Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS - New York City REIT, Inc. | arcnycr1231201710-kaex32.htm |
| EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - New York City REIT, Inc. | arcnycr1231201710-kaex312.htm |
| EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - New York City REIT, Inc. | arcnycr1231201710-kaex311.htm |
| EX-23.1 - EXHIBIT 23.1 CONSENT OF KPMG LLP - New York City REIT, Inc. | arcnycr1231201710-kaex231.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |
EXCHANGE ACT OF 1934 | ||
For the fiscal year ended December 31, 2017
OR | ||
o | 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
American Realty Capital New York City REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 46-4380248 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
405 Park Ave., 4th Floor, New York, NY | 10022 | |
(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 |
Securities registered pursuant to section 12 (g) of the Act: Common stock, $0.01 par value per share (Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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. x Yes ¨ No
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Emerging growth company x | |
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). ¨ Yes x No
There is no established public market for the registrant's shares of common stock.
As of February 28, 2018, the registrant had 31,416,972 shares of common stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive proxy statement to be delivered to stockholders in connection with the registrant's 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) amends American Realty Capital New York City REIT, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on March 19, 2018 (the “Original Filing”). This Amendment No. 1 is being filed solely to include a statement inadvertently omitted by KPMG LLP (“KPMG”) from the filed version of KPMG’s report included in the Original Filing that states the Company was not required to have, nor did KPMG audit the Company’s internal control over financial reporting. The change to the filed version of KPMG’s report included in the Original Filing does not affect KPMG’s unqualified opinion on the Company’s consolidated financial statements included in the Original Filing and this Amendment No. 1.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Amendment No. 1 includes a new consent of KPMG LLP (Exhibit 23.1), new certifications from the Company’s principal executive officer (Exhibit 31.1) and principal financial officer (Exhibit 31.2) and new Section 1350 certifications (Exhibit 32) dated as of the date of filing of this Amendment No. 1.
This Amendment No. 1 amends the Original Filing, making only the amendments described above. No other amendments have been made to the Original Filing and the Company is not amending its consolidated financial statements or any other part of, or otherwise updating any other disclosures made in, the Original Filing. This Amendment No. 1 speaks as of the original filing date of the Original Filing and does not reflect any events that may have occurred subsequent to the original filing date. Accordingly, this Amendment No. 1 should be read in conjunction with our other filings made with the SEC subsequent to the filing of the Original Filing, including any amendments to those filings.
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
FORM 10-K/A
Year Ended December 31, 2017
1
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
FORM 10-K/A
Year Ended December 31, 2017
PART II
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K/A.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)Financial Statement Schedules
See the Index to Consolidated Financial Statements at page F-1 of this report.
The following financial statement schedule is included herein at page F-29 of this report:
Schedule III – Real Estate and Accumulated Depreciation
(b)Exhibits
2
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K/A for the year ended December 31, 2017 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. | Description | |
3.1 (1) | Articles of Amendment and Restatement for American Realty Capital New York City REIT, Inc. | |
3.2 (4) | Bylaws of American Realty Capital New York City REIT, Inc. | |
3.3 (14) | Articles Supplementary of American Realty Capital New York City REIT, Inc. | |
4.1 (2) | Agreement of Limited Partnership of New York City Operating Partnership, L.P., dated as of April 24, 2014 | |
4.2 (8) | First Amendment to Agreement of Limited Partnership of New York City Operating Partnership, L.P., dated as of November 5, 2015 | |
4.3 (16) | Amended and Restated Distribution Reinvestment Plan | |
10.1 (6) | Amended and Restated Advisory Agreement, dated as of June 26, 2015, by and among American Realty Capital New York City REIT, Inc., New York City Operating Partnership, L.P. and New York City Advisors, LLC | |
10.2 (8) | First Amendment to Amended and Restated Advisory Agreement, dated as of November 5, 2015, among American Realty Capital New York City REIT, Inc., New York City Operating Partnership, L.P. and New York City Advisors, LLC | |
10.3 (2) | Property Management and Leasing Agreement, dated as of April 24, 2014, by and among American Realty Capital New York City REIT, Inc., New York City Operating Partnership, L.P. and New York City Properties, LLC | |
10.4 (15) | Amended and Restated Employee and Director Incentive Restricted Share Plan of American Realty Capital New York City REIT, Inc., effective as of November 8, 2017. | |
10.5 (15) | Indemnification Agreement, dated as of November 13, 2017, between the Company and Katie P. Kurtz. | |
10.6 (3) | Indemnification Agreement, dated as of December 31, 2014, between the Company and certain directors, officers and service providers | |
10.7 (5) | Indemnification Agreement, dated as of June 5, 2015, between the Company and Nicholas Radesca | |
10.8 (7) | Indemnification Agreement, dated as of June 22, 2015, between the Company and Patrick O'Malley | |
10.9 (9) | Indemnification Agreement, dated as of February 17, 2016, between the Company and Lee M. Elman | |
10.10 (10) | Agreement of Purchase and Sale, dated as of March 18, 2016, by and between BPGL HOLDINGS LLC and ARC NYC1140SIXTH, LLC | |
10.11 (11) | Loan Agreement, dated as of June 15, 2016, between ARC NYC1140SIXTH, LLC and Ladder Capital Finance I LLC | |
10.12 (11) | Form of Restricted Stock Award Agreement | |
10.13 (12) | Loan Agreement, dated as of March 6, 2017, between Barclays Bank PLC, as lender, and ARC NYC123WILLIAM, LLC, as borrower | |
10.14 (12) | Limited Recourse Guaranty, dated as of March 6, 2017, made by New York City Operating Partnership, L.P., as guarantor, in favor of Barclays Bank PLC, as lender | |
10.15 (12) | Environmental Indemnity Agreement, dated as of March 6, 2017, made by ARC NYC123WILLIAM, LLC, as borrower, and New York City Operating Partnership, L.P., as principal, in favor of Barclays Bank PLC, as indemnitee | |
21.1 (17) | List of Subsidiaries of American Realty Capital New York City REIT, Inc. | |
23.1 * | Consent of KPMG LLP | |
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. | |
99.2 (13) | Second Amended and Restated Share Repurchase Program effective as of July 14, 2017. | |
101 * | XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital New York City REIT, Inc.'s Annual Report on Form 10-K/A for the year ended December 31, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. | |
____________________
* Filed herewith.
Table of Contents
(1) | Filed as an exhibit to the Company’s Registration Statement on Form S-11/A filed with the SEC on April 21, 2014. |
(2) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 14, 2014. |
(3) | Filed as an exhibit to the Company’s Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 4 to Form S-11 filed with the SEC on January 6, 2015. |
(4) | Filed as an exhibit to the Company’s Registration Statement on Form S-11 submitted confidentially to the SEC on January 15, 2014. |
(5) | Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on June 8, 2015. |
(6) | Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on June 26, 2015. |
(7) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 12, 2015. |
(8) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 16, 2015. |
(9) | Filed as an exhibit to the Company's Annual Report on Form 10-K filed with the SEC on March 16, 2016. |
(10) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 12, 2016. |
(11) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 12, 2016. |
(12) | Filed as an exhibit to the Company's Form 8-K filed with the SEC on March 10, 2017. |
3
(13) | Filed as an exhibit to the Company’s Form 8-K filed with the SEC on June 14, 2017. |
(14) | Filed as an exhibit to the Company's Form 8-K filed with the SEC on October 10, 2017. |
(15) | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 13, 2017. |
(16) | Filed as Appendix A to the Company's Registration Statement on Form S-3 filed with the SEC on May 22, 2015. |
(17) | Filed as an exhibit to the Company's Annual Report on Form 10-K filed with the SEC on March 19, 2018. |
4
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 8th day of June, 2018.
