American Strategic Investment Co. (NYC) Earnings Call Transcript & Summary

Good morning and welcome to the New York City REIT Fourth Quarter and Full Year 2020 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Louisa Quarto, Executive Vice President. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for NYC's Fourth quarter and Full Year 2020 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 Form 10-K filed for the year ended December 31, 2019, filed on March 19, 2020, 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 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 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. 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 a more detailed information about what we consider to be implied investment-grade tenants, a term we'll use throughout today's call. I'll now turn the call over to Michael Weil, Chief Executive Officer of New York City REIT. Please go ahead, Mike.

Thanks, Louisa. Good morning, and thank you for joining us today. New York City REIT continues to drive results through a proactive asset management strategy, highlighted by our fourth quarter cash rent collection of 82% across the portfolio and 89% from our top 10 tenants despite the ongoing challenges of the COVID-19 pandemic. Although 2020 was a challenging year for everyone, we remain highly confident in the long-term strength of New York City, its real estate, our business model and the opportunity to further grow our portfolio and create shareholder value. 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 other government agencies. As of December 31, NYC's top 10 tenants were 73% investment-grade or implied investment-grade rated and have an average remaining lease term of almost 10 years, which we believe increases the quality and stability of earnings in our portfolio. Our $860.6 million 1.2 million square foot portfolio has high occupancy of 87%, a weighted average remaining lease term in excess of 7.2 years and the opportunity for substantial incremental earnings growth as we lease up available space. Despite the challenges New York City has faced in the last 12 months, we believe that New York is a resilient and irreplaceable city capable of rebounding and remaking itself in times of crisis. The signals we're currently seeing bolster our confidence that the long-term value of New York City real estate will outweigh the short-term effects of the pandemic. New York City continues to be a leader in the fight against the COVID-19 virus and has an aggressive in-place recovery plan and vaccination policy that we believe will expedite a return to normalcy. New York State has administered more than 2.5 million COVID-19 vaccine doses, 43% of which have been given in New York City. Mayor de Blasio has provided an outline of a plan to return children to classrooms and workers to offices that includes vaccinating 5 million residents by the end of June. We are expecting a return to normalcy to at least start as we move through the summer, consistent with the 6-month lag from the mass rollout of vaccination efforts. This is a similar expectation as some of our peers who have estimated that office usage will start returning to prepandemic levels during the second half of 2021. Further, major employers, ranging from Goldman Sachs to BlackRock to Netflix, have expressed their intentions to bring employees back to the office at scale before the end of this year. Throughout the course of the pandemic, we've seen some of the world's largest technology companies affirm their confidence that New York City continues to emerge as an important tech hub and that collaborative physical workspaces will remain essential to productivity and innovation. Facebook, Apple, Amazon and others have signed significant leases and announced plans to hire thousands of office-using workers. These commitments continue a trend that began well before the COVID-19 pandemic of tech companies seeking to capitalize on New York's human capital. In our own portfolio, we've recently seen evidence of tech's commitment to the city as we executed a short-term lease and a nonbinding letter of intent with a Fortune 50 technology company to lease over 15,000 square feet at 123 William Street for 5 years. This agreement is a unique opportunity to help this tenant expand its New York City footprint and capitalize on tech's increasing Manhattan presence. The Fortune 50 tech company was a subtenant of Knotel, a shared space operator and tenant of ours at 9 Times Square and 123 William Street. Early in 2020, we identified operator problems that ultimately led to the company's filing for Chapter 11 bankruptcy last month and the termination of their leases with us. We engaged with Knotel and their subtenants early on and are now on the unsecured credit committee. We'll continue to protect our rights at every step along the way and seek to recover as much past-due rent as possible. In addition to the previously mentioned tech lease, we have also entered into a 2-year lease with a global human resource company. Combined, these 2 agreements represent over 65% of the previous Knotel space and 68% of the previous Knotel rent at 123 William Street. At 9 Times Square and 123 William Street, we believe there's an opportunity for us to create significant value by aggressively leasing prime space that's in turnkey condition to creditworthy tenants. The space previously leased to Knotel is in excellent condition, is fully furnished and requires minimal tenant improvement to re-lease. Leading the effort to lease former Knotel space and increase our occupancy across our portfolio is Chris Chao, who joined NYC's team in the fourth quarter and has responsibility for asset management across our portfolio. Chris is an industry veteran, who comes to us with over 15 years of experience in real estate, spanning asset management, acquisition and commercial lending. Most recently, he was a Director of Asset Management at -- for the Paramount Group in New York. Chris' impact can already be seen in the NYC portfolio, and I'm pleased to have him as part of our team. To help generate leasing momentum at 9 Time Square, we've hired Cushman & Wakefield as our leasing broker to support Chris' effort and attract creditworthy tenants. Leasing available space and working on expanding the leases of our current tenants remains a top focus of our asset management team in 2021. As Chris Masterson will discuss in more detail, the tenants who were most impacted by COVID had a material effect on our results for this quarter, primarily in the form of onetime write-offs. In addition to Knotel, other tenants in our portfolio who've been significantly impacted by the pandemic include 2 parking garages and Universal Sports. Management has engaged with these tenants, and we're confident that we'll be able to reach a mutually beneficial agreement as COVID-related headwinds subside. We believe parking garages may be on the early end of the recovery time line as workers and residents return to the city, and the garages we own will bounce back to their pre-COVID operating level swiftly. As a counterweight to the impact from these tenants, our proactive approach to portfolio management has delivered results that enhance the overall quality of the NYC portfolio. We're in advanced discussions for a 5-year lease extension with an Aa2 credit tenant at 123 William Street. Earlier last year, we signed an early 10-year lease extension with City National Bank that increased the remaining lease term to 13 years from 3 years and increased the expected gross rent over the term of the lease by $44 million. Finally, we also executed the lease amendment with MakeSpace at 123 William Street that recaptured all of the past-due and future 2021 cash rent due discounted by 25% in exchange for a 2-year reduction in lease term. Since the beginning of the year, we've executed 1 new lease that represents approximately $250,000 of annual cash rent once rent commences later this year. We also have a forward leasing pipeline of over 32,000 square feet that would increase annual base rent by $1.4 million if these leases commence. Rent expirations compare favorably to our peers with 37% of rent scheduled to expire through 2025. Turning to corporate matters. As you know, in August of last year, NYC's Class A common shares were listed on the NYSE. This is the first step of a phased listing, and as of today, 75% of NYC's outstanding common shares are Class A shares trading under the symbol NYC. We'll complete the phased listing with the final conversion of Class B shares later this year. I'll turn it over to Chris Masterson to go over the fourth quarter and full year financials. Chris, can you take us through the results?

