American Strategic Investment Co (NYC) 2021 Q2 法說會逐字稿

Good day. Thank you for standing by, and welcome to the New York City REIT, Inc. second-quarter earnings call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Louisa Quarto from NYC. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for NYC's second-quarter 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 Form 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 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 any 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.

I'll now turn the call over to Michael Weil, Chief Executive Officer. Please go ahead, Mike.

Thanks, Louisa. Good morning and thank you for joining us today.

New York City REIT continues to execute on our proactive asset management strategy highlighted by sequential quarter improvement in cash rent collection and nearly a $1 million increase in core FFO. Warmer weather has brought an ever-increasing number of tourists and locals back to the city's stores, restaurants, and office buildings, giving the city renewed vitality. With vaccines widely available, business and local leaders continue to voice their strong support for a return to office for their workers. While we can't pinpoint the moment in time where businesses will fully return to their pre-COVID existence, the trend line is very clear that there'll be a full return.

We continue to operate New York City REIT with the assumption that that day will be soon. We have taken advantage of the time to work with our existing tenants and potential new tenants to build out floors, lock in long-term leases, and reimagine or reconfigure space to address emerging New York City office trends and tenant needs.

For the second quarter, we recorded strong rent collection at 89% of original cash rent across the portfolio, a 400-basis-point increase from 85% last quarter and a 700-basis-point improvement from the fourth quarter. Our asset management team has remained engaged with our tenants, helping to drive rent collection.

As measured by VTS, New York City has seen demand for office space that is outpacing demand in Boston, Chicago, Seattle, San Francisco, and Washington, D.C. Demand for New York City office is now 98% of where it was pre-COVID, providing insight about employers' plans to bring workers back into offices, which in turn generates demand for restaurants, retailers, building services, construction, and all of the infrastructure that supports the city's vibrant economy.

A recent report from Transwestern notes that office landlords are holding firm on asking rents, expecting pent-up demand to emerge in the third and fourth quarter. Like the CEOs of our peers, I remain bullish on the office sector in particular, and New York City in general, especially reading reports like these and others that show pedestrian traffic in Times Square is nearing pre-pandemic levels and that vaccines have reached 70% of all New York City adults.

For these reasons as well as our fundamental belief in the necessity of New York City office and retail space, we remain highly confident in the long-term strength of New York City real estate. Our portfolio includes eight office and retail condominium assets located entirely in New York City and primarily in Manhattan. We've built a pure-play New York City portfolio that features a number of large investment-grade tenants, including City National Bank, CVS, TD Bank, and government agencies. As of June 30, NYC's top 10 tenants were 73% investment-grade or implied investment-grade rated and had an average remaining lease term of over nine years.

Our $861.9-million, 1.2-million-square-foot portfolio has occupancy of 84.5%, up from 82.8% at the end of the first quarter, but still affording us plenty of upside potential to drive future cash flow as we further lease up these properties. Occupancy gains at 123 William Street, where four new leases increased building level occupancy to 91% and annualized straight-line rent by almost $1 million, helped drive this gain.

Across all of our assets, we have a weighted average remaining lease term of 6.7 years. We're engaged with several key tenants, including the GSA, where we have about a year of lease term remaining to negotiate renewals. Our leasing pipeline, including two leases signed after quarter end and one LOI, is expected to increase portfolio occupancy by 1% and annualize straight-line rent by an additional $1.3 million if a definitive agreement is reached on the terms of the LOI.

Over the last year, we've sought to be an owner and landlord who is willing and able to be creative in our management of the portfolio. For example, at 1140 Avenue of the Americas, we took over a co-working space, formerly leased to Work Better, and launched Innovate NYC, which opened earlier in the third quarter. This was a great opportunity to diversify our strategy into a growing segment of New York City real estate market, with minimal initial investment and in-place agreements with tenants.

We've also worked with I Love New York, one of our retail tenants at 9 Times Square, to restructure their lease in a way that puts the tenant on a recovery path and where we share in that recovery by providing rent credits in exchange for extending the lease by two years. We negotiated a percentage rent lease with this tenant with escalating floors over time.

