Earnings Call Transcript - NYC Q4 2021

Louisa Quarto, Executive Vice President

Thank you, operator. Good morning, everyone, and thank you for joining us for NYC's Fourth Quarter and Full Year 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 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 call are made only 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.

Michael Weil, CEO

Thanks, Louisa. Good morning, and thank you for joining us. Today, we'll discuss the strong return that NYC achieved for shareholders in 2021 and how our proactive asset and property management initiatives have helped us successfully navigate two years of pandemic impacts. Thankfully, it appears that New York has turned another corner as COVID positivity rates drop and vaccination rates soar. The statewide rollback of pandemic-related regulations and mandates paves the way for workers to return to offices in mass and for the vibrancy of New York City to return to normal. Because we've long been preparing for it, New York City REIT is well positioned to benefit as New Yorkers return to their offices and tourists return in significant numbers. For the period between the beginning of 2021 through March 1, 2022, we delivered an exceptional total return to shareholders of 55% based on stock price appreciation and dividends paid. This outperformed the S&P 500 by over 36% and a group of New York City focused peer REITs by over 31%. Through these unprecedented times, NYC has continued to outperform the market and our peers. Nonetheless, we believe that there remains significant potential for our pure-play New York City portfolio, which is marked by investment grade and government agency tenants and which has proven resilience over the last two years to create meaningful value for years to come. Over the last year, we recorded growing rent collection across our portfolio. In the fourth quarter, we collected 96% of the original cash rent due for the period, a 4% increase from 92% of the amount due in the third quarter and a 14% improvement from an amount due in the fourth quarter of 2020. In addition, we collected 100% of the deferred rent that was due in the third and fourth quarters of 2021, pursuant to approved agreements. Our annual report on Form 10-K will provide additional detail on cash collections. As the largest densest city in the country, the impact of COVID on New York City was perhaps deeper and longer lasting than anywhere else in the United States. In light of this, we remain pleased with the results of our proactive asset management and property management functions, which have maintained rent collection throughout the pandemic. Our asset management team remains engaged with our tenants working towards a complete recovery from pandemic-related challenges. We work closely with our tenants to reach agreements that allow them to continue their operations and remain at our buildings. Where no agreement was possible, such as the space formerly leased to Knotel, ICON Parking, and Quick Park, we rapidly signed new leases and licensing agreements to replace the prior tenants. Along these lines, last year, we launched a co-working office, Innovate NYC at 1140 Avenue of the Americas, in space that was already set up furnished and with some licensees in place from the previous co-working tenant. Last year, we also executed two leases which contain percentage rent clauses, tying a portion of rent from key retail tenants to sales that we expected to increase over time while their businesses began to rebound from pandemic lows. Since execution, both tenants have performed exceptionally well and, as a result, have nearly returned to original cash rent levels much sooner than expected. These leases are another example of how at every opportunity we've been responsive, creative and innovative in our approach to managing our portfolio. Specifically, we've signed leases with former tenants of Knotel and leased up much of the space at 9 Times Square and 123 William Street in the year since Knotel declared bankruptcy. Through March 1, 2022, we've replaced more than 69% of the 71,200 square feet formerly occupied by Knotel with creditworthy rent-paying tenants. These leases have a weighted average remaining lease term of seven years and combined annualized straight-line rent of almost $2.5 million or 64% of the previous Knotel rent. Recently, LHi executed a full five-year lease for additional space after previously signing a two-year license, not only extending but growing their occupancy. Our team has done an amazing job leasing and licensing the former Knotel space in only 13 months. The remaining high-quality turnkey space is being actively marketed, and we believe it will be very attractive to new tenants who are establishing or reestablishing physical office space as COVID abates. Last quarter, we finalized the seamless transfer of management of our parking garages to a new operator. In connection with the transition, we agreed to a $1.4 million termination fee payment from the former operator. The transfer of responsibility for these garages couldn't have been better executed, and we're happy to have a new partner running these properties. Our asset management team has also been very busy working on lease renewals, encouraging current tenants to execute renewals well before the lease expiration. For the full year of 2021, we executed 17 new leases for over 200,000 square feet that added approximately $7.4 million of annualized straight-line rent. In addition to new leases, we completed four lease renewals, including a five-year lease extension with an Aa2 credit rated tenant that increased annualized straight-line rent from the tenant by $300,000. We also have a forward-leasing pipeline of over 14,000 square feet that will increase occupancy to 84% if these leases commence. At year-end, our $852.7 million, 1.2 million square foot portfolio had occupancy of 82.9%, and a weighted average remaining lease term of 6.9 years. Of course, all the good work and progress we've made throughout our portfolio is done for the purpose of continuing to grow and improve our quarterly and annual results. I'm happy to report that our leasing and asset management initiatives have begun to reflect well in our numbers. I'll let Chris give more details. But quarter-over-quarter, revenue grew by 53%, adjusted EBITDA grew to $11.9 million from $4.1 million, and core FFO increased by over $7 million to $7.1 million. Comparing the fourth quarters of 2020 and 2021, revenue more than doubled and cash NOI increased by 74% to $7.1 million. Our balance sheet remains strong with net leverage of 40% and over 6 years of weighted average debt maturity. We remain highly confident in the 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. We've built a pure-play New York City portfolio that features a mix of large investment-grade tenants, including City National Bank, CVS, TD Bank and state government agencies. As of December 31, NYC's top 10 tenants were 72% investment-grade or implied investment-grade rated and have an average remaining lease term of 9.6 years, which we believe increases the quality and stability of earnings in our portfolio. We've continued to drive New York City REIT forward during the last year, negotiating leases with new and existing tenants and growing rent collection across the portfolio. With a 55% total return since the beginning of 2021 and through March 1, 2022, and the current trading price that we believe is a significant discount to our NAV, we believe that our New York City portfolio is well positioned for the investment community to realize substantial gains as the market starts to appreciate the value being built.

