Expert Meeting Minutes | American Strategic Investment Co. (NYC) Q4 2022 Earnings Call Transcript

1. American Strategic Investment Co. believes diversifying its portfolio will help to offset the delayed rebound of office space to pre-pandemic levels, which they still anticipate occurring. By expanding the nature and type of assets we acquire and own, they will reduce our exposure to a single asset class over time.

2. The rights offering was a first step. It was relatively small from a capital perspective, but they wanted to shore up the investor base. The opportunity to go into the market is going to be driven by the possibilities of the new structure.

3. Completing this offering was an important step for American Strategic Investment Company as we move forward with diversifying our portfolio and pursuing new opportunities to generate revenue.

Curtis Parker - Senior Vice President

Michael Weil - Chief Executive Officer

Christopher Masterson - Chief Financial Officer

Bryan Maher - B. Riley FBR

Good morning and welcome to the American Strategic Investment Co's Fourth Quarter and Year-End 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

I'd now like to turn the conference over to Curtis Parker, Senior Vice President. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us for ASIC's Fourth Quarter and Year-End 2022 Earnings Call. This call is being webcast in the Investor Relations section of our website at americanstrategicinvestment.com

Joining me today on the call to discuss the results are Michael Weil, our Chief Executive Officer; and Chris Masterson, 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, 2021, filed on March 18th, 2022 and all subsequent SEC filings for a more detailed discussion of the risk factors that could cause these differences.

The Form 10-K for the year ended December 31st, 2022 will be filed subsequent to today's call. Any forward-looking statements provided during this call are only made as of the date of this call, as stated in our SEC filings, ASIC disclaims any intent or obligation to update or revise these forward-looking statements except as required to do so 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 and operating 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. 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 of American Strategic Investment Co. Please go ahead, Mike.

Thanks, Curtis. Good morning and thank you for joining us for American Strategic Investment Company's first earnings call following our restructuring and rebranding from New York City REIT.

Today, we'll discuss the improved results recorded for the fourth quarter and our full year 2022. Before we get to that, I want to discuss the changes we've announced to our long-term business strategy and the results of the successful rights offering we completed last month.

As we announced at the end of December, 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 real estate in the five boroughs of New York City.

We believe diversifying our portfolio will help to offset the delayed rebound of office space to pre-pandemic levels, which we still anticipate occurring. By expanding the nature and type of assets we acquire and own, we'll reduce our exposure to a single asset class over time.

Beginning with the taxable year that will end December 31, 2023, we're now a C Corporation and no longer a real estate investment trust. In January, we renamed the company American Strategic Investment Company to reflect the change.

Some examples of potential real estate anchored businesses that we may seek to own include hotels and parking lot management companies. Additionally, we may seek to expand our co-working office space business.

Many of the new assets or businesses we may acquire would generate income that does not generate REIT-qualifying income or what the industry refers to as bad REIT income. We believe that no income is bad and through this modification, not only can we invest in these types of businesses, but we may also be able to limit the tax on this income through the use of existing net operating loss carryforwards that were not beneficial to our shareholders under the REIT structure.

Together with the evolution and strategy, last month, we completed a successful $5 million rights offering. Existing shareholders were granted non-transferable rights to purchase shares in the offering, commensurate with their ownership and those who fully exercise these rights have the option to purchase additional shares through an oversubscription right.

We believe that participants see the long-term value of our stock. Looking to the future, we believe that we may be able to raise capital from a broader base of new investors who seek companies with greater asset and business diversification.

Completing this offering was an important step for American Strategic Investment Company as we move forward with diversifying our portfolio and pursuing new opportunities to generate revenue.

Turning to our existing portfolio, which today consists of the eight real estate assets we own in New York City primarily in Manhattan. At year-end, our $841.1 million, 1.2 million square foot portfolio had occupancy of 82.7% and a weighted average remaining lease term of 7.1 years.

Our portfolio features a mix of large investment grade tenants. Our top 10 tenants are 79% investment grade or implied investment grade based on straight line rent with a weighted average remaining lease term of 9.6 years.

We have a balanced long-term lease maturity schedule with 41% of leases expiring after the year 2030. Rent collection across our portfolio remains strong with 100% rent collected in the fourth quarter and nearly complete collection for the entire year.

Despite our expanded strategy, we remain focused on maximizing the value of our existing assets. To that point, our asset management team has worked closely with existing tenants and the brokerage community to sign new and renewal leases and to negotiate tenant expansions.

In 2022, we completed nine new leases totalling 58,200 square feet and we have a forward pipeline of leases and expansions that total over 26,000 square feet and approximately $1.1 million of annualized straight line rent.