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC. | ||
By: | /s/ EDWARD M. WEIL | |
EDWARD M. WEIL | ||
EXECUTIVE CHAIRMAN, CHIEF EXECUTIVE OFFICER, PRESIDENT AND SECRETARY | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Capacity | Date | ||
/s/ Edward M. Weil, Jr. | Executive Chairman, Chief Executive Officer, President and Secretary (Principal Executive Officer) | June 8, 2018 | ||
Edward M. Weil, Jr. | ||||
/s/ Katie P. Kurtz | Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | June 8, 2018 | ||
Katie P. Kurtz | ||||
/s/ Lee M. Elman | Independent Director, Audit Committee Chair, Conflicts Committee Chair | June 8, 2018 | ||
Lee M. Elman | ||||
/s/ Elizabeth K. Tuppeny | Independent Director | June 8, 2018 | ||
Elizabeth K. Tuppeny | ||||
/s/ Abby M. Wenzel | Independent Director | June 8, 2018 | ||
Abby M. Wenzel | ||||
5
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Financial Statement Schedule: | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
American Realty Capital New York City REIT, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of American Realty Capital New York City REIT, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes and financial statement schedule III (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
New York, New York
March 16, 2018
F-2
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, | |||||||
2017 | 2016 | ||||||
ASSETS | |||||||
Real estate investments, at cost: | |||||||
Land | $ | 133,380 | $ | 133,380 | |||
Buildings and improvements | 514,459 | 502,067 | |||||
Acquired intangible assets | 105,954 | 109,498 | |||||
Total real estate investments, at cost | 753,793 | 744,945 | |||||
Less accumulated depreciation and amortization | (64,926 | ) | (37,889 | ) | |||
Total real estate investments, net | 688,867 | 707,056 | |||||
Cash and cash equivalents | 39,598 | 47,671 | |||||
Restricted cash | 7,618 | 2,150 | |||||
Investment securities, at fair value | — | 477 | |||||
Prepaid expenses and other assets (including amounts due from related parties of $39 and $670 at December 31, 2017 and December 31, 2016, respectively) | 17,721 | 13,017 | |||||
Deferred leasing costs, net | 6,646 | 3,233 | |||||
Total assets | $ | 760,450 | $ | 773,604 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Mortgage notes payable, net | $ | 233,517 | $ | 191,328 | |||
Accounts payable, accrued expenses and other liabilities (including amounts due to related parties of $364 and $167 at December 31, 2017 and December 31, 2016, respectively) | 11,406 | 6,580 | |||||
Below-market lease liabilities, net | 24,753 | 28,528 | |||||
Deferred revenue | 5,255 | 3,024 | |||||
Distributions payable | 4,035 | 3,953 | |||||
Total liabilities | 278,966 | 233,413 | |||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued and outstanding at December 31, 2017 and December 31, 2016 | — | — | |||||
Common stock, $0.01 par value, 300,000,000 shares authorized, 31,382,120 and 30,856,841 shares issued and outstanding as of December 31, 2017 and December 31, 2016, respectively | 314 | 309 | |||||
Additional paid-in capital | 691,775 | 680,476 | |||||
Accumulated other comprehensive income | — | 10 | |||||
Accumulated deficit | (210,605 | ) | (140,604 | ) | |||
Total stockholders' equity | 481,484 | 540,191 | |||||
Total liabilities and stockholders' equity | $ | 760,450 | $ | 773,604 | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues: | ||||||||||||
Rental income | $ | 53,930 | $ | 44,223 | $ | 24,472 | ||||||
Operating expense reimbursements and other revenue | 4,454 | 3,384 | 1,964 | |||||||||
Total revenues | 58,384 | 47,607 | 26,436 | |||||||||
Operating expenses: | ||||||||||||
Property operating | 26,825 | 20,919 | 11,296 | |||||||||
Operating fees incurred from related parties | 6,039 | 5,179 | 1,145 | |||||||||
Acquisition and transaction related | 6 | 3,695 | 6,015 | |||||||||
General and administrative | 8,087 | 4,933 | 3,634 | |||||||||
Depreciation and amortization | 29,539 | 25,586 | 16,759 | |||||||||
Total operating expenses | 70,496 | 60,312 | 38,849 | |||||||||
Operating loss | (12,112 | ) | (12,705 | ) | (12,413 | ) | ||||||
Other income (expense): | ||||||||||||
Interest expense | (11,230 | ) | (7,404 | ) | (3,554 | ) | ||||||
Income from investment securities and interest | 245 | 344 | 252 | |||||||||
Gain on sale of investment securities | 24 | — | — | |||||||||
Other-than-temporary impairment on investment securities | — | — | (70 | ) | ||||||||
Total other expense | (10,961 | ) | (7,060 | ) | (3,372 | ) | ||||||
Net loss | (23,073 | ) | (19,765 | ) | (15,785 | ) | ||||||
Other comprehensive income (loss): | ||||||||||||
Reversal of accumulated unrealized gain on investment securities | (10 | ) | — | — | ||||||||
Unrealized gain on investment securities | — | 10 | — | |||||||||
Reclassification adjustment for other-than-temporary impairment losses recognized in earnings | — | — | 24 | |||||||||
Comprehensive loss | $ | (23,083 | ) | $ | (19,755 | ) | $ | (15,761 | ) | |||
Basic and diluted weighted average shares outstanding | 31,042,307 | 30,668,238 | 27,599,363 | |||||||||
Basic and diluted net loss per share | $ | (0.74 | ) | $ | (0.64 | ) | $ | (0.57 | ) | |||
Dividends declared per common share | $ | 1.51 | $ | 1.51 | $ | 1.51 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share data)
Common Stock | ||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||
Balance, December 31, 2014 | 20,569,012 | $ | 206 | $ | 454,131 | $ | (24 | ) | $ | (16,907 | ) | $ | 437,406 | |||||||||
Issuance of common stock | 9,165,430 | 91 | 228,506 | — | — | 228,597 | ||||||||||||||||
Common stock offering costs, commissions and dealer manager fees | — | — | (28,424 | ) | — | — | (28,424 | ) | ||||||||||||||
Common stock issued through distribution reinvestment plan | 858,472 | 9 | 20,381 | — | — | 20,390 | ||||||||||||||||
Common stock repurchases | (183,780 | ) | (2 | ) | (4,341 | ) | — | — | (4,343 | ) | ||||||||||||
Share-based compensation | 1,333 | — | 26 | — | 26 | |||||||||||||||||
Distributions declared | — | — | — | — | (41,752 | ) | (41,752 | ) | ||||||||||||||
Reclassification adjustment for other-than-temporary impairment losses recognized in earnings | — | — | — | 24 | — | 24 | ||||||||||||||||
Net loss | — | — | — | — | (15,785 | ) | (15,785 | ) | ||||||||||||||
Balance, December 31, 2015 | 30,410,467 | 304 | 670,279 | — | (74,444 | ) | 596,139 | |||||||||||||||
Common stock issued through distribution reinvestment plan | 902,597 | 9 | 21,037 | — | — | 21,046 | ||||||||||||||||
Common stock repurchases | (461,555 | ) | (4 | ) | (10,901 | ) | — | — | (10,905 | ) | ||||||||||||
Share-based compensation | 5,332 | — | 61 | — | — | 61 | ||||||||||||||||
Distributions declared | — | — | — | — | (46,395 | ) | (46,395 | ) | ||||||||||||||
Net loss | — | — | — | — | (19,765 | ) | (19,765 | ) | ||||||||||||||
Unrealized gain on investment securities | — | — | — | 10 | — | 10 | ||||||||||||||||
Balance, December 31, 2016 | 30,856,841 | 309 | 680,476 | 10 | (140,604 | ) | 540,191 | |||||||||||||||
Common stock issued through distribution reinvestment plan | 880,504 | 9 | 18,558 | — | — | 18,567 | ||||||||||||||||
Common stock repurchases | (359,458 | ) | (4 | ) | (7,333 | ) | — | — | (7,337 | ) | ||||||||||||
Share-based compensation | 4,233 | — | 74 | — | — | 74 | ||||||||||||||||
Distributions declared | — | — | — | — | (46,928 | ) | (46,928 | ) | ||||||||||||||
Net loss | — | — | — | — | (23,073 | ) | (23,073 | ) | ||||||||||||||
Reversal of unrealized gain upon realization of investment securities | — | — | — | (10 | ) | — | (10 | ) | ||||||||||||||
Balance, December 31, 2017 | 31,382,120 | $ | 314 | $ | 691,775 | $ | — | $ | (210,605 | ) | $ | 481,484 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (23,073 | ) | $ | (19,765 | ) | $ | (15,785 | ) | |||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||||||
Depreciation and amortization | 29,539 | 25,586 | 16,759 | |||||||||
Amortization of deferred financing costs | 1,120 | 2,479 | 1,731 | |||||||||
Accretion of below- and amortization of above-market lease liabilities and assets, net | (2,247 | ) | (2,376 | ) | (2,476 | ) | ||||||
Share-based compensation | 74 | 61 | 26 | |||||||||
(Gain) loss on sale of investment securities | (24 | ) | 5 | — | ||||||||
Other-than-temporary impairment on investment securities | — | — | 70 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Prepaid expenses, other assets and deferred costs | (8,603 | ) | (6,038 | ) | (8,177 | ) | ||||||
Accounts payable, accrued expenses and other liabilities | 3,265 | 2,803 | 1,232 | |||||||||
Deferred revenue | 2,231 | 1,373 | 1,426 | |||||||||
Net cash provided by (used in) operating activities | 2,282 | 4,128 | (5,194 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||
Investments in real estate | — | (79,162 | ) | (157,029 | ) | |||||||
Proceeds from the sale of investment securities | 491 | — | — | |||||||||
Purchase of investment securities, net | — | — | (28 | ) | ||||||||
Acquisition funds released from escrow | — | — | 2,068 | |||||||||
Capital expenditures | (10,831 | ) | (16,718 | ) | (14,175 | ) | ||||||
Net cash used in investing activities | (10,340 | ) | (95,880 | ) | (169,164 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from mortgage note payable | 140,000 | — | — | |||||||||
Payment of mortgage note payable | (96,000 | ) | — | — | ||||||||
Payments of offering costs and fees related to common stock issuances | — | — | (30,580 | ) | ||||||||
Payments of financing costs | (2,931 | ) | (3,327 | ) | (4,555 | ) | ||||||
Proceeds from issuance of common stock | — | — | 230,600 | |||||||||
Distributions paid | (28,279 | ) | (25,312 | ) | (19,988 | ) | ||||||
Repurchases of common stock | (7,337 | ) | (12,488 | ) | (2,760 | ) | ||||||
Net cash provided by (used in) financing activities | 5,453 | (41,127 | ) | 172,717 | ||||||||
Net change in cash, cash equivalents and restricted cash | (2,605 | ) | (132,879 | ) | (1,641 | ) | ||||||
Cash, cash equivalents and restricted cash, beginning of period | 49,821 | 182,700 | 184,341 | |||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 47,216 | $ | 49,821 | $ | 182,700 | ||||||
Supplemental Disclosures: | ||||||||||||
Cash paid for interest | $ | 9,655 | $ | 4,622 | $ | 1,817 | ||||||
Non-Cash Investing and Financing Activities: | ||||||||||||
Receivable for offering cost reimbursement | — | — | 775 | |||||||||
Mortgage note payable used to acquire investments in real estate | — | 99,000 | 96,000 | |||||||||
Accrued stock repurchase requests | — | — | 1,583 | |||||||||
Distributions payable | 4,035 | 3,953 | 3,916 | |||||||||
Accrued offering costs | — | — | 17 | |||||||||
Accrued capital expenditures | 1,561 | 118 | 1 | |||||||||
Other assets acquired or (liabilities assumed) in real estate transactions, net | — | (353 | ) | 29 | ||||||||
Common stock issued through distribution reinvestment plan | 18,567 | 21,046 | 20,390 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Note 1 — Organization
American Realty Capital New York City REIT, Inc. (including, as required by context, New York City Operating Partnership L.P., (the "OP") and its subsidiaries, the “Company”) was formed to invest its assets in properties in the five boroughs of New York City, with a focus on Manhattan. The Company may also purchase for investment purposes certain real estate investment assets that accompany office properties, including retail spaces and amenities, as well as hospitality assets, residential assets and other property types exclusively in New York City. All such properties may be acquired and owned by the Company alone or jointly with another party. As of December 31, 2017, the Company owned six properties consisting of 1.1 million rentable square feet, acquired for an aggregate purchase price of $686.1 million.
