American Strategic Investment Co. (NYC) Q3 2022 Earnings Report, Transcript and Summary

Good morning. Welcome to the New York City REIT Third Quarter Earnings Call. At this time all participants are in listen-only mode. After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions]. And I'd like to turn the conference over to Curtis Parker, Senior Vice President. Please go ahead.

Thank you. Good morning, everyone. And thank you for joining us for NYCs third 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 in all subsequent PC 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, which is posted on our website at www.newyorkcityreit.com. Please also refer to our earnings release for more 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, Curtis. Good morning. And thank you all for joining us today. The third quarter was very positive for us, especially with respect to leasing. During the quarter we commenced five new leases across almost 49,000 square feet, with a weighted average remaining lease term of 6.3 years. During the first nine months of 2022, we signed seven new leases that increased portfolio occupancy by 160 basis points, including a 790 basis points increase at 9 Times Square. Compared to last quarter, our portfolio occupancy held steady at 85% with a weighted average remaining lease term of 7.3 years. These gains illustrate the benefits of our proactive asset and property management strategy, the significant relationships we 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 and the long-range demand for New York City Real Estate, where nearly 40% of our leases extend beyond the year 2030. Of our top 10 tenants 79% are investment grade, an increase of 8% from last quarter, showing the quality of our tenant roster. These tenants have a remaining lease term of 9.9 years providing long term stability in our portfolio. 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 $851 million, 1.2 million square foot portfolio of New York City Real Estate. Our portfolio consists of eight office and retail condominium assets located entirely in New York City and primarily in Manhattan. We built a pure play in New York City portfolio, featuring a number of large investment grade tenants including City National Bank, CVS, TD Bank, and government agencies. Across our portfolio 39% of our tenant base operates in industries with the lowest unemployment rates, including government agencies and financial firms. The Manhattan market continues to show progress on the leasing front, where all but one of our properties is located. According to Avison Young's third quarter Manhattan Office Market Report, new leasing activity has outpaced last year's total, while office usage across various sectors continues to increase as companies continue to adopt mandatory in office policies. Ridership across MTA subways and buses have increased by 33$ and 37%, respectively, from their pre-pandemic level, and weekly occupancy rates from buildings tracked by Kastle Systems reached 44% in October, a post-pandemic high. In our portfolio, physical occupancy was approximately 49% in the month of October. All of these factors support our view that the outlook for Manhattan real estate is very strong, and that the asset management efforts we continue to expand will create long term value. As we head into the holiday season, we expect to see office and retail traffic increase in Manhattan. Our portfolio is well positioned to capitalize on this progress. Our leasing pipeline is expected to increase occupancy by an additional 0.5% and straight line rent by $0.3 million once the lease is going into effect. As we have discussed in previous quarters, we've continued to be successful and leasing up spaces at 9 Times Square, where occupancy improved by 3% over last quarter, and is increased by 8% year-to-date. In the third quarter, we once again collected nearly all of the original cash rent due across the portfolio. Year-over-year total portfolio original cash rent collection improved from 92% to 99%. And we collected all of the original cash rent from our top 10 tenants in the third quarter. We believe the rent collection success we've achieved is due in part to the credit worthiness of our tenants and the work our team has done to ensure that rent payments are made and to replace prior tenants with new rent paying tenants were necessary. We expect to continue to benefit from our recent leasing momentum and the positive rebound in the New York City rental market. We think we have a conservative balance sheet based on the fact that our net leverage was 40.3% and had a weighted average interest rate of 4.4% with 4.4 years of weighted average debt maturity. In fact, we don't have any debt maturities this year or next, and minimal maturities until 2026. 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. We believe that there's significant potential for our pure play New York City portfolio to create meaningful value for years to come. To that point, we believe NYC's independent board members advisor and its affiliates remained well aligned with shareholders as they continue growing their significant collective holdings of NYC. As of November 1, NYC's independent board members owned over 80,000 shares of NYC and separately, New York City's advisor and affiliates owned approximately 3 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 third quarter results. Chris?

Thanks, Mike. Third quarter 2022 revenue was $15.9 million, up from $15.8 million in the third 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 third quarter of 2021. Cash net operating income increased by $463,000 to $6.2 million from $5.7 million in the prior year third quarter. For the third quarter of 2022, our FFO attributable to common stockholders, was a negative $4.1 million. Core FFO was negative $1.9 million, or negative $0.14 per share. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release and quarterly supplemental. Yesterday, we restated our second quarter 10-Quarter to include certain expenses that were primarily related to our 2022 contested proxy. This changed our second quarter 2022 core FFO from negative $0.11 per share the negative $0.12 per share. As Mike discussed, NYC has no debt maturities until 2024 and net leverage at 40.3%. We ended the third quarter with net debt of $392.1 million at a weighted average effective interest rate of 4.4%, with a weighted average remaining debt term of over four years. I'll turn the call back to Mike for some closing remarks.

