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, 2018
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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., 3
rd
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, every Interactive Data File required to be submitted 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 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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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
November 7, 2018
, the registrant had
30,990,448
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,
2018 |
December 31,
2017 |
|||||||
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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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521,186
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514,459
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|
||||
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Acquired intangible assets
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100,954
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105,954
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||||
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Total real estate investments, at cost
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755,520
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753,793
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||||
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Less accumulated depreciation and amortization
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(82,883
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)
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(64,926
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)
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||||
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Total real estate investments, net
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672,637
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688,867
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||||
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Cash and cash equivalents
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64,061
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39,598
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||||
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Restricted cash
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5,734
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7,618
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||||
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Prepaid expenses and other assets (including amounts due from related parties of $33 and $39 at September 30, 2018 and December 31, 2017, respectively)
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22,589
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17,721
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||||
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Deferred leasing costs, net
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7,057
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6,646
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||||
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Total assets
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$
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772,078
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$
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760,450
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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||||||
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Mortgage notes payable, net
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$
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281,757
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$
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233,517
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||
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Accounts payable, accrued expenses and other liabilities (including amounts due to related parties of $280 and $568 at September 30, 2018 and December 31, 2017, respectively)
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13,920
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11,406
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||||
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Below-market lease liabilities, net
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22,054
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24,753
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Deferred revenue
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5,477
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5,255
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||||
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Distributions payable
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—
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4,035
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||||
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Total liabilities
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323,208
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278,966
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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, 2018 and December 31, 2017
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—
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—
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||||
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Common stock, $0.01 par value, 300,000,000 shares authorized, 30,990,448 and 31,382,120 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
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310
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314
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|
||||
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Additional paid-in capital
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685,814
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691,775
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||||
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Accumulated deficit
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(237,254
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)
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(210,605
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)
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||||
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Total stockholders’ equity
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448,870
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481,484
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||||
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Total liabilities and stockholders’ equity
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$
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772,078
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$
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760,450
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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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2018
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2017
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2018
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2017
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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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14,237
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$
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13,345
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$
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42,257
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$
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40,009
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||||
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Operating expense reimbursements and other revenue
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1,504
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1,130
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3,909
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3,554
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Total revenues
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15,741
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14,475
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46,166
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43,563
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Operating expenses:
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Asset and property management fees to related parties
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1,532
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1,515
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4,633
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4,566
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||||||||
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Property operating
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7,295
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6,848
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20,839
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19,882
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||||||||
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Acquisition and transaction related
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—
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—
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1
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6
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||||||||
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General and administrative
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2,261
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2,066
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7,805
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5,634
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||||||||
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Depreciation and amortization
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7,128
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7,125
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22,421
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21,349
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Total operating expenses
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18,216
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17,554
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55,699
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51,437
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Operating loss
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(2,475
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)
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(3,079
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)
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(9,533
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)
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(7,874
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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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(3,501
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)
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(2,866
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)
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(9,684
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)
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(8,365
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)
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||||||||
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Income from investment securities and interest
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111
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68
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239
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190
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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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—
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24
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||||||||
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Total other expense
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(3,390
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)
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(2,798
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)
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(9,445
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)
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(8,151
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)
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Net loss
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$
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(5,865
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)
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$
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(5,877
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)
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$
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(18,978
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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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Other comprehensive income (loss):
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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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—
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(10
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)
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||||||||
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Comprehensive loss
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$
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(5,865
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)
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$
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(5,877
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)
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$
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(18,978
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)
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$
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(16,035
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)
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Basic and diluted weighted average shares outstanding
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31,180,373
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31,106,250
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31,313,567
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30,956,152
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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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(0.19
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)
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$
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(0.61
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)
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$
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(0.52
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)
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Dividends declared per common share
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$
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—
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$
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0.39
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$
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0.24
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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
(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 Deficit
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Total Stockholders’ Equity
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||||||||||||||
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Balance, December 31, 2017
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31,382,120
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$
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314
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$
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691,775
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$
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(210,605
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)
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$
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481,484
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|
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Common stock issued through distribution reinvestment plan
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208,836
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1
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4,230
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—
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4,231
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||||||||
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Common stock repurchases
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(604,948
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)
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(5
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)
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(10,264
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)
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—
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(10,269
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)
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Share-based compensation
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4,440
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—
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|
73
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|
—
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73
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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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(7,671
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)
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(7,671
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)
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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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(18,978
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)
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(18,978
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)
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||||||||
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Balance, September 30, 2018
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30,990,448
|
|
$
|
310
|
|
$
|
685,814
|
|
$
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(237,254
|
)
|
$
|
448,870
|
|
||||
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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2018
|
2017
|
|||||||
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Cash flows from operating activities:
|
|
|
||||||
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Net loss
|
$
|
(18,978
|
)
|
$
|
(16,025
|
)
|
||
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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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22,421
|
|
21,349
|
|
||||
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Amortization of deferred financing costs
|
573
|
|
964
|
|
||||
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Accretion of below- and amortization of above-market lease liabilities and assets, net
|
(1,557
|
)
|
(1,570
|
)
|
||||
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Share-based compensation
|
73
|
|
36
|
|
||||
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Gain on sale of investment securities
|
—
|
|
(24
|
)
|
||||
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Changes in assets and liabilities:
|
||||||||
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Prepaid expenses, other assets and deferred costs
|
(5,885
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)
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(7,236
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)
|
||||
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Accounts payable, accrued expenses and other liabilities
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(1,064
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)
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3,901
|
|
||||
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Deferred revenue
|
222
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|
2,533
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|
||||
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Net cash (used in) provided by operating activities
|
(4,195
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)
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3,928
|
|
||||
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Cash flows from investing activities:
|
||||||||
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Proceeds from the sale of investment securities
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—
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|
491
|
|
||||
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Capital expenditures
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(6,099
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)
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(8,084
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)
|
||||
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Net cash used in investing activities
|
(6,099
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)
|
(7,593
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)
|
||||
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Cash flows from financing activities:
|
|
|
|
|||||
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Proceeds from mortgage note payable
|
50,000
|
|
140,000
|
|
||||
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Payment of mortgage note payable
|
—
|
|
(96,000
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)
|
||||
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Payments of financing costs
|
(2,333
|
)
|
(2,931
|
)
|
||||
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Distributions paid
|
(7,475
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)
|
(20,898
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)
|
||||
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Repurchases of common stock
|
(7,319
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)
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(7,337
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)
|
||||
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Net cash provided by financing activities
|
32,873
|
|
12,834
|
|
||||
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Net change in cash, cash equivalents and restricted cash
|
22,579
|
|
9,169
|
|
||||
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Cash, cash equivalents and restricted cash, beginning of period
|
47,216
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|
49,821
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|
||||
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Cash, cash equivalents and restricted cash, end of period
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$
|
69,795
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$
|
58,990
|
|
||
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Supplemental Disclosures:
|
||||||||
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Cash paid for interest
|
$
|
8,952
|
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$
|
6,976
|
|
||
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Non-Cash Investing and Financing Activities:
|
||||||||
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Accrued stock repurchases
|
2,950
|
|
—
|
|
||||
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Distributions payable
|
—
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3,873
|
|
||||
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Accrued capital expenditures
|
628
|
|
140
|
|
||||
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Common stock issued through distribution reinvestment plan
|
4,231
|
|
14,170
|
|
||||
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Mortgage notes payable proceeds classified as restricted cash
|
2,539
|
|
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, 2018
(Unaudited)
American Realty Capital New York City REIT, Inc. (including, 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, 2018
, 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, 2018
, the Company had
31.0 million
shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the dividend reinvestment plan (“DRIP”), and had received total gross proceeds from the IPO of
$776.0 million
, inclusive of
$68.8 million
from the DRIP and net of repurchases.
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.
Basis of Accounting
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, 2018
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, 2017
, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2018. There have been no significant changes to the Company’s significant accounting policies during the
nine
months ended
September 30, 2018
.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest,
7
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. The Company had no investments in joint ventures or variable interest entities as of
September 30, 2018
or
December 31, 2017
.
Reclassifications
The presentation of prior year restricted cash on the Company’s consolidated statements of cash flows has been changed to conform to the current year presentation. The change in the current year presentation relates to the adoption of accounting standards update (“ASU”) No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which was adopted by the Company effective December 31, 2017.