As we discussed last quarter, we were able to work with one of the 1140 Avenue of America's longest-standing tenants, Red Flame, to come to a mutually acceptable agreement to defer and abate rent and keep their kitchen open while they recover from COVID. We're excited to see their success as restaurants resume normal operations. We'll remain aggressive in our collection of rent payments from tenants who have unpaid rent bills.

We're actively seeking to sign leases with former tenants of Knotel and to lease up space that Knotel formerly occupied before its January 2021 bankruptcy. Through the second quarter, we've replaced nearly half of the space formerly occupied by Knotel with creditworthy, rent-paying tenants, some of whom were previously subtenants of Knotel.

Of the 71,200 square feet previously occupied by Knotel, 32,200 square feet has been leased, including one lease signed after the end of the quarter. These leases have a weighted average remaining lease term of six years and combined annualized straight-line rent of over $1.6 million. We've mentioned significant leases with technology companies and others in prior quarter. And to those, we can add a lease for 8,800 square feet for 10 years with a leading media company at 9 Times Square, absorbing an additional 12% of Knotel's former space.

As I've said before, we believe that New York is an irreplaceable city. The aggressive recovery of demand for office space, the big bets that tech firms have placed that the city is the next global tech hub, and the public announcements that major private employers in the city have made about the importance of their workers returning to the office serve to support that belief. Over the long term, we believe that New York City will remain the foremost market for owning stable, occupied, non-trophy but high-quality real estate.

I'll turn it over to Chris Masterson to go over the second-quarter results. Chris?

Thanks, Mike. Second-quarter 2021 revenue was $15 million compared to $15.2 million in the first quarter of 2021. The company's first-quarter GAAP net loss attributable to common stockholders was $11.1 million compared to a net loss of $13.5 million in the first quarter of 2021.

For the second quarter of 2021, our FFO attributable to common stockholders was a loss of $4.1 million compared to a loss of $5 million last quarter. Core FFO was negative $1.9 million compared to the negative $2.9 million in the first quarter, or $0.15 per share compared to $0.23 per share last quarter. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release, supplemental, and Form 10-Q.

NYC also maintains a conservative balance sheet with no debt maturities until 2024 and prudent net leverage at 38.3%, which compares favorably to our peers. We ended the second quarter with net debt of $381.1 million at a weighted average effective interest rate of 4.4% and with a weighted average remaining debt term of nearly six years.

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

Thanks, Chris.

Tomorrow, we anticipate the final conversion of Class B common shares to Class A common shares, thereby completing our phased liquidity plan. After this conversion, all NYC shares will be freely tradable on the New York Stock Exchange. Our retail and institutional shareholders are all looking forward to the completion of the plan and the additional float it will provide for NYC's stock in the market.

We've continued to drive New York City REIT forward during the second quarter, negotiating leases with new and existing tenants working to replace Knotel at 123 William Street and 9 Times Square and preparing our buildings for the return of workers at scale. While these efforts will take some time to be fully reflected in our financials, we've demonstrated results through improvements in rent collection, core FFO, and occupancy relative to the prior quarter.

We believe that our New York City portfolio is well positioned to deliver long-term value and that the limited near-term lease expirations and long weighted-average remaining lease term provides the portfolio with stability. We expect there's a tremendous value in the business relative to our portfolio and our continued performance since our listing a year ago.

Our adviser, management, and Board of Directors collectively own nearly $3 million worth of NYC shares and are all individually among the top 25 shareholders of the company, aligning our interest with stockholders. We're proud of the high-quality assets that we own and believe the portfolio will greatly benefit from the imminent return of office workers at scale. We maintain an aggressive approach to leasing and are well positioned for the second half of the year and beyond to unlock additional value.

With that, operator, please open the line for questions.

Thank you. (Operator Instructions) Bryan Maher, B. Riley Securities.

Good Morning, Chris. A couple of questions for me. Can you give us a little bit more color on the LOI and the two leases that you signed post quarter, basically what type of tenants those are?

