions
|
Percentage of Distributions
|
Percentage of Distributions
|
||||||||||||||||||||||||
|
Distributions:
(1)
|
||||||||||||||||||||||||||||
|
Cash distributions paid to stockholders not reinvested in common stock
|
$
|
6,661
|
|
$
|
7,004
|
|
$
|
7,233
|
|
$
|
20,898
|
|
||||||||||||||||
|
Cash distributions reinvested in common stock issued under the DRIP
|
4,794
|
|
4,771
|
|
4,605
|
|
14,170
|
|
||||||||||||||||||||
|
Total distributions paid
|
$
|
11,455
|
|
$
|
11,775
|
|
$
|
11,838
|
|
$
|
35,068
|
|
||||||||||||||||
|
Source of distribution coverage:
|
||||||||||||||||||||||||||||
|
Cash flows provided by operations
|
*
|
—
|
%
|
$
|
3,612
|
|
30.7
|
%
|
*
|
—
|
%
|
$
|
3,612
|
|
10.3
|
%
|
||||||||||||
|
Cash proceeds received from common stock issued under the DRIP
|
4,936
|
|
43.1
|
%
|
4,673
|
|
39.7
|
%
|
4,655
|
|
39.3
|
%
|
14,264
|
|
40.7
|
%
|
||||||||||||
|
Available cash on hand
(2)
|
6,519
|
|
56.9
|
%
|
3,490
|
|
29.6
|
%
|
7,183
|
|
60.7
|
%
|
17,192
|
|
49.0
|
%
|
||||||||||||
|
Total sources of distributions
|
$
|
11,455
|
|
100.0
|
%
|
$
|
11,775
|
|
100.0
|
%
|
$
|
11,838
|
|
100.0
|
%
|
$
|
35,068
|
|
100.0
|
%
|
||||||||
|
Cash flows (used in) provided by operations (GAAP basis)
|
$
|
(98
|
)
|
$
|
3,612
|
|
$
|
(1,135
|
)
|
$
|
2,379
|
|
||||||||||||||||
|
Net loss (in accordance with GAAP)
|
$
|
(4,786
|
)
|
$
|
(5,362
|
)
|
$
|
(5,877
|
)
|
$
|
(16,025
|
)
|
||||||||||||||||
__________________________________
(1) Excludes distributions related to Class B Units, the expense for which is included in general and administrative expenses on the consolidated statements of operations and comprehensive loss.
(2) Includes remaining proceeds from the IPO and proceeds from secured mortgages financing. As of September 30, 2017, there were no remaining proceeds from the IPO. See
Note 5 — Mortgage Notes Payable
for information on our secured mortgage loans outstanding.
* No cash flows from operations were used to cover distributions during the three months ended March 31, 2017 and September 30, 2017. Net cash used in operating activities was approximately $98,000 and $1.1 million for the three months ended March 31, 2017 and September 30, 2017, respectively.
Contractual Obligations
The following is a summary of our contractual debt obligations as of
September 30, 2017
:
|
|
|
Years Ended December 31,
|
|
|||||||||||||||||
|
(In thousands)
|
Total
|
October 1, 2017 — December 31, 2017
|
2018 — 2019
|
2020 — 2021
|
Thereafter
|
|||||||||||||||
|
Mortgage note payable:
|
||||||||||||||||||||
|
Principal payments
|
$
|
239,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
239,000
|
|
|||||
|
Interest payments
|
99,372
|
|
2,680
|
|
21,496
|
|
21,525
|
|
53,671
|
|
||||||||||
|
Total debt obligations
|
$
|
338,372
|
|
$
|
2,680
|
|
$
|
21,496
|
|
$
|
21,525
|
|
$
|
292,671
|
|
|||||
39
Ground Lease Obligations
The following is a summary of our contractual ground lease obligations as of
September 30, 2017
:
|
|
|
Years Ended December 31,
|
|
|||||||||||||||||
|
(In thousands)
|
Total
|
October 1, 2017 — December 31, 2017
|
2018 — 2019
|
2020 — 2021
|
Thereafter
|
|||||||||||||||
|
Ground lease payments
|
$
|
241,655
|
|
$
|
1,187
|
|
$
|
9,492
|
|
$
|
9,492
|
|
$
|
221,484
|
|
|||||
Election as a REIT
We elected and qualified to be taxed as a REIT under the Code, effective for our taxable year ended December 31, 2014. We believe that, commencing with such taxable year, we have been organized and operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified for taxation as a REIT. In order to continue to qualify for taxation as a REIT we must, among other things, distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as federal income and excise taxes on our undistributed income.
Inflation
Many of our leases contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions. In addition, our net leases require the tenant to pay its allocable share of operating expenses, which may include common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in operating expenses resulting from inflation.
