American Strategic Investment (NYC) - 2018 Q4 - Annual Report

Part I Business New York City REIT, Inc. is a Maryland REIT that acquires and manages income-producing commercial real estate, primarily office properties, in New York City, with a portfolio of seven properties as of December 31, 2018, and is externally managed - The company's primary business is investing in commercial properties within the five boroughs of New York City, with a focus on Manhattan[16] - The company is externally managed by New York City Advisors, LLC and has no employees; the Advisor and its affiliates receive fees for their services[20][42] - Key investment objectives include a focus on NYC, investing in properties with at least 80% occupancy, limiting borrowings to 40-50% of asset value, and maximizing total returns; the company suspended monthly distributions in February 2018[22][27] - The company elected to be taxed as a REIT beginning with the taxable year ended December 31, 2014, and intends to maintain this status[15][34] Portfolio Summary as of December 31, 2018 | Metric | Value | | :--- | :--- | | Number of Properties | 7 | | Rentable Square Feet | 1,102,584 | | Aggregate Purchase Price | $702.0 million | Risk Factors The company faces diverse risks including geographic concentration in New York City, stock illiquidity, suspended distributions, conflicts of interest with its external Advisor, anti-takeover corporate provisions, general real estate market downturns, debt financing, and complex REIT tax compliance Risks Related to an Investment in New York City REIT, Inc. Investment in the company carries specific risks, including a high concentration of all properties in the New York MSA, making it vulnerable to local economic downturns, and significant illiquidity for stockholders due to non-traded stock and suspended share repurchase program and distributions - All company properties are located in the New York MSA, creating a dependency on the local economic climate and a lack of geographic diversification[47] - The common stock is not traded on a national exchange, and the Share Repurchase Program (SRP) is suspended, limiting stockholders' ability to sell their shares[51] - The company suspended dividend payments to stockholders effective March 1, 2018, with no assurance of when or if they will resume[52] - The portfolio has significant asset concentration, with two properties (123 William Street and 1140 Avenue of the Americas) accounting for approximately 71% of total square footage and 73% of annualized straight-line rent as of December 31, 2018[64] Risks Related to Conflicts of Interest Significant conflicts of interest exist due to the company's relationship with its external Advisor, AR Global, and its affiliates, creating competition for investment opportunities and personnel time, conflicting fiduciary duties for executive officers, and a compensation structure that may incentivize riskier investments - The Advisor and its affiliates face conflicts of interest in allocating suitable investment opportunities between the company and other AR Global-advised programs[82] - Executive officers and directors hold positions with the Advisor and other related entities, creating conflicting fiduciary duties that could be detrimental to the company's business[87][88] - The Advisor's compensation structure, including substantial fees and performance-based distributions upon a liquidity event, may incentivize actions that are riskier or more speculative[90] Risks Related to Our Corporate Structure The company's corporate structure presents several risks, including charter limits on individual stock ownership, the board's ability to issue additional stock without stockholder approval, Maryland corporate law anti-takeover provisions, and reduced public reporting requirements as an "emerging growth company" - The company's charter limits any person from owning more than 9.8% of its stock, which may discourage a change in control[92] - Maryland law prohibits certain business combinations with interested stockholders for five years, potentially making acquisitions more difficult[95] - The company has a classified board of directors, which may delay or prevent a change in control[98] - As an "emerging growth company," the company is subject to reduced public company reporting requirements, such as not needing an auditor's attestation on internal controls[101][102] General Risks Related to Investments in Real Estate The company is subject to general risks inherent in real estate investment, including adverse impacts from economic changes, tenant bankruptcies, illiquidity of assets, inability to renew leases, uninsured losses from catastrophic events, and significant costs from compliance with governmental regulations - Operating results are affected by general real estate market risks, including changes in economic conditions, tenant demand, and operating expenses[110] - The bankruptcy or insolvency of a tenant could result in the inability to collect rent and may delay or preclude full collection of balances due[116] - The