Recently Issued Accounting Pronouncements
Adopted as of September 30, 2018:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
and has since issued several additional amendments thereto (collectively referred to herein as “ASC 606”). ASC 606 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 adopted this guidance effective January 1, 2018, under the modified retrospective approach. The new guidance did not have an impact on the Company’s consolidated financial statements, primarily as a result of revenue being sourced from lease arrangements that are outside the scope of ASC 606 until the new lease standard is adopted.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments-Overall (Subtopic 825-10),
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. The Company adopted this guidance on January 1, 2018 and there was no impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which provides 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 Company adopted this new guidance effective January 1, 2018, and it did not have an impact on the Company’s consolidated statement of cash flows.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a
Business,
which 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 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 on January 1, 2017, which would apply to prospective acquisitions. On October 17, 2018, the Company closed on an acquisition of a property which was determined to be an asset acquisition based on this new guidance. Apart from the aforementioned, there were no acquisitions during the nine months ended
September 30, 2018
or the year ended December 31, 2017.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,
which 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 Company adopted this guidance effective January 1, 2018 and it did not have an impact on the Company’s consolidated financial statements. The Company expects that any future modifications to its issued share-based awards will be accounted for using modification accounting, unless the modification meets all of the exception criteria noted above. As a result,
8
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
the modification would be treated as an exchange of the original award for a new award, with any incremental fair value being treated as additional compensation cost.
Pending Adoption as of September 30, 2018:
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASC 842”), which originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, in July 2018 (“ASU 2018-11”), which allows lessors a practical expedient by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is consistent with the Company’s existing policies. ASC 842 originally required a modified retrospective method of adoption, however, ASU 2018-11 indicates that companies may be permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The pronouncement allows some optional practical expedients. In addition, in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new leasing standard. The Company does not expect this guidance to impact its existing lessor revenue recognition pattern.
The Company is a lessee for a property in which it has a ground lease as of
September 30, 2018
. 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. The Company will adopt this new guidance upon its effective date on January 1, 2019 and will continue to evaluate the impact of this guidance until it becomes effective.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018. On July 25, 2018, the FASB proposed an amendment to ASU 2016-13 to clarify that operating lease receivables recorded by lessors (including unbilled straight-line rent) are explicitly excluded from the scope of ASU 2016-13. The Company is currently evaluating the impact of this new guidance.
In June 2018, the FASB issued ASU 2018-07,
Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
as an amendment and update expanding the scope of Topic 718. The amendment specifies that Topic 718 now applies to all share-based payment transactions, even non-employee awards, in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Under the new guidance, awards to nonemployees are measured on the grant date, rather than on the earlier of the performance commitment date or the date at which the nonemployee’s performance is complete. Also, the awards would be measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can be measured more reliably. In addition, entities may use the expected term to measure nonemployee awards or elect to use the contractual term as the expected term, on an award-by-award basis. The new guidance is effective for the Company in annual periods beginning after December 15, 2018, and interim periods within those annual periods, however early adoption is permitted. 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, 2018
(Unaudited)
There were no real estate assets acquired or liabilities assumed during the
nine
months ended
September 30, 2018
or
2017
.
Future Minimum Base Cash Rental Payments
The following table presents future minimum base cash rental payments due to the Company subsequent to
September 30, 2018
. 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 Rental Payments
|
|||
|
2018 (remainder)
|
$
|
12,668
|
|
|
|
2019
|
50,391
|
|
||
|
2020
|
46,649
|
|
||
|
2021
|
42,202
|
|
||
|
2022
|
38,713
|
|
||
|
Thereafter
|
145,331
|
|
||
|
|
$
|
335,954
|
|
|
Significant Tenants
As of
September 30, 2018
and
2017
, there were no tenants whose annualized rental income on a straight-line basis, based on leases that have commenced, represented greater than 10% of total annualized rental income on a straight-line basis.
Intangible Assets and Liabilities
Acquired intangible assets and lease liabilities consist of the following as of
September 30, 2018
and
December 31, 2017
:
|
September 30, 2018
|
December 31, 2017
|
|||||||||||||||||||||||
|
(In thousands)
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
||||||||||||||||||
|
Intangible assets:
|
||||||||||||||||||||||||
|
In-place leases
|
$
|
57,376
|
|
$
|
25,312
|
|
$
|
32,064
|
|
$
|
62,142
|
|
$
|
22,147
|
|
$
|
39,995
|
|
||||||
|
Other intangibles
|
31,447
|
|
4,641
|
|
26,806
|
|
31,447
|
|
3,767
|
|
27,680
|
|
||||||||||||
|
Below-market ground lease
|
2,482
|
|
113
|
|
2,369
|
|
2,482
|
|
76
|
|
2,406
|
|
||||||||||||
|
Above-market leases
|
9,649
|
|
3,826
|
|
5,823
|
|
9,883
|
|
2,955
|
|
6,928
|
|
||||||||||||
|
Total intangible assets
|
$
|
100,954
|
|
$
|
33,892
|
|
$
|
67,062
|
|
$
|
105,954
|
|
$
|
28,945
|
|
$
|
77,009
|
|
||||||
|
Intangible liabilities:
|
||||||||||||||||||||||||
|
Below-market lease liabilities
|
$
|
33,104
|
|
$
|
11,050
|
|
$
|
22,054
|
|
$
|
34,068
|
|
$
|
9,315
|
|
$
|
24,753
|
|
||||||
10
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
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)
|
2018
|
2017
|
2018
|
2017
|
||||||||||||
|
Amortization of in-place leases and other intangibles
(1)
|
$
|
2,527
|
|
$
|
2,877
|
|
$
|
8,805
|
|
$
|
9,113
|
|
||||
|
Amortization and (accretion) of above- and below-market leases, net
(2)
|
$
|
(496
|
)
|
$
|
(512
|
)
|
$
|
(1,594
|
)
|
$
|
(1,607
|
)
|
||||
|
Amortization of below-market ground lease
(3)
|
$
|
12
|
|
$
|
13
|
|
$
|
37
|
|
$
|
37
|
|
||||
_______________
|
(1)
|
Reflected within depreciation and amortization expense.
|
|
(2)
|
Reflected within rental income.
|
|
(3)
|
Reflected within property operating expense.
|
The following table provides the projected amortization expense and adjustments to revenues for the next five years as of
September 30, 2018
:
|
(In thousands)
|
2018 (October 1 - December 31)
|
2019
|
2020
|
2021
|
2022
|
|||||||||||||||
|
In-place leases
|
$
|
2,309
|
|
$
|
8,149
|
|
$
|
6,398
|
|
$
|
5,188
|
|
$
|
3,816
|
|
|||||
|
Other intangibles
|
291
|
|
1,165
|
|
1,165
|
|
937
|
|
708
|
|
||||||||||
|
Total to be included in depreciation and amortization
|
$
|
2,600
|
|
$
|
9,314
|
|
$
|
7,563
|
|
$
|
6,125
|
|
$
|
4,524
|
|
|||||
|
Above-market lease assets
|
$
|
362
|
|
$
|
1,256
|
|
$
|
1,137
|
|
$
|
1,064
|
|
$
|
847
|
|
|||||
|
Below-market lease liabilities
|
(855
|
)
|
(3,049
|
)
|
(2,635
|
)
|
(2,328
|
)
|
(1,789
|
)
|
||||||||||
|
Total to be included in rental income
|
$
|
(493
|
)
|
$
|
(1,793
|
)
|
$
|
(1,498
|
)
|
$
|
(1,264
|
)
|
$
|
(942
|
)
|
|||||
During the second quarter of 2018, the sole tenant in the Company’s 421 W. 54th Street property terminated its lease early and vacated the space. As a result, the Company accelerated the amortization expense on the in-place lease intangible asset associated with this tenant and recorded additional amortization expense of
$0.3 million
for the
nine
months ended
September 30, 2018
.
11
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
The Company’s mortgage notes payable, net as of
September 30, 2018
and
December 31, 2017
are as follows:
|
Outstanding Loan Amount
|
|||||||||||||||||
|
Portfolio
|
Encumbered Properties
|
September 30,
2018 |
December 31,
2017 |
Effective Interest Rate
|
Interest Rate
|
Maturity
|
|||||||||||
|
(In thousands)
|
(In thousands)
|
||||||||||||||||
|
123 William Street
(1)
|
1
|
$
|
140,000
|
|
$
|
140,000
|
|
4.73
|
%
|
Fixed
|
Mar. 2027
|
||||||
|
1140 Avenue of the Americas
|
1
|
99,000
|
|
99,000
|
|
4.17
|
%
|
Fixed
|
Jul. 2026
|
||||||||
|
400 E. 67th Street - Laurel Condominium / 200 Riverside Boulevard - ICON Garage
|
2
|
50,000
|
|
—
|
|
4.58
|
%
|
Fixed
|
May 2028
|
||||||||
|
Mortgage notes payable, gross
|
4
|
289,000
|
|
239,000
|
|
4.51
|
%
|
||||||||||
|
Less: deferred financing costs, net
(2)
|
—
|
(7,243
|
)
|
(5,483
|
)
|
|
|||||||||||
|
Mortgage notes payable, net
|
4
|
$
|
281,757
|
|
$
|
233,517
|
|
|
|||||||||
(1)
As of
September 30, 2018
,
$2.5 million
of the proceeds from the Company’s loan agreement with Barclays Bank PLC remained 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, and is included in restricted cash on the unaudited consolidated balance sheet.