The Company was incorporated on December 19, 2013 as a Maryland corporation and elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes (“REIT”) beginning with its taxable year ended December 31, 2014. Substantially all of the Company’s business is conducted through the OP.
On April 24, 2014, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 30.0 million shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, for total gross proceeds of up to $750.0 million. The Company closed its IPO on May 31, 2015, and continued to accept subscriptions in process as of that date. As of December 31, 2017, the Company had 31.4 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 $64.5 million from the DRIP and net of repurchases.
The Company first established an estimated net asset value per share of its common stock (“Estimated Per-Share NAV”) in 2016. On October 24, 2016, the Company’s board of directors approved an Estimated Per-Share NAV as of June 30, 2016 (the “2016 Estimated Per-Share NAV”), which was published on October 26, 2016 (the “NAV Pricing Date”). Prior to the NAV Pricing Date, the Company had offered shares pursuant to the DRIP and had repurchased shares pursuant to the Share Repurchase Program (“SRP”) at a price based on $23.75 per share, the offering price in the IPO. Beginning with the NAV Pricing Date, the Company began to offer shares pursuant to the DRIP and repurchase shares pursuant to its SRP at a price based on Estimated Per-Share NAV.
On October 25, 2017, the Company's board of directors approved an Estimated Per-Share NAV as of June 30, 2017 (the "2017 Estimated Per-Share NAV"), which was published on October 26, 2017. This was the first annual update of the Estimated Per-Share NAV the Company has published. The Company intends to publish subsequent valuations of Estimated Per-Share NAV at least once annually, at the discretion of the Company’s board of directors.
The Company has no employees. New York City Advisors, LLC (the "Advisor") has been retained by the Company to manage the Company's affairs on a day-to-day basis. The Company has retained New York City Properties, LLC (the “Property Manager”) to serve as the Company’s property manager. The Advisor and Property Manager are under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC "AR Global"), the parent of the Company's sponsor, American Realty Capital III, LLC (the "Sponsor"), as a result of which they are related parties, and each of these entities has received or will receive compensation, fees and expense reimbursements for services related to the IPO and the investment and management of the Company's assets.
The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP (“OP units”). The Advisor contributed $2,020 to the OP in exchange for 90 OP units, which represents a nominal percentage of the aggregate OP ownership. A holder of OP units has the right to convert OP units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP, provided, however, that such OP units must have been outstanding for at least one year. The remaining rights of the limited partners in the OP are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
Note 2 — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP").
F-7
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Reclassifications
The presentation of prior year restricted cash on the Company's consolidated statements of cash flows, related to the adoption of a new accounting standard (see "Recently Issued Accounting Pronouncements" below for additional information) has been changed to conform to the current year presentation.
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, 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 December 31, 2017, 2016 or 2015.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, and fair value measurements, as applicable.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
The Company evaluates each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities and non-controlling interests based on their respective estimated fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets or liabilities may include the value of in-place leases, above- and below-market leases and other identifiable intangible assets or liabilities based on lease or property specific characteristics.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company's estimate of the comparable fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases. The fair value of other intangible assets, such as real estate tax abatements, are recorded based on the present value of the expected benefit and amortized over the expected useful life.
Fair values of assumed mortgages, if applicable, are recorded as debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above- or below-market interest rates.
Non-controlling interests in property owning entities are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
The Company utilizes a number of sources in making its estimates of fair values for purposes of allocating purchase price, including real estate valuations prepared by independent valuation firms. The Company also considers information and other factors including: market conditions, the industry in which the tenant operates, characteristics of the real estate such as location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business.
F-8
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Disposals of real estate investments that represent a strategic shift in operations that will have a major effect on the Company's operations and financial results are presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all periods presented; otherwise, the Company continues to report results of these properties' operations within continuing operations. Properties that are intended to be sold will be designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Properties are no longer depreciated when they are classified as held for sale. The Company did not have any properties held for sale as of December 31, 2017 or 2016.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five to seven years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Acquired above-market leases are amortized as a reduction of rental income over the remaining terms of the respective leases. Acquired below-market leases are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above- and below-market in-place leases, is amortized to depreciation and amortization expense over the remaining periods of the respective leases.
The value of other acquired intangibles is amortized to depreciation and amortization expense over the remaining expected useful life.
Assumed mortgage premiums or discounts, if applicable, are amortized as a reduction or increase to interest expense over the remaining term of the respective mortgages.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If such estimated cash flows are less than the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is based on the adjustment to estimated fair value less estimated cost to dispose of the asset. Generally, the Company determines estimated fair value for properties held for sale based on the estimated selling price of the asset. These assessments may result in the immediate recognition of an impairment loss, resulting in a reduction of net income (loss). The Company did not recognize any impairment charges for the years ended December 31, 2017, 2016 or 2015.
Cash and Cash Equivalents
Cash and cash equivalents includes cash in bank accounts as well as investments in highly liquid money market funds with original maturities of three months or less. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company ("FDIC") up to an insurance limit. At December 31, 2017 and 2016, the Company had cash and cash equivalents of $39.6 million and $47.7 million, of which $38.2 million and $46.1 million, respectively, were in excess of the amount insured by the FDIC. Although the Company bears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result.
Restricted Cash
Restricted cash primarily consists of ground rent, real estate tax, structural, leasing commissions, free rent and insurance reserves.
Investment Securities
The Company classifies its investments in debt or equity securities into one of three classes: held-to-maturity, available-for-sale or trading, as applicable. Investments in debt securities that the Company has the positive intent and ability to hold until maturity are classified as held-to-maturity and are reported at amortized cost. Debt and equity securities that are bought and held principally for the purposes of selling them in the near future are classified as trading securities. Debt and equity securities not classified as trading securities or as held-to-maturity securities are classified as available-for-sale securities and are reported at fair value, with unrealized holding gains and losses reported as a component of equity within accumulated other comprehensive income or loss. Gains or losses on securities sold are based on the specific identification method.
F-9
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
The Company evaluates its investments in securities for impairment or other-than-temporary impairment on a quarterly basis. The Company reviews each investment individually and assesses factors that may include (i) if the carrying amount of an investment exceeds its fair value, (ii) if there has been any change in the market as a whole or in the investee’s market, (iii) if there are any plans to sell the investment in question or if the Company believes it may be forced to sell its investment, and (iv) if there have been any other factors that would indicate the possibility of the existence of an other-than-temporary impairment. The fair value of the Company’s investments in available-for-sale securities generally rise and fall based on current market conditions. If, after reviewing relevant factors surrounding an impaired security, the Company determines that it will not recover its full investment in an impaired security, the Company recognizes an other-than-temporary impairment charge in the consolidated statements of operations and comprehensive loss in the period in which the other-than-temporary impairment is discovered, regardless of whether or not the Company plans to sell or believes it will be forced to sell the security in question. The Company recognized other-than-temporary impairment charges of $0.1 million for the year ended December 31, 2015. The Company did not recognize any other-than-temporary impairment charges for the years ended December 31, 2017 or 2016.