Christopher Masterson, CFO

Thanks, Mike. Revenue was $70.2 million for the year ended December 31, 2021. Revenue for the fourth quarter was $24.2 million compared to $9.9 million in the fourth quarter of 2020 and $15.8 million in the third quarter of 2021. Revenue for the fourth quarter and full year 2021 includes income from the accelerated amortization of the remaining unamortized balance of below-market lease liabilities of approximately $7.7 million and $7.9 million, respectively, which is recorded in Revenue from tenants in the consolidated statements of operations. Revenue for the fourth quarter and full year 2021 also includes $1.4 million and $1.5 million in termination fees, respectively. The company's full year GAAP net loss attributable to common stockholders was $39.5 million compared to a net loss of $41 million in 2020. Net loss for the quarter was $3.8 million compared to net losses of $16.6 million in the fourth quarter 2020 and $11.1 million in the prior quarter. Cash NOI for the fourth quarter was $7.1 million, a 74% increase compared to $4.1 million in the fourth quarter of 2020 and a 24% increase over last quarter. For the fourth quarter of 2021, our FFO attributable to common stockholders was $4.9 million compared to negative $8.9 million in the same quarter of 2020, a negative $2.9 million in the third quarter 2021. Core FFO was $7.1 million in the fourth quarter or $0.53 per share from negative $6.8 million or negative $0.53 per share in the fourth quarter 2020, and it increased from negative $0.7 million or negative $0.06 per share in the third quarter. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release, supplemental and Form 10-K. NYC maintains a conservative balance sheet with no debt maturity scheduled within the next three years and prudent net leverage at 40.1%. We ended the fourth quarter with net debt of $393.3 million at a weighted average effective interest rate of 4.4% and a weighted average remaining debt term of 5.1 years.

Michael Weil, CEO

Great. Thank you, Chris. We believe that our Manhattan-focused New York City portfolio is resilient and well positioned to deliver significant long-term value as COVID-19 continues to abate. Our independent directors, myself, and the adviser and its affiliates have each separately demonstrated the depth of our commitment to NYC's long-term value by increasing our NYC ownership. In total, as of March 1, NYC's independent Board members owned over 57,000 shares of NYC, and separately, our adviser and its affiliates owned over 1 million shares. This alignment of interest drives the proactive approach to asset management that we believe has helped us successfully navigate the last two years. In addition to owning a significant number of shares, we've been able to leverage the substantial resources of our adviser throughout COVID to re-lease vacant space, replace tenants, and increase rent collections by utilizing the asset management and property management expertise of the platform. Despite being a micro-cap company, we have access to resources that have allowed us to be proactive on these fronts. During this time, we've worked with our tenants and licensees to sign new leases and agreements, collect over 96% of the original cash rents due in the fourth quarter, and replaced tenants and operators who have surrendered their space. We believe there is significant upside potential, and we have positioned the company to benefit from a full post-COVID return to normalcy. With that, operator, please open the lines for questions.