(2)
Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining commitments for financing. These costs are amortized to interest expense over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
New Loan Agreement
On April 13, 2018,
two
wholly owned subsidiaries (the “Borrowers”) of the OP, entered into a loan agreement (the “Loan Agreement”) with Societe Generale (the “Lender”). The Loan Agreement provides for a
$50.0 million
loan (the “Loan”) with a fixed interest rate of
4.516%
and a maturity date of May 1, 2028. The Loan requires monthly interest-only payments, with the principal balance due on the maturity date. The Loan is secured by, among other things, mortgage liens on two of the Company’s previously unencumbered properties, the retail condominiums located at 400 E. 67th Street, New York, New York (the “Laurel Condominium”) and a parking garage condominium unit located at 200 Riverside Boulevard, New York, New York (the “Riverside Garage,” together with the Laurel Condominium, the “Mortgaged Properties” and individually a “Mortgaged Property”). The Loan Agreement permits the Lender to securitize the Loan or any portion thereof.
At the closing of the Loan, the net proceeds after accrued interest and closing costs were used to fund approximately
$0.6 million
in deposits into reserve accounts required to be made at closing under the Loan Agreement, with approximately
$47.1 million
in net proceeds remaining available to the Company to be used for general corporate purposes, including to make future acquisitions. From and after May 1, 2019, the Loan may be prepaid at any time in whole, but not in part (unless a Mortgaged Property is released from the Loan), subject to certain conditions and limitations, including payment of a yield maintenance prepayment premium for any prepayments made prior to the March 2028 monthly payment date. From and after May 1, 2019, any Mortgaged Property may, subject to certain conditions and limitations, be released from the Loan in connection with a sale or disposition of the Mortgaged Property to a bona-fide third party by prepayment of an amount equal to
115%
of the portion of the Loan allocated to the Mortgaged Property sold or disposed, plus any applicable yield maintenance prepayment premium. In addition, from and after May 1, 2019 and prior to May 1, 2028, the Riverside Garage (but not the Laurel Condominium) may be released from the Loan, subject to certain conditions and limitations, by simultaneously substituting another property (or properties) for the Riverside Garage. The OP has guaranteed, pursuant to a guaranty in favor of the Lender (the “Guaranty”), certain enumerated recourse liabilities of the Borrowers under the Loan Agreement and, from and after certain events of defaults and other breaches under the Loan Agreement as well as bankruptcies or similar events, payment of all amounts due to the Lender in respect of the Loan. The Guaranty also requires the OP to maintain a minimum net worth of
$57.5 million
and minimum liquid assets of
$3.0 million
.
Real estate assets and intangible assets of
$535.7 million
, at cost (net of below-market lease liabilities), at
September 30, 2018
have been pledged as collateral to the Company’s mortgage notes 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 notes payable on a monthly basis.
12
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
The following table summarizes the scheduled aggregate principal payments subsequent to
September 30, 2018
:
|
(In thousands)
|
Future Minimum Principal Payments
|
|||
|
2018 (remainder)
|
$
|
—
|
|
|
|
2019
|
—
|
|
||
|
2020
|
—
|
|
||
|
2021
|
—
|
|
||
|
2022
|
—
|
|
||
|
Thereafter
|
289,000
|
|
||
|
Total
|
$
|
289,000
|
|
|
The Company’s mortgage notes payable require compliance with certain property-level debt covenants. As of
September 30, 2018
, the Company was in compliance with the debt covenants under its mortgage note agreements.
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.
Financial Instruments Carried at Fair Value
As of
September 30, 2018
and
December 31, 2017
, the Company did not have any financial instruments measured at fair value on a recurring basis.
Financial Instruments Not Carried at Fair 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:
13
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
|
September 30, 2018
|
December 31, 2017
|
|||||||||||||||||
|
(In thousands)
|
Level
|
Gross Principal Balance
|
Fair Value
|
Gross Principal Balance
|
Fair Value
|
|||||||||||||
|
Mortgage note payable — 123 William Street
|
3
|
$
|
140,000
|
|
$
|
141,000
|
|
$
|
140,000
|
|
$
|
147,531
|
|
|||||
|
Mortgage note payable — 1140 Avenue of the Americas
|
3
|
$
|
99,000
|
|
$
|
96,058
|
|
$
|
99,000
|
|
$
|
100,036
|
|
|||||
|
Mortgage note payable — 400 E. 67th Street - Laurel Condominium / 200 Riverside Boulevard - ICON Garage
|
3
|
$
|
50,000
|
|
$
|
49,757
|
|
$
|
—
|
|
$
|
—
|
|
|||||
As of
September 30, 2018
and
December 31, 2017
, the Company had
31.0 million
and
31.4 million
shares of common stock outstanding, respectively, including unvested restricted shares and shares issued pursuant to the DRIP.
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 were payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. On February 27, 2018, the Company’s board of directors unanimously authorized a suspension of the distributions that the Company pays to holders of the Company’s common stock, effective as of March 1, 2018. The Company’s board of directors will continue to evaluate the Company’s performance and expects to assess its distribution policy no sooner than February 2019.
On February 6, 2018, in response to an unsolicited offer to the Company’s stockholders, the Company commenced a tender offer, which was subsequently amended on February 22, 2018 and March 6, 2018 (as amended, the “February Offer”). The Company made the February Offer in order to deter an unsolicited bidder and other potential future bidders that may try to exploit the illiquidity of the Company’s common stock and acquire it from stockholders at prices substantially below the current Estimated Per-Share NAV. Under the February Offer, the Company offered to purchase up to
140,000
shares of its common stock for cash at a purchase price equal to
$17.03
per share. The February Offer expired on March 20, 2018 and, in accordance with the terms of the February Offer, the Company accepted for purchase
139,993
shares of common stock for a total cost of approximately
$2.4 million
, which was paid in April 2018.
On June 15, 2018, in response to an unsolicited offer to the Company’s stockholders, the Company commenced a tender offer (the “June Offer”) to purchase up to
500,000
shares of its common stock for cash at a purchase price equal to
$12.95
per share. The Company made the June Offer in order to deter an unsolicited bidder and other potential future bidders that may try to exploit the illiquidity of the Company’s common stock and acquire it from stockholders at prices substantially below the current Estimated Per-Share NAV. The June Offer expired on July 24, 2018 and, in accordance with the terms of the June Offer, the Company accepted for purchase
210,014
shares of common stock for a total cost of approximately
$2.7 million
, which was paid in July 2018.
On October 25, 2017, the Company’s board of directors approved an estimated net asset value per share of its common stock (“Estimated Per-Share NAV”) as of June 30, 2017, and on October 23, 2018, the Company’s board of directors approved an estimated net asset value per share of its common stock as of June 30, 2018 (the “2018 Estimated Per-Share NAV”), which was published on October 25, 2018.
Share Repurchase Program
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 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
14
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
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 amendment and restatement of the SRP, 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.
|
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.
In connection with the February Offer, the Company’s board of directors suspended the SRP during the pendency of the February Offer. On April 26, 2018 the Company’s board of directors reactivated the SRP. In connection with the June Offer, the Company’s board of directors suspended the SRP during the pendency of the June Offer. On August 23, 2018, the Company’s board of directors unanimously reactivated the SRP for a period commencing August 25, 2018 and ending on September 24, 2018 (the “2018 Reactivation Period”). Prior to the end of the third quarter of 2018, the Company’s board of directors approved repurchase requests made during the 2018 Reactivation period as well as requests made in the period from January 1, 2018 until the suspension of the SRP on February 6, 2018 and the period commencing with the reactivation of the SRP on April 26, 2018 until the suspension of the SRP on June 15, 2018 (the “2018 Active Period”). The board of directors also approved a related amendment to the SRP, effective August 25, 2018, and a subsequent suspension of the SRP commencing immediately following the 2018 Reactivation Period which will remain in effect until the Company announces that it will resume paying regular cash distributions to its stockholders. On October 9, 2018, the Company repurchased a total of
145,627
shares approved with respect to the 2018 Reactivation Period and the 2018 Active Period. (See
Note 12
— Subsequent Events
for details).