Thanks, Mike. Revenue was $62.9 million for the year ended December 31, 2020, compared to $70.5 million for the prior year. Revenue for the fourth quarter was $9.9 million compared to $17 million in the third quarter. The company's full year GAAP net loss attributable to common stockholders was $41 million compared to a net loss of $21.9 million in 2019. Net loss for the quarter was $16.6 million compared to $12.3 million in the prior quarter. For the fourth quarter of 2020, our FFO attributable to common stockholders was negative $8.9 million compared to negative $3.6 million in the prior quarter. Core FFO was negative $6.8 million in the fourth quarter compared to $514,000 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. I'd like to come back to some of the COVID-related headwinds Mike mentioned earlier because they have had a material effect on our results. Approximately 75% of the quarter-over-quarter core FFO decline was the result of past-due balances in prior periods mainly from 4 tenants that were written off in the fourth quarter, including $3.4 million outstanding from Knotel and $2.6 million from 2 parking garages. Total revenue was off approximately $7 million quarter-over-quarter. We expect that our aggressive leasing efforts will begin to replace this revenue in future quarters, and we are aggressively working to recover the past-due rent that was written off. We have a seat on the Unsecured Creditor Committee for Knotel, have received favorable summary judgment rulings for all of the rent and expenses in arrears of 2 properties and filed for a similar judgment on the balance of the pass-through rents and expenses related to another. Slide 19 of our investor presentation provides further details and analysis regarding these impacts. NYC maintains a conservative balance sheet with no debt maturities within the next 3 years and prudent net leverage at 37.3%. We ended the fourth quarter with net debt of $374 million at a weighted average effective interest rate of 4.35% and with a weighted average remaining debt term of 6.1 years. Liquidity, which is measured as cash and cash equivalents, stood at $31 million, subject to a loan covenant that requires estimated $10 million in unrestricted cash. With that, I'll turn the call back to Mike for some closing remarks.

