Earnings Call Transcript - NYC Q2 2023

Operator, Operator

Good morning, and welcome to the American Strategic Investment Company Second Quarter Earnings Call. All lines have been muted to avoid background noise. Following the speaker's remarks, there will be a question-and-answer session. I would now like to turn the conference over to Curtis Parker, Senior Vice President. Please go ahead.

Curtis Parker, Senior Vice President

Thank you. Good morning, everyone, and thank you for joining us for our second quarter 2023 earnings call. This event is being webcast in the Investor Relations section of our website. Joining me today on the call to discuss the quarter's results are Michael Weil, American Strategic Investment Company's Chief Executive Officer; and Chris Masterson, the 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, 2022, filed on March 16, 2023, in 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, the company 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.americanstrategicinvestment.com. 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.

Michael Weil, CEO

Thanks, Curtis. Good morning and thank you all for joining us today. The second quarter was extremely productive as our ongoing focus on leasing activity throughout our portfolio continued to produce positive results. We signed four new leases during the second quarter that totaled over 26,000 square feet that will generate $1.5 million of straight-line rent. As a result, we grew in-place occupancy to 85.1% from 84% at the end of the prior quarter, a 110 basis point increase in just three months. Our portfolio weighted average remaining lease term was 6.8 years as over 40% of our leases extend beyond the year 2030, which we believe increases the stability of the real estate we own. Our top 10 tenants, 79%, are what we consider to be investment grade, showing the quality of our tenant roster. These tenants had a remaining lease term of 9.1 years, providing further stability in our portfolio. We executed two leases during the second quarter that I'd like to highlight because we believe they illustrate the strength of our leasing platform. The first is a lease expansion with an existing tenant at 9 Times Square. The expansion doubled this tenant's occupancy in the building to over 17,500 feet. Accordingly, we doubled the annual straight-line rent from this tenant by $500,000 to $1 million. There are six years of lease term on the expansion, which matches the expiration date of the original lease. Second, at 8713 Fifth Avenue in Brooklyn, we executed a 10-year lease renewal with one of the largest healthcare systems in the Northeast. From a financial standpoint, this transaction maintained the current annual straight-line rent and required no leasing commission. We'll maintain our proactive leasing approach as our portfolio management expertise and strong tenant relationships have led to increased occupancy for two quarters in a row and our highest occupancy rate since the fourth quarter of 2020. Our asset management approach contributes to the long-term strength of our $834 million, 1.2 million square foot portfolio of New York City real estate. Our portfolio consists of eight office and retail condominiums all located in New York City, primarily in Manhattan. We've built a pure-play New York City portfolio featuring a number of large investment-grade tenants, including Weill Cornell Medical, CVS and Government Agencies. Across our portfolio, 37% of our tenant base operates in resilient industries, including government agencies and financial firms. Touching on the quarterly results, the efforts of our asset and property management teams resulted in adjusted EBITDA more than doubling and cash NOI growth of 7.7% compared to the prior year. The increases were achieved through a reduction in G&A and operating expenses, coupled with our ongoing leasing success. Compared to the first quarter, adjusted EBITDA grew by almost 47% and core FFO increased by $0.54 per share. On the balance sheet, our debt was 100% fixed rate, including debt that is swapped to fixed rate with an attractive weighted average effective interest rate of 4.4% and a weighted average maturity of 3.7 years. Our financing is very attractive in the current lending environment and we're pleased that we have no maturities this year and limited maturities through 2025, insulating us from the refinancing risk that other New York City building owners have been experiencing. Our net leverage was a modest 41%. We're committed to strengthening our existing portfolio of real estate assets as we explore additional income-generating investments. In recent years, we've taken advantage of opportunities to invest in the long-term future of our portfolio, and we believe that expanding the scope of our assets is the next step forward for the company. With that, I'll turn it over to Chris Masterson to go over the second quarter results. Chris?

Christopher Masterson, CFO

Thanks, Mike. In the second quarter of 2023, revenue was $15.8 million, down from $16.2 million in the same period last year, but slightly up from $15.5 million in the first quarter of 2023 as newly started leases began generating rental income. The GAAP net loss for the second quarter attributable to shareholders was $10.9 million, an improvement from a net loss of $13 million in the second quarter of 2022. Cash net operating income rose by $0.6 million or 7.7% to $7.5 million from $6.9 million in the same quarter last year. Our funds from operations attributable to common stockholders amounted to a negative $4 million, while core funds from operations improved to negative $1.7 million or negative $0.74 per share. A reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release and quarterly supplemental documents available on our website. At the end of the quarter, we maintained a conservative balance sheet, reporting a net leverage of 41% and a weighted average interest rate of 4.4%, with nearly four years of weighted average debt maturity. We have limited debt maturities until 2025, with none due this year. As previously mentioned, all our debt is fixed rate or has been swapped to fixed rate after we secured interest rates at historically low levels. I'll hand the call back to Mike for some closing remarks.

Michael Weil, CEO

Thanks, Chris. We executed on our leasing pipeline last quarter, driving occupancy up 1.1% to 85.1% and adding $1.5 million in annualized straight-line rent. Our new leasing and lower operating expenses resulted in quarter-over-quarter growth in adjusted EBITDA and cash NOI. We believe the long-term lease extensions and expansions we signed this quarter signal our tenants' commitments to the properties we own in New York City, and we remain focused on maximizing the value of these properties through our continued proactive asset management strategy. In May, we announced that upon the completion of a proposed merger between Global Net Lease and the necessity retail REIT, Chris and I would resign our positions as CFO and CEO of ASIC. As such, this may be the last time that Chris and I get to discuss the company's results with you. We'd like to thank you for your insight, support and ownership of ASIC over the years, and we take great comfort leaving the company in the hands of Michael Anderson and Joe Marnikovic, who we've recommended to the Board for the positions of CEO and CFO, respectively. Michael and Joe have both been long-time employees of our adviser, AR Global. Michael started with us in 2013 and has risen to become AR Global's General Counsel. Joe joined us in 2017 and currently serves as AR Global's CFO. I believe I speak for Michael, Joe and the Board when I say that we're excited about the opportunities ahead of us. Thank you for joining us today. Operator, please open the line for questions.