Deferred Leasing Costs, Net
Deferred leasing costs, consisting primarily of lease commissions and professional fees incurred, are deferred and amortized to depreciation and amortization expense over the term of the related lease.
Share Repurchase Program
The Company has a Share Repurchase Program ("SRP") that enables stockholders to sell their shares to the Company. Under the SRP, stockholders may request that the Company redeem all or any portion of their shares, subject to certain minimum conditions, if such repurchase does not impair the Company's capital or operations.
When a stockholder requests redemption and the redemption is approved, the Company will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. See Note 7 — Common Stock.
Distribution Reinvestment Plan
Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP. Participants purchasing shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the IPO. The board of directors may designate that certain cash or other distributions be excluded from the DRIP. The Company has the right to amend any aspect of the DRIP or terminate the DRIP with ten days' notice to participants. Shares issued under the DRIP are recorded to equity in the accompanying balance sheets in the period distributions are declared. See Note 7 — Common Stock.
Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Because many of the Company's leases provide for rental increases at specified intervals, GAAP requires that the Company record a receivable, 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. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. When the Company acquires a property, the acquisition date is considered to be the commencement date for purposes of this calculation.
Rental revenue recognition commences when the tenant takes possession of or controls the physical use of the leased space. For the tenant to take possession, the leased space must be substantially ready for its intended use. To determine whether the leased space is substantially ready for its intended use, the Company evaluates whether the Company owns or if the tenant owns the tenant improvements. When the Company is the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of the finished space, which is when such improvements are substantially complete. When the tenant is the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of or controls the space.
When the Company concludes that it is the owner of tenant improvements, the Company capitalizes the cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants. When the Company concludes that the tenant is the owner of tenant improvements for accounting purposes, the Company records its contribution towards those improvements as a lease incentive, which is included in deferred leasing costs, net on the consolidated balance sheets and amortized as a reduction to rental income on a straight-line basis over the term of the lease.
F-10
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectibility by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectibility of a receivable is in doubt, the Company will record an increase in its allowance for uncollectible accounts or record a direct write-off of the receivable in its consolidated statements of operations and comprehensive loss. Certain tenants have provided letters of credit in lieu of cash security deposit required per the respective lease agreements.
The Company may own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets, which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, the Company defers the recognition of contingent rental income until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. If the Company owns certain properties with leases that include provisions for the tenant to pay contingent rental income, contingent rental income will be included in rental income on the consolidated statements of operations and comprehensive loss. The Company did not recognize any contingent rental income for the years ended December 31, 2017, 2016 or 2015.
Cost recoveries from tenants are included in operating expense reimbursements and other revenue in the period the related costs are incurred, as applicable.
Offering and Related Costs
All offering costs incurred by the Company, its Advisor and its affiliates on behalf of the Company are charged to additional paid-in capital on the consolidated balance sheets. Offering and related costs include all expenses incurred in connection with the Company's IPO. Offering costs (other than selling commissions and the dealer manager fees) of the Company may be paid by the Advisor, the Former Dealer Manager or their affiliates on behalf of the Company. These costs include but are not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Former Dealer Manager for amounts it may pay to reimburse the bona fide due diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. The Company is obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on behalf of the Company, provided that the Advisor is obligated to reimburse the Company to the extent organization and offering costs (excluding selling commissions and the dealer manager fees) incurred by the Company in its offering exceed 2.0% of gross offering proceeds. As a result, these costs are only a liability of the Company to the extent aggregate selling commissions, dealer manager fees and other organization and offering costs do not exceed 12.0% of the gross proceeds determined at the end of the IPO. See Note 9 — Related Party Transactions and Arrangements for additional information.
Share-Based Compensation
The Company has a stock-based incentive award plan, which is accounted for under the guidance for employee share based payments. The expense for such awards are included in general and administrative expenses and are recognized over the vesting period or when the requirements for exercise of the award have been met. See Note 11 — Share-Based Compensation.
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with its taxable year ended December 31, 2014. If the Company continues to qualify for taxation as a REIT, it generally will not be subject to federal corporate income tax to the extent it distributes annually all of its REIT taxable income to its stockholders, determined without regard for the deduction for dividends paid and excluding net capital gains. REITs are subject to a number of organizational and operational requirements, including a requirement that the Company distribute annually at least 90% of the Company’s REIT taxable income to the Company’s stockholders. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law by the U.S. President. The Company is not aware of any provision in the final tax reform legislation or any pending tax legislation that would adversely affect its ability to operate as a REIT or to qualify as a REIT for U.S. federal income tax purposes. However, new legislation, as well as new regulations, administrative interpretations, or court decisions may be introduced, enacted, or promulgated from time to time, that could change the tax laws or interpretations of the tax laws regarding qualification as a REIT, or the federal income tax consequences of that qualification, in a manner that is adverse to the Company's qualification as a REIT. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company’s four subsequent taxable years. The Company distributed to its stockholders 100% of its REIT taxable income for each of the years ended December 31, 2017, 2016 and 2015. From a U.S. federal income tax perspective, 100% of distributions, or $1.51 per share, for the years ended December 31, 2017, 2016 and 2015 represented a return of capital. Even
F-11
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.
As of December 31, 2017, the Company had no material uncertain tax positions. The tax years subsequent to and including December 31, 2014 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Per Share Data
The Company calculates basic income (loss) per share of common stock by dividing net income (loss) for the period by the weighted-average shares of its common stock outstanding for the respective period. Diluted income per share takes into account the effect of dilutive instruments, such as OP units, Class B units and unvested restricted stock (assuming such units are not antidilutive), based on, the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding. See Note 12 — Net Loss Per Share for additional information.
Reportable Segments
The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company's investments in real estate generate rental revenue and other income through the leasing and management of properties. Management evaluates the operating performance of the Company's investments in real estate at the individual property level.
Recently Issued Accounting Pronouncements
Adopted as of December 31, 2017:
In October 2016, the FASB issued accounting standards Update ("ASU") No. 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control, which provides guidance relating to interest held through related parties that are under common control, where a reporting entity will need to evaluate if it should consolidate a variable interest entity ("VIE"). The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The provisions of this guidance became effective on January 1, 2017, and upon adoption, the Company determined that there was no impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which provides guidance on the classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The amendments are effective for fiscal years beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The Company adopted this guidance effective December 31, 2017, using a retrospective transition method. As a result, the Company adjusted its statements of cash flows for the year ended December 31, 2016 to include $2.2 million of restricted cash in the ending cash balance and remove the transfer of this amount between cash and restricted cash from operating activities for the year ended December 31, 2016.
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, however it had no acquisitions in 2017 in which to apply the new provisions of this standard.
Pending Adoption as of December 31, 2017:
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
F-12
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
approach. The Company adopted this guidance effective January 1, 2018 under the modified retrospective approach and it did not have an impact on the Company's consolidated financial statements.
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 will adopt this guidance on January 1, 2018 and there was no material impact on the Company's consolidated financial statements.
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 an exposure draft in January 2018 (2018 Exposure Draft) which, if adopted as written, would allow 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. ASU 2016-02 originally required a modified retrospective method of adoption, however, the 2018 Exposure Draft 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. 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 December 31, 2017. For this lease, the Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining lease payments upon adoption of this update. The new standard requires lessees to apply a dual lease classification approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. 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. The Company is currently evaluating the impact of this new guidance.
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, with reclassification of prior period amounts where applicable, and it does not expect the provisions to have a significant impact on the consolidated statement of cash flows.
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. 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, 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.
F-13
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Note 3 — Real Estate Investments
There were no acquisitions during the year ended December 31, 2017. The following table presents the allocation of real estate assets acquired and liabilities assumed during the years ended December 31, 2016 and 2015.
(Dollar amounts in thousands) | 2016 | 2015 | ||||||
Real estate investments, at cost: | ||||||||
Land | $ | — | $ | 50,064 | ||||
Building and improvements | 148,647 | 182,917 | ||||||
Total tangible assets | 148,647 | 232,981 | ||||||
Acquired intangibles: | ||||||||
In-place leases | 27,433 | 33,380 | ||||||
Above-market lease assets | 5,230 | 884 | ||||||
Below-market lease liabilities | (5,277 | ) | (14,245 | ) | ||||
Below-market ground lease asset | 2,482 | — | ||||||
Total intangible assets, net | 29,868 | 20,019 | ||||||
Total assets acquired, net | 178,515 | 253,000 | ||||||
Mortgage notes payable used to acquire real estate investments | (99,000 | ) | (96,000 | ) | ||||
Other assets acquired | — | 458 | ||||||
Other liabilities assumed | (353 | ) | (429 | ) | ||||
Cash paid for acquired real estate investment | $ | 79,162 | $ | 157,029 | ||||
Number of properties purchased | 1 | 1 | ||||||
The following table presents unaudited pro forma information as if the acquisition during the year ended December 31, 2016 had been consummated on January 1, 2015. Additionally, the unaudited pro forma net loss was adjusted to reclassify acquisition and transaction related expenses of $3.7 million from the year ended December 31, 2016 to the year ended December 31, 2015. The unaudited pro forma net loss for the year ended December 31, 2015 was adjusted to exclude acquisition and transaction related expenses of $6.0 million.