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, 2018
.
|
Numbers of Shares Repurchased
|
Weighted-Average Price per Share
|
||||||
|
Cumulative repurchases as of December 31, 2017
(1)
|
1,004,793
|
|
$
|
22.48
|
|
||
|
Nine months ended September 30, 2018
(2) (3)
|
254,941
|
|
20.26
|
|
|||
|
Cumulative repurchases as of September 30, 2018
|
1,259,734
|
|
22.03
|
|
|||
(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
$13,700
at a weighted-average price per share of
$23.68
, (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
. During the three months ended September 30, 2017, following the effectiveness of the amendment and restatement of the SRP, the Company’s 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.
15
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
(2)
In January 2018, the Company’s board of directors approved the repurchase requests made pursuant to the SRP during the period from July 1, 2017 to December 31, 2017, which resulted in the repurchase of
99,131
shares for approximately
$2.0 million
at a weighted-average price per share of
$20.26
and
10,183
shares were repurchased from an individual stockholder in a privately negotiated transaction during January 2018 for approximately
$0.2 million
at a weighted-average price per share of
$20.26
.
(3)
Includes repurchase requests approved during the third quarter of 2018, and paid on October 9, 2018, which resulted in the repurchase of
145,627
shares for approximately
$3.0 million
at a weighted-average price per share of
$20.26
, which are comprised of shares related to repurchase requests made during the 2018 Active Period and shares related to repurchase requests made during the 2018 Reactivation Period.
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 Rent Payments
|
|||
|
2018 (remainder)
|
$
|
1,187
|
|
|
|
2019
|
4,746
|
|
||
|
2020
|
4,746
|
|
||
|
2021
|
4,746
|
|
||
|
2022
|
4,746
|
|
||
|
Thereafter
|
216,738
|
|
||
|
Total
|
$
|
236,909
|
|
|
The Company incurred ground rent expense of
$1.2 million
and
$3.6 million
during the three and
nine
months ended
September 30, 2018
, respectively. 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.
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, 2018
, 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.
As of
September 30, 2018
, 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. American National Stock Transfer, LLC (“ANST”), a subsidiary of the parent company of the Former Dealer Manager, provided other general professional services through January 2016. RCS Capital Corporation (“RCAP”), which became the parent company of the Former Dealer Manager in December 2012, and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016. 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 Capital, 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), and RCAP Holdings, LLC. The suit alleges, among other things, certain breaches of duties to RCAP. The Company is not a defendant in the suit, nor are there allegations that the Advisor engaged in any wrongful conduct. On May 26, 2017, the defendants moved to dismiss. On November 30, 2017, the court issued an opinion partially granting the defendant’s motion to dismiss. On
16
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
December 7, 2017, the creditor trust moved for limited reargument of the court’s partial dismissal of its breach of fiduciary duty claim, and on January 10, 2018, the defendants filed a supplemental motion to dismiss certain claims. On April 5, 2018, the court issued an opinion denying the creditor trust’s motion for reconsideration while partially granting the defendants’ supplemental motion to dismiss. Document discovery closed on October 31, 2018. On November 5, 2018, the defendants moved for partial summary judgment seeking dismissal of aspects of the fiduciary duty claims. That motion is pending. The Advisor informed the Company that the Advisor believes the suit is without merit and intends to defend against it vigorously.
Fees and Participations Paid in Connection with the Operations of the Company
Acquisition Fees
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, 2018
or
2017
.
Financing Coordination Fees
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.
Asset Management Fees and Variable Management/Incentive Fees
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, 2018
, 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, 2018
, 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
17
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
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
$4.2 million
in cash asset management fees during the three and
nine
months ended
September 30, 2018
, respectively. 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.
Property Management Fees
Pursuant to the Property Management and Leasing Agreement, dated as of April 24, 2014 (the “PMA”), 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
$0.1 million
and
$0.4 million
in property management fees during the three and
nine
months ended
September 30, 2018
, respectively. The Company incurred approximately
$0.1 million
and
$0.5 million
in property management fees during the three and
nine
months ended
September 30, 2017
, respectively.
On April 13, 2018, in connection with the Loan, the Borrowers entered into a new Property Management and Leasing Agreement (the “New PMA”) with the Property Manager with respect to the Mortgaged Properties. With respect to these properties, the substantive terms of the New PMA are identical to the terms of the PMA, except that the New PMA does not include provisions related to the management of hotels.
On April 13, 2018, concurrently with entering into the New PMA, the Company and the Property Manager entered into an amendment to the PMA (the “PMA Amendment”). Prior to the PMA Amendment, the Property Manager had been retained, pursuant to the PMA, to manage, operate and maintain all the Company’s properties. Following the PMA Amendment, any of the Company’s properties that are or become subject to a separate property management agreement with the Property Manager (including the Mortgaged Properties, which are subject to the New PMA) are not subject to the PMA.
Professional Fees and Other Reimbursements
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. This reimbursement includes reasonable overhead expenses for employees of the Advisor or its affiliates directly involved in the performance of services on behalf of the Company, including the reimbursement of rent expense at certain properties that are both occupied by employees of the Advisor or its affiliates and owned by affiliates of the Advisor.
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 officers. Total reimbursement of costs and expenses for the three and
nine
months ended
September 30, 2018
were
$1.2 million
and
$3.6 million
, respectively. Total reimbursement of costs and expenses for the three and
nine
months ended
September 30, 2017
were
$1.0 million
and
$2.6 million
, respectively.
18
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
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)
|
2018
|
2017
|
2018
|
2017
|
September 30, 2018
|
December 31, 2017
|
|||||||||||||||||||
|
Acquisition fees and reimbursements:
|
|||||||||||||||||||||||||
|
Acquisition fees and related cost reimbursements
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|||||||
|
Financing coordination fees
(1)
|
—
|
|
—
|
|
375
|
|
1,050
|
|
—
|
|
—
|
|
|||||||||||||
|
Ongoing fees:
|
|
|
|||||||||||||||||||||||
|
Asset and property management fees to related parties
|
1,532
|
|
1,515
|
|
4,633
|
|
4,566
|
|
(33
|
)
|
(3)
|
(18
|
)
|
(3)
|
|||||||||||
|
Professional fees and other reimbursements
(2)
|
1,214
|
|
988
|
|
3,639
|
|
2,644
|
|
280
|
|
(4) (5)
|
527
|
|
(4) (5)
|
|||||||||||
|
Distributions on Class B units
(2)
|
—
|
|
61
|
|
39
|
|
180
|
|
—
|
|
20
|
|
(5)
|
||||||||||||
|
Total related party operation fees and reimbursements
|
$
|
2,746
|
|
$
|
2,564
|
|
$
|
8,686
|
|
$
|
8,440
|
|
$
|
247
|
|
$
|
529
|
|
|||||||
_____________________
|
(1)
|
Included as a deferred financing cost within mortgage notes payable, net on the unaudited and audited consolidated balance sheets, respectively.
|
|
(2)
|
Amounts for the three and
nine
mont
h
s ended
September 30, 2018
and
2017
are included in general and administrative expenses in the unaudited consolidated statements of operations and comprehensive loss.
|
|
(3)
|
Included in prepaid expenses and other assets on the unaudited and audited consolidated balance sheets, respectively.
|
|
(4)
|
Balance includes costs which were incurred and accrued due to ANST and a subsidiary of RCAP which were related parties of the Company. See above for further details on the status of the ANST and RCAP relationship.
|
|
(5)
|
Included in accounts payable, accrued expense and other liabilities on the unaudited and audited consolidated balance sheets, respectively.
|
Fees and Participations Paid in Connection with Liquidation or Listing
Annual Subordinated Performance Fees and Brokerage Commissions
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, 2018
or
2017
.
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, 2018
or
2017
.
Subordinated Participation in Real Estate Sales
Upon a liquidation or sale of all or substantially all assets, including through a merger or sale of stock of the Company, an affiliate of the Advisor that is special limited partner of the OP, New York City Special Limited Partnership, LLC (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, 2018
and
2017
.
19
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Fees Incurred in Connection with a Listing
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, 2018
or
2017
. Neither the Special Limited Partner nor any of its affiliates can earn both the subordinated participation in net sales proceeds and the subordinated incentive listing distribution.
Termination Fees
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, 2018
or
2017
.
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 services 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 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 board of 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).
20
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
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 Company’s board of directors. 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, 2018
:
|
Number of
Restricted Shares |
Weighted-Average Issue Price
|
||||||
|
Unvested, December 31, 2017
|
11,165
|
|
$
|
22.14
|
|
||
|
Granted
|
4,440
|
|
20.26
|
|
|||
|
Vested
|
(2,979
|
)
|
22.14
|
|
|||
|
Forfeited
|
—
|
|
—
|
|
|||
|
Unvested, September 30, 2018
|
|
12,626
|
|
21.48
|
|
||
As of
September 30, 2018
, the Company had
$0.3 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
3.6
years. Restricted share awards are expensed in accordance with the service period required. Compensation expense related to restricted share awards was approximately
$39,869
and
$73,031
for the three and
nine
months ended
September 30, 2018
, respectively. 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 is recorded as general and administrative expense in the accompanying unaudited 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 board of 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, 2018
or
2017
.
