American Strategic Investment Co. (NYC) Q3 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by and welcome to the New York City REIT Inc. Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Louisa Quarto. Please go ahead.

Thank you, operator. Good morning everyone and thank you for joining us for NYC’s third 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. Please also refer to the Form 10-Q for the quarter ended September 30, 2021 filed today for a more detailed discussion of certain risk factors relating to our property at 9 Times Square. Any forward-looking statements provided during this conference call are only made as of the date of the 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. 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 will 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 execute on our proactive asset management strategy highlighted by increased occupancy at 9 Times Square and another quarter of increasing rent collection to 92%. We launched Innovate NYC, a co-working company at 1140 Avenue of the Americas, diversifying our strategy into a growing segment of the New York City real estate market. Finally, our property at 123 William Street was named Building of the Year by BOMA New York for superior operations and management. As recognition for the extensive upgrades to the building and its systems, this award is a testament to the strong focus of New York City’s asset management team. The effort is spearheaded by Chris Chao and is a tribute to the exceptional work of our CBRE building management team. Together, their dedication continues to deliver outstanding results. More broadly, office use and pedestrian traffic continues to increase as the city continues to encourage a return to pre-pandemic lifestyle through an aggressive ongoing vaccination campaign. Further support for New York City’s return is apparent from recent trends in the apartment leasing market. After an initial decline in 2020, as young workers in particular departed the city to work from home, asking rents have soared back to in some cases meet or exceed pre-pandemic prices. Pent-up demand and limited supply are helping fuel the rise in prices. A set of conditions we expect to continue to see echoed in other real estate segments such as office leasing, which according to CBRE research, has already climbed back to 95% of pre-pandemic baseline. The natural follow-through should be the return to office which will drive onsite occupancy. We remain highly confident in long-term strength of New York City real estate based on our fundamental belief in the necessity of New York City office and retail space. Our portfolio includes 8 office and retail condominium assets located entirely in New York City and primarily in Manhattan. We have built this pure-play New York City portfolio featuring a number of large investment grade tenants, including City National Bank, CVS, TD Bank and government agencies. As of September 30, NYC’s top 10 tenants were 71% investment grade or implied investment grade rated and had an average remaining lease term of 9.2 years, our $861 million, 1.2 million square foot portfolio has occupancy of 85.3% at the end of the third quarter. Quarter-over-quarter occupancy at 9 Times Square increased 3.5% with the commencement of a lease that replaced 8,800 square feet that was previously leased to Knotel and has an 11-year lease term. Across all of our assets, we have a weighted average remaining lease term of 6.8 years. For the third quarter, we recorded strong rent collection at 92% of original cash rent across the portfolio, a 3% increase from 89% reported last quarter and a full 10% improvement from the fourth quarter of last year. This includes a $265,000 rent increase related to several retail tenants at 9 Times Square that resumed paying rent after being written off last quarter. Our asset management team remains engaged with our tenants helping to drive rent collection and working towards a complete recovery from pandemic related challenges. We are also having ongoing dialogue with several key tenants to negotiate renewals, including the State of New York and the GSA. Our leasing pipeline, including a lease signed after quarter end and 2 executed LOIs is expected to increase portfolio occupancy to 87%, increased occupancy at 9 Times Square by 5% and add $400,000 of annualized straight line rent. As mentioned, at 1140 Avenue of the Americas, we took over co-working space formally leased to work better and launched Innovate NYC, which opened this quarter. This was a great opportunity to diversify our strategy into a growing segment of the New York City real estate market with minimal initial investment and in-place agreements with tenants. Innovate NYC offers moving-ready private offices, virtual offices and meeting space with modern furnishings and all of the comforts of the full service office on bespoke terms to clients. Onsite staff and seamless technology ensure a turnkey experience. We are already seeing results from this initiative as the Innovate NYC space generated over $200,000 more in rental income this quarter than it did last quarter. We are actively seeking to sign leases with former tenants of Knotel and to lease up space that Knotel formerly occupied. Through the third quarter we have replaced more than half of the 71,200 square feet formerly occupied by Knotel with creditworthy rent paying tenants, some of whom were previously subtenants of Knotel. Including 1 lease signed after quarter end, 41,000 square feet has been leased or nearly 58% of the available space. These leases have a weighted average remaining lease term of 6 years and combined annualized straight line rent of almost $2.1 million. Along the same lines as the former work better and Knotel spaces, we finalized a surrender agreement with Universal Sports this quarter that included consideration for part of the past due rent and a return of the space to NYC. We are converting this former gym space into office space, which we believe will be better positioned for leasing. We have engaged CBRE to lease the space through their best relationship network with the goal of backfilling with a creditworthy tenant. And last week, we finalized the seamless transfer of management of our parking garages to a new operator, who was in fact the original operator of these garages. In connection with the transition to the new operator, we agreed to a $1.4 million termination fee payment from the former operator, which will be included in our fourth quarter results. We have continued to drive New York City REIT forward during the third quarter, negotiating leases with new and existing tenants, increasing occupancy at 9 Times Square and growing rent collection across the portfolio. We have replaced almost two-thirds of the former Knotel space at 123 William Street, which also was honored by our peers with a BOMA award. Launching our co-working initiative at 1140 Avenue of the Americas opens a new exciting chapter for NYC and diversifies our business. We believe that our New York City portfolio is well-positioned to deliver long-term value. I will turn it over to Chris Masterson to go over the third quarter results. Chris?

