American Strategic Investment Co. (NYC) Q1 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the New York City REIT First Quarter Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Louisa Quarto, Executive Vice President. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for NYC’s first quarter 2021 earnings call. This event is being webcast in the Investor Relations section of NYC’s website at www.newyorkcityreit.com. Joining me today on the call to discuss the quarter’s results are Mike Weil, NYC’s Chief Executive Officer; and Chris Masterson, NYC’s Chief Financial Officer. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. We refer all of you to our SEC filings, including the Form 10-K filed for the year ended December 31, 2020, filed on March 29, 2021, and all subsequent SEC filings for a more detailed discussion of the risk factors that could cause these differences. Any forward-looking statements provided during this conference call are only made as of the date of this call. As stated in our SEC filings, NYC disclaims any intent or obligation to update or revise these forward-looking statements, except as required by law. Also, during today’s call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company’s financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release. Please also refer to our earnings release for more detailed information about what we consider to be implied investment-grade tenants, a term we will use throughout today’s call. I’ll now turn the call over to Michael Weil, Chief Executive Officer. Please go ahead, Mike.

Thanks, Louisa. Good morning, and thank you for joining us today. New York City REIT continues to drive results through a proactive asset management strategy, highlighted by improving quarter-over-quarter cash rent collection across the portfolio and impressive leasing activity. After over a year of being substantially locked down, we are enthusiastic about the prospect of New York City reopening on a significant scale in the coming weeks and ramping up over the summer. We’re seeing an alignment of intentions from the mayor to the governor and all of the businesses, restaurants, tourist attractions and cultural institutions that should revitalize the vibrant city. The community is interlocked and depends on all of these segments for talent, inspiration and revenue. We believe that as these participants returned, it will serve as another catalyst for growth throughout the city. For the first quarter, we recorded strong cash rent collection of 85% across the portfolio, a 300 basis point increase from 82% last quarter, with 89% collected from our top 10 tenants, consistent with our collections from this group last quarter. Our asset management team has remained engaged with our tenants, helping to drive rent collection. At 1140 Avenue of the Americas, for instance, we’re able to work with one of our longest-standing tenants to come to a mutually acceptable agreement and are excited to see their success as restaurants resume normal operations in the near term. We remain highly confident in the long-term strength of New York City real estate, our business model and the opportunity to further grow our portfolio and create shareholder value. Our portfolio is diversified across 8 high-quality office and retail condominium assets located entirely in New York City and primarily in Manhattan. We’ve built a pure-play New York City portfolio that features a number of large investment-grade tenants, including City National Bank, CVS, TD Bank and government agencies. As of March 31, NYC’s top 10 tenants were 73% investment-grade or implied investment-grade rated and have an average remaining lease term of almost 10 years, which we believe increases the quality and stability of earnings in our portfolio. Our $861.2 million, 1.2 million square foot portfolio has occupancy of 82.8%, a weighted average remaining lease term of 6.9 years and the opportunity for substantial incremental earnings growth as we lease up available space. As we discussed last quarter, we’re actively seeking to sign leases with former tenants of Knotel and to lease up space that Knotel formerly occupied. In the first quarter, we executed 2 replacement leases composed of a 2-year lease with a global human resource company and a short-term license agreement with a Fortune 50 technology company that total over 23,000 square feet and $1.1 million in annualized straight-line rent. We also executed a nonbinding letter of intent for a 5-year lease with the aforementioned technology company. Additionally, we completed 2 new leases totaling 6,800 square feet and over $360,000 in annualized straight-line rent. Our portfolio occupancy of 83% was down from 87% at the end of last year, largely as a result of Knotel surrender of their space during the quarter. To date, we’ve leased or signed nonbinding letters of intent to lease approximately half of the space formerly occupied by Knotel. We believe there’s an opportunity for us to create significant value by aggressively leasing the remaining prime space, which is an excellent turnkey condition and fully furnished to creditworthy tenants. Further, as we previously discussed, we remain engaged with several tenants for whom we took substantial write-offs in prior quarters for uncollectible rent. Even though we concluded these receivables are not collectible for accounting purposes, we feel very strongly in our position on these matters, as businesses are open and operating, and we see no basis for the withholding of rent payments. We will remain aggressive in our pursuit of these payments and are extremely confident in our legal position, allowing us to recover these tenants’ unpaid rent. Our proactive approach to portfolio management continues to deliver results that enhance the overall quality of the NYC portfolio. Subsequent to quarter end, we executed a new 7-year lease at 123 William Street for 7,800 square feet that will generate net annualized straight-line rent of $315,000. We’re also building a forward pipeline of leasing deals that currently totals over 21,000 square feet. If all of these leases were consummated on the current terms, they would increase our portfolio occupancy to 85%, assuming no expirations or terminations. We’re also in advanced stages of taking over and operating co-working space from one of our tenants and keeping their licensees in place. We have an aggressive capable team, the right technology and the operating experience to capitalize on this opportunity. We believe that the short-term dislocation in New York City asset prices may present a unique opportunity to acquire attractive assets at potentially discounted prices. We believe that New York is an irreplaceable city and the signals we are seeing bolster our confidence in the long-term value of New York City real estate. In the past several weeks, news articles have documented the reawakening of Times Square plans to relax occupancy restriction for offices and the plans of large employers such as Google and JPMorgan to bring workers back to the office at a large scale in the very near future. Mayor de Blasio called back 80,000 New York City workers to city offices last week and has a goal of 5 million people being vaccinated by June. We believe that by the end of the summer, the city will be recognizable once more as the growing, diversified vibrant city that we’re familiar with. Over the long term, we believe that New York City will remain an enduring center of global commerce and the foremost market for owning stable, occupied non trophy office buildings, retail condominiums and other high-quality real estate. I’ll turn it over to Chris Masterson to go over the first quarter results. Chris?