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,
|
|||||||||||||||
|
2018
|
2017
|
2018
|
2017
|
|||||||||||||
|
Net loss
(in thousands)
|
$
|
(5,865
|
)
|
$
|
(5,877
|
)
|
$
|
(18,978
|
)
|
$
|
(16,025
|
)
|
||||
|
Basic and diluted weighted average shares outstanding
|
31,180,373
|
|
31,106,250
|
|
31,313,567
|
|
30,956,152
|
|
||||||||
|
Basic and diluted net loss per share
|
$
|
(0.19
|
)
|
$
|
(0.19
|
)
|
$
|
(0.61
|
)
|
$
|
(0.52
|
)
|
||||
21
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
The Company had the following weighted-average common share equivalents as of
September 30, 2018
and
2017
, which were excluded from the calculation of diluted net loss per share attributable to stockholders as the effect would have been anti-dilutive:
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
2018
|
2017
|
2018
|
2017
|
|||||||||
|
Unvested restricted shares
|
12,625
|
|
6,932
|
|
12,625
|
|
6,932
|
|
||||
|
OP units
|
90
|
|
90
|
|
90
|
|
90
|
|
||||
|
Class B units
|
159,159
|
|
159,159
|
|
159,159
|
|
159,159
|
|
||||
|
Total weighted-average anti-dilutive common share equivalents
|
171,874
|
|
166,181
|
|
171,874
|
|
166,181
|
|
||||
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:
Share Repurchase Program
On October 9, 2018 the Company repurchased
145,627
shares of common stock for approximately
$3.0
million, at a weighted-average price per share of
$20.26
pursuant to the SRP.
Acquisitions
On October 17, 2018, the Company closed on an acquisition of a medical office building with an aggregate base purchase price of
$15.9 million
, excluding acquisition related costs. The acquisition was funded by proceeds from issuance of mortgage debt in the amount of
$10.0 million
with the remainder funded with cash on hand.
22
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;
|
|
•
|
Effective March 1, 2018, we ceased paying distributions. There can be no assurance we will be able to resume paying distributions at our previous 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;
|
|
•
|
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, 2018
, we owned only six properties and therefore have limited diversification.
|
Overview
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.
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
23
assets, residential assets and other property types exclusively in New York City. As of
September 30, 2018
, we owned
six
properties consisting of
1,085,084
rentable square feet acquired for an aggregate purchase price of
$686.1 million
.
On October 23, 2018, our board of directors approved an estimated net asset value per share of its common stock (“Estimated Per-Share NAV”) equal to $20.26 as of June 30, 2018 (the “2018 Estimated Per-Share NAV”), which was published on October 25, 2018. This was the second annual update of Estimated Per-Share NAV we have published. We intend to publish subsequent valuations of Estimated Per-Share NAV at least once annually at the discretion of our board of directors. We offer shares pursuant to the dividend reinvestment plan (“DRIP”) and repurchase shares pursuant to our SRP at a price based on Estimated Per-Share NAV. For additional information on the current status of the DRIP and our SRP, see
Note 6
— Common Stock
and
Note 12
— Subsequent Events
to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q.
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
For a discussion about our significant accounting estimates and critical accounting policies, see the “Significant Accounting Estimates and Critical Accounting Policies” section of our 2017 Annual Report on Form 10-K. There have been no material changes from these significant accounting estimates and critical accounting policies.
Recently Issued Accounting Pronouncements
See
Note 2
— Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements
to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion.
Properties
The following table presents certain information about the investment properties we owned as of
September 30, 2018
:
|
Portfolio
|
Acquisition Date
|
Rentable Square Feet
|
Occupancy
|
Remaining Lease Term
(2)
|
Gross Asset Value
(3)
|
|||||||||
|
(in thousands)
|
||||||||||||||
|
421 W. 54th Street - Hit Factory
(1)
|
Jun. 2014
|
12,327
|
|
—
|
%
|
0
|
$
|
6,480
|
|
|||||
|
400 E. 67th Street - Laurel Condominium
|
Sept. 2014
|
58,750
|
|
100.0
|
%
|
7.6
|
76,086
|
|
||||||
|
200 Riverside Boulevard - ICON Garage
|
Sept. 2014
|
61,475
|
|
100.0
|
%
|
19.0
|
9,000
|
|
||||||
|
9 Times Square
|
Nov. 2014
|
167,390
|
|
74.6
|
%
|
6.4
|
180,191
|
|
||||||
|
123 William Street
|
Mar. 2015
|
542,676
|
|
94.7
|
%
|
7.4
|
272,204
|
|
||||||
|
1140 Avenue of the Americas
|
Jun. 2016
|
242,466
|
|
91.3
|
%
|
4.1
|
178,455
|
|
||||||
|
1,085,084
|
|
90.3
|
%
|
6.2
|
$
|
722,416
|
|
|||||||
(1)
During the second quarter of 2018, the sole tenant in our 421 W. 54th Street property terminated its lease early and vacated the space.
(2)
Remaining lease term in years as of
September 30, 2018
, calculated on a weighted-average basis, as applicable.
(3)
Gross asset value represents total real estate investments, at cost, net of gross market lease intangible liabilities.
24
Results of Operations
As of
September 30, 2018
and
2017
, our overall portfolio occupancy was
90.3%
and 87.1%, respectively, while occupancy at our property located at 9 Times Square increased to
74.6%
from 57.9% as of
September 30, 2018
and
2017
, respectively.
The following table is a summary of our quarterly leasing activity for
2018
:
|
Q1 2018
|
Q2 2018
|
Q3 2018
|
||||||||||
|
Leasing activity:
|
||||||||||||
|
New Leases
(1)
:
|
||||||||||||
|
New leases commenced
|
2
|
|
4
|
|
4
|
|
||||||
|
Total square feet leased
|
34,789
|
|
52,425
|
|
19,813
|
|
||||||
|
Annualized straight-line rent
(2)
|
$
|
43.13
|
|
$
|
63.70
|
|
$
|
98.92
|
|
|||
|
Weighted average lease term (years)
|
13.0
|
|
7.4
|
|
11.2
|
|
||||||
|
Replacement leases
(3)
:
|
||||||||||||
|
Replacement leases commenced
|
2
|
|
2
|
|
1
|
|
||||||
|
Square feet
|
30,349
|
|
20,216
|
|
4,312
|
|
||||||
|
Terminations
(4)
:
|
||||||||||||
|
Leases terminated
|
1
|
|
1
|
|
2
|
|
||||||
|
Square feet
|
12,658
|
|
12,327
|
|
9,765
|
|
||||||
|
Annualized straight-line rent
(2)
|
$
|
55.08
|
|
$
|
49.31
|
|
$
|
48.48
|
|
|||
|
Tenant improvements on replacement leases per square foot
(5)
|
$
|
23.39
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Leasing commissions on replacement leases per square foot
(5)
|
$
|
7.49
|
|
$
|
8.93
|
|
$
|
—
|
|
|||
(1)
Includes new and replacement leases commenced during the quarter.
(2)
Represents the GAAP basis weighted-average rent per square foot that is recognized over the term on the respective leases, includes free rent and periodic rent increases, excludes recoveries.
(3)
Represents replacement leases commenced, and related square feet, for spaces that had been previously leased in the prior twelve months.
(4)
Calculated as of the date of termination.
(5)
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.
Comparison of Three Months Ended
September 30, 2018
and
2017
Rental Income
Rental income increased
$0.9 million
to
$14.2 million
for the three months ended
September 30, 2018
, from
$13.3 million
for the three months ended
September 30, 2017
, due to an increase in occupancy.
Operating Expense Reimbursements
Operating expense reimbursements increased
$0.4 million
to
$1.5 million
for the three months ended
September 30, 2018
, compared to
$1.1 million
for the three months ended
September 30, 2017
, primarily due to higher recoveries of reimbursable costs. The costs associated with these reimbursements are recorded in property expenses, which increased as a result of new lease commencements and the increased costs of maintaining our six properties including costs of real estate taxes, utilities, and repairs and maintenance.
Pursuant to many of our lease agreements, tenants are required to reimburse us for 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 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.
Property Operating Expenses
Property operating expenses increased
$0.5 million
to
$7.3 million
for the three months ended
September 30, 2018
from
$6.8 million
for the three months ended
September 30, 2017
. This increase is primarily due to new lease commencements and the increased costs of maintaining our six properties including the costs of real estate taxes, utilities, and repairs and maintenance.