Year Ended December 31, | ||||||||
(In thousands, except per share data) | 2016 | 2015 | ||||||
Pro forma revenues (1) | $ | 57,089 | $ | 51,694 | ||||
Pro forma net loss (1) | $ | (18,636 | ) | $ | (20,695 | ) | ||
Basic and diluted pro forma net loss per share | $ | (0.61 | ) | $ | (0.75 | ) | ||
________________________
(1) | For the year ended December 31, 2016, aggregate revenues and net loss (excluding acquisition and transaction-related expenses) derived from the Company's acquisitions (for the Company's period of ownership) were $11.4 million and $3.0 million, respectively. |
F-14
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
The following table presents future minimum base cash rental payments due to the Company over the next five years and thereafter. 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 Rent Payments | |||
2018 | $ | 48,115 | ||
2019 | 47,104 | |||
2020 | 42,987 | |||
2021 | 39,002 | |||
2022 | 33,941 | |||
Thereafter | 108,063 | |||
$ | 319,212 | |||
The following table lists the tenant whose annualized rental income on a straight-line basis, based on leases signed, represented greater than 10% of total annualized rental income for all portfolio properties on a straight-line basis as of December 31, 2015. As of December 31, 2017 and 2016 there were no tenants whose annualized rental income on a straight-line basis, based on leases signed, represented greater than 10% of total annualized rental income for all portfolio properties on a straight-line basis.
December 31, | ||||
Property Portfolio | Tenant | 2015 | ||
123 William Street | Planned Parenthood Federation of America, Inc. | 10.7% | ||
The termination, delinquency or non-renewal of this lease may have a material adverse effect on the Company's revenues.
Intangible Assets and Liabilities
Acquired intangible assets and lease liabilities consisted of the following as of December 31, 2017 and 2016.
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Intangible assets: | ||||||||||||||||||||||||
In-place leases | $ | 62,142 | $ | 22,147 | $ | 39,995 | $ | 65,544 | $ | 14,045 | $ | 51,499 | ||||||||||||
Other intangibles | 31,447 | 3,767 | 27,680 | 31,447 | 2,601 | 28,846 | ||||||||||||||||||
Below-market ground lease | 2,482 | 76 | 2,406 | 2,482 | 27 | 2,455 | ||||||||||||||||||
Above-market leases | 9,883 | 2,955 | 6,928 | 10,025 | 1,618 | 8,407 | ||||||||||||||||||
Acquired intangible assets | $ | 105,954 | $ | 28,945 | $ | 77,009 | $ | 109,498 | $ | 18,291 | $ | 91,207 | ||||||||||||
Intangible liabilities: | ||||||||||||||||||||||||
Below-market lease liabilities | $ | 34,068 | $ | 9,315 | $ | 24,753 | $ | 34,471 | $ | 5,943 | $ | 28,528 | ||||||||||||
F-15
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
The following table discloses the 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:
Year Ended December 31, | ||||||||||||
(In thousands) | 2017 | 2016 | 2015 | |||||||||
Amortization of in-place leases and other intangibles (1) | $ | 12,669 | $ | 13,247 | $ | 9,596 | ||||||
Amortization and (accretion) of above- and below-market leases, net (2) | $ | (2,296 | ) | $ | (2,403 | ) | $ | (2,476 | ) | |||
Amortization of below-market ground lease (3) | $ | 49 | $ | 27 | $ | — | ||||||
________________
(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 December 31, 2017:
(In thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||
In-place leases | $ | 9,899 | $ | 8,260 | $ | 6,481 | $ | 5,188 | $ | 3,816 | ||||||||||
Other intangibles | 1,165 | 1,165 | 1,165 | 937 | 708 | |||||||||||||||
Total to be included in depreciation and amortization | $ | 11,064 | $ | 9,425 | $ | 7,646 | $ | 6,125 | $ | 4,524 | ||||||||||
Above-market lease assets | $ | 1,416 | $ | 1,266 | $ | 1,144 | $ | 1,064 | $ | 847 | ||||||||||
Below-market lease liabilities | (3,527 | ) | (3,049 | ) | (2,635 | ) | (2,328 | ) | (1,789 | ) | ||||||||||
Total to be included in rental income | $ | (2,111 | ) | $ | (1,783 | ) | $ | (1,491 | ) | $ | (1,264 | ) | $ | (942 | ) | |||||
Note 4 — Investment Securities
As of December 31, 2017, the Company had no investment securities. As of December 31, 2016, the Company had an investment in an equity security with a fair value of $0.5 million. The equity security consisted of a mutual fund managed by an affiliate of the Sponsor. See Note 9 — Related Party Transactions and Arrangements. This investment was considered to be an available-for-sale security and therefore increases or decreases in the fair value of this investment were recorded in accumulated other comprehensive income (loss) as a component of equity on the consolidated balance sheets unless the security was considered to be other-than-temporarily impaired, at which time the losses would be reclassified to expense. In addition, the unrealized gain or loss recorded in accumulated other comprehensive income (loss) was reversed on the date of the sale. On June 15, 2017, the Company redeemed its investment in equity securities at approximately $491,000 with a cost basis of approximately $467,000 and realized approximately $24,000 gain in the year ended December 31, 2017. As of December 31, 2015, the Company had determined its investment in this equity security was other-than-temporarily impaired. For the year ended December 31, 2015, the Company recorded an other-than-temporary impairment charge of $0.1 million, which is reflected on the consolidated statements of operations and comprehensive loss. The Company did not record any impairment charges during the years ended December 31, 2017 and 2016.
The following table details the realized and unrealized gains and losses on the investment security by security type as of December 31, 2016:
(In thousands) | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
December 31, 2016 | ||||||||||||||||
Equity security | $ | 467 | $ | 10 | $ | — | $ | 477 | ||||||||
F-16
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Note 5 — Mortgage Notes Payable, Net
The Company's mortgage notes payable as of December 31, 2017 and 2016 are as follows.
Outstanding Loan Amount | ||||||||||||||||||
December 31, | ||||||||||||||||||
Portfolio | Encumbered Properties | 2017 | 2016 | Effective Interest Rate | Interest Rate | Maturity | ||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||
123 William Street (1) | 1 | $ | 140,000 | $ | 96,000 | 4.73 | % | Fixed | Mar. 2027 | |||||||||
1140 Avenue of the Americas | 1 | 99,000 | 99,000 | 4.17 | % | Fixed | Jul. 2026 | |||||||||||
Mortgage notes payable, gross | 2 | 239,000 | 195,000 | 4.61 | % | |||||||||||||
Less: deferred financing costs, net (2) | — | (5,483 | ) | (3,672 | ) | — | ||||||||||||
Mortgage notes payable, net | 2 | $ | 233,517 | $ | 191,328 | 4.61 | % | |||||||||||
(1) | The Company entered into a loan agreement with Barclays Bank PLC, in the amount of $140.0 million, on March 6, 2017. A portion of the proceeds from the loan was used to repay the outstanding principal balance of approximately $96.0 million on the existing mortgage loan secured by the property. At closing, the lender placed $24.8 million of the proceeds in escrow, to be released to the Company in accordance with the conditions under the loan, in connection with leasing activity, tenant improvements, leasing commissions and free rent obligations related to this property. As of December 31, 2017, $4.9 million of the proceeds remained in escrow and is included in restricted cash on the 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. |
Real estate assets of $448.1 million, at cost (net of below-market lease liabilities), at December 31, 2017 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 note payable on a monthly basis.
The following table summarizes the scheduled aggregate principal payments subsequent to December 31, 2017:
(In thousands) | Future Minimum Principal Payments | |||
2018 | $ | — | ||
2019 | — | |||
2020 | — | |||
2021 | — | |||
2022 | — | |||
Thereafter | 239,000 | |||
Total | $ | 239,000 | ||
The Company's mortgage notes payable require compliance with certain property-level debt covenants. As of December 31, 2017, the Company was in compliance with the debt covenants under its mortgage note agreements.
F-17
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Note 6 — 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.
On June 15, 2017, the Company redeemed its investment in an equity security (see Note 4 — Investment Securities). As of December 31, 2016, the Company had an investment in a real estate income fund that was traded in active markets and therefore, due to the availability of quoted market prices in active markets, classified this investment as Level 1 in the fair value hierarchy.
The following table presents information about the Company's asset measured at fair value on a recurring basis as of December 31, 2016, aggregated by the level in the fair value hierarchy within which that instrument falls.
Quoted Prices in Active Markets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
December 31, 2016 | ||||||||||||||||
Investment Securities | $ | 477 | $ | — | $ | — | $ | 477 | ||||||||
There were no transfers between levels of the fair value hierarchy during the year ended December 31, 2016.