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 abates. We're encouraged by progress on the New York City and nationwide rollout of vaccinations and believe that a return to a degree of normalcy will not only benefit our portfolio but New York City and all New Yorkers. Our properties are concentrated in Manhattan and comprised of a diversified tenant base, of which 7 of the largest 10 are investment grade. The limited near-term expirations and long weighted average remaining lease term provide the portfolio with stability, and the 87% occupancy rate leaves room for continued growth of annualized straight-line rent. At the present valuation, we believe there's tremendous value in the business relative to our portfolio. We own stable, high-quality assets that we believe have performed well and will continue to provide a solid foundation to support future growth. Operator, please open the line for questions.

[Operator Instructions] Our first question today will come from Bryan Maher with B. Riley Securities.

A few questions. On the Knotel, was that -- was Knotel the main reason for the occupancy declines at 123 William and Times Square? Or was there anything else going on at those properties?

Bryan, yes, Knotel was the -- Knotel did have the biggest impact.

Okay. And then we noticed an occupancy decline at Avenue of the Americas. Can you give us a little color on that property?

Yes. Chris Chao, I think it would be a good opportunity if you would introduce yourself and talk a little bit about that asset.

Sure. Thank you, Mike. Bryan, this is Chris Chao speaking. At 1140 Avenue of the Americas, there was one tenant that had a natural lease expiration at the end of 2020 that led to some occupancy decline. Otherwise, that really is the only tenant who had an expiration. And as we've discussed on the call, we've been active with our broker on that building and leasing space and successfully leased a tenant at our top floor of the building earlier this quarter.

Okay. And just kind of following on with that thought process, as you go to re-lease those spaces and the remaining Knotel space, what are you thinking about as it relates to rent per square foot from kind of a roll-up or a roll-down basis? Can you give any broad strokes on how we should be thinking about that?

Yes. What we're seeing now, Bryan, is the rents have been -- the proposed rents and where the market is have really held pretty well to where we were. These, again, are boutique buildings in very good locations, quality B buildings, and we have not seen a significant decline in market rents. The other thing that we're optimistic about is the space is in what we would think of as turnkey condition for the most part. It's first-generation build-out. It's lightly used. So we'll be able to control TI expenses in the re-leasing effort, which will be another positive that we're anticipating during the course of '21.

Great. That's good news. And given the Knotel experience, has it changed your mindset at all or your criteria as it relates to those type of tenants, kind of the flex leasing or short-term leasing guys? I mean how do you think about that business going forward?

I'll just be very direct, it's not the type of tenant that we would look to fill the building with. We -- and we're experiencing that. Chris is doing a great job going direct, as we talked about the Fortune 50 technology company taking space. We're making very positive and, frankly, pretty quick progress refilling the space at 123 William that was occupied by Knotel by going direct to the tenants that were in place there. So it's better for us. We obviously enjoy the corporate tenancy, the strength of the tenant and the direction of their business. So I am feeling that it is opportunistic for us. It's -- nobody likes the downtime that's involved, but we will go with direct users in that space.

Yes. On that note, Mike, are any of those Knotel tenants like still physically in place?

Chris, why don't you give us a little bit of color on the 9 Times Square space because I know with -- and touch on 123 William? But 123 William is their enterprise platform, which was shorter-term corporate tenants. So that's been an immediate pickup.

Sure. Thank you, Mike. Yes, there were 2 -- so when Knotel declared bankruptcy earlier in the quarter, there were 3 subtenants who were in place. We've secured short-term leases with 2 of those subtenants, as mentioned, at 123 William Street, recouping approximately 65% of the presence in that building. At 9 Times Square, all the Knotel floors are currently vacant. And as Mike alluded to earlier, these are floors that are in great shape that were only really built in the last 2, 3 years. And we've already been aggressively marketing that space for a tenant ready to move into a turnkey space.

Great. And Bryan, if I can just also add, we're also pretty excited. The relationship work that Chris has been doing with the new Cushman leasing team at 9 Times Square, we're pushing this very aggressively. And we're seeing the city coming back. 2021 has started off with a lot of activity, a number of tours. And Chris and the Cushman team are -- this is their top priority.

Great. Just two more for me, one kind of housekeeping, and maybe this one is best for Chris Masterson. As it relates to the write-offs in the fourth quarter and Knotel, does that kind of put Knotel and its financial