Thanks, Chris. As we close out this year, we're maintaining our focus on asset management, leasing up available space and negotiating lease renewals and extensions with our existing tenants. This strategy will continue to enhance our pureplay New York City portfolio which has seen growth in both occupancy and weighted average remaining lease term thus far in 2022. We think that significant growth opportunities remained to grow occupancy and revenue is a combination of our diligent management and the continuing momentum in the Manhattan market that points to a return to offices and strong leasing activity. 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.

Thank you. [Operator Instructions] The first question is from Bryan Maher with B. Riley Securities. Your line is open.

Great. Michael and Chris, just a couple for me this morning. When thinking about the third quarter numbers, the revenue came in line pretty much with our expectations, occupancy was a little on the light side relative to our model. Kind of what's going on with occupancy, kind of the puts and takes, any vacancies offsetting new leasing activity? Can you give us a little more color there?

Yeah, so, you know, we have continued to improve the occupancy at 9 Times Square and 1140 Avenue of the Americas. Third quarter, it was positive absorption, but it was a little bit slower than what we had been seeing in previous quarters. So that is a continued focus, and probably the area that will have the most positive impact on the portfolio in upcoming quarters. We're really encouraged by what we're seeing in the activity in the general Manhattan office market. And Chris Chao, and his team continue to really position the two assets. Again, these are second generation leasing opportunities. So most of the work has been done. And we're encouraged by the statistics that show people are returning to office. It is slow and steady, but steady. And we're starting to approach the kind of 43% back to office. So we'll continue to see this as a benefit. And a lot of opportunities, Chris is talking to a number of potential occupants of the buildings. And we also have the one asset in the Brooklyn submarket that has some vacancy, that we expect one of the two major tenants in that building to take in the near future. So again, it is the daily grind of New York City office leasing. But the work that Chris continues to do, the brokers that he has working in each of the buildings are really going to be the difference maker in filling those buildings.

Okay. And then when we think about occupancy in this portfolio, long term, three-four-five years out after we've seen decent New York City recovery and work in office. You've been pretty spot on when you given us your occupancy projections for RTL. Can you tell us where you think that the portfolio as it is now can ultimately get to?

Yeah, and again, I always have to frame it, Bryan in that. We're active in the market. And we're encouraged by the return to work of the of the post-COVID impact. This portfolio today, or at the end of the third quarter sat at 85% occupancy. It's got a very long weighted average lease term for an office portfolio. So the foundation is incredibly stable. And the work that we're going to continue to do on the asset management side that leads to the lease up is like, like good office portfolios. I expect us to be in the mid-90s over the next, I would give -- I would say three to four quarters. We're seeing the market holding up on a rent basis. So where we've underwritten historically, these types of buildings which are very boutique focused, they're important buildings in the New York City office environment. They -- the floor plates are typically in the 10,000 to 15,000 square foot range. So it's very manageable for strong, but smaller tenants. And they need good office space to make home base. So, again, really excited to see the results of the effort that Chris and his team have been putting forward, coming out of COVID, which we're all very happy to have that behind us. And we'll catch a little tailwind and push this occupancy into the mid-90s.

Great. And just last for me, when you think about the portfolio, and potential either capital recycling opportunities or acquisitions in the future. Do you envision getting to a place where you've kind of got a property to maximum occupancy relative to your expectations with kind of longer lease terms? Do you envision a place where you might sell that asset and recycle the proceeds into something where you think you can drive the value of that asset higher? And over what type of timeframe, do you think something like that would happen?

Yeah, well, I just have to be a little bit -- well, let me tell you how we think about it. First of all, we're always looking at how do we drive long term shareholder value. And it's really going to depend on a number of factors, including the overall health of the market in New York City. If you have a great asset and the markets a little tepid, you're better off driving the earnings, or the NOI from that property for a period of time. So long term, we will continue to look at strategic opportunities. Short term, the most valuable thing that we can continue to do is drive occupancy, drive rental income, and really maximize these assets. So as we talk about this 95%, or mid-90 occupancy range that's really where our focus is. We have a couple of smaller assets that you and I have talked about in the past that are certainly open for strategic disposition possibility. And we'll continue to drive down that path as we look at all of the ways to unlock value in this portfolio.

Okay, I won't ask you about that asset again. So thanks for your answers.

Okay. Thanks, Brian.

There are no further questions. I'll turn it over to Michael Weil for any closing remarks.

All right. Well, again, thank you all for joining us this morning. We were pleased to present the third quarter results. And really the communicate the focus on long term value creation, occupancy, et cetera. New York is in a very strong healthy place. I've been spending more and more time there. And it's great to see the foot traffic, the office traffic, the data supported by the public transport numbers, et cetera. So New York City, as we've always expected, continues to be the resilient epicenter of the financial world. And you will continue to see the results match that effort by everybody. So thank you all. We'll talk to you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.