Earnings Call Transcript - NYC Q1 2023

Operator, Operator

Good morning, and welcome to the American Strategic Investment Company's First Quarter 2023 Earnings Call. After the speakers' 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 first 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 Co.'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 31st, 2022, and filed on March 16th, 2023, 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 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. We continue to focus on leasing activity during the first quarter, while completing our changing corporate structure and the rights offering to existing shareholders. As we discussed previously, the company is expanding the scope of the assets and businesses we may own and operate, diversifying our revenue streams, and opening up opportunities that extend beyond owning just real estate in the five boroughs of New York City. We believe diversifying our portfolio will create an exciting opportunity to drive growth and add benefit beyond what traditional New York real estate can deliver. By expanding the nature and type of assets we can acquire and own, over time, we'll reduce our exposure to a single asset class. We are also now a C corporation and no longer a real estate investment trust from a tax perspective. Accordingly, we have begun transitioning our reporting to focus on earnings per share, but we'll continue reporting FFO metrics as well during this change to provide clarity when comparing to prior periods. Expanding our investment strategy is an exciting step for American Strategic Investment Co., and we're looking forward to pursuing additional income-generating opportunities down the road. In our existing portfolio, during the first quarter, we completed five new leases, totaling almost 20,000 square feet, that will add an additional $1.1 million of straight-line rent. Occupancy in the portfolio increased to 84% from 82.7% at the end of the fourth quarter, with these leases in place. Our portfolio weighted average remaining lease term is seven years, which we believe reflects the high quality of our assets and the long-range demand for New York City real estate, where over 40% of our leases extend beyond the year 2030. Of our top 10 tenants, nearly 80% are what we consider to be investment grade, showing the quality of our tenant roster. These tenants have a remaining lease term of 9.4 years, providing long-term stability in our portfolio. We have built a leasing pipeline that is expected to increase occupancy by an additional 1.3%, bringing our occupancy up to 85.3%. This will also increase straight-line rent by $500,000 once the lease term starts at 123 William Street and at 87-13 Fifth Avenue, which will begin on June 1, 2023. We're also actively marketing the space we have available, particularly at 9 Times Square and 1140 Avenue of the Americas, a leasing opportunity that totals 130,000 square feet. 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 $843 million, 1.2 million square foot portfolio of New York City real estate. Our portfolio consists of eight office and retail condominiums located entirely in New York City and primarily in Manhattan. We've built a pure-play New York City portfolio, featuring a number of large investment-grade tenants including Weill Cornell Medicine, CBS, 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 activities of our asset and property management teams resulted in 22% growth of cash NOI compared to the first quarter in 2022 and through controlling costs and lowering G&A and operating expenses. G&A expenses are subject to an annual cap. As a result, first quarter G&A expenses increased compared to the fourth quarter of 2022 and as this annual cap was reached part of the way through the quarter, limiting the cost to the company. Combined with our fixed-rate debt and prudent net leverage, we believe that our existing assets and management of these assets provides a strong foundation for our expanded strategy. We are entering into an exciting period for American Strategic Investment Co. as we continue to strengthen our existing portfolio of real estate assets while exploring additional income-generating investments. Over the last few years, we've taken advantage of opportunities to invest in the long-term future of our portfolio and expanding the scope of the assets we own is the next step forward for the company. With that, I'll turn it over to Chris Masterson to go over the first quarter results. Chris?

Chris Masterson, CFO

Thanks Mike. First quarter 2023 revenue was $15.5 million, compared to $15.6 million in the first quarter of 2022. The company's first quarter GAAP net loss attributable to common stockholders was $11.8 million compared to a net loss of $11.7 million in the first quarter of 2022. For the first quarter of 2023, adjusted EBITDA was $2 million compared to $2.1 million in 2022. Cash net operating income increased by $1.3 million or 21.9% to $7 million from $5.7 million in the first quarter of 2020. Our FFO attributable to common stockholders was a negative $4.8 million. Core FFO was negative $2.6 million or negative $1.28 per share. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release and quarterly supplemental. At quarter end, we had a relatively conservative balance sheet based on our net leverage of 40.7%, a weighted average interest rate of 4.4% and almost four years of weighted average debt maturity. We don't have any debt maturity this year and have only minimal maturities until 2026. As we have previously discussed, all of our debt is fixed rate after we locked in interest rates while they were broadly at historic lows. I'll turn the call back to Mike for some closing remarks.

Michael Weil, CEO

Thanks, Chris. Now that we've completed our transformation to American Strategic Investment Company, we're focused on continuing to build the company for the future. We signed new leases during the quarter and have a leasing pipeline that would further grow occupancy by 1.3%, as well as add $500,000 of additional annualized straight-line rent once leases commence. We are looking forward to the opportunities ahead of us with our solid portfolio as a foundation. Thank you for joining us today. And operator, please open the lines for questions.

Operator, Operator

Our first question is from Bryan Maher from B. Riley. Your line is open.

Bryan Maher, Analyst

Thank you. Good morning, Michael and Chris.