Thanks Mike. Third quarter 2021 revenue was $15.8 million compared to $15 million in the second quarter of 2021. The company’s third quarter GAAP net loss attributable to common stockholders was $11.1 million compared to a net loss of $11.1 million in the second quarter 2021. For the third quarter of 2021, our FFO attributable to common stockholders was a negative $2.9 million compared to negative $4 million last quarter. Core FFO was negative $0.7 million compared to negative $1.9 million in the second quarter or $0.06 per share compared to $0.16 per share last 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 until 2024 and prudent net leverage of 38.5%, which compares favorably to our peers. We ended the third quarter with net debt of $381.8 million at a weighted average effective interest rate of 4.4% and with a weighted average remaining debt term of nearly 5 years. With that, I will turn the call back to Mike for some closing remarks.

Thanks, Chris. I am proud of the success we have seen with our active asset management strategy over the last year. Despite headwinds in the market, we have negotiated and signed a dozen new leases and leased renewals this year, totaling over 86,000 square feet or 8% of our portfolio. These leases have a weighted average 6-year term and totaled $4.3 million of annualized straight line rent. In the cases where tenants couldn’t survive the pandemic, we found success re-leasing their high-quality former space to new tenants, where we have been creative in developing alternative solutions. Every week, we observed more evidence of New York City returning to pre-pandemic conditions, whether its foot traffic in Times Square, asking rents for apartments, the office demand index or the leasing interest we are seeing at our properties. We believe the hard work we have done over the last 1.5 years has created momentum that will accelerate alongside the pace of our favorite city as we finished 2021 and look forward to 2022 and beyond. With that, operator, please open the lines for questions.

Thank you. [Operator Instructions] We have our first question coming from the line of Bryan Maher with B. Riley Securities. Your line is open.

Hi, Bryan.

Good morning, Michael, Chris. I hope you guys are doing well. Listening to those comments that leads me to believe that New York City real estate is not for the fainted heart with all you have to do to keep everything leased up?

So, Bryan, I think the third quarter, we were able to post the successes of some hard work that was being done really necessitated by COVID. And we spent the end of 2020 and the beginning of 2021. Chris Chao did a fantastic job. We had a lot of help from the necessary groups within the organization. But to your point, it is not for the faint of heart, but we needed to find reasonable outcomes that were beneficial to the company and to the shareholders. And I am really pleased with what we were able to complete in the third quarter and the momentum we have going into the end of the year.

Yes and congrats on the successes so far. Well done. Couple of questions for me on the – well, first of all, I think that the Innovate NYC space and plan is pretty impressive. I was lucky enough to tour that back in September, there you have it. My question is, is there other properties where you could put that? And more specifically and in general, if you have a property that’s leased up pretty full at 90%, 95% occupancy, is there a way to kind of carve out space in a building that’s pretty well occupied to get some incremental money from Innovate NYC? And could you also do that over at 9 Times Square?

Yes. So first, the most important part of that is with Innovate NYC. We now have a platform. We have the technology. We can provide the services. We have the staffing, so that it is a viable option for us. I will turn it over to Chris in just a minute to get his thoughts. As the market comes back, I think we are going to see demand for both long-term direct leasing, but I also expect that we will see this type of commuter space coming back into favor. So, the – my answer to you is we will evaluate it on a building-by-building basis. We certainly – I don’t anticipate only going forward with more Innovate NYC space, but we love having the ability to do it, we have a very aggressive online presence as well, so that people know Innovate NYC is available. And I am really pleased with what Chris and the team have been able to create out of Innovate NYC. Chris, any thoughts you have?

Mike, I think that’s right. I think it certainly will evaluate when we look across our portfolio. I think at 1140 of Americas launching Innovate, certainly the right strategic decision and the existing build out of the two floors that we launched on made practical sense, given that they were office intensive. I think if you look at our portfolio as a whole, some of our other space really lends themselves to just direct leases. So, I think that’s the most likely path. But again, since we had launched this, we can certainly look at other situations that make sense.

Okay. And then moving on to the garage situation, can you give us a little more call on this? Did I hear you say correctly, that’s a new tenant is the original tenant and you expect them to stay in place without problems for a good while?