25
Asset and Property Management Fees to Related Parties
Fees for asset and property management services from our Advisor and Property Manager essentially remained flat at
$1.5 million
for the three months ended
September 30, 2018
and
September 30, 2017
(
see
Note 8
— Related Party Transactions and Arrangements
for more information on fees incurred from our Advisor and Property Manager).
General and Administrative Expenses
General and administrative expenses increased
$0.2 million
to
$2.3 million
for the three months ended
September 30, 2018
from
$2.1 million
for the three months ended
September 30, 2017
. These expenses are primarily related to professional fees and other reimbursements incurred from our Advisor. The professional fees and other reimbursements include administrative services, overhead expenses for employees of the Advisor (excluding our executive officers) and other reimbursements incurred from our Advisor. For the three months ended
September 30, 2018
, professional fees and other reimbursements incurred from our Advisor increased
$0.2 million
to
$1.2 million
, as compared to
$1.0 million
for the three months ended
September 30, 2017
.
Depreciation and Amortization
Depreciation and amortization expense was essentially flat at
$7.1 million
for the three months ended
September 30, 2018
and
September 30, 2017
.
Interest Expense
Interest expense increased
$0.6 million
to
$3.5 million
for the three months ended
September 30, 2018
, compared to
$2.9 million
for the three months ended
September 30, 2017
. The increase was due to a new $50.0 million loan entered into on April 13, 2018 (see
Note 4
- Mortgage Notes Payable, Net
to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for additional information). As of
September 30, 2018
the gross balance of our outstanding debt was
$289.0 million
and had a weighted-average effective interest rate of
4.51%
. As of
September 30, 2017
, the gross balance of our outstanding debt was
$239.0
million and had a weighted-average effective interest rate of 4.61%.
Income from Investment Securities and Interest
Income from investment securities and interest was essentially flat at approximately
$0.1 million
for the three months ended
September 30, 2018
and
2017
, respectively. The income primarily relates to interest earned on our cash balances during the periods.
Comparison of
Nine
Months Ended
September 30, 2018
and
2017
Rental Income
Rental income increased
$2.3 million
to
$42.3 million
for the
nine
months ended
September 30, 2018
, from
$40.0 million
for the
nine
months ended
September 30, 2017
, primarily due to an increase in occupancy.
Operating Expense Reimbursements
Operating expense reimbursements increased
$0.3 million
to
$3.9 million
for the
nine
months ended
September 30, 2018
, from
$3.6 million
for the
nine
months ended September 30,
2017
, primarily due to higher recoveries of reimbursable costs. The costs associated with these reimbursements are recorded in property expenses, which increased as a result of new lease commencements and the increased costs of maintaining our six properties including costs of real estate taxes, utilities, and repairs and maintenance.
Pursuant to many of our lease agreements, tenants are required to reimburse us for 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.
Property Operating Expenses
Property operating expenses increased
$0.9 million
to
$20.8 million
for the
nine
months ended
September 30, 2018
from
$19.9 million
for the
nine
months ended
September 30, 2017
, primarily due to new lease commencements and the increased costs of maintaining our six properties including costs of real estate taxes, utilities, and repairs and maintenance.
Asset and Property Management Fees to Related Parties
We incurred
$4.6 million
in fees for asset and property management services from our Advisor and Property Manager for both the
nine
months ended
September 30, 2018
and
2017
(
see
Note 8
— Related Party Transactions and Arrangements
for more information on fees incurred from our Advisor and Property Manager).
26
Acquisition and Transaction Related Expenses
We incurred
$1,000
and
$6,000
of acquisition and transaction related expenses for the
nine
months ended
September 30, 2018
and
2017
, respectively.
General and Administrative Expenses
General and administrative expenses increased
$2.2 million
to
$7.8 million
for the
nine
months ended
September 30, 2018
compared to
$5.6 million
for the
nine
months ended
September 30, 2017
, primarily related to an increase in professional fees and other reimbursements incurred from our Advisor, as well as an increase in legal and proxy fees. These professional fees and other reimbursements include administrative services, overhead expenses for employees of the Advisor (excluding our executive officers) and other reimbursements incurred from our Advisor.
For the
nine
months ended
September 30, 2018
, professional fees and other reimbursements incurred from our Advisor increased
$1.0 million
to
$3.6 million
for the
nine
months ended
September 30, 2018
, compared to
$2.6 million
for the
nine
months ended
September 30, 2017
. The legal and proxy fees contributed approximately
$0.8 million
to the increase in general and administrative expenses during the
nine
months ended
September 30, 2018
, when compared to the
nine
months ended
September 30, 2017
, which included approximately $0.4 million paid for an agreement to settle the contested vote at our 2017 annual meeting of shareholders.
Depreciation and Amortization
Depreciation and amortization expense increased
$1.1 million
to
$22.4 million
for the
nine
months ended
September 30, 2018
, compared to
$21.3 million
for the
nine
months ended
September 30, 2017
, primarily due to a higher depreciable asset base as a result of capital improvements during the year ended December 31, 2017.
Interest Expense
Interest expense increased
$1.3 million
to
$9.7 million
for the
nine
months ended
September 30, 2018
, from
$8.4 million
for the
nine
months ended
September 30, 2017
. The increase was due to a new $50.0 million loan entered into on April 13, 2018 (see
Note 4
- Mortgage Notes Payable, Net
to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for additional information). As of
September 30, 2018
, the gross balance of our outstanding debt was
$289.0 million
and we had a weighted-average effective interest rate of
4.51%
. As of
September 30, 2017
, the gross balance of our outstanding debt was $239.0 million and we had a weighted-average effective interest rate of 4.61%.
Income from Investment Securities and Interest
Income from investment securities and interest was essentially flat at approximately
$0.2 million
for the
nine
months ended
September 30, 2018
and 2017, respectively. The income primarily relates to interest earned on our cash balances during the periods.
Gain on Sale of Investment Securities
Gain on sale of investment securities was 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, 2018
.
Cash Flows from Operating Activities
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 used in operating activities was
$4.2 million
during the
nine
months ended
September 30, 2018
and consisted primarily of a net loss of
$19.0 million
, offset by depreciation and amortization for tangible and intangible assets and other non-cash expenses of
$21.5 million
, which resulted in net cash inflows of
$2.5 million
. Net cash used in operating activities also included a $1.0 million decrease related to accounts payable and accrued expenses associated with operating activities and an increase in prepaid expenses and other assets of
$5.9 million
, primarily related to an increase in unbilled rent receivables recorded in accordance with accounting for rental income on a straight-line basis. In addition, net cash used in operating activities was impacted by a net cash inflow of
$0.2 million
for an increase in deferred rent.
During the
nine
months ended
September 30, 2017
, net cash provided by operating activities was approximately
$3.9 million
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 $20.7 million, which resulted in cash inflows of
$4.7 million
. Net cash provided by operating activities also 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, 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 increase in prepaid expenses and other assets of
$7.2 million
27
primarily related to an increase in unbilled rent receivables recorded in accordance with accounting for rental income on a straight-line basis,
Cash Flows from Investing Activities
Net cash used in investing activities of
$6.1 million
during the
nine
months ended
September 30, 2018
related to funding of capital expenditures relating to building and tenant improvements at 9 Times Square and 123 William Street.
Net cash used in investing activities of $7.6 million during the
nine
months ended
September 30, 2017
related to funding 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.
Cash Flows from Financing Activities
Net cash provided by financing activities of
$32.9 million
during the
nine
months ended
September 30, 2018
primarily related to the proceeds from mortgage notes payable of
$50.0 million
, partially offset by distributions to stockholders of
$7.5 million
, payments of
$2.3 million
relating to financing costs and repurchases of common stock of
$7.3 million
.
Net cash provided by financing activities of
$12.8 million
during the
nine
months ended
September 30, 2017
related to the gross proceeds from a mortgage note payable of $140.0 million which included $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.
Liquidity and Capital Resources
As of
September 30, 2018
, we had cash and cash equivalents of
$64.1 million
as compared to
$39.6 million
as of
December 31, 2017
. The increase in our cash and cash equivalents balance was primarily driven by the new loan we closed in April 2018, detailed further below. In addition, on February 27, 2018, our board of directors unanimously authorized a suspension of the distributions we pay to holders of our common stock, effective as of March 1, 2018. We believe this suspension better positions us for future growth by enhancing our ability to fund potential future acquisitions as well as execute on the repositioning and leasing efforts related to the six properties we already own. Our board of directors will continue to evaluate our performance and expects to assess our distribution policy no sooner than February 2019, however there can be no assurance we will be able to resume paying cash distributions at our previous level or at all.
Our principal demands for cash are to fund operating and administrative expenses, capital expenditures, tenant improvement and leasing commission costs related to our properties, our debt service obligations, acquisitions, potential future distributions to our stockholders and repurchases under our SRP.