Thanks, Mike. First quarter 2021 revenue was $15.2 million compared to $9.9 million in the fourth quarter of 2020. The company’s first quarter GAAP net loss attributable to common stockholders was $13.5 million compared to a net loss of $16.6 million in the fourth quarter 2020. For the first quarter of 2021, our FFO attributable to common stockholders was negative $5 million compared to negative $8.9 million last quarter. Core FFO was negative $2.9 million compared to negative $6.8 million in the fourth quarter. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release, supplemental and Form 10-Q. NYC also maintains a conservative balance sheet with no debt maturities within the next 3 years and prudent net leverage of 37.6%. We ended the first quarter with net debt of $375.6 million at a weighted average effective interest rate of 4.4% and with a weighted average remaining debt term of nearly 6 years. With that, I’ll turn the call back to Mike for some closing remarks.

Thanks, Chris. We believe that our New York City portfolio is well positioned to deliver long-term value. Our properties are concentrated in Manhattan and comprised of a diversified tenant base, of which 7 of the largest 10 are investment grade. The limited near-term lease expirations and long-weighted average remaining lease term provide the portfolio the stability, and the 82.8% occupancy rate leaves room for continued growth of annualized straight-line rent. We believe there is a tremendous value in the business relative to our portfolio and our continued performance during this pandemic. We own high-quality assets that we believe will greatly benefit from the imminent return of office workers at scale based on the time line set forth by the city, state and federal government and the announcements of significant New York City employers. We’ll maintain an aggressive approach to leasing in our own portfolio, which we believe will be accelerated by the return of active offices, busy restaurants and the world-class institutions that contribute to making New York City a great place to live and work. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from Bryan Maher from B. Riley Securities.

A couple of questions for me. You talked about acquisitions briefly in your prepared comments. Can you give us a little bit more color on what opportunities you’re seeing, maybe scope? And what is NYC’s appetite for making acquisitions over the next, say, 4 quarters?

Sure. First, before I answer specifically, we did ask Chris Chao to join us today, as I think you have spoken to Chris before. But Chris heads up the asset management platform for New York City REIT, and he can jump in as well. I’ll start. We have seen a few assets come to market that fit the typical criteria of New York City REIT. I would describe these as boutique buildings in the $50 million to $250 million range with a solid rent roll of the types of businesses that we’ve always seen occupying the, what I would describe as, non trophy assets in New York City. So a lot of law firms, accounting firms, those types of businesses. We have reviewed some OMs where maybe it was a family-owned asset, and coming out of COVID there’s some re-leasing, retenanting work that needs to be done or just this long year period has just taken them to a place where they no longer want to be owners of real estate. So I think we’re going to continue to see that. Chris is very active in the market. And It’s probably one acquisition, maybe 2 that we would look to make in New York City, but we’re really going to take our time and find the right fit for the portfolio. We want to increase the occupancy, the stability in what we buy.