The answer to both of those questions is yes. Quick Park is a well established New York City parking garage operator. They contacted us early in this situation we had with ICON. And we needed to make sure that we did the transition in a way that didn’t give NYC any unnecessary legal exposure with ICON. We wanted to enforce our rights under the lease. We wanted to collect as much background as possible. And then again, Chris did a really terrific job of working very closely with Quick Park. They understood the situation. And the day that we were able to legally retrieve the space from ICON, the next day Quick Park was open with signage in place. They had communicated to the monthly garage customers. And frankly, Quick Park has extended the hours at the 67th Street parking garage, which makes the tenants very happy. ICON for some reason had very restrictive hours over the weekend, which for the building residents just was a terrible situation. So, we do believe that Quick Park will be a successful operator on a long-term basis.

Great. And then moving on to the Universal Sports, when all is said and done, what do you think is the net impact on the rents for having it be a gym versus now being an office? My suspicion is that maybe it’s a little bit more and you feel more comfortable about collecting the rents longer term with it being an office, but is there $1 change that you can discuss?

It’s not something that we can discuss right now, because we haven’t talked about it in any public filings. So, let us come back to you on that, Bryan, as we get a little bit further down. But yes, it’s a better use for the building frankly. And it makes the other tenants in the building much more comfortable. Nobody – I shouldn’t say nobody, but the overall concept of a gym use in an office building can give people some concern about noise and traffic in and out. So, we believe the Times Square sub-market will continue to be strong. And this is a desirable floor that we will look to put a long-term user in a more traditional use.

Okay. And then just last for me, is there any update on the Hit Factory, the plans to either release or sell that property?

Nothing that is at a point we can discuss. We have continued to be very active in the marketing, the disposition of the Hit Factory. Chris, any anything that you think we can share with Bryan right now?

Nothing right now, but we are working through with our team of brokers and engaged with various investors in the market who are interested in this product.

And there are there are some very active potential buyers. It’s not just one. And frankly, my goal is I would definitely like to have this resolved before the end of the year. It’s something that Chris and I focus on. It’s something that people inquire about. And it is an incredibly small part of the portfolio, but we still would like to have it resolved in a positive way.

Okay, maybe just one more, if I have a second here with what’s going on with the dynamics in the New York City real estate market. We know rents that have come back for people living there and young kids, including my son has moved into the market. But are you seeing any opportunities with office space, there continued to be dialogue as to how much exactly, people come back to the office, is there anything out there given your strong balance sheet that you might be able to take advantage of the situation?

As far as from an acquisition standpoint, Bryan or as far as the lease up?

No, acquisition,

Yes. The acquisition pipeline has really started to get more active, which is interesting. And we have seen some buildings trade at very high pre-COVID levels. We have also had seen smaller landlords that just don’t have the will to fight through this. What we see is the next opportunity in New York City real estate. So Chris, I think that we are going to have an active market in 2022, any thoughts that you have?

I think that’s right. We said since early fall, Bryan, we have seen a really a flurry of opportunities that have hit the market. We have also seen some opportunities that have been off-market. And so, we are really taking a close examination at all these opportunities throughout the city, primarily focusing on Manhattan. And I think this will continue in early 2022.

And maybe we can just get a refresher on the sweet spot of what you are looking for both as far as an asset goes and your portfolio has some different assets and maybe the dollar amount of an asset, maybe within some $25 million range?

So, we continue to really look in kind of $100 million to $400 million asset range Bryan. In the sub-markets that we see strong activity, we are looking for stable buildings, but buildings that have upside. So, we don’t want to have a complete reposition asset, but we want to have something that is going to be able to take advantage of what we think over the next couple of years is going to be the return of stabilized occupancy, possibly even growing rents as we see the economy rebounding further from COVID. So, very similar to the types of buildings that we have in the portfolio now as far as the 9 Times Square, 123 Williams 1140 Avenue of the Americas. So, somewhat boutique, if that’s an acceptable expression. Not by no means are we looking for trophy assets, I don’t think that they provide us with the type of upside and opportunity that we are looking for. And then I think as Chris continues to really build out this asset management platform for New York City REIT, we certainly have the ability to improve buildings where they need some improvement, whether that’s in the mechanical side of the building, maybe some lobby type work upgrades in buildings that just haven’t had that type of investment for a while. And then his relationships in the brokerage community continue to benefit us as we lease through these buildings.

Thank you.

Yes. Thanks, Bryan.

Thank you, I will now turn the call back over to Mike Weil for any closing comments.

Great. Thank you. Well, thank you all for joining us. As I have said to Bryan, we were quite encouraged by the success of the third quarter. We look forward to finishing out 2021 with the positive momentum. And frankly looking forward to a much more normalized year in 2022, so, we can continue executing on our plans and move forward with this portfolio. So, thank you all very much.

This concludes today’s conference call. Thank you for participating. You may now disconnect.