We had historically used the net proceeds from our IPO to fund acquisitions and distributions, as well as for other corporate purposes. However, this source is no longer available to us. We expect to fund future acquisitions, if any, and operations through a combination of net cash provided by our current property operations, the operations of properties that may be acquired in the future and proceeds from financings, and we believe that we will have sufficient cash flow to meet our operating needs over the next year. We expect that cash retained by the suspension of distributions noted above will aid in the funding of our operations, capital expenditures related to tenant improvements, costs associated with new leases and lease renewals (including leasing commissions), and acquisitions in the New York City market. As mentioned above, additional sources of capital may also include proceeds from secured and unsecured financing from banks or other lenders. To the extent we are required to obtain additional financing we may not be able to do so on favorable terms 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. On April 13, 2018, two wholly owned subsidiaries of the OP, entered into a loan agreement (the “Loan Agreement”) with Societe Generale (the “Lender”). The Loan Agreement provides for a $50.0 million loan (the “Loan”) with a fixed interest rate of 4.516% and a maturity date of May 1, 2028. The Loan requires monthly interest-only payments, with the principal balance due on the maturity date. The Loan is secured by, among other things, mortgage liens on two of our previously unencumbered properties. For additional information, see
Note 4
— Mortgage Notes Payable, Net
to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion.
We plan to increase our indebtedness over time such that aggregate borrowings are closer to 40% to 50% of the aggregate fair market value of our assets, or approximately $340.0 and $425.1 million, respectively, based on the fair market value of our real estate assets established in connection with the approval by our independent board of directors of our Estimated Per-Share NAV as of June 30, 2018 (published on October 25, 2018). As of
September 30, 2018
, our gross aggregate borrowings were
$289.0 million
with a weighted-average effective interest rate of
4.51%
. 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. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
28
We have no future scheduled principal payments on our mortgage notes payable (including the Loan) for the remainder of 2018 or for the year ended December 31, 2019.
On February 6, 2018, in response to an unsolicited offer to our stockholders, we commenced a tender offer (as amended, the “February Offer”). Under the February Offer, we offered to purchase up to 140,000 shares of our common stock for cash at a purchase price equal to $17.03 per share. The February Offer expired on March 20, 2018, and, in accordance with the terms of the February Offer, we accepted for purchase 139,993 shares of common stock for a total cost of approximately $2.4 million. Payment of this amount and related costs was made in April 2018 and funded using cash on hand.
On June 15, 2018, in response to an unsolicited offer to our stockholders, we commenced a tender offer (the “June Offer”) to purchase up to
500,000
shares of our common stock for cash at a purchase price equal to
$12.95
per share. The June Offer expired on July 24, 2018 and, in accordance with the terms of the June Offer, we accepted for purchase
210,014
shares of common stock for a total cost of approximately
$2.7 million
. Payment of this amount and related costs was made in July 2018 and funded using cash on hand.
Subsequent Events
On October 9, 2018 we repurchased
145,627
shares of common stock for approximately
$3.0
million, at a weighted-average price per share of
$20.26
pursuant to the SRP. These repurchases were funded with cash on hand.
On October 17, 2018, we closed on an acquisition of a medical office building with an aggregate base purchase price of
$15.9 million
, excluding acquisition related costs. The acquisition was funded by proceeds from issuance of mortgage debt in the amount of
$10.0 million
with the remainder funded with cash on hand.
Repositioning and Leasing Initiatives
Our repositioning and leasing initiatives have resulted in an occupancy level of
90.3%
across our portfolio as of
September 30, 2018
, as compared to 88.3% as of December 31, 2017. Specifically, occupancy levels at 9 Times Square and 123 Williams Street have increased to
74.6%
and
94.7%
, respectively, as compared to 63.9% and 92.7%, respectively, as of December 31, 2017.
We believe the repositioning strategy undertaken on the ground floor retail space at 9 Times Square has made the Seventh Avenue retail frontage more attractive to potential tenants, while the new lobby and the pre-built office suites have helped us achieve the lease-up of the office floors throughout the building and drive increased property value. We believe that certain market tenant incentives, including free rent periods and tenant improvements, have driven occupancy rates higher and extended the average duration of our leases. While we will not receive cash during initial free rent periods, we are often able to negotiate longer, more attractive lease terms by having the flexibility to include such a feature. There can be no assurance, however, that these improvements will occur on a timely basis, or at all.
We will seek replacement tenants and continue to evaluate its strategic alternatives for our 421 W. 54th Street property, where the sole tenant terminated its lease early and vacated the space during the second quarter of 2018.
Capital Expenditures
For the
nine
months ended
September 30, 2018
, we have funded
$6.1 million
of capital expenditures primarily related to improvements at our 123 William Street and 9 Times Square properties. The capital expenditures for the
nine
months ended
September 30, 2017
of
$8.1 million
were primarily related to 9 Times Square, 123 William Street and 1140 Avenue of the Americas. We may invest in additional capital expenditures to further enhance the value of our investments. Additionally, many of our lease agreements with tenants include provisions for tenant improvement allowances.
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 the full lease-up of this property or effectively repositioning or remarketing any other property we may acquire for these purposes, including increasing the occupancy rate.
Non-GAAP Financial Measures
This section includes 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.
Because of these factors, 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, a non-GAAP measure, 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.
29
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 Institute for Portfolio Alternatives (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.
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.
30
The tables below reflect 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 September 30, 2018
|
|||||||||||||||
|
(In thousands)
|
March 31,
2018 |
June 30,
2018 |
September 30, 2018
|
|||||||||||||
|
Net loss (in accordance with GAAP)
|
$
|
(6,584
|
)
|
$
|
(6,529
|
)
|
$
|
(5,865
|
)
|
$
|
(18,978
|
)
|
||||
|
Depreciation and amortization
|
7,731
|
|
7,562
|
|
7,128
|
|
22,421
|
|
||||||||
|
FFO
|
1,147
|
|
1,033
|
|
1,263
|
|
3,443
|
|
||||||||
|
Acquisition and transaction related
|
—
|
|
1
|
|
—
|
|
1
|
|
||||||||
|
Accretion of below- and amortization of above-market lease liabilities and assets, net
|
(610
|
)
|
(463
|
)
|
(484
|
)
|
(1,557
|
)
|
||||||||
|
Straight-line rent
|
(1,126
|
)
|
(929
|
)
|
(1,249
|
)
|
(3,304
|
)
|
||||||||
|
Straight-line ground rent
|
27
|
|
27
|
|
28
|
|
82
|
|
||||||||
|
MFFO
|
$
|
(562
|
)
|
$
|
(331
|
)
|
$
|
(442
|
)
|
$
|
(1,335
|
)
|
||||
|
Three Months Ended
|
Nine Months Ended September 30, 2017
|
|||||||||||||||
|
(In thousands)
|
March 31,
2017 |
June 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
|
|
||||||||
|
Non-recurring 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.
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.
31
The tables below reflect 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,
2018 |
June 30,
2018 |
September 30, 2018
|
September 30, 2018
|
||||||||||||
|
Net loss (in accordance with GAAP)
|
$
|
(6,584
|
)
|
$
|
(6,529
|
)
|
$
|
(5,865
|
)
|
$
|
(18,978
|
)
|
||||
|
Income from interest
|
(64
|
)
|
(64
|
)
|
(111
|
)
|
(239
|
)
|
||||||||
|
General and administrative
|
3,004
|
|
2,540
|
|
2,261
|
|
7,805
|
|
||||||||
|
Asset and property management fees to related parties
|
1,483
|
|
1,618
|
|
1,532
|
|
4,633
|
|
||||||||
|
Acquisition and transaction related
|
—
|
|
1
|
|
—
|
|
1
|
|
||||||||
|
Depreciation and amortization
|
7,731
|
|
7,562
|
|
7,128
|
|
22,421
|
|
||||||||
|
Interest expense
|
2,803
|
|
3,380
|
|
3,501
|
|
9,684
|
|
||||||||
|
Accretion of below- and amortization of above-market lease liabilities and assets, net
|
(610
|
)
|
(463
|
)
|
(484
|
)
|
(1,557
|
)
|
||||||||
|
Straight-line rent
|
(1,126
|
)
|
(929
|
)
|
(1,249
|
)
|
(3,304
|
)
|
||||||||
|
Straight-line ground rent
|
27
|
|
27
|
|
28
|
|
82
|
|
||||||||
|
Cash NOI
|
$
|
6,664
|
|
$
|
7,143
|
|
$
|
6,741
|
|
$
|
20,548
|
|
||||
|
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
|
|
||||||||
|
Asset and property management fees to 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
We are required to distribute annually at least 90% of our annual REIT taxable income, determined without regard for the deduction for distributions paid and excluding net capital gains. 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 payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. On February 27, 2018, our board of directors unanimously authorized a suspension of the distributions we pay to holders of our common stock, effective as of March 1, 2018. There can be no assurance we will be able to resume paying cash distributions at our previous level or at all. A tax loss for a particular year eliminates the need to distribute REIT taxable income to meet the 90% distribution requirement for that year and may minimize or eliminate the need to make distributions in order to meet the distribution requirement in one or more subsequent years.