company faces risks of uninsured losses, particularly from catastrophic events like terrorism, as the Terrorism Risk Insurance Act (TRIA) is set to expire[125][126] - The portfolio is subject to risks from natural disasters and climate change, such as rising sea levels and increased storm intensity in the New York MSA[131] - Compliance with environmental laws and the Americans with Disabilities Act (Disabilities Act) could require substantial expenditures[135][139] Risks Associated with Debt Financing The company's use of debt financing introduces significant risks, including hindering adjustments to market conditions, limiting access to capital, increasing vulnerability to economic downturns, exposure to rising interest rates from future variable-rate debt, uncertainty from the LIBOR transition, and increased default risk from interest-only loans with large balloon payments - As of December 31, 2018, the company had approximately $291.7 million in total outstanding indebtedness, which increases business risks such as vulnerability to economic downturns and limits financial flexibility[143] - The planned discontinuation of LIBOR after 2021 creates uncertainty and could increase the cost of future variable-rate debt[146] - The use of interest-only indebtedness, which comprised all outstanding mortgage debt at year-end 2018, increases the risk of default, as principal is not reduced and large balloon payments will be required at maturity[149] U.S. Federal Income Tax Risks Maintaining REIT status involves complex U.S. federal income tax risks, including the potential for corporate income tax if REIT qualification is lost, the requirement to distribute at least 90% of taxable income annually, exposure to a 100% tax on prohibited transactions, and strict ownership limitations and asset/income tests that may force the company to forgo attractive investment opportunities - Failure to maintain REIT qualification would subject the company to U.S. federal income tax at corporate rates and disqualify it from REIT treatment for four subsequent years[153][154] - To qualify as a REIT, the company must distribute at least 90% of its REIT taxable income annually, which may require borrowing funds or selling assets under unfavorable conditions[156] - The company may be subject to a 100% tax on net income from the sale of properties deemed to be held primarily for sale to customers in the ordinary course of business (prohibited transactions)[157] - To help maintain REIT status, the company's charter restricts ownership by any single person to 9.8% and requires compliance with the "five or fewer" rule, which may inhibit market activity and business combinations[174][175] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - Not applicable[180] Properties As of December 31, 2018, the company's portfolio consisted of seven properties totaling 1,102,584 rentable square feet with an overall occupancy of 93.7% and a weighted-average remaining lease term of 6.3 years, with future minimum base rent payments from existing leases totaling $382.2 million, and $299.0 million in gross mortgage notes payable secured by five properties Property Portfolio Overview (as of December 31, 2018) | Property | Rentable Square Feet | Occupancy | Remaining Lease Term (Years) | | :--- | :--- | :--- | :--- | | 421 W. 54th Street - Hit Factory | 12,327 | —% | — | | 400 E. 67th Street - Laurel Condominium | 58,750 | 100.0% | 7.4 | | 200 Riverside Boulevard - ICON Garage | 61,475 | 100.0% | 18.8 | | 9 Times Square | 167,390 | 84.3% | 8.1 | | 123 William Street | 542,676 | 98.3% | 7.1 | | 1140 Avenue of the Americas | 242,466 | 91.3% | 3.7 | | 8713 Fifth Avenue | 17,500 | 100.0% | 6.5 | | Total | 1,102,584 | 93.7% | 6.3 | Future Minimum Base Rent Payments (in thousands) | Year | Amount | | :--- | :--- | | 2019 | $53,347 | | 2020 | $51,404 | | 2021 | $47,237 | | 2022 | $44,018 | | 2023 | $35,920 | | Thereafter | $150,226 | | Total | $382,152 | Property Financing (as of December 31, 2018) | Encumbered Properties | Outstanding Loan Amount (thousands) | Interest Rate | Maturity | | :--- | :--- | :--- | :--- | | 123 William Street | $140,000 | 4.73% Fixed | Mar. 2027 | | 1140 Avenue of the Americas | $99,000 | 4.17% Fixed | Jul. 2026 | | Laurel Condominium / ICON Garage | $50,000 | 4.58% Fixed | May 2028 | | 8713 Fifth Avenue | $10,000 | 5.04% Fixed | Nov. 2028 | | Total Gross Mortgage Notes | $299,000 | 4.54% | | Legal Proceedings The company states that it is not a party to, and none of its properties are subject to, any material pending legal proceedings as of the end of the reporting period - As of the end of the period covered by this report, the company is not a party to any material pending legal proceedings[195] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[196] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities There is no public trading market for the company's common stock, with the Estimated Per-Share NAV approved at $20.26 as of June 30, 2018, and both distributions and the Share Repurchase Program (SRP) suspended as of March 1, 2018, and