Michael Weil, CEO

Hi, Bryan.

Bryan Maher, Analyst

A couple of questions. I mean, look, you guys have boots on the ground in New York. We're repeating all the stuff we read about New York City. Do you see any opportunities in that market, I know that you're stepping outside the market. But anything in that market that interests you? And if so, how would you finance it?

Michael Weil, CEO

Surprisingly, the market has been quite stable. Many landlords, like us, see this as a time to focus on our existing assets. As previously mentioned, leasing activity in our portfolio remains strong; we've executed five new leases and handled some renewals, which is helping to solidify our portfolio. Additionally, we don't have any debt maturities, allowing us to strengthen our foundation and improve both NOI and revenue while different property owners face varying challenges. There is a possibility that the difficulty of refinancing could create opportunities. The lending market is still open for stable assets, and we will continue to seek out targets as they arise. Our focus is generally on assets within the $50 million to $250 million range, which have stable occupancy and an essential role in New York City's business landscape. How we finance these opportunities will depend on how aggressive we choose to be in pursuing them. Currently, our portfolio is about 40% leveraged, providing us with room to make moves with existing assets that can offer us flexibility in targeting new acquisitions. We will evaluate different opportunities as they become available, and if they align with what our company can take on, we will actively participate in the process.

Bryan Maher, Analyst

Okay. And then kind of staying on that line of topic for a minute. You've got a couple of assets in the portfolio running pretty high occupancy, 100% occupancy in certain cases, and some pretty low rate fixed-rate debt. If you were to consider selling any of those 100% occupied properties to maybe recycle capital into something that you could then re-lease up, maybe something that's running 60%, 70%, 80% occupancy that you could lease up and create value, are any of those properties, do they have assumable debt that could be really attractive to a buyer?

Michael Weil, CEO

Certainly, we have considered this. Some of those properties indeed come with assumable debt, which I view as more attractive compared to older debt. However, I'm not sure there is a large pool of buyers at the moment, aside from those looking for distressed sellers. As you've pointed out, we would not classify ourselves as a distressed seller; rather, we would be selling from a position of opportunity. Based on discussions we've had with the institutional brokerage market, the prospective buyer pool is quite limited right now. With our occupancy levels at or near 100% and the advantage of fixed-rate debt, we want to ensure we are not perceived as distressed, because that's not the case.

Bryan Maher, Analyst

Okay. This might be a bit outside your area, but it could be useful to consider the market. My son and several of his friends living in New York City are dealing with rent renewals and experiencing massive rent increases. Finding alternative housing is nearly impossible for those in their twenties, whether it's a one-bedroom or two-bedroom. While we hear about a lot of vacant Class B office spaces in New York City, there are challenges around converting those to residential use. How do you see that market? Is there anything that could be done at Times Square or your nine Times Square property, or is there an opportunity for you or others to address this situation for these young adults?

Michael Weil, CEO

I won't comment on the situation with 20-somethings, but I will discuss the transition from office to residential spaces, which we have been observing. I believe the effectiveness of that endeavor is still uncertain. It is extremely costly, and converting traditional office buildings poses significant challenges. In your example of reasonable housing, I question whether the returns on such a project would justify the expense. The process involves extensive planning and construction, requiring you to vacate the building and obtain necessary approvals, which can take two to three years before any conversion can commence. The substantial costs associated with construction and architecture also add to the complexity. If we consider a two to three-year time frame, I think we should focus on the fact that workplace attendance is currently around 65%. Data shows that New York City is about 65% back to in-office work as we approach summer. I believe that after Labor Day, with children returning to school, employers will adopt a more definitive stance regarding office attendance. I suspect that while it may not mean a full five days in the office, there will be a requirement for employees to spend the majority of their workweek—over 50%—in the office, likely exceeding the current 65%. Once that occurs, organizations will recognize their need for office space, which I believe will positively impact market activity and office renewals. While some companies might downsize, I see this as favorable for us because our tenants generally occupy smaller spaces, typically 8,000 to 10,000 square feet, and are unlikely to significantly reduce their footprint. However, we may attract new tenants who previously occupied larger spaces, like 25,000 square feet, and decide to opt for a full floor at our property with a 12,000 square foot lease. Given that we currently have an 85% occupancy rate in a market that is expected to improve, I am more optimistic about this scenario than about converting office space to residential.

Bryan Maher, Analyst

Great. That's helpful. Thanks, Michael.

Michael Weil, CEO

All right. Thank you, Bryan.

Operator, Operator

And this ends our question-and-answer period. I will now turn the call back over to our CEO, Michael Weil, for some closing remarks.

Michael Weil, CEO

All right. Well, thank you, everybody. And Bryan, thank you for the questions because I think specifically, your last question really let us or let me talk about what I see as the vision for the New York real estate market, it's still an important part of the company. But as you all recall, the transition to American strategic investment that would be one part of our go-forward business. It gives us opportunities to evaluate and make decisions that will drive shareholder value in the near term and also the long-term. So thank you very much, and we look forward to talking to you again soon.

Operator, Operator

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