American Strategic Investment Co. (NYC) Q2 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the New York City REIT Second Quarter Earnings Call. All lines have been placed on you to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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 second quarter 2022 earnings call. This event is being webcast in the Investor Relations section of NYC's website. Joining me today on the call to discuss the quarter's results are Michael 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, 2021, filed on March 18, 2022, 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 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 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, which is posted on our website at www.newyorkcityreit.com. Please also refer to our earnings release for a more detailed information about what we consider to be implied investment-grade tenant, 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 all for joining us today. The second quarter was very positive for us, especially with respect to leasing. We executed three long-term renewals, including leases with the GSA at 123 William Street and for the operation of two parking garages that we own encompassing over 120,000 square feet. On the strength of new leases signed during the quarter, our portfolio occupancy continued to grow to 85%, up 20 basis points from the first quarter. Our top 10 tenants are 71% investment grade, showing the quality of our tenant roster. We also extended our weighted average remaining lease term to 7.1 years from 6.8 years at the end of the first quarter and from 6.7 years in the same quarter last year. These gains illustrate the benefits of our proactive asset and property management strategy, the significant relationships we've built with tenants and brokers over the years and the hard work of our dedicated management team. We also believe this reflects well on the high quality of our assets under long-range demand for New York City real estate, where nearly 40% of our leases extend beyond the year 2030. The impact of our management initiatives is reflected in our second quarter results, as we grew revenue by 8.4% and cash NOI by 16.5% to $7 million compared to the same quarter last year. Based on our fundamental belief in the necessity of New York City office and retail space, we remain highly confident in the long-term strength of our $854 million, 1.2 million square foot portfolio of New York City real estate. Our portfolio consists of eight office and retail condominium assets located entirely in New York City and primarily in Manhattan. We built a 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 June 30, NYC's top 10 tenants were 71% investment grade or implied investment grade rated and had an average remaining lease term of 9.6 years. Across our portfolio, 42% of our entire tenant base operates in industries with the lowest unemployment rates, including government agencies and financial firms. We built a robust leasing pipeline of 23,400 square feet that is expected to increase occupancy by an additional 2% and straight line rent by $1.2 million once all of the leases go into effect. As we've discussed in previous quarters, we've continued to be successful in leasing up space at 9 Times Square and 123 William Street that was formerly leased in hotel. As of June 30, we've replaced more than 82% of their former space with creditworthy rent paying tenants, including replacing all of the space at 9 Times Square. The remaining high-quality turnkey space at 123 William Street is being actively marketed, and we believe it will be very attractive to new tenants. In the second quarter, we once again collected nearly all of the original cash trend due across the portfolio. Year-over-year, our total portfolio cash rent collection improved from 91% to 98%, and we collected all of the cash rent from our top 10 tenants in the second quarter. We believe the rent collection success we have achieved is due in part to the work our team has done with our existing tenants to ensure that rent payments are made and to replace prior tenants with new rent-paying tenants where necessary. We expect to continue to benefit from our recent leasing momentum and the positive rebound in the New York City rental market. The leasing success we achieved this quarter and the pipeline of leasing activity that we built will continue to drive NYC forward. As the rest of this year progresses, we expect to see office and retail traffic increase in Manhattan, as pandemic-related restrictions and policies have been removed. Our portfolio is well positioned to capitalize on this progress. We have a conservative well-positioned balance sheet with net leverage of 40.1% and 4.7 years of weighted average debt maturity. We don't have any debt maturities this year or next and minimal maturities until 2027. All of our debt is fixed rate. As we've previously discussed, we locked in interest rates while they were broadly at historic lows, a strategy that has been validated as interest rates are rising. Our conservative balance sheet is well positioned for NYC to continue to pursue our Manhattan focused strategy. We believe that there's significant potential for our pure-play NYC portfolio to create meaningful value for years to come. To that point, we believe NYC's independent Board members, adviser and its affiliates remain well aligned with shareholders as they continue growing their significant collective holdings of NYC. As of August 1, NYC's independent Board members owned over 80,000 shares of NYC and separately, NYC adviser [ph] and affiliates owned approximately 1.9 million shares of NYC. As we move ahead, it's our intent to continue to build value for all stakeholders. With that, I'll turn it over to Chris Masterson to go over the second quarter results. Chris?

Thanks, Mike. Second quarter 2022 revenue was $16.2 million, up from $15 million in the second quarter of 2021. The Company's second quarter GAAP net loss attributable to common stockholders was $11.3 million compared to a net loss of $11.1 million in the second quarter of 2021. For the second quarter of 2022, our FFO attributable to common stockholders was a negative $4.2 million compared to negative $4 million in the second quarter of 2021. Core FFO was negative $1.5 million compared to negative $1.9 million in the second quarter of 2021 or negative $0.11 per share compared to negative $0.15 per share last year. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release and quarterly supplemental. As Mike discussed, NYC also maintains a conservative balance sheet with no debt maturities until 2024 and net leverage at 40.1%. We ended the second quarter with net debt of $391.4 million at a weighted average effective interest rate of 4.4% and with a weighted average remaining debt [ph] term of nearly 5 years. Subsequent to quarter end, we announced that in order to potentially help fund upfront tenant acquisition and retention costs, such as leasing commissions and tenant improvements which must be paid months before rent commences in some circumstances. Our Board of Directors suspended NYC dividend This determination allows us to maintain the leasing momentum we have built that has grown our occupancy and extended the weighted average remaining lease term of our portfolio. The Board will continue to evaluate dividend policy on a quarterly basis. I'll turn the call back to Mike for some closing remarks.