September 25, 2018, respectively, while the company repurchased a total of 350,007 shares for approximately $5.1 million in 2018 through two tender offers - No established public market exists for the company's common stock, and there are no current plans to list the shares on a national exchange[198] - The board of directors approved an Estimated Per-Share NAV of $20.26 as of June 30, 2018[206] - Distributions to common stockholders were suspended effective March 1, 2018[209] - The Share Repurchase Program (SRP) has been suspended since September 25, 2018, and will remain so until regular cash distributions resume[216] - In 2018, the company conducted two tender offers in response to unsolicited bids, purchasing 139,993 shares at $17.03 and 210,014 shares at $12.95[218][220] Selected Financial Data This section provides a five-year summary of the company's key financial data, showing total assets growing to $773.7 million in 2018, total revenues reaching $62.4 million in 2018, but consistent net losses, widening to $24.1 million in 2018, with negative cash flows from operations of $(7.1) million in 2018, and distributions declared per share decreasing to $0.25 in 2018 before suspension Selected Balance Sheet Data (in thousands) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total real estate investments, at cost | $774,494 | $753,793 | $744,945 | $550,369 | $270,083 | | Total assets | $773,742 | $760,450 | $773,604 | $726,415 | $458,565 | | Mortgage notes payable, net | $291,653 | $233,517 | $191,328 | $93,176 | $— | | Total liabilities | $330,062 | $278,966 | $233,413 | $130,276 | $21,159 | | Total stockholders' equity | $443,680 | $481,484 | $540,191 | $596,139 | $437,406 | Selected Operating Data (in thousands, except per share data) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $62,399 | $58,384 | $47,607 | $26,436 | $2,851 | | Operating loss | $(11,262) | $(12,112) | $(12,705) | $(12,413) | $(6,535) | | Net loss | $(24,112) | $(23,073) | $(19,765) | $(15,785) | $(6,519) | | Cash flows (used in) provided by operations | $(7,080) | $2,282 | $4,128 | $(5,194) | $(4,965) | | Basic and diluted net loss per common share | $(0.77) | $(0.74) | $(0.64) | $(0.57) | $(0.95) | | Distributions declared per common share | $0.25 | $1.51 | $1.51 | $1.51 | $0.84 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results, highlighting key accounting policies and estimates, year-over-year performance where revenue growth was offset by rising expenses and interest leading to continued net losses, negative operating cash flow in 2018, and a liquidity strategy relying on cash from operations, debt financing, and retained cash from suspended distributions to fund capital expenditures and potential acquisitions, while also providing definitions and reconciliations for non-GAAP measures like FFO, MFFO, and Cash NOI Results of Operations For 2018 compared to 2017, rental income increased by $3.2 million to $57.1 million due to increased occupancy and an acquisition, but total operating expenses rose by $3.2 million to $73.7 million and interest expense increased by $2.1 million, resulting in a net loss of $24.1 million for 2018, an increase from the $23.1 million loss in 2017, with a similar trend observed in the 2017 vs 2016 comparison Comparison of Results: 2018 vs. 2017 (in millions) | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Rental Income | $57.1 | $53.9 | +$3.2 | | Total Revenues | $62.4 | $58.4 | +$4.0 | | Total Operating Expenses | $73.7 | $70.5 | +$3.2 | | Interest Expense | $13.3 | $11.2 | +$2.1 | | Net Loss | $(24.1) | $(23.1) | +$1.0 | Comparison of Results: 2017 vs. 2016 (in millions) | Metric | 2017 | 2016 | Change | | :--- | :--- | :--- | :--- | | Rental Income | $53.9 | $44.2 | +$9.7 | | Total Revenues | $58.4 | $47.6 | +$10.8 | | Total Operating Expenses | $70.5 | $60.3 | +$10.2 | | Interest Expense | $11.2 | $7.4 | +$3.8 | | Net Loss | $(23.1) | $(19.8) | +$3.3 | Liquidity and Capital Resources As of December 31, 2018, the company had $48.0 million in cash and cash equivalents, with primary liquidity sources being cash from property operations and debt financing, and the suspension of distributions in March 2018 intended to enhance liquidity for future acquisitions and repositioning efforts, while principal cash demands include operating expenses, debt service, capital expenditures (totaling $9.0 million in 2018), and tenant improvements, with plans to increase leverage to 40-50% of asset fair market value, and aggregate borrowings of $299.0 million at year-end 2018 - Cash and cash equivalents were $48.0 million as of December 31, 2018, up from $39.6 million at year-end 2017[282] - The suspension of distributions effective March 1, 2018, is intended to enhance the company's ability to fund future acquisitions and leasing efforts[282] - In April 2018, the company entered into a new $50.0 million loan, using the proceeds for share repurchases, capital expenditures, acquisitions, and general corporate purposes[285] - The company's repositioning and leasing initiatives increased portfolio occupancy to 93.7% as of Dec 31, 2018, from 88.3% a year prior[290] Non-GAAP Financial Measures The company uses non-GAAP financial measures, including Funds from Operations (FFO), Modified Funds from Operations (MFFO), and Cash Net Operating Income (Cash NOI), to provide supplemental insight into its performance, with FFO adjusting net loss for real estate depreciation and amortization, MFFO further adjusting FFO for acquisition-related expenses and non-cash rent adjustments, and Cash NOI reflecting property-level income and expense items, resulting in FFO of $5.6 million, MFFO of $(0.5) million, and Cash NOI of $27.5 million for 2018 - The company uses FFO and MFFO as supplemental performance measures consistent with NAREIT and IPA guidelines, respectively, to provide a more complete understanding of operating performance by excluding items like real estate depreciation and acquisition-related costs[297][301] Reconciliation of Net Loss to FFO and MFFO (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net loss (GAAP) | $(24,112) | $(23,073) | $(19,765) | | Depreciation and amortization | 29,690 | 29,539 | 25,586 | | FFO | $5,578 | $6,466 | $5,821 | | MFFO Adjustments | (6,072) | (5,523) | (737) | | MFFO | $(494) | $943 | $5,084 | - Cash Net Operating Income (Cash NOI) is used internally to evaluate the operating performance of real estate assets on an unlevered basis, reflecting only property-level income and expense items[310] Cash NOI (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Cash NOI | $27,542 | $25,923 | $22,251 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate changes, with all of its $299.0 million in debt being fixed-rate as of December 31, 2018, which mitigates the impact of interest rate fluctuations on cash flows and earnings, although a hypothetical 100 basis point increase in interest rates would decrease the fair value of this debt by $19.5 million, while the company does not hold derivative contracts for speculative purposes and has no foreign currency exposure - The company's main market risk is interest rate risk; as of December 31, 2018, all debt was fixed-rate, minimizing the impact of rate changes on earnings and cash flows[326][327] - A 100 basis point increase in market interest rates would result in a decrease in the fair value of the company's fixed-rate debt by $19.5 million, while a 100 basis point decrease would increase its fair value by $21.1 million[327] Financial Statements and Supplementary Data This item incorporates by reference the company's Consolidated Financial Statements and related notes, which begin on page F-1 of the Annual Report on Form 10-K - The information required by this item is incorporated by reference to the Consolidated Financial Statements beginning on page F-1 of the report[329] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[330] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2018, and management's annual report on internal control over financial reporting, based on the COSO framework, also concluded that internal controls were effective, with no material changes to internal control over financial reporting during the fourth quarter of 2018 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[332] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[335] Other Information On March 13, 2019, the company filed an amendment to its charter to change its corporate name from American Realty Capital New York City REIT, Inc. to New York City REIT, Inc. - Effective March 13, 2019, the company changed its name from American Realty Capital New York City REIT, Inc. to New York City REIT, Inc.[337] Part III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance, including its code of ethics, is incorporated by reference from its definitive proxy statement for the 2019 annual meeting of stockholders - The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders[341] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for the 2019 annual meeting of stockholders - The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders[342] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference from the company's definitive proxy statement for the 2019 annual meeting of stockholders - The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders[343] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement for the 2019 annual meeting of stockholders - The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders[344] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement for the 2019 annual meeting of stockholders - The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders[345] Part IV Exhibits and Financial Statement Schedules This section lists the financial statement schedules and exhibits filed with the Form 10-K, including Schedule III – Real Estate and Accumulated Depreciation, and key corporate documents such as the Articles of Amendment for the name change, the Second Amended and Restated Advisory Agreement, various loan agreements, and management certifications - The filing includes the financial statement schedule: Schedule III – Real Estate and Accumulated Depreciation[347] - Key exhibits filed include the Articles of Amendment for the name change to New York City REIT, Inc., the Second Amended and Restated Advisory Agreement with the Advisor, and various property loan and management agreements[351] Form 10-K Summary This item is not applicable - Not applicable[354] Financial Statements and Notes Consolidated Financial Statements The consolidated financial statements present the company's financial position as of December 31, 2018 and 2017, and its results of operations and cash flows for the three years ended December 31, 2018, reporting total assets of $773.7 million, total liabilities of $330.1 million, total stockholders' equity of $443.7 million, total revenues of $62.4 million, a net loss of $24.1 million or $(0.77) per share, and net cash used in operating activities of $7.1 million for the year ended December 31, 2018 Consolidated Balance Sheet Highlights (as of Dec 31, 2018, in thousands) | | Amount | | :--- | :--- | | Total real estate investments, net | $684,259 | | Total assets | $773,742 | | Mortgage notes payable, net | $291,653 | | Total liabilities | $330,062 | | Total stockholders' equity | $443,680 | Consolidated Statement of Operations Highlights (Year Ended Dec 31, 2018, in thousands) | | Amount | | :--- | :--- | | Total revenues | $62,399 | | Total operating expenses | $73,661 | | Operating loss | $(11,262) | | Net loss | $(24,112) | | Basic and diluted net loss per share | $(0.77) | Notes to Consolidated Financial Statements The notes provide detailed disclosure on the company's accounting policies, real estate investments, debt, related-party transactions, and other financial matters, including specifics of its seven-property portfolio, terms of its $299 million in mortgage debt, complex fee structure with its external Advisor, confirmation of suspended distributions and Share Repurchase Program, and explanations of various fees payable to the Advisor and its affiliates for services and potential performance-based compensation Note 3 — Real Estate Investments This note details the company's real estate portfolio, including the acquisition of one property in 2018 for a cash payment of $5.9 million, funded partially by a new $10.0 million mortgage, and projected future minimum base rent payments from existing leases totaling $382.2 million as of December 31, 2018, along with amortization schedules for intangible assets and liabilities - In 2018, the company acquired one property, determined to be an asset acquisition, for a net cash payment of $5.9 million[443] - As of December 31, 2018, future minimum base rent payments due to the company total $382.2 million[444] Note 4 — Mortgage Notes Payable, Net As of December 31, 2018, the company had four separate fixed-rate mortgage notes payable with a gross outstanding balance of $299.0 million and a net balance of $291.7 million after deferred financing costs, with a weighted-average effective interest rate of 4.54%, all being interest-only loans with principal due at maturity between 2026 and 2028, secured by five of the company's properties, and including a new $50.0 million loan entered into in April 2018 Mortgage Notes Payable Summary (as of Dec 31, 2018) | | Gross Amount (thousands) | | :--- | :--- | | Mortgage notes payable, gross | $299,000 | | Deferred financing costs, net | $(7,347) | | Mortgage notes payable, net | $291,653 | - All mortgage notes require interest-only payments, with the full principal amounts due at maturity[453][457] Note 8 — Related Party Transactions and Arrangements This note details the extensive financial relationship with the Advisor and its affiliates, including a new advisory agreement effective November 2018 that eliminated acquisition and financing coordination fees but established a new fixed and variable asset management fee structure, resulting in $11.7 million in total operations-related fees and reimbursements to related parties for 2018, and outlining potential termination fees payable to the Advisor and a subordinated 15% participation for the Special Limited Partner in net proceeds from a sale or listing, contingent upon investors receiving a 6% cumulative annual return - A new advisory agreement effective November 16, 2018 eliminated acquisition and financing coordination fees but changed the asset management fee to a fixed monthly amount plus a variable fee based on new equity proceeds[494][501][507] - For the year ended December 31, 2018, the company incurred $5.6 million in cash asset management fees and $0.6 million in property management fees to related parties[509][514] - The Special Limited Partner, an affiliate of the Advisor, is entitled to a subordinated distribution of 15% of net proceeds upon liquidation or listing, after investors receive their capital back plus a 6% cumulative annual return[525][528] - A termination of the advisory agreement in connection with a change of control could trigger a termination fee to the Advisor of $15.0 million plus three or four times the prior year's management fees[531]