F-18
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Financial instruments not carried at fair value
The Company is required to disclose at least annually the fair value of financial instruments for which it is practicable to estimate the value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, prepaid expenses and other assets, accounts payable and distributions payable approximates their carrying value on the consolidated balance sheet due to their short-term nature. The fair value of the variable mortgage note payable is deemed to be equivalent to its carrying value because it bears interest at a variable rate that fluctuates with market and there has been no significant change in the credit risk or credit markets since origination. The fair values of the Company's financial instruments that are not reported at fair value on the consolidated balance sheet are reported below:
December 31, 2017 | December 31, 2016 | |||||||||||||||||
(In thousands) | Level | Gross Principal | Fair Value | Gross Principal | Fair Value | |||||||||||||
Mortgage note payable — 123 William Street | 3 | $ | 140,000 | $ | 147,531 | * | * | |||||||||||
Mortgage note payable — 1140 Avenue of the Americas | 3 | $ | 99,000 | $ | 100,036 | $ | 99,000 | $ | 98,000 | |||||||||
* The fair value of the mortgage note payable at December 31, 2016 was estimated to be equivalent to its carrying value. This mortgage note payable was repaid on March 6, 2017 and replaced by a new loan agreement (see Note 5 — Mortgage Notes Payable).
Note 7 — Common Stock
As of December 31, 2017, the Company had 31.4 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds of $776.0 million, inclusive of $64.5 million from the DRIP and net of repurchases. As of December 31, 2016, the Company had 30.9 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross process of $764.8 million, inclusive of $46.0 million from the DRIP and net of repurchases.
In May 2014, the board of directors of the Company authorized, and the Company began paying, a monthly distribution equivalent to $1.5125 per annum, per share of common stock. The distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
On February 27, 2018, the Company's board of directors unanimously authorized a suspension of the distributions the Company pays to holders of the Company’s common stock, effective as of March 1, 2018 (see Note 14 — Subsequent Events for additional information).
Share Repurchase Program
The Company has a SRP that enables stockholders, subject to certain conditions and limitations, to sell their shares to the Company. Under the SRP, stockholders may request that the Company repurchase all or any portion of their shares of common stock, if such repurchase does not impair the Company's capital or operations.
On January 25, 2016, the Company's board of directors approved an amendment of the SRP to supersede and replace the existing SRP effective beginning on February 28, 2016. Under the SRP, as amended, repurchases of shares of the Company's common stock, when requested, are at the sole discretion of the Company's board of directors and generally will be made semiannually (each six-month period ending June 30 or December 31, a "fiscal semester").
On October 24, 2016, the Company's board of directors approved an Estimated Per-Share NAV, and, on October 25, 2017, the Company's board of directors approved the 2017 Estimated Per-Share NAV.
On June 14, 2017, the Company announced that its board of directors had adopted an amendment and restatement of the SRP that superseded and replaced the existing SRP effective as of July 14, 2017. Under the amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of the Company’s common stock or received their shares from the Company (directly or indirectly) through one or more non-cash transactions would be considered for repurchase. Other terms and provisions of the amended and restated SRP remained consistent with the existing SRP.
F-19
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
In cases of requests for death and disability, the repurchase price is equal to then-current Estimated Per-Share NAV at the time of repurchase. Prior to the establishment of Estimated Per-Share NAV, the repurchase price in these circumstances was equal to the price paid to acquire the shares.
Prior to the establishment of Estimated Per-Share NAV, the purchase price per share for requests other than for death or disability under the SRP depended on the length of time investors have held such shares as follows (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations):
• | after one year from the purchase date - the lower of $23.13 and 92.5% of the amount they actually paid for each share; and, |
• | after two years from the purchase date - the lower of $23.75 and 95.0% of the amount they actually paid for each share. |
Following the establishment of Estimated Per-Share NAV, the purchase price per share for requests other than for death or disability under the SRP now depends on the length of time investors have 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 will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year, with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, the Company is only authorized to repurchase shares in a given fiscal semester up to the amount of proceeds received from the DRIP in that same fiscal semester, as well as any reservation of funds the Company's board of directors, may, in its sole discretion, make available for this purpose. If the establishment of an Estimated Per-Share NAV occurs during any fiscal semester, any repurchase requests received during such fiscal semester will be paid at the Estimated Per-Share NAV applicable on the last day of the fiscal semester.
When a stockholder requests a repurchase and the repurchase is approved by the Company's board of directors, the Company will reclassify such obligation from equity to a liability based on the value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. The following table reflects the number of shares repurchased cumulatively through December 31, 2017.
Numbers of Shares Repurchased | Weighted-Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2014 | — | $ | — | ||||
Year ended December 31, 2015 | 183,780 | 23.63 | |||||
Year ended December 31, 2016 | 461,555 | 23.62 | |||||
Year ended December 31, 2017 (1) | 359,458 | 20.41 | |||||
Cumulative repurchases as of December 31, 2017 | 1,004,793 | $ | 22.48 | ||||
____________________
(1) Includes (i) 276,624 shares repurchased during the three months ended March 31, 2017 for approximately $5.6 million at a weighted average price per share of $20.15, (ii) 578 shares repurchased during the three months ended June 30, 2017 for approximately $13,700 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. Excludes rejected repurchase requests received during 2016 with respect to 902,420 shares for $18.1 million at an average price per share of $20.03. During the three months ended September 30, 2017, following the effectiveness of the amendment and restatement of the SRP, the 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 six months ended December 31, 2017. In January 2018, the Company's board of directors approved the repurchase requests made during the period from July 1, 2017 to December 31, 2017 (see Note 14 — Subsequent Events for additional information). 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.
F-20
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Note 8 — Commitments and Contingencies
Ground Lease
The Company entered into a ground lease agreement related to the acquisition of 1140 Avenue of the Americas under a leasehold interest arrangement. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter:
(In thousands) | Future Minimum Base Cash Rent Payments- Ground Lease | |||
2018 | $ | 4,746 | ||
2019 | 4,746 | |||
2020 | 4,746 | |||
2021 | 4,746 | |||
2022 | 4,746 | |||
Thereafter | 216,738 | |||
Total | $ | 240,468 | ||
The Company incurred ground rent expense of $4.9 million and $2.6 million during the years ended December 31, 2017 and 2016, respectively. The Company incurred no ground rent expense during the year ended December 31, 2015.
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 December 31, 2017, the Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
Note 9 — Related Party Transactions and Arrangements
As of December 31, 2017, an entity wholly owned by the Sponsor owned 8,888 shares of the Company’s outstanding common stock.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO, which was ongoing from April 2014 to May 2015, and, together with its affiliates, continued to provide the Company with various services through December 31, 2015. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was also under common control with AR Global, the parent of the Sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name, Aretec Group, Inc. On March 8, 2017, the creditor trust established in connection with the RCAP bankruptcy filed suit against AR Global, the Advisor, advisors of other entities sponsored by AR Global, and AR Global’s principals (including Mr. Weil, the Company's Executive Chairman, Chief Executive Officer, President and Secretary). The suit alleges, among other things, certain breaches of duties to RCAP. The Company is not named in the suit, nor are there allegations related to the services the Advisor provides to the Company. On May 26, 2017, the defendants moved to dismiss. On November 30, 2017, the court issued an opinion partially granting the defendant's motion. The Advisor informed the Company that the Advisor believes the suit is without merit and intends to defend against it vigorously.
During the year ended December 31, 2016, the Company sold its investment in a mutual fund managed by an affiliate of the Sponsor. The Company recognized income from investment securities managed by an affiliate of the Sponsor of approximately $6,000 and $42,000, respectively, during the years ended December 31, 2016 and 2015. There was no income or loss recorded investment securities recorded during the year ended December 31, 2017.
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Fees Paid in Connection with the IPO
The Former Dealer Manager was paid fees and compensation in connection with the sale of the Company's common stock in the IPO. The Former Dealer Manager was paid a selling commission of up to 7.0% of the per share purchase price of offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Former Dealer Manager was paid up to 3.0% of the gross proceeds from the sale of shares as a dealer manager fee. The Former Dealer Manager was able to reallow its dealer manager fee to participating broker-dealers. A participating broker-dealer had the option to elect to receive a fee equal to 7.5% of the gross proceeds from the sale of shares (not including selling commissions and dealer manager fees) by such participating broker-dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option was elected, the dealer manager fee would have been reduced to 2.5% of gross proceeds (not including selling commissions and dealer manager fees). Total selling commissions and dealer manager fees incurred from the Former Dealer Manager were $22.4 million for the year ended December 31, 2015. There were no such amounts in 2016 and 2017 and there were no amounts payable as of December 31, 2017 and 2016.
The Advisor and its affiliates were paid compensation and reimbursement for services relating to the IPO, including transfer agent services and other professional services provided by an affiliate of the Former Dealer Manager. All offering costs incurred by the Company, the Advisor and affiliated entities of the Advisor on behalf of the Company were charged to additional paid-in capital on the accompanying consolidated balance sheets through the end of the IPO. Subsequent to the closing of the IPO, transfer agent and other professional fees are recognized as a component of general and administrative expenses on the accompanying consolidated statements of operations and comprehensive loss. Fees and expense reimbursements from the Advisor and affiliates of Former Dealer Manager were $5.2 million for the year ended December 31, 2015. There were no such amounts in 2016 and 2017 and there were no amounts receivable as of December 31, 2017 and 2016.
As of December 31, 2017 and 2016, cumulative offering costs, including selling commissions and dealer manager fees, were $84.0 million, respectively. The Company was responsible for paying offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 2.0% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs, excluding commissions and dealer manager fees, in excess of the 2.0% cap as of the end of the IPO are the Advisor’s responsibility. During the year ended December 31, 2017, the Advisor paid the Company the total amount owed to the Company related to excess offering and related costs.
Fees and Participations Paid in Connection With the Operations of the Company
The Advisor is paid an acquisition fee of 1.5% of (A) the contract purchase price of each acquired property and (B) the amount advanced for a loan or other investment. The Advisor is also reimbursed for expenses incurred related to selecting, evaluating and acquiring assets on the Company's behalf, regardless of whether the Company actually acquires the related assets. These acquisition expenses may also include insourced expenses for services performed by the Advisor or its affiliates. Such insourced expenses are fixed initially at, and may not exceed, 0.50% of the contract purchase price of each property and 0.50% of the amount advanced for each loan or other investment, which is paid at the closing of each such investment. The Advisor is also reimbursed for legal expenses incurred in the process of acquiring properties, in an amount not to exceed 0.10% of the contract purchase price. In addition, the Company also pays third parties, or reimburses the Advisor for any investment-related expenses due to third parties. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees (as described below) payable with respect to the Company's portfolio of investments exceed 4.5% of (A) the contract purchase price or (B) the amount advanced for all loans or other investments. Once the proceeds from the primary offering have been fully invested, the aggregate amount of acquisition fees and any financing coordination fees may not exceed 1.5% of (A) the contract purchase price and (B) the amount advanced for a loan or other investment, as applicable, for all the assets acquired. During the year ended December 31, 2017, the Company incurred no acquisition fees and acquisition expense reimbursements to the Advisor. During the year ended December 31, 2016, the Company incurred acquisition fees and acquisition expense reimbursements of $3.6 million, which is net of $0.6 million in acquisition expense reimbursements which were waived by the Advisor.
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.
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
F-22
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
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 December 31, 2017, the Company cannot determine the probability of achieving the performance condition. The Advisor receives distributions on Class B Units, whether vested or unvested, at the same rate as distributions received on the Company's common stock. Such distributions on issued Class B Units are expensed in the consolidated statements of operations and comprehensive loss until the performance condition is considered probable to occur. As of December 31, 2017, the Company's board of directors had approved the issuance of 159,159 Class B Units in connection with the arrangement. Beginning on October 1, 2015, and in lieu of the asset management subordinated participation, the Company began paying an asset management fee in cash to the Advisor or its assignees as compensation for services rendered in connection with the management of the Company’s assets. The asset management fee is payable on the first business day of each month in the amount of 0.0625% multiplied by (i) the cost of the Company's assets for the preceding monthly period or (ii) during the period of time after the Company publishes Estimated Per-Share NAV, the lower of the cost of assets and the estimated fair market value of the Company’s assets as reported in the applicable periodic or current report filed with the SEC disclosing the fair market value. The Company paid $5.5 million, $4.7 million and $1.0 million in cash asset management fees during the years ended December 31, 2017, 2016 and 2015, respectively.
Unless the Company contracts with a third party, the Company pays the Property Manager a property management fee equal to: (i) for non-hotel properties, 4.0% of gross revenues from the properties managed, plus market-based leasing commissions; and (ii) for hotel properties, a market-based fee based on a percentage of gross revenues. The Company also reimburses the Property Manager for property-level expenses. The Property Manager may subcontract the performance of its property management and leasing services duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracts for these services. The Company incurred approximately $0.6 million, $0.5 million and $0.2 million in property management fees during the years ended December 31, 2017, 2016 and 2015, respectively.
The Company reimburses the Advisor’s costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt, impairments or other similar non-cash expenses and excluding any gain from the sale of assets for that period, unless the Company's independent directors determine that such excess was justified based on unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the Advisor in subsequent periods. Additionally, the Company reimburses the Advisor for personnel costs in connection with other services; however, the Company may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expense reimbursements or real estate commissions and no reimbursement shall be made for salaries, bonuses or benefits to be paid to the Company's executive officer. Total reimbursement of costs and expenses for the years ended December 31, 2017, 2016 and 2015 were $3.8 million, $1.7 million and $0.5 million, respectively.
The predecessor to the parent of the Sponsor was party to a services agreement with RCS Advisory Services, LLC ("RCS Advisory"), a subsidiary of RCAP, pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by the Sponsor with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to the parent of the Sponsor instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory.
The Company was also party to a transfer agency agreement with American National Stock Transfer, LLC ("ANST"), a subsidiary of RCAP, pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end Internal Revenue Service ("IRS") reporting and other services), and
F-23
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
supervisory services overseeing the transfer agency services performed by DST Systems, Inc. ("DST"), a third-party transfer agent. The Sponsor received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. DST continued to provide the Company with transfer agency services and, on March 10, 2016, the Company entered into a definitive agreement with DST to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services). For the year ended December 31, 2017, the fees for services from DST are included in general and administrative expenses on the consolidated statements of operations and comprehensive loss during the period in which the service was provided.
The following table details amounts incurred, waived and payable in connection with the Company's operations-related services described above as of and for the periods presented:
Year Ended December 31, | Payable (Receivable) | |||||||||||||||||||||||||||||||
(In thousands) | 2017 | 2016 | 2015 | as of December 31, | ||||||||||||||||||||||||||||
Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | 2017 | 2016 | |||||||||||||||||||||||||
Acquisition fees and reimbursements: | ||||||||||||||||||||||||||||||||
Acquisition fees and related cost reimbursements | $ | — | $ | — | $ | 3,600 | $ | 646 | $ | 5,060 | $ | — | $ | — | $ | (646 | ) | |||||||||||||||
Financing coordination fees | 1,050 | — | 743 | — | 825 | — | — | — | ||||||||||||||||||||||||
Ongoing fees: | ||||||||||||||||||||||||||||||||
Operating fees incurred from related parties | 6,039 | — | 5,179 | — | 1,145 | 204 | (18 | ) | (1) | (24 | ) | |||||||||||||||||||||
Professional fees and other reimbursements | 4,019 | — | 1,795 | — | 1,140 | — | 323 | (2) | 167 | |||||||||||||||||||||||
Distributions on Class B units | 241 | — | 241 | — | 122 | — | 20 | (3) | — | |||||||||||||||||||||||
Total related party operation fees and reimbursements | $ | 11,349 | $ | — | $ | 11,558 | $ | 646 | $ | 8,292 | $ | 204 | $ | 325 | $ | (503 | ) | |||||||||||||||
____________________
(1) | The receivable balance is included in prepaid expenses and other assets on the consolidated balance sheet. |
(2) | Represents a payable balance of approximately $364,000, offset with a receivable balance of approximately $21,000. The payable balance is included in accounts payable, accrued expense and other liabilities on the consolidated balance sheet. The receivable balance is included in prepaid expenses and other assets on the consolidated balance sheet. |
(3) | The payable balance is included in accounts payable, accrued expense and other liabilities on the consolidated balance sheet. |
Fees and Participations Paid in Connection with Liquidation or Listing
The Company will pay to the Advisor an annual subordinated performance fee calculated on the basis of the Company’s return to stockholders, payable annually in arrears, such that for any year in which investors receive payment of 6.0% per annum, the Advisor will be entitled to 15.0% of the excess return, provided that the amount paid to the Advisor does not exceed 10.0% of the aggregate return for such year, and that the amount paid to the Advisor will not be paid unless investors receive a return of capital contributions. This fee will be paid only upon the sale of assets, distributions or other event which results in the return on stockholders’ capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the years ended December 31, 2017, 2016 or 2015.
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 years ended December 31, 2017, 2016 or 2015.
Upon a liquidation or sale of all or substantially all assets, including through a merger or sale of stock of the Company, the Special Limited Partner will be entitled to receive a subordinated distribution from the OP equal to 15.0% of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of an annual 6.0% cumulative, pre-tax noncompounded 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 years ended December 31, 2017, 2016 or 2015.
F-24
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
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 years ended December 31, 2017, 2016 or 2015. 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.
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 to15.0% 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 years ended December 31, 2017, 2016 or 2015.
The Special Limited Partner and its affiliates can earn only one of the subordinated distribution from the OP described above.
Note 10 — Economic Dependency
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.
Note 11 — Share-Based Compensation
Restricted Share Plan
The Company has an employee and director incentive restricted share plan (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 five-year period following the grant date in increments of 20.0% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of shares granted as awards under the RSP shall not exceed 5.0% of the Company’s outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 1.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. For restricted share awards granted prior to July 1, 2015, such awards would typically be forfeited with respect to the unvested restricted shares upon the termination of the recipient's employment or other relationship with the Company. For restricted share awards granted on or after July 1, 2015, such awards provide for accelerated vesting of the
F-25
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
portion of the unvested restricted shares scheduled to vest in the year of the recipient's voluntary termination or the failure to be re-elected to the board. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares receive cash distributions on the same basis as distributions paid on shares of common stock prior to the time that the restrictions on the restricted shares have lapsed and thereafter. Any distributions payable in shares of common stock will be subject to the same restrictions as the underlying restricted shares.
The following table displays restricted share award activity during the years ended December 31, 2017, 2016 and 2015:
Number of Restricted Shares | Weighted-Average Issue Price | ||||||
Unvested, December 31, 2014 | 3,999 | $ | 22.50 | ||||
Granted | 2,666 | 22.50 | |||||
Vested | (533 | ) | 22.50 | ||||
Forfeited | (1,333 | ) | 22.50 | ||||
Unvested, December 31, 2015 | 4,799 | 22.50 | |||||
Granted | 5,332 | 22.50 | |||||
Vested | (1,066 | ) | 22.50 | ||||
Unvested, December 31, 2016 | 9,065 | 22.50 | |||||
Granted | 4,233 | 21.25 | |||||
Vested | (2,133 | ) | 22.50 | ||||
Unvested, December 31, 2017 | 11,165 | 22.14 | |||||
As of December 31, 2017 and 2016, the Company had $0.2 million and $0.1 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company's RSP. As of December 31, 2017 and 2016, that cost is expected to be recognized over a weighted-average period of 3.6 and 3.8 years, respectively. Restricted share awards are expensed in accordance with the service period required. Compensation expense related to restricted stock was approximately $74,000, $61,000 and $26,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Compensation expense related to restricted stock is recorded as general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at the respective director's election. There are no restrictions on the shares issued. There were no shares of common stock issued in lieu of cash during the years ended December 31, 2017, 2016 and 2015.
F-26
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Note 12 — Net Loss Per Share
The following is a summary of the basic and diluted net loss per share computation for the periods presented:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net loss (In thousands) | $ | (23,073 | ) | $ | (19,765 | ) | $ | (15,785 | ) | |||
Basic and diluted weighted average shares outstanding | 31,042,307 | 30,668,238 | 27,599,363 | |||||||||
Basic and diluted net loss per share | $ | (0.74 | ) | $ | (0.64 | ) | $ | (0.57 | ) | |||
The Company had the following potentially dilutive securities as of December 31, 2017, 2016 and 2015, which were excluded from the calculation of diluted net loss per share attributable to stockholders as the effect would have been antidilutive:
Year Ended December 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Unvested restricted stock | 11,165 | 9,065 | 4,799 | ||||||
OP Units | 90 | 90 | 90 | ||||||
Class B units | 159,159 | 159,159 | 159,159 | ||||||
Total potentially dilutive securities | 170,414 | 168,314 | 164,048 | ||||||
Note 13 — Quarterly Results (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2017 and 2016.
Quarters Ended | ||||||||||||||||
(In thousands, except share and per share data) | March 31, 2017 | June 30, 2017 | September 30, 2017 | December 31, 2017 | ||||||||||||
Total revenues | $ | 14,583 | $ | 14,545 | $ | 14,475 | $ | 14,821 | ||||||||
Net loss | $ | (4,786 | ) | $ | (5,362 | ) | $ | (5,877 | ) | $ | (7,048 | ) | ||||
Weighted average shares outstanding | 30,814,927 | 30,944,077 | 31,106,250 | 31,297,963 | ||||||||||||
Basic and diluted net loss per share | $ | (0.16 | ) | $ | (0.17 | ) | $ | (0.19 | ) | $ | (0.23 | ) | ||||
Quarters Ended | ||||||||||||||||
(In thousands, except share and per share data) | March 31, 2016 | June 30, 2016 | September 30, 2016 | December 31, 2016 | ||||||||||||
Total revenues | $ | 8,506 | $ | 10,053 | $ | 14,408 | $ | 14,640 | ||||||||
Net loss | $ | (3,405 | ) | $ | (6,401 | ) | $ | (4,369 | ) | $ | (5,589 | ) | ||||
Weighted average shares outstanding | 30,562,487 | 30,785,076 | 30,556,494 | 30,769,015 | ||||||||||||
Basic and diluted net loss per share | $ | (0.11 | ) | $ | (0.21 | ) | $ | (0.14 | ) | $ | (0.18 | ) | ||||
Note 14 — Subsequent Events
Approval of Share Repurchases
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 was equal to 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. 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. See Note 7 — Common Stock for additional information on the SRP.
F-27
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
Tender Offer
On January 29, 2018, Comrit Investments 1, Limited Partnership (“Comrit”) commenced an unsolicited offer to the Company's stockholders, which was subsequently amended on February 22, 2018 and March 2, 2018 (the "Comrit Offer"). As amended, the Comrit Offer is an offer to purchase up to 124,844 shares of the Company’s common stock at a price of $16.02 per share in cash and expires on March 20, 2018 (unless extended).
In response to the Comrit Offer, on February 6, 2018 the Company commenced a tender offer, which was subsequently amended on February 22, 2018 and March 6, 2018 (as amended, the “Offer”). The Company made the Offer in order to deter Comrit 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 Offer, the Company has offered to purchase up to 140,000 shares of the Company’s common stock for cash at a purchase price equal to $17.03 per share, or approximately $2.4 million, in the aggregate. Unless extended or withdrawn, the Offer, proration period and withdrawal rights will expire at 11:59 p.m. Eastern Time, on March 20, 2018. The Company's board of directors suspended the SRP. We will not accept any repurchase requests under the SRP during the pendency of the Offer.
Suspension of Distributions
On February 27, 2018, the Company's board of directors unanimously authorized a suspension of the distributions 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 our distribution policy no sooner than February 2019.
F-28
AMERICAN REALTY CAPITAL NEW YORK CITY REIT, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
DECEMBER 31, 2017
(dollar amounts in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition | |||||||||||||||||||||||||||
Portfolio | State | Acquisition Date | Encumbrances at December 31, 2017 | Land | Building and Improvements | Building and Improvements | Gross Amount at December 31, 2017 (1) (2) | Accumulated Depreciation (3) (4) | ||||||||||||||||||||
421 W. 54th Street - Hit Factory | NY | 6/13/2014 | $ | — | $ | 4,723 | $ | 1,757 | $ | — | $ | 6,480 | $ | 157 | ||||||||||||||
400 E. 67th Street - Laurel Condominiums | NY | 9/5/2014 | — | 10,653 | 55,682 | 86 | 66,421 | 4,647 | ||||||||||||||||||||
200 Riverside Blvd - ICON Garage | NY | 9/24/2014 | — | 13,787 | 5,510 | — | 19,297 | 448 | ||||||||||||||||||||
9 Times Square | NY | 11/5/2014 | — | 54,153 | 76,454 | 19,251 | 149,858 | 9,288 | ||||||||||||||||||||
123 William Street | NY | 3/27/2015 | 140,000 | 50,064 | 182,917 | 20,960 | 253,941 | 15,595 | ||||||||||||||||||||
1140 Avenue of the Americas | NY | 6/15/2016 | 99,000 | — | 148,647 | 3,195 | 151,842 | 5,847 | ||||||||||||||||||||
$ | 239,000 | $ | 133,380 | $ | 470,967 | $ | 43,492 | $ | 647,839 | $ | 35,982 | |||||||||||||||||
____________
(1) | Acquired intangible assets allocated to individual properties in the amount of $106.0 million are not reflected in the table above. |
(2) | The gross tax basis of aggregate land, buildings and improvements as of December 31, 2017 is $696.4 million (unaudited). |
(3) | The accumulated depreciation column excludes $28.9 million of amortization associated with acquired intangible assets. |
(4) | Each of the properties has a depreciable life of: 40 years for buildings, 15 years for land improvements and five to seven years for fixtures. |
A summary of activity for real estate and accumulated depreciation for the year ended December 31, 2017, 2016 and 2015:
December 31, | ||||||||||||
(In thousands) | 2017 | 2016 | 2015 | |||||||||
Real estate investments, at cost: | ||||||||||||
Balance at beginning of year | $ | 635,447 | $ | 469,962 | $ | 222,805 | ||||||
Additions-acquisitions | — | 148,647 | 232,981 | |||||||||
Capital expenditures | 12,392 | 16,838 | 14,176 | |||||||||
Disposals | — | — | — | |||||||||
Balance at end of the year | $ | 647,839 | $ | 635,447 | $ | 469,962 | ||||||
Accumulated depreciation: | ||||||||||||
Balance at beginning of year | $ | 19,598 | $ | 7,966 | $ | 843 | ||||||
Depreciation expense | 16,384 | 11,632 | 7,123 | |||||||||
Disposals | — | — | — | |||||||||
Balance at the end of the year | $ | 35,982 | $ | 19,598 | $ | 7,966 | ||||||
F-29