Included in the pipeline is a 12,600 square foot lease at 123 William Street with a growth focused marketing agency, Super Bowl. As this and other leases in the pipeline commenced during 2023, portfolio occupancy is expected to increase to 85% from 82.7%.

As we announced earlier this week, we also signed a replacement lease for 9,000 square feet with Security Scorecard, a service that offers continuous monitoring of a customer security risk at 1140 Avenue of the Americas and an excellent addition to that building.

The activities of our asset and property management teams resulted in significant growth in two of our key performance metrics, adjusted EBITDA and core FFO compared to last quarter. We controlled costs and lower G&A and operating expenses.

Expense efficiency contributed to the over 50% growth in adjusted EBITDA over the prior quarter to $4.5 million from $2.9 million. Core FFO also increased during the same period by over $1.7 million to negative $0.2 million. On a per share basis, and after adjusting for the reverse stock split that was completed in January, core FFO for the fourth quarter improved by $1.01 from the third quarter, a 90% increase.

Combined with our fixed rate debt and prudent net leverage, we believe that our existing assets and our management of them provides a strong foundation for our expanded strategy. Over the last several years, we've taken advantage of opportunities to invest in the long-term future of our portfolio by signing long-term leases with credit worthy tenants, replacing challenged tenants with stronger ones and internalizing operations like our co-working space at 1140 Avenue of the Americas.

Expanding our investment strategy is another step in this strategy and we're looking forward to exploring additional income generating opportunities as we move forward. Chris is going to discuss the strong financial results in greater detail. Chris?

Thanks, Mike. Revenue was $64 million for the year ended December 31st, 2022 compared to $70.2 million in 2021.

Revenue for the fourth quarter of 2022 was $16.2 million compared to $24.2 million in the fourth quarter of 2021. As you may recall from last year, revenue in 2021 for the fourth quarter and full year benefited from over $9 million of income from termination fees and accelerated amortization of remaining unamortized balance of below market lease liabilities, which was recorded as revenue.

Excluding these items, full year revenue would have increased by approximately 5% year-over-year. The company's full year GAAP net loss attributable to common stockholders was $45.9 million compared to a net loss of $39.5 million in 2021.

Net loss for the quarter was $10.1 million. Adjusted EBITDA for 2022 was $10.5 million and was $4.5 million for the fourth quarter. Cash NOI for the full year was $26.9 million and was $8 million in the fourth quarter, a 10% increase compared to the full year of 2021 and a 13% increase compared to the fourth quarter of 2021.

For the fourth quarter of 2022, our FFO attributable to common stockholders was negative $2.4 million. Core FFO was negative $0.2 million in the fourth quarter or negative $0.11 per share, an increase from negative $1.9 million or negative $1.12 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 maturities scheduled this year and prudent net leverage at 40.7%.

We ended the fourth quarter with net debt of $390.3 million at a weighted average effective interest rate of 4.4% and a weighted average remaining debt term of 4.1 years. All of our debt is fixed rate. As we have previously discussed, we thoughtfully locked in interest rates while they were broadly at historic lows.

With that I'll turn the call back to Mike for some closing remarks.

Great. Thank you, Chris. The beginning of 2023 has already been pivotal for the company, and we're excited to explore new opportunities for growth under our expanded investment strategy.

We've completed our transformation to American Strategic Investment Co and are pleased with the results of the recent rights offering. Our current leasing pipeline is expected to increase occupancy 2.7% to 85% from 82.7% and would add approximately $1.1 million of additional straight-line rent as leases commenced this year. We're looking forward to the year ahead and to building on the solid foundation of our portfolio.

Thank you for joining us today. And operator, please open the line for questions.

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

Great. Good morning, Michael and Chris.

Hi, Bryan.

A few questions for me this morning. On the capital raising to grow the company from here. How are you thinking about that? What type of vehicles? What type of size? Is it too early to talk about that? Can you give us a little color on that?

Yeah. So the rights offering was a first step. It was rather small from a capital perspective, but we just wanted to kind of shore up the investor base a bit. The opportunity to go into the market is going to be driven by the opportunities of the new structure.

Being a C Corp versus a REIT allows us to focus, as you understand, on more of the operations or operating side of the businesses, not just real estate. And I think as we identify those target opportunities, it will bring us an opportunity to come to the market and raise equity at the right time and at the right price.

And you've talked about a couple of times now, hotels and parking garages. Can you give us some flavor as to where those opportunities might be? I mean I suppose that if it's parking garages, it's going to be in markets like New York City or other gateway markets. Can you just give us a little more color on a) what you're looking at and where and you know what's the discount maybe to replacement costs that you're seeing some of those assets trading at?