Related-Party Transactions and Agreements
See
Note 9 — Related Party Transactions and Arrangements
to our accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, bears interest at fixed rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time, we may enter into interest rate hedge contracts such as swaps, caps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
As of
September 30, 2017
, our debt consisted of fixed-rate secured mortgage notes payable with an aggregate carrying value of
$239.0 million
and a fair value of
$
244.2 million
.
Changes in market interest rates on our fixed-rate debt impact the fair value of the note, but it has no impact on interest due on the note. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their
September 30, 2017
levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by
$17.4 million
.
A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by
$19.0 million
.
40
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and assuming no other changes in our capital structure. As the information presented above includes only those exposures that existed as of
September 30, 2017
and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our management, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.
No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended
September 30, 2017
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
41
As of the end of the period covered by this Quarterly Report on Form 10-Q, we are not a party to any material pending legal proceedings.
Not applicable.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Sales of Registered Securities
On April 24, 2014, we commenced our IPO on a "reasonable best efforts" basis of up to 30.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to the Registration Statement filed with the SEC under the Securities Act (File No. 333-194135). The Registration Statement also included 10.5 million shares of common stock issuable pursuant to the DRIP under which common stockholders may elect to have their distributions reinvested in additional shares of common stock. On May 29, 2014, we received and accepted subscriptions in excess of the minimum offering amount for the IPO of $2.0 million in shares, broke general escrow and issued shares of common stock to initial investors who were admitted as stockholders. On May 31, 2015, we closed our IPO after having sold substantially all of the shares registered in our IPO, and continued to accept subscriptions in process as of that date. As of
September 30, 2017
, we had
31.2 million
shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO and DRIP of
$771.6 million
, inclusive of
$60.1 million
from the DRIP.
The following table reflects the offering costs associated with the issuance of common stock:
|
Year Ended December 31,
|
||||||||
|
(In thousands)
|
2015
|
2014
|
||||||
|
Selling commissions and dealer manager fees
|
$
|
22,374
|
|
$
|
46,997
|
|
||
|
Other offering costs
|
6,050
|
|
8,628
|
|
||||
|
Total offering costs
|
$
|
28,424
|
|
$
|
55,625
|
|
||
The Former Dealer Manager was able to reallow the selling commissions and a portion of the dealer manager fees to participating broker-dealers. The following table details the selling commissions incurred and reallowed related to the sale of shares of common stock:
|
Year Ended December 31,
|
||||||||
|
(In thousands)
|
2015
|
2014
|
||||||
|
Total commissions paid to the Former Dealer Manager
|
$
|
22,374
|
|
$
|
46,997
|
|
||
|
Less:
|
||||||||
|
Commissions to participating brokers
|
(15,505
|
)
|
(31,920
|
)
|
||||
|
Reallowance to participating broker dealers
|
(2,625
|
)
|
(5,685
|
)
|
||||
|
Net to the Former Dealer Manager
|
$
|
4,244
|
|
$
|
9,392
|
|
||
As of
September 30, 2017
, we have incurred $84.0 million of cumulative offering costs in connection with the issuance and distribution of our registered securities. Cumulative offering proceeds from the sale of common stock exceeded cumulative offering costs by $680.0 million at
September 30, 2017
.
42
As of
September 30, 2017
, cumulative offering costs included $69.4 million of selling commissions and dealer manager fees and $11.9 million of offering cost reimbursements incurred from the Advisor and Former Dealer Manager. We are obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor is obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by us in our IPO exceed 2.0% of gross offering proceeds in the IPO. As a result, these costs were only our liability to the extent aggregate selling commissions, the dealer manager fee and other organization and offering costs did not exceed 12.0% of the gross proceeds determined at the end of the IPO. As of the end of the IPO, aggregate selling commissions, dealer manager fees and other offering costs did not exceed 12.0% of the gross proceeds received in the IPO.
As of
September 30, 2017
, we have used
$11.2 million
of proceeds from secured mortgage financing and all
$711.5 million
in aggregate net proceeds from our IPO, excluding the DRIP, as follows: (i)
$492.5 million
to pay all or a portion of the purchase price of six properties; (ii)
$69.4 million
to pay selling commissions and dealer manager fees to our Former Dealer Manager; (iii)
$11.9 million
to reimburse our Advisor for Offering expenses; (iv)
$17.6 million
to pay acquisition fees, acquisition cost reimbursements, financing coordination fees and other fees and reimbursements to our Advisor and its affiliates; (v)
$69.5 million
to pay distributions to our stockholders; (vi)
$39.3 million
to fund capital expenditures; and (vii)
$22.5 million
to repurchase shares of our common stock pursuant to the SRP. As of
September 30, 2017
, there were no remaining proceeds from the IPO.