Operator, Operator

Your first question today comes from Bryan Maher with B. Riley Securities.

Bryan Maher, Analyst

Maybe start with, Chris, on the amortization of below-market lease liabilities, can you give us some color on what triggered that? It certainly wasn't something we were expecting in our model.

Christopher Masterson, CFO

So that was actually due to the termination of the parking garage lease in the fourth quarter. So when that was terminated, we accelerated all of the amortization related to the below-market lease. And now we brought in the new operator who now, going forward, we're going to continue to have the rent from that operator.

Bryan Maher, Analyst

Okay. And then moving on to 123 William Street and 9 Times Square. It seems like during the quarter, occupancies had stayed pretty steady despite backfilling some of the Knotel space. Was there any notable vacancies there that we should be thinking about for our model?

Michael Weil, CEO

And Bryan, you mean upcoming vacancies? I just want to make sure I answer the question.

Bryan Maher, Analyst

Yes.

Michael Weil, CEO

No, I'm sorry, please continue.

Bryan Maher, Analyst

Yes. Just what's going on in those two properties as it relates to backfilling Knotel versus other existing tenants? Is there any movement there that would impact how we're thinking about occupancy as we kind of move through 2022?

Michael Weil, CEO

Yes, we look at net positive absorption at both of those buildings.

Bryan Maher, Analyst

Okay. And then Avenue of the Americas, what drove the occupancy dip there? And then maybe kind of a two-part question. When you look out to the full year of 2022, how should we think about occupancy maybe ending the year, give or take?

Michael Weil, CEO

We do not provide guidance, but we observe strong leasing activity in the New York City market for 2022, following a very active second half of 2021 where we secured several new tenants in our building. Consequently, we are seeing an increase in portfolio occupancy. The pipeline of near-execution deals represents about 1 percentage point of additional occupancy, though there are many more opportunities that we are not currently prepared to discuss publicly.

Bryan Maher, Analyst

Got it. But kind of longer term, when you look at the portfolio as it is now, and I think you talked about this to a degree on the Necessity Retail REIT. Do you have an idea in your head where 83%, 84% occupancy can go 2, 3, 5 years out with the recovery?

Michael Weil, CEO

Absolutely. We expect this portfolio to grow into around 95% to 96% occupancy over time. It consists of leasable second-generation spaces, most of which have been previously tenanted. This means we avoid the costs associated with raw build-out. Chris Chao, who leads our Asset Management Team, believes these properties are well positioned given their locations in the city and the quality of the tenant roster. We're seeing new tenants entering the market, and existing tenants are renewing and expanding their leases. We're optimistic about the return of corporate tenants to their offices, which is already evident in 2022, and we anticipate a positive trend in the spring. We expect to continue to attract users and grow occupancy.

Bryan Maher, Analyst

Great. And maybe just one last one for me. You've talked in the past to a degree about the acquisition outlook. What are you seeing? I mean you guys have a strong balance sheet. You can certainly be doing something out there. Are there deals that you're seeing that are catching your attention and do you think we might hear something in 2022?

Michael Weil, CEO

We would like to be growing the company, and we will continue to monitor the acquisition pipeline. We haven't seen anything that we felt was a positive addition to the portfolio. We've looked at a number of assets where it was kind of a distressed seller type of situation where the impact of COVID and the required capital that they were facing. So there will definitely be great opportunities in New York City for the types of assets that we look to acquire. We will continue to be Manhattan-focused, and I do look forward to identifying and talking about potential acquisitions.

Operator, Operator

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

Michael Weil, CEO

Great. Well, thank you all for joining us. As you heard from our presentation today, we really had a great 2021. The company is seeing very positive results. We continue to be focused on growth of occupancy, growth of earnings. And this is a really exciting time for the company. The outperformance that we have experienced in 2021 and coming into 2022 is something that we're very proud of, not only as we compare against the S&P, but as we also compare against our New York City peers, publicly traded REITs. And we will continue to execute, and we look forward to talking to everybody soon. So thank you very much.

Operator, Operator

This concludes today's conference call. Thank you for attending. You may now disconnect.