Yeah. So the opportunity set is much wider than just hotels and parking garages. But I think that for this period of transition is a clear way to kind of set the expectation for the market. We look at the parking garages that we currently own where we don't control the management company they're run by a terrific operator in New York City on a long-term contract.

But going forward to be able to look at something inclusively where you have the security and the real estate and the business operation, it's just a better fit for us, we think. And being able to operate both sides of the business does present a market discount, we believe.

Hotels are something that we have experience with on our platform. I don't know that this right now is the market where -- where we're ready to identify where those opportunities would be. But again hospitality we see as a great combination of operating experience and real estate experience that most platforms don't have.

Okay. Moving on to like the portfolio. Occupancy was a little lighter than we expected at 9 Times Square. Is there anything particular going on with that property? And given its really strategic location, is there any thoughts of doing any type of conversion on that property?

So the second question first. Most likely not. It's 9 Times Square, that building, we've got some pipeline activity on leasing. We've got a very active broker in Cushman on that property working with Chris Chow. And because we have a number of longer term leases in that property, I don't think it is a great candidate for conversion to residential.

We're seeing the market coming back steady but slow. With our pipeline, we have identified through active deals that are approaching execution, 85% occupancy. We see a path into the 90s and you see just in the quarterly results, the increase in revenue, this is recurring revenue.

There's not any type of one-time special event in those revenue numbers. And our pipeline that gets us to 85% will generate an additional $1.1 million of straight line rent when executed and rent commenced. So you will continue to see increase in occupancy primarily in the 9 Times Square and 1140 Avenue of the Americas.

We'd like to button up 123 William Street. We've got a couple of deals that we're very active in there as well. So we're encouraged by the market activity. We're also excited that Jones Lang LaSalle has taken over the direct leasing activity at 1140 Avenues of the Americas, something that Chris and I had been working on in the fourth quarter.

We just think that they're a larger team, a bigger footprint in New York City and their landlord business is amongst the best. So we were happy to have the team take over at 1140 Avenues of the America.

Okay. And just two more quick ones for me. Are you planning maybe for Chris? Are you planning to stop reporting FFO now in 2023 and move to EPS and adjusted EPS? And then for Michael, are you planning on changing the ticker symbol given the change in strategy and name?

Chris, do you want to go first?

Sure. So in regards to the FFO, core FFO, we haven't made any decisions yet. We're still evaluating what really the most appropriate option is. So that's something we'll get back to you once we make a decision on that.

Yeah. And if I can just add to that, a lot of it's going to be driven, as we are right now, we do have a primarily real estate driven portfolio. So I don't think the conversion is -- as I don't want to say urgent, but it will be something that we do, just not yet. And we'll be in touch as we start to transition that. I'm sorry. What was the second question, Bryan?

Continuing to have NYC as your Ticker doesn't seem.

Yes. For the time being, we are staying with the NYC ticker. We wanted to make it easier for the existing shareholders to continue to be able to find us and they were used to the ticker NYC.

Okay. Maybe if I could just add one more real quick. You know, we're reading a lot in the press about some funds and some big managers of office buildings handing back properties, you know, keys to the lenders. Do you suspect that, that creates an opportunity for you and when does that opportunity happen? Does it have to kind of feed through the servicer kind of chain of command and that's three, six, nine months down the road or a year? Where are you thinking that, that could create opportunities?

Yeah, I think that's a few quarters down the road. Fortunately, as you know, we have very long fixed rate debt in our portfolio. We don't have any concerns regarding those types of issues. But from an acquisition standpoint or from a buyer's standpoint, I do think it will create some opportunities.

We're going to have to see how the banks and the special servicers react to this. They can do it at any number of things from extending if necessary, or if at their choice to taking the properties back. We all know that the banks have quite a bit on their plate right now.

So they very well may look to the resale market for properties that they have foreclosed on. So we're watching very closely. We're talking to our bank relationships and I do think it will lead to opportunities for companies like ours.

Yeah. Thank you.

Yeah. Thank you, Bryan.

We have no further questions at this time. I'll turn it over to Mike Weil for any closing remarks.

All right. Well, thank you, and thanks, everybody, for joining us today. It was a very exciting quarter for us as well as an end to a good year in 2022. We're always excited by the opportunity to grow revenue. And as I said in my opening comments to also really control expenses.

Obviously, both line items matter a great deal as we look to continue to grow the adjusted EBITDA of the company and really drive the growth and value for our shareholders. So we'll continue to keep everybody updated. We look forward to the opportunities in the market. And again, thank you for joining us.

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