Issuer Purchases of Equity Securities
As permitted under the SRP, as amended and restated on June 14, 2017 and effective as of July 14, 2017, our board of directors authorized, with respect to redemption requests received during the quarter ended
September 30, 2017
, the repurchase of all shares validly submitted for repurchase following the death or qualifying disability of a shareholder. When a shareholder requests a repurchase and the repurchase is approved by our board of directors, we will reclassify such obligation from equity to a liability based on the value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. The following table reflects the number of shares repurchased cumulatively through
September 30, 2017
.
_____________________
|
Numbers of Shares Repurchased
|
Weighted-Average Price per Share
|
||||||
|
Cumulative repurchases as of December 31, 2016
|
645,335
|
|
$
|
23.63
|
|
||
|
Nine months ended September 30, 2017
(1)
|
359,458
|
|
20.41
|
|
|||
|
Cumulative repurchases as of September 30, 2017
|
1,004,793
|
|
$
|
22.48
|
|
||
|
(1)
|
Includes (i)
276,624
shares repurchased during the
three months ended March 31, 2017
for approximately
$5.6 million
at a weighted average price per share of
$20.15
, (ii)
578
shares repurchased during the
three months ended
June 30, 2017
for approximately
$13.7 thousand
at a weighted average price per share of
$23.68
and (iii)
82,256
shares repurchased during the
three months ended
September 30, 2017
, for approximately
$1.7 million
at a weighted average price per share of
$21.25
. Excludes rejected repurchase requests received during 2016 with respect to
902,420
shares for
$18.1 million
at an average price per share of
$20.03
. During the
three months ended
September 30, 2017
, following the effectiveness of the amendment and restatement of the SRP, the board of directors approved
100%
of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to June 30, 2017, which were fulfilled during the
three months ended
September 30, 2017
. No repurchases have been or will be made with respect to requests received during 2017 that are not valid requests in accordance with the amended and restated SRP.
|
None.
Not applicable.
43
Item
5. Other Information.
Indemnification Agreement
On
November 13, 2017, in connection with the election of Katie P. Kurtz as our chief financial officer and treasurer, effective upon the resignation of Nicholas Radesca from the same role, we entered into an indemnification agreement (the “Indemnification Agreement”) with Ms. Kurtz in the same form as the indemnification agreements we have entered into with our other directors and officers. Under the Indemnification Agreement, Ms. Kurtz will be indemnified by us to the maximum extent permitted by Maryland law for certain liabilities and will be advanced certain expenses that have been incurred as a result of actions brought, or threatened to be brought, against him as our officer as a result of his service, subject to the limitations set forth in the Indemnification Agreement. The Indemnification Agreement will become effective on November 15, 2017, the date Mr. Radesca’s resignation will become effective.
The foregoing description of the Indemnification Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Indemnification Agreement, which is filed as an exhibit to this Quarterly Report on Form 10-Q.
Item
6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
|
|
|
|
By:
|
/s/ Edward M. Weil, Jr.
|
|
|
|
Edward M. Weil, Jr.
|
|
|
|
Executive Chairman, Chief Executive Officer, President and Secretary
(Principal Executive Officer)
|
|
By:
|
/s/ Nicholas Radesca
|
|
|
|
Nicholas Radesca
|
|
|
|
Interim Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer) |
|
Dated:
November 13, 2017
45
EXHIBITS INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended
September 30, 2017
(and are numbered in accordance with Item 601 of Regulation S-K).
|
Exhibit No.
|
|
Description
|
|
3.1
(1)
|
Articles Supplementary of American Realty Capital New York City REIT, Inc.
|
|
|
10.1
(2)
|
First Amendment to Employee and Director Incentive Restricted Share Plan of American Realty Capital New York City REIT, Inc.
|
|
|
10.2
*
|
Amended and Restated Employee and Director Incentive Restricted Share Plan of American Realty Capital New York City REIT, Inc.
|
|
|
10.3
*
|
Indemnification Agreement between the Company and Katie P. Kurtz, dated as of November 13, 2017.
|
|
|
31.1
*
|
Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
*
|
|
Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
*
|
|
Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101 *
|
XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital New York City REIT, Inc.'s Quarterly Report on Form 10-Q for the three months ended September 30, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
|
|
____________________
* Filed herewith
(1)
Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on October 10, 2017.
(2)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 11, 2017.
46
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 OrganizationNote 2 Summary Of Significant Accounting PoliciesNote 3 Real Estate InvestmentsNote 4 Investment SecuritiesNote 5 Mortgage Notes PayableNote 6 Fair Value Of Financial InstrumentsNote 7 Common StockNote 8 Commitments and ContingenciesNote 9 Related Party Transactions and ArrangementsNote 10 Economic DependencyNote 11 Share-based CompensationNote 12 Net Loss Per ShareNote 13 Subsequent EventsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Of Registered SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits