American Realty Capital New York City REIT Earnings 2019-06-30
NYCR 10Q Quarterly Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2019
OR | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _________ to __________
Commission file number: 000-55393
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||
, | |||||||
(Address of principal executive offices) | (Zip Code) | ||||||
(212 ) 415-6500
Registrant's telephone number, including area code
Securities registered pursuant to section 12(b) of the Act: None. | ||||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A | ||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
☒ | Smaller reporting company | |||
Emerging growth company | ||||
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. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of August 6, 2019, the registrant had 30,994,891 shares of common stock outstanding.
NEW YORK CITY REIT, INC.
INDEX TO FINANCIAL STATEMENTS
Page | |
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
NEW YORK CITY REIT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
June 30, 2019 | December 31, 2018 | |||||||
ASSETS | (Unaudited) | |||||||
Real estate investments, at cost: | ||||||||
Land | $ | $ | ||||||
Buildings and improvements | ||||||||
Acquired intangible assets | ||||||||
Total real estate investments, at cost | ||||||||
Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
Total real estate investments, net | ||||||||
Cash and cash equivalents | ||||||||
Restricted cash | ||||||||
Operating lease right-of-use asset | — | |||||||
Prepaid expenses and other assets (including amounts due from related parties of $0 and $158 at June 30, 2019 and December 31, 2018, respectively) | ||||||||
Deferred leasing costs, net | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Mortgage notes payable, net | $ | $ | ||||||
Accounts payable, accrued expenses and other liabilities (including amounts due to related parties of $757 and $204 at June 30, 2019 and December 31, 2018, respectively) | ||||||||
Operating lease liability | — | |||||||
Below-market lease liabilities, net | ||||||||
Derivative liability, at fair value | ||||||||
Deferred revenue | ||||||||
Total liabilities | ||||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued and outstanding at June 30, 2019 and December 31, 2018 | ||||||||
Common stock, $0.01 par value, 300,000,000 shares authorized, 30,994,891 shares issued and outstanding as of June 30, 2019 and December 31, 2018 | ||||||||
Additional paid-in capital | ||||||||
Accumulated other comprehensive loss | ( | ) | ||||||
Distributions in excess of accumulated earnings | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
NEW YORK CITY REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for share and per share data)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue from tenants | $ | $ | $ | $ | ||||||||||||
Operating expenses: | ||||||||||||||||
Asset and property management fees to related parties | ||||||||||||||||
Property operating | ||||||||||||||||
Acquisition and transaction related | ||||||||||||||||
General and administrative | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Total operating expenses | ||||||||||||||||
Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other income | ||||||||||||||||
Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other comprehensive loss: | ||||||||||||||||
Change in unrealized loss on derivative | ( | ) | ( | ) | ||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ||||||||||||
Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Weighted-average shares outstanding — Basic and Diluted | ||||||||||||||||
Net loss per share attributable to common stockholders — Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
NEW YORK CITY REIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except for share data)
(Unaudited)
Six Months Ended June 30, 2019 | ||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Distributions in excess of accumulated earnings | Total Stockholders’ Equity | |||||||||||||||||
Balance, December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Share-based compensation | — | — | — | |||||||||||||||||||
Net loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Other comprehensive loss | — | — | — | ( | ) | — | ( | ) | ||||||||||||||
Balance, June 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Three Months Ended June 30, 2019 | ||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Distributions in excess of accumulated earnings | Total Stockholders’ Equity | |||||||||||||||||
Balance, March 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Share-based compensation | — | — | — | |||||||||||||||||||
Net loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Other comprehensive loss | — | — | — | ( | ) | — | ( | ) | ||||||||||||||
Balance, June 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
NEW YORK CITY REIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except for share data)
(Unaudited)
Six Months Ended June 30, 2018 | ||||||||||||||||||
Common Stock | ||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Distributions in excess of accumulated earnings | Total Stockholders' Equity | ||||||||||||||
Balance, December 31, 2017 | $ | $ | $ | ( | ) | $ | ||||||||||||
Common stock issued through distribution reinvestment plan | — | |||||||||||||||||
Common stock repurchases | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||
Share-based compensation | — | — | ||||||||||||||||
Distributions declared ($0.24 per common share) | — | — | — | ( | ) | ( | ) | |||||||||||
Net loss | — | — | — | ( | ) | ( | ) | |||||||||||
Balance, June 30, 2018 | $ | $ | $ | ( | ) | $ | ||||||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||||
Common Stock | ||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Distributions in excess of accumulated earnings | Total Stockholders' Equity | ||||||||||||||
Balance, March 31, 2018 | $ | $ | $ | ( | ) | $ | ||||||||||||
Common stock issued through distribution reinvestment plan | ( | ) | — | — | — | |||||||||||||
Share-based compensation | — | — | ||||||||||||||||
Net loss | — | — | — | ( | ) | ( | ) | |||||||||||
Balance, June 30, 2018 | $ | $ | $ | ( | ) | $ | ||||||||||||
6
NEW YORK CITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Amortization of deferred financing costs | ||||||||
Accretion of below- and amortization of above-market lease liabilities and assets, net | ( | ) | ( | ) | ||||
Share-based compensation | ||||||||
Changes in assets and liabilities: | ||||||||
Straight-line rent receivable | ( | ) | ( | ) | ||||
Straight-line rent payable | ||||||||
Prepaid expenses, other assets and deferred costs | ||||||||
Accounts payable, accrued expenses and other liabilities | ( | ) | ( | ) | ||||
Deferred revenue | ( | ) | ( | ) | ||||
Net cash provided by (used in) operating activities | ( | ) | ||||||
Cash flows from investing activities: | ||||||||
Deposits for real estate investments | ( | ) | ||||||
Capital expenditures | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from mortgage note payable | ||||||||
Payments of financing costs | ( | ) | ( | ) | ||||
Distributions paid | ( | ) | ||||||
Repurchases of common stock | ( | ) | ||||||
Net cash provided by financing activities | ||||||||
Net change in cash, cash equivalents and restricted cash | ||||||||
Cash, cash equivalents and restricted cash, beginning of period | ||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash | ||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
Supplemental Disclosures: | ||||||||
Cash paid for interest | $ | $ | ||||||
Non-Cash Investing and Financing Activities: | ||||||||
Accrued capital expenditures | ||||||||
Common stock issued through distribution reinvestment plan | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Note 1 — Organization
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 June 30, 2019, the Company owned seven properties consisting of 1.1 million rentable square feet, acquired for an aggregate purchase price of $702.0 million. Subsequent to June 30, 2019, the Company acquired one additional property located in New York City, for an aggregate contract sales price of approximately $88.8 million, excluding acquisition related costs. The property consists of approximately 60,297 rentable square feet. (See Note 13 — Subsequent Events for further discussion.)
The Company was incorporated on December 19, 2013 as a Maryland corporation and elected 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 June 30, 2019, the Company had 31.0 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the distribution reinvestment plan (“DRIP”). In addition, from inception through June 30, 2019 the Company had raised net proceeds of $769.9 million, including $68.8 million of distributions to the Company’s shareholders which were reinvested in its common stock through DRIP.
On October 25, 2017, the Company’s board of directors approved an Estimated Per-Share NAV as of June 30, 2017 (the “2017 Estimated Per-Share NAV”) which was published on October 26, 2017, 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. The 2018 Estimated Per-Share NAV was the second annual update of Estimated Per-Share NAV the Company has published. Until the Company lists shares of its common stock or another liquidity event occurs, the Company intends to publish subsequent valuations of Estimated Per-Share NAV at least once annually, at the discretion of the Company’s board of directors.
The Company has no employees. New York City Advisors, LLC (the “Advisor”) has been retained by the Company to manage the Company’s affairs on a day-to-day basis. The Company has retained New York City Properties, LLC (the “Property Manager”) to serve as the Company’s property manager. The Advisor and Property Manager are under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, “AR Global”), and these entities receive compensation, fees and expense reimbursements for services related to 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.
8
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Note 2 — Summary of Significant Accounting Policies
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 statement of results for the interim periods. The results of operations for the three and six months ended June 30, 2019 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, 2018, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019. Except for those required by new accounting pronouncements discussed below, there have been no significant changes to the Company’s significant accounting policies during the three and six months ended June 30, 2019.
Principles of Consolidation
Purchase Accounting
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or an asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized as part of the overall purchase price.
In both a business combination and an asset acquisition, the Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets or liabilities may include the value of in-place leases, above- and below- market leases and other identifiable assets or liabilities based on lease or property specific characteristics. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests (in a business combination) are recorded at their estimated fair values. In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates. In a business combination, the difference between the purchase price and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain. In an asset acquisition, the difference between the acquisition price (including capitalized transaction costs) and the fair value of identifiable net assets acquired is allocated to the non-current assets. There were no acquisitions during the three and six months ended June 30, 2019 or June 30, 2018.
Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company’s analysis of comparable properties in the Company’s portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates and the value of in-place leases as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 24 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
9
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below-market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company’s pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If an impairment exists, due to the inability to recover the carrying value of a property, the Company would recognize an impairment loss in the consolidated statement of operations and comprehensive income (loss) to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss recorded would equal the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net earnings.
Revenue Recognition
The Company’s revenue from tenants, which are derived primarily from rental income pursuant to lease contracts, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. As of June 30, 2019, these leases had an average remaining lease term of 6.1 years. Because many of the Company’s leases provide for rental increases at specified intervals, GAAP requires that the Company record a receivable for, and include in revenues on a straight-line basis, unbilled rent receivables that it will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When the Company acquires a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease modification is executed. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. Pursuant to certain of the Company’s lease agreements, tenants are required to reimburse the Company for certain property operating expenses (recorded in total revenue from tenants), in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. Under ASC 842, the Company has elected to report combined lease and non-lease components in a single line “Revenue from tenants.” For comparative purposes, the Company has also elected to reflect prior revenue and reimbursements reported under ASC 842 also on a single line. For expenses paid directly by the tenant, under both ASC 842 and 840, the Company has reflected them on a net basis.
Included in revenue from tenants for the six months ended June 30, 2019, the Company recorded $0.1 million of tenant reimbursements related to prior year.
The following tables present future base rent payments due to the Company over the periods indicated. 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.
10
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
As of June 30, 2019:
(In thousands) | Future Base Rent Payments | |||
2019 (remainder) | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total | $ | |||
11
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
As of December 31, 2018:
(In thousands) | Future Base Rent Payments | |||
2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total | $ | |||
The Company continually reviews receivables related to rent and unbilled rents receivable and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Under the new leasing standard (see the “Recently Issued Accounting Pronouncements” section below), the Company is required to assess, based on credit risk only, if it’s probable that it will collect virtually all of the lease payments at lease commencement date and it must continue to reassess collectability periodically thereafter based on new facts and circumstances affecting the credit risk of the tenant. Partial reserves, or the ability to assume partial recovery are no longer permitted. If the Company determines that it’s probable it will collect virtually all of the lease payments (rent and common area maintenance), the lease will continue to be accounted for on an accrual basis (i.e. straight-line). However, if the Company determines it’s not probable that it will collect virtually all of the lease payments, the lease will be accounted for on a cash basis and a full reserve would be recorded on previously accrued amounts in cases where it was subsequently concluded that collection was not probable. Cost recoveries from tenants are included in operating revenue from tenants beginning on January 1, 2019, in accordance with new accounting rules, on the accompanying consolidated statements of operations and comprehensive income (loss) in the period the related costs are incurred, as applicable.
Under ASC 842, uncollectable amounts are reflected as reductions in revenue. Under ASC 840, the Company recorded such amounts as bad debt expense as part of property operating expenses. No bad debt expense was recorded for the three and six months ended June 30, 2019 and 2018.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation:
• | The Company has aggregated revenue from its lease components and non-lease components (tenant operating expense reimbursements) into one line (see additional information in the “Recently Issued Accounting Pronouncements” section below). |
Adopted as of January 1, 2019:
ASU No. 2016-02 — Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02") which provides new guidance related to the accounting for leases, as well as the related disclosures. For lessors of real estate, leases are accounted for using an approach substantially the same as previous accounting guidance for operating leases and direct financing leases. For lessees, the new standard requires the application of a dual lease classification approach, classifying leases as either operating or finance leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease, while lease expense for finance leases is recognized based on an effective interest method over the term of the lease. Also, lessees must recognize a right-of-use asset (“ROU”) and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Further, certain transactions where at inception of the lease the buyer-lessor accounted for the transaction as a purchase of real estate and a new lease, may now be required to have symmetrical accounting to the seller-lessee if the transaction was not a qualified sale-leaseback and accounted for as a financing transaction.
Upon adoption, lessors were allowed a practical expedient, which the Company has elected, by class of underlying assets to account for lease and non-lease components (such as tenant reimbursements of property operating expenses) as a single lease
12
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
component as an operating lease because (a) the non-lease components have the same timing and pattern of transfer as the associated lease component; and (b) the lease component, if accounted for separately, would be classified as an operating lease. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is consistent with the Company’s existing policies. Also, upon adoption, companies were allowed a practical expedient package, which the Company has elected, that allowed the Company: (a) to not reassess whether any expired or existing contracts entered into prior to January 1, 2019 are or contain leases; (b) to not reassess the lease classification for any expired or existing leases entered into prior to January 1, 2019 (including assessing sale-leaseback transactions); and (c) to not reassess initial direct costs for any expired or existing leases entered into prior to January 1, 2019. As a result, all of the Company’s existing leases will continue to be classified as operating leases under the new standard. Further, any existing leases for which the property is the leased to a tenant in a transaction that at inception was a sale-leaseback transaction will continue to be treated (absent a modification) as an operating lease. The Company did not have any leases that would be considered financing leases as of January 1, 2019.
The Company assessed the impact of adoption from both a lessor and lessee perspective, which is discussed in more detail below, and adopted the new guidance prospectively on January 1, 2019, using a prospective transition approach under which the Company elected to apply the guidance effective January 1, 2019 and not adjust prior comparative reporting periods (except for the Company’s presentation of lease revenue discussed below).
Lessor Accounting
As discussed above, the Company was not required to re-assess the classification of its leases, which are considered operating leases under ASU 2016-02. The following is a summary of the most significant impacts to the Company of the new accounting guidance, as lessor:
• | Since the Company elected the practical expedient noted above to not separate non-lease component revenue from the associated lease component, the Company has aggregated revenue from its lease components and non-lease components (tenant operating expense reimbursements) into one line. The prior period has been conformed to this new presentation for comparative purposes only, there has been no change to the net loss of the Company as a result of the change. |
• | The Company did not have any reserves for bad debts at December 31, 2018, therefore it did not have to make an assessment of any bad debt reserves under the new accounting rules. |
• | Indirect leasing costs in connection with new or extended tenant leases, if any, are being expensed. Under prior accounting guidance, the recognition would have been deferred. |
Lessee Accounting
The Company is a lessee under a ground lease for one property as of January 1, 2019. The following is a summary of the most significant impacts to the Company of the new accounting guidance, as lessee:
• | Upon adoption of the new standard, the Company recorded a right-of-use asset ( an “ROU asset”) and lease liability equal to $ |
• | The Company also reclassified $ |
Other Recently Issued Accounting Pronouncements
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-Controlling Interests with a Scope Exception guidance that changes the method to determine the classification of certain financial instruments with a down round feature as liabilities or equity instruments and clarify existing disclosure requirements for equity-classified instruments. A down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability, rather, an entity that presents earnings per share is required to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features. The revised guidance is effective for annual periods and interim periods within those annual periods, beginning after December
13
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
15, 2018. The revised guidance became effective for the Company effective January 1, 2019 and it did not have an impact on the Company's consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018. The Company adopted ASU 2017-12 on January 1, 2019 using a modified retrospective transition method, as required, and did not have an impact on the Company's consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement- Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance addresses the impact of Tax Cuts and Jobs Act signed into law on December 22, 2017, (“Tax Cuts and Jobs Act”) on items within accumulated other comprehensive loss which do not reflect the appropriate tax rate. ASU 2018-02 allows the Company to retrospectively reclassify the income tax effects on items in accumulated other comprehensive loss to retained earnings for all periods in which the effect of the change in the U.S. federal corporate income tax rate was recognized. In addition, all companies are required to disclose whether the company has elected to reclassify the income tax effects of the Tax Cuts and Jobs Act to retained earnings and disclose information about any other income tax effects that are reclassified from accumulated other comprehensive loss by the Company. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Companies are required to apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The revised guidance became effective for the Company effective January 1, 2019 and it did not have an impact on the Company's consolidated financial statements.
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 Company adopted this new guidance on January 1, 2019, however the Company did not have any nonemployee awards outstanding that would have been impacted by the new guidance. Therefore, the Company will apply this new guidance prospectively to grants of nonemployee awards, if any.
Pending Adoption as of June 30, 2019:
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. 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 new guidance is effective for reporting periods beginning after December 15, 2019, with early adoption permitted for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to the financial statements by removing, modifying, and adding certain fair value disclosure requirements to facilitate clear communication of the information required by generally accepted accounting principles. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted upon issuance of this ASU. The Company is currently evaluating the potential impact of this new guidance.
14
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Note 3 — Real Estate Investments
There were no real estate assets acquired or liabilities assumed during the three and six months ended June 30, 2019 or 2018.
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 June 30, | Six Months Ended June 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Amortization of in-place leases and other intangibles (1) | $ | $ | $ | $ | ||||||||||||
Amortization and (accretion) of above- and below-market leases, net (2) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Amortization of below-market ground lease (3) | $ | $ | $ | $ | ||||||||||||
_______________
(1) | Reflected within depreciation and amortization expense. |
(2) | Reflected within rental income. |
(3) | Reflected within property operating expenses. |
The following table provides the projected amortization expense and adjustments to revenues for the next five years as of June 30, 2019:
(In thousands) | 2019 (remainder) | 2020 | 2021 | 2022 | 2023 | |||||||||||||||
In-place leases | $ | $ | $ | $ | $ | |||||||||||||||
Other intangibles | ||||||||||||||||||||
Total to be included in depreciation and amortization | $ | $ | $ | $ | $ | |||||||||||||||
Above-market lease assets | $ | $ | $ | $ | $ | |||||||||||||||
Below-market lease liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
Total to be included in rental income | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Significant Tenants
As of June 30, 2019 and December 31, 2018, there were no tenants whose annualized rental income on a straight-line basis, based on leases commenced, represented greater than 10% of total annualized rental income for all portfolio properties on a straight-line basis.
15
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Note 4 — Mortgage Notes Payable, Net
The Company’s mortgage notes payable, net as of June 30, 2019 and December 31, 2018 are as follows:
Outstanding Loan Amount | |||||||||||||||||
Portfolio | Encumbered Properties | June 30, 2019 | December 31, 2018 | Effective Interest Rate | Interest Rate | Maturity | |||||||||||
(In thousands) | (In thousands) | ||||||||||||||||
123 William Street (1) | $ | $ | % | Fixed | Mar. 2027 | ||||||||||||
1140 Avenue of the Americas | % | Fixed | Jul. 2026 | ||||||||||||||
400 E. 67th Street - Laurel Condominium / 200 Riverside Boulevard - ICON Garage | % | Fixed | May 2028 | ||||||||||||||
8713 Fifth Avenue | % | Fixed | Nov. 2028 | ||||||||||||||
9 Times Square | — | % | Fixed | (2) | Apr. 2024 | ||||||||||||
Mortgage notes payable, gross | % | ||||||||||||||||
Less: deferred financing costs, net (3) | ( | ) | ( | ) | |||||||||||||
Mortgage notes payable, net | $ | $ | |||||||||||||||
(1) | As of June 30, 2019, $ |
(2) | Fixed as a result of the Company having entered into a “pay-fixed” interest rate swap agreement, which is included in derivatives, at fair value on the consolidated balance sheet as of June 30, 2019 (see Note 6 — Derivatives and Hedging Activities). |
(3) | 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. |
Capital One Loan
On April 26, 2019, the Company, through the OP, entered into a term loan agreement with Capital One, National Association, as administrative agent, and the other lenders party thereto for a $55.0 million loan with an interest rate fixed at 3.6725 % by a swap agreement. The loan has a maturity date of April 26, 2024, and requires monthly interest-only payments, with the principal balance due on the maturity date. The loan is secured by, among other things, a mortgage lien on the Company’s previously unencumbered 9 Times Square property. The Company has guaranteed certain enumerated recourse liabilities of the borrower under the agreement and the guaranty requires the Company to maintain a minimum net worth in excess of $175.0 million and minimum liquid assets of $10.0 million.
Société Générale Loan Agreement
On April 13, 2018, the Company, through the OP, entered into a loan agreement with Société Générale for a $50.0 million 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 and a parking garage condominium unit located at 200 Riverside Boulevard, New York, New York. 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 200 Riverside Boulevard property (but not the 400 E. 67th Street property) may be released from
16
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
the loan, subject to certain conditions and limitations, by simultaneously substituting another property (or properties) for the 200 Riverside Boulevard property. The OP has guaranteed, pursuant to a guaranty in favor of the lender, 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.
Collateral and Principal Payments
Real estate assets and intangible assets of $738.5 million, at cost (net of below-market lease liabilities), at June 30, 2019 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.
The following table summarizes the scheduled aggregate principal payments subsequent to June 30, 2019:
(In thousands) | Future Minimum Principal Payments | |||
2019 (remainder) | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total | $ | |||
The Company’s mortgage notes payable require compliance with certain property-level debt covenants. As of June 30, 2019, the Company was in compliance with the debt covenants under its mortgage note agreements.
Note 5 — Fair Value of Financial Instruments
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.
17
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
The following table presents information about the Company’s assets and liabilities measured at fair value as of June 30, 2019. The Company did not have any financial instruments measured at fair value on a recurring basis as of December 31, 2018.
(In thousands) | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||||||
June 30, 2019 | ||||||||||||||||
Interest rate “Pay - Fixed” swaps - liabilities | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Total | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
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:
June 30, 2019 | December 31, 2018 | |||||||||||||||||
(In thousands) | Level | Gross Principal Balance | Fair Value | Gross Principal Balance | Fair Value | |||||||||||||
Mortgage note payable — 123 William Street | 3 | $ | $ | $ | $ | |||||||||||||
Mortgage note payable — 1140 Avenue of the Americas | 3 | $ | $ | $ | $ | |||||||||||||
Mortgage note payable — 400 E. 67th Street - Laurel Condominium / 200 Riverside Boulevard - ICON Garage | 3 | $ | $ | $ | $ | |||||||||||||
Mortgage note payable — 8713 Fifth Avenue | 3 | $ | $ | $ | $ | |||||||||||||
Mortgage note payable — 9 Times Square | 3 | $ | $ | $ | $ | |||||||||||||
Note 6 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company currently uses derivative financial instruments, including an interest rate swap, and may in the future use others, including options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company endeavors to only enter into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.
On March 28, 2019, the Company entered into a forward starting five-year interest rate swap which became effective on May 1, 2019. The Company entered into this derivative in order to lock-in and swap the floating rate interest on its term loan encumbering the Company’s 9 Times Square property to a fixed rate. Upon entering into the swap, the Company paid a deposit of $0.8 million which was refunded at the closing of the new financing for the 9 Times Square property effective as of April 26, 2019.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2019. The Company did not have any derivatives outstanding as of December 31, 2018.
18
NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
(In thousands) | Balance Sheet Location | June 30, 2019 | December 31, 2018 | |||||||
Derivatives designated as hedging instruments: | ||||||||||
Interest Rate “Pay-fixed” Swap | Derivative liability, at fair value | $ | $ | |||||||
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and collars as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.
The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2019, such derivatives were used to hedge the variable cash flows associated with variable-rate debt.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that $0.2 million will be reclassified from other comprehensive income as an increase to interest expense.
As of June 30, 2019, the Company had the following derivatives that were designated as cash flow hedges of interest rate risk. The Company did not have any derivatives outstanding as of December 31, 2018.