Chris Chao, that -- you're on the line, aren't you?

Yes, I am. Hi, Bryan. How are you?

Good. Thank you.

Yes, we've -- the two tenants that we've signed kind of post-quarter were actually really three. One is a media company that relocated its office to 200 West 41st Street. The other is a tenant at 123 William, which we had addressed earlier. They are a top 50 tech company that have previously executed a shorter-term license agreement, which we've now replaced with a longer-term lease. And the last tenant is an investment management firm out of 1140 Avenue of the Americas. They were a prior subtenant who has now gone direct with us on a new floor. So three leases in three of our buildings.

Great. And it seems like it has been a little bit easier to lease the Knotel space at 123 William than 9 Times Square. Is there any particular reason why that might be? It seems like you're having some more [success] at 9 Times Square though.

The 123 William deals that we've executed, those tenants were captive tenants in place when we -- when Knotel declared bankruptcy. So we had prior lines of communication that we had reopened with those tenants, and we were able to facilitate, I guess, quicker lease signings.

That being said, I think both locations are equally similar in their build-out and just ability to attract tenants given their recent build. The tenant that we've executed, at least kind of post quarter end, was actually for a former Knotel floor, a full floor. So that's 25% of the Knotel space at that building, and we've actually been trading several term sheets with other future prospects for the remaining floors as there has been a lot of interest. So definitely, there has been a lot of momentum.

Great. And maybe you could give us a little color, Michael, on -- I guess, it's called Innovate NYC, your co-working space. I mean, how big can that get? Or what is your vision of that?

So Bryan, I'll jump in on that. We saw an opportunity to continue a rent stream in a business that was pretty straightforward to operate. So we were able to retain the general manager to operate Innovate NYC. There's demand in the city for working space. Many of the existing agreements remained in place. And I think that we can get this fully back to where it was on an NOI contribution to the portfolio, and we'll evaluate it from there.

We're certainly open to marketing it for longer-term permanent use as well. But the co-working need in the city will remain. And Chris has done a great job working with the general manager to get Innovate NYC fully operational, complete with technology that the users expect. I think we're doing actually a better job than what they -- was being done before and really at no additional cost to us because the space was existing.

Right. And maybe last for me. On your rent collections, you've made a lot of good progress there. Where might you think [you're at] with rent collections by, say, year-end, give or take a little bit? And is there any update on (technical difficulty) that you can or are willing to share?

Yes. So I think the biggest area that remains a challenge in the rent collection numbers that we've published has been the two parking garages, and we did put details in the investor deck on Slide 16. We're aggressively pursuing that. I believe that we will have a positive outcome. I don't want to disclose too much, not only with ending the relationship that -- with the provider that is not performing, but Chris has done a great job in having alternative in hand.

So I do believe that will be resolved. I would hope that that would be resolved in this calendar year. Rent collection will continue to improve throughout the third and fourth quarters. We do have some deferrals that will be ending. And again, Chris has done a very good job working with Equinox, finding a reasonable solution and outcome, where we did have a lease extension, some deferral, a recovery of past rent owed. And Chris, correct me if I'm wrong, but I believe by October, they'll be back to full pay.

That's correct. That's correct, Mike.

So again, Bryan, this is really, as you know, a grinded out type of time in New York City, and our tenants have been very resilient. And for the most part, I'm very pleased with the relationships, with the communication, and our ability to work together. And I do expect that by end of third quarter, fourth quarter, we're going to be seeing very normalized rent collection in the portfolio.

Great. Thanks. That's all for me.

I see no further questions in the queue. I would now like to turn the conference back to Mike Weil.

Great. Thank you, everybody. I always appreciate you taking some time to listen to the update. We're very pleased with the accomplishments in the second quarter. Chris Masterson, Chris Chao, myself, and the New York City REIT team continue to focus on lifting this portfolio back up to the levels that we saw pre-COVID. We frankly are pretty excited about the direction that we're going. So thank you again, and we'll talk to everybody soon.

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