During the
nine
months ended
September 30, 2018
, distributions paid to common stockholders totaled
$11.7 million
. Of that amount,
$4.2 million
was reinvested in shares of our common stock pursuant to the DRIP. During January and February 2018, when we were paying distributions, we funded distributions from cash proceeds received from cash on hand, representing proceeds from secured mortgages financing. No cash flows from operations were used to fund distributions during this period. Net cash used in operating activities was approximately
$4.2 million
for the
nine
months ended
September 30, 2018
.
32
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 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 considered for repurchase. Other terms and provisions of the amended and restated SRP remained consistent with the existing SRP.
In connection with the February Offer, our board of directors suspended the SRP during the pendency of the February Offer. On April 26, 2018, our board of directors reactivated the SRP. In connection with the June Offer, our board of directors suspended the SRP during the pendency of the June Offer. On August 23, 2018, our board of directors unanimously reactivated the SRP, which had been suspended, for a period commencing on August 25, 2018 and ending on September 24, 2018 (the “2018 Reactivation Period”). The board of directors also approved a related amendment to the SRP, effective August 25, 2018, and a subsequent suspension of the SRP commencing immediately following the 2018 Reactivation Period which will remain in effect until the date that we announce that we will resume paying regular cash distributions to our stockholders although there can be no assurance that we will do so at all. On October 9, 2018, we repurchased
145,627
which were comprised of shares related to repurchase requests made during the period from January 1, 2018 until the suspension of the SRP on February 6, 2018 and the period commencing with the reactivation of the SRP on April 26, 2018 until the suspension of the SRP on June 15, 2018 (the “2018 Active Period”), which represent the two periods of time during the six months ended June 30, 2018 when the SRP was not suspended, and shares related to repurchase requests made during the 2018 Reactivation Period.
Under the SRP, 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 (periods January 1 through June 30, “first fiscal semester” or July 1 through December 31 “second fiscal semester”, together referred to as a “fiscal semester”). 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, 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.
We repurchase shares pursuant to the SRP at a price based on Estimated Per-Share NAV. 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. On October 24, 2016, our board of directors approved an estimated net asset value per share of our common stock as of June 30, 2016 (the “2016 Estimated Per-Share NAV”). 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. On February 28, 2016, the SRP amendment became effective and on October 25, 2017, our board of directors approved an estimated net asset value per share of our common stock as of June 30, 2017 (the “2017 Estimated Per-Share NAV”). Since we established the 2017 Estimated Per-Share NAV during the second fiscal semester of 2017, 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 were paid at the 2017 Estimated Per-Share NAV. During the second fiscal semester, on October 23, 2018, the independent directors of the board unanimously approved the 2018 Estimated Per-Share NAV equal to $20.26. Any repurchase requests received as of this date in the second fiscal semester and until a new annual Estimated Per-Share NAV is published, stockholders would be paid $20.26 per share of common stock.
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, 2018
:
|
Numbers of Shares Repurchased
|
Weighted-Average Price per Share
|
||||||
|
Cumulative repurchases as of December 31, 2017
(1)
|
1,004,793
|
|
$
|
22.48
|
|
||
|
Nine months ended September 30, 2018
(2) (3)
|
254,941
|
|
20.26
|
|
|||
|
Cumulative repurchases as of September 30, 2018
|
1,259,734
|
|
22.03
|
|
|||
(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
$13,700
at a weighted-average price per share of
$23.68
, (iii)
82,256
shares repurchased during the three months ended September 30, 2017, for approximately
33
$1.7 million
at a weighted-average price per share of
$21.25
. During the three months ended September 30, 2017, following the effectiveness of the amendment and restatement of the SRP, our 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.
(2)
In January 2018, our board of directors approved the repurchase requests made pursuant to the SRP during the period from July 1, 2017 to December 31, 2017, which resulted in the repurchase of
99,131
shares for approximately
$2.0 million
at a weighted-average price per share of
$20.26
and
10,183
shares were repurchased from an individual stockholder in a privately negotiated transaction during January 2018 for approximately
$0.2 million
at a weighted-average price per share of
$20.26
.
(3)
Includes repurchase requests approved during the third quarter of 2018, and paid on October 9, 2018, which resulted in the repurchase of
145,627
shares for approximately
$3.0 million
at a weighted-average price per share of
$20.26
, which are comprised of shares related to repurchase requests made during the 2018 Active Period and shares related to repurchase requests made during the 2018 Reactivation Period.
Contractual Obligations
In April 2018, we entered into the Loan which will require us to make annual interest payments of approximately $2.3 million. The $50.0 million principal balance is required to be repaid upon maturity in May 2028. There were no other material changes in our contractual obligations at
September 30, 2018
, as compared to those reported in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
Election as a REIT
We elected and qualified to be taxed as a REIT under the Internal Revenue Code (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 8
— Related Party Transactions and Arrangements
to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion.
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.
There has been no material change in our exposure to market risk during the
nine
months ended
September 30, 2018
. For a discussion of our exposure to market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
.
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, 2018
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
34
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.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Sales of Registered Securities
None.
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, 2018
, the repurchase of all shares validly submitted for repurchase following the death or qualifying disability of a stockholder. In connection with the February Offer, our board of directors suspended the SRP during the pendency of the February Offer. On April 26, 2018, our board of directors reactivated the SRP. In connection with the June Offer, our board of directors suspended the SRP during the pendency of the June Offer. On August 23, 2018, our board of directors unanimously reactivated the SRP for the 2018 Reactivation Period. The board of directors also approved a subsequent suspension of the SRP commencing immediately following the 2018 Reactivation Period which will remain in effect until we announce that we will resume paying regular cash distributions to our stockholders. We have not yet reactivated the SRP following the 2018 Reactivation Period.
When 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, 2018
.
|
Numbers of Shares Repurchased
|
Weighted-Average Price per Share
|
||||||
|
Cumulative repurchases as of December 31, 2017
(1)
|
1,004,793
|
|
$
|
22.48
|
|
||
|
Nine months ended September 30, 2018
(2) (3)
|
254,941
|
|
20.26
|
|
|||
|
Cumulative repurchases as of September 30, 2018
|
1,259,734
|
|
22.03
|
|
|||
(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
$13,700
at a weighted-average price per share of
$23.68
, (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
. During the three months ended September 30, 2017, following the effectiveness of the amendment and restatement of the SRP, our 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.
(2)
In January 2018, our board of directors approved the repurchase requests made pursuant to the SRP during the period from July 1, 2017 to December 31, 2017, which resulted in the repurchase of
99,131
shares for approximately
$2.0 million
at a weighted-average price per share of
$20.26
and
10,183
shares were repurchased from an individual stockholder in a privately negotiated transaction during January 2018 for approximately
$0.2 million
at a weighted-average price per share of
$20.26
.
(3)
Includes repurchase requests approved during the third quarter of 2018, and paid on October 9, 2018, which resulted in the repurchase of
145,627
shares for approximately
$3.0 million
at a weighted-average price per share of
$20.26
, which are comprised of shares related to repurchase requests made during the 2018 Active Period and shares related to repurchase requests made during the 2018 Reactivation Period.
Other Repurchases
Under the June Offer, we offered to purchase up to 500,000 shares of our common stock for cash at a purchase price equal to $12.95 per share. The June Offer expired on July 24, 2018 and, in accordance with the terms of the June Offer, we accepted for purchase 210,014 shares of common stock for a total cost of approximately $2.7 million. Payment of this amount and related costs were made in July 2018 and funded using cash on hand.
None.
35
Not applicable.
Item
5. Other Information.
None.
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.
36
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/ Katie P. Kurtz
|
|
|
|
Katie P. Kurtz
|
|
|
|
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer) |
|
Dated:
November 13, 2018
37
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, 2018
(and are numbered in accordance with Item 601 of Regulation S-K).
|
Exhibit No.
|
|
Description
|
|
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, 2018, 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
38
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 OrganizationNote 2 Summary Of Significant Accounting PoliciesNote 3 Real Estate InvestmentsNote 4 Mortgage Notes Payable, NetNote 5 Fair Value Of Financial InstrumentsNote 6 Common StockNote 7 Commitments and ContingenciesNote 8 Related Party Transactions and ArrangementsNote 9 Economic DependencyNote 10 Share-based CompensationNote 11 Net Loss Per ShareNote 12 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