Thanks, Chris. We anticipate that our active asset management strategy will continue to enhance our pure-play New York City portfolio. We achieved considerable leasing success in the second quarter, and we believe that there remain significant growth opportunities through the combination of our diligent management and the continued return to a pre-pandemic wave life in New York City. With year-over-year growth in revenue and cash NOI and conservative fixed rate debt, we are well positioned to continue the momentum we've been building through the rest of this year and beyond. We believe that the market will appreciate and value the careful construction, increased leasing and strong management of our portfolio. With that, operator, please open the lines for questions.

Good morning, Michael and Chris. A couple of questions from me this morning. G&A came in a little bit hotter than we had been modeling. Do anything unusual happen there in the quarter? And maybe what might be a good run rate for that in [ph]

Sure. So the key driver here is the proxy. Approximately $600,000 of the increase was directly due to the contested portion of the proxy. And then there was some additional standard proxy costs in there. We also had some true-up expenses related to the 10-K filing for legal and audit, which came in during the quarter. So I would say if you take a look at run rate, used previous quarters as opposed to this quarter.

Okay. Thanks. And then I think you guys said on the call, that the current leasing pipeline could get occupancy up another 2%. So kind of approaching 87 million. Michael, where are you thinking, a, kind of on a timing standpoint that shakes out and then potential upside from there to the extent you comment…

So the 87% is active pipeline that we anticipate within this current quarter and maybe into the beginning of next quarter just to execute on that pipeline. T is well underway and other than just some delays from summertime pace. We look forward to that commencing very quickly. As far as the overall portfolio, and Chris Chao is on with us again today, Chris continues see strong activity in the market, a number of not only new tours for space, but we are engaged in some conversations that involve extensions and expansions. So the tenants in place currently are occupying their space, some are thinking of expanding their space. We're working with them and doing that. So I believe that as we see the next - I always like to think in terms of kind of four to six quarters out because beyond that, it just gets a little too far. But I think in the next call it, four quarters, we should definitely be in the low to mid 90s on occupancy, 92%, .93% with what we're seeing in today's market.

That's helpful. And then can you elaborate a little bit on the parking garage leases that you executed during the quarter. Is there anything material going on there? Or kind of an extension of what we've seen…

Exactly. Yeah. So it's an extension of what we've talked about in the past, Bryan. We had an operator that through COVID, although they're – the business of operating the parking garage continue to be solid. They no longer were a performing tenant in the portfolio. We took aggressive legal actions, executing within all of our rights to replace them with another very qualified New York City parking operator. And just as the timing of all these things occurred, the first step in replacing them, we executed short-term, month-to-month lease, just as I said, it was necessary as part of this process. But all along, Chris, who did an amazing job of identifying the replacement tenants, getting them in place, it was within the second quarter that we were able to execute the long-term lease, and it was always anticipated to be a 15-year term.

Okay. And I promise not to ask about the hit factory. But can you - can you talk a little bit about the Brooklyn asset. We were thinking in our model that, that would have been leased up by now. It doesn't appear to be the case is there any update there?

Yes. Chris, will you give Bryan the walk-through on the Brooklyn asset because we are in good shape there.

Sure. Good morning, Bryan. The Brooklyn asset is 100% leased. We executed at least for the -- both the ground floor and the basement with a preschool. We are nearing completion of building out the space with delivery expected over the next months. So that lease will commence shortly. But otherwise, the building is 100% leased.

Okay. And then just last for me, Michael, can you give us any update on what you're seeing as far as availability and pricing goes for any acquisition that might fit into your strategy?

The market has been pretty slow, Bryan, on acquisitions, but I don't think that, that is unusual as New York City really does – have take a rate in July and August historically. We continue to focus on that same type of building that you've seen us execute on before buildings like 9 Times Square, 1140 Avenue of the Americas, where we're looking for the buildings that are a little under the radar. They're typically in the $50 million to $300 million range there, in many cases, individually or family owned a little smaller than where the pension funds or sovereign funds like to invest. And they're buildings that with our asset management platform, Chris can really dig in and do a great job with the existing tenants or we do want to find buildings that are predominantly occupied but remains with some upside through new leasing or replacement of some existing tenants So I think that we will continue to see the opportunity, and that will probably come as we pass through Labor Day and into the remainder of the year. And I will tell you, on the hit factory, we continue to have activity. And Chris and I are at this point overly focused on it, not because, but just an asset that - the best use in the portfolio is to dispose of it. And I'm anticipating that we have a buyer group that is prepared to move forward

Perfect. Thank you., Michael.

Thanks, Bryan.

There are no further questions at this time. Mr. Weil, I turn the call back over to you.

All right. Well, thank you. And as always, thanks for taking the time to join us today. We continue to see the New York City market recovery. We continue to see New York City REIT increasing occupancy. And the benefit of that, of course, is the steady increase in portfolio NOI. And as you've seen over time, the independent Board of Directors, as well as the management and the company continue to believe in the company with approximately 15% ownership of the outstanding shares because we do see the continued recovery of the New York City marketplace post COVID. And as we come through the Labor Day holiday, we are really anticipating and looking forward to return to normal for the city. So thanks, everybody, and we'll talk soon.

This concludes today's conference call.