Great. And is there any update on the Hit Factory potentially selling that asset?

I’ll give you an update there. As you know, it is a very small asset in the portfolio, but it does sit there, and we have been marketing it. Interestingly enough, we have really seen an increase in leasing interest, which is something that we’ve always been interested in opportunity. So I think it’s fair to say that we will continue to market it for sale. Chris is negotiating with a group right now with a potential longer-term lease opportunity in a related industry. So it’s a good fit. And I would look forward to updating you as we have more concrete information.

Great. And then I know you had signed rent parol agreements, I believe it’s Equinox and I Love New York Gifts. Any update with those 2 businesses, with a lot of visitation coming back to Times Square and some people moving into the New York City market as well as Equinox.

Well, I’ll start with I Love New York because it’s been a really positive outcome and experience. I love New York is a terrific tenant in the portfolio and, frankly, a very talented business man and a great business. So we’ve been really pleased to see his business coming back. Obviously, every month of reopenings and traffic in New York City is beneficial to him. We’re all very excited having seen and listened to both the governor and the mayor’s commentary about reopening New York. And with the high level of vaccinations, that reopening is just tremendous for I Love New York’s business. And Not only did we come to an agreement, it did involve some abatements, some deferral, but also some extension of term. And this is a premier location for I Love New York. So I think that we have together, as landlord and tenant, really come to a great outcome so that we can both be successful. Equinox, I’m looking forward to the outcome of the pending litigation against them. It’s a very frustrating tenant because they have no reason to be the problem that they are. We know that their location is operating and open and quite successful. And again, they have absolutely no excuse for the position that they’ve taken, and we look forward to successful litigation.

Great. And then just a couple of more for me. On the Knotel side -- first of all, congratulations on getting that re-leased so quickly what you have so far. But what’s the outlook for the balance of that space?

So, Chris Chao, would you like to talk a little bit about that. Obviously, we want to keep it to general conversation, and we’ll continue to update in our public disclosures, Bryan. But I think, Chris, you’ve got a great sense of activity at that space.

Yes, certainly. Bryan, good to talk to you again. There’s been a really tremendous -- we’ve noticed tremendous leasing activity really through tours pick up over the past several months and starting -- and just looking at 200 West 41st Street where Knotel had 4 floors. We’ve seen a number of tenants walk them. As we’ve stated in our releases that these floors are fully built, furnished and really ready to go. And to that, we’ve -- we’re actually working with an existing tenant on an LOI for a new lease. And we continue to see traction on that front. And I would say the same at 123 William Street. And so we’re quite pleased with the progress that we’ve had so far.

Great.

And Bryan, if I can just add, we’re seeing the market rents holding up to pre-COVID levels at this location. So we’re not seeing a significant need to discount rents. And as Chris mentioned, this is essentially first-generation build-out space. So we’re not anticipating significant construction costs in retenanting. So I don’t want to -- we’re not done, but we’ve certainly got good momentum. And Chris and his leasing team are active in retenanting.

Great. And then just last for me, and maybe this is best for Chris Masterson. On CapEx, when you look back the last couple of years, I think it was a little over $3 million last year, kind of 8-ish, 9-ish in the years before that. Where do you think that, that sticks out this year?

Sorry, can you just repeat the beginning please? You kind of cut out on my phone.

Sorry. I was just asking about CapEx for 2021 because when we looked back at last year, it was only a little over $3 million. And the 2 years before that, it was kind of $8 million, $9 million. And is it closer to the $3 million or closer to the $8 million, $9 million for this year?

I would say it’ll probably end up probably closer to the $3 million. It’s going to depend on what we need to do with any new tenants coming in. But in general, I would say it will probably shake out towards the lower end this year.

There are no more questions in the queue. This concludes our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.

I just want to thank everybody for taking some time and listening to our update for the first quarter. We’re very excited about the reopening that is underway in New York City. This is obviously based on the positive news regarding vaccinations and COVID cases dropping. So we’re looking forward to a positive 2021 and look forward to talking again at the end of the second quarter. So thank you all very much.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.