Operator, Operator

Thank you. Your first question comes from Bryan Maher of B. Riley Securities. Your line is open.

Bryan Maher, Analyst

Thank you and good morning. And I guess we're going to miss these calls with you, Michael, on NYC.

Michael Weil, CEO

Well, Bryan, it's been a pleasure, and we always appreciate your participation. So thank you.

Bryan Maher, Analyst

Okay. Moving on to a couple of questions I had this morning. Given the stress that's going on with WeWork, is there anything there that can, in your view, kind of help or hurt NYC, I know that you have a modest shared working platform? But any thoughts on whether or not people might abandon WeWork and maybe take up some of your space where you have vacancy at 1140 or at 9 Times Square?

Michael Weil, CEO

Yes. I think that, that is a possibility that not only are we thinking about, but I think all New York landlords are thinking about. WeWork is a bit of a phenomenon in my eyes and always has been. WeWork built themselves as something new and different, and they tried to convince everybody that they were some kind of technology company when really they were a traditional real estate short-term leasing platform, like we've seen Regis operate for decades. So the name WeWork, I think, means more than what their business really ever was. And we will continue to see short-term need for space and these types of platforms, whether it's what we operate in our building at 1140 Avenue of the Americas or throughout New York and the rest of the country will continue to have demand and provide space for people.

Bryan Maher, Analyst

Okay. And then as it relates to the changes in the New York City office dynamics with return to office mandates, et cetera. Are you seeing anything as a result of that as it relates to office cap rates or transaction activity?

Michael Weil, CEO

No, not yet. I think that we are going through the tunnel right now, not us as a company, but New York as a market. I think a number of landlords are facing debt maturities and we're starting to hear the rumblings of either forced sales or defaults with lenders. And it reminds me back to 2009; I think the banks' position in a number of cases, especially for assets that are performing fairly well, is we'll go back to the kind of delay the outcome. I don't think the banks are going to be very aggressive in foreclosing on properties. Now, I relate it back to ASIC. And as Chris mentioned in his comments, our greatest benefit is we have about four years of average remaining debt maturity, and we have fixed-rate debt. So we're well positioned. You saw this quarter that we were really able to start putting some new tenants in expanding and extending some existing tenants, Chris Chao and the asset management team are active in the market. And frankly, we all know summertime in New York is probably the toughest period of the year outside of the Christmas and New Year holidays to really drive leasing. So we were really happy to increase occupancy over a full point in the quarter and looking forward to continuing that in the next two quarters.

Bryan Maher, Analyst

Maybe following on from that a little bit. Where are you thinking that ASIC is going to see opportunities? I know you expanded the picture as to what you would acquire and where you would acquire it. But as you look at the landscape now, is that more parking, is it more hospitality, is the next thing the company owns outside of New York? Can you give us any color there?

Michael Weil, CEO

I can't give you a lot of color right now because we haven't announced anything and nor have we made any decisions. But we continue to look at some interesting opportunities in the operating business side. And as we continue to grow occupancy and increase NOI, we'll continue to position the company to be able to make those types of investment decisions. They very well may be outside of New York City as I think that will diversify the portfolio. We have the strong foundation of the properties that we own and the performance continues to kick up and improve, so stay tuned. I think that's something that Michael and Joe are going to be able to really drive; that is one of Joe's core background experiences in the operating business side as well. And Michael, as you know, has been with the company for over 10 years and has been very involved in more than just the general counsel seat. So their experience is going to be a smooth transition from Chris and me, and they will continue to evaluate those opportunities.

Bryan Maher, Analyst

Okay. Thanks. And just last for me, and I don't know if Ori or Chris Chao on the line, but with your leasing pipeline that you're seeing out there, can you give us any color as to where you think occupancy might gravitate towards over the next two to four quarters?

Michael Weil, CEO

I’d like to address that. Although you asked Chris Chao, who is on the line, we haven't provided guidance yet, so I prefer not to put him in a position where he might reveal something inappropriate for this call. However, you've likely noticed a consistent increase in occupancy over the last few quarters. It will be a gradual but steady return to pre-COVID levels. Among our main properties, 123 William Street is currently maintaining a very high occupancy rate. Our focus in asset management is on 1140 Avenue of the Americas and 9 Times Square, where we have invested significant effort, with Chris leading the brokerage teams there. We are observing an uptick in tours and activity, and I believe September will be a key month for fostering that engagement. We are confident that, in time, this portfolio will reach above 90% occupancy.

Bryan Maher, Analyst

Great. That's all for me, and good luck with the new merged RTL and G&L.

Michael Weil, CEO

Thank you, Bryan.

Operator, Operator

There are no further questions at this time. I would now like to turn the call back over to the management team for closing remarks.

Michael Weil, CEO

All right. Well, again, Chris and I wanted to thank everybody, as we said in our comments. We are very excited for the transition to Michael and Joe. We've got a great team embedded in the ASIC platform, and we'll continue to drive through and back to our pre-COVID levels as well as bringing some pretty exciting opportunities to the company and shareholders. So thank you all again for your time. And Michael and Joe, we wish you the best of luck, and we're excited to see what the direction that you take the company in. Thank you, everybody.

Operator, Operator

This concludes today's conference call. You may now disconnect.