Update on ARC New York City REIT
September 6, 2018 | James Sprow | Blue Vault
Since suspending distributions to common shareholders effective as of March 1, 2018, American Realty Capital New York City REIT has pursued a strategy described as “enhance the Company’s ability to execute on acquisitions, repositioning and leasing efforts related to the six properties owned by NYCR.” The REIT’s board stated that suspending the distribution better positioned the Company for future growth and a successful liquidity event.
How has this nontraded REIT performed since the suspension of distributions? Is it making progress toward a liquidity event?
Looking first at its property portfolio, the REIT still owns the same six mixed-use office and retail condominium buildings located in New York City. Overall, the occupancy rate for these properties has increased from 88.3% as of December 31, 2017, to 89.8% as of June 30, 2018. The weighted average remaining lease term based on annualized straight-line rental income held steady at 6.2 years. During Q2 2018 the sole tenant at its 421 W 54thStreet (“Hit Factory”) property terminated its lease and vacated the space. The REIT also increased its encumbered assets by entering into a loan agreement that provides $50 million with a fixed interest rate of 4.516% and a maturity date of May 1, 2028, secured by mortgages on its Laurel Condominium and ICON Garage assets.
The financing increased the REIT’s cash balances to $70.5 million from $39.6 million, and with the suspension of cash distributions, the net leverage based upon total real estate investments at cost as of June 30, 2018, was 29%. If the REIT pursues additional acquisitions, it does have the cash and borrowing capacity to do so. The question is whether doing so will add to shareholder value or simply put off further the eventual liquidity event.
On September 5, 2018, the REIT announced two new leases totaling approximately 17,000 square feet at its 123 William Street property in Manhattan. Senior Vice President Zachary Pomerantz commented, “We are excited to add to our already strong tenant roster and extend our overall lease maturity with the execution of these two new leases at 123 William Street with Classroom, Inc., and Fundera, two high-quality companies. The choice these companies made to lease long-term with us speaks directly to the desirability of the building and strength of the location.”
If these two new leases had commenced in Q2 2018, they would have increased occupancy at 123 William Street as of June 30, 2018, from 94.7% to 97.7%. These two new leases have a weighted average lease duration of 10 years.
Also on September 5, the REIT announced five new leases totaling approximately 33,427 square feet at 9 Times Square (200 West 41stStreet) in Manhattan. If these five new leases had commenced in Q2 2018, they would have increased occupancy at 9 Times Square as of June 30, 2018, from 74.4% to 89.1%. These five new leases have a weighted average lease duration of 9.3 years. 9 Times Square is a 167,390-square-foot office building with more than 4,000 square feet of divisible retail space at its base.
On March 20, 2018, the REIT accepted for purchase 139,993 shares for cash at a purchase price of $17.03. The offer was for up to 140,000 shares.
On July 24, 2018, the REIT accepted for purchase 210, 014 shares in a self tender offer at a purchase price of $12.95 per share. The offer was for up to 500,000 shares. The Company made the offer in order to deter an unsolicited bidder and other potential bidders that might try to exploit the illiquidity of the Company’s common stock and acquire it from stockholders at prices substantially below the most recent estimated net asset value of $20.26 as of June 30, 2017. During both self tender offer periods the Company suspended its share repurchase program (“SRP”) and has not reactivated the SRP.
The Company repurchased 109,314 common shares in January 2018, that were approved requests from the period July 1, 2017, to December 31, 2017. The average price per share was the $20.26 estimated NAV as of June 30, 2017.
The Company states that it intends to publish subsequent valuations of its estimated per-share NAV at least once annually. As Blue Vault noted, the range of values provided by the third-party valuation firm Duff & Phelps as of June 30, 2017, was $18.26 to $20.53, with a midpoint of the range at $19.36. Unlike most other nontraded REITs, this company chose a value near the high end of the range at that time of $20.26. Although the REIT’s portfolio appears to have higher occupancy rates, it will be interesting to see if the next NAV estimate by a third-party valuation firm will justify the Company’s choice.
Sources: SEC, ARC NYC REIT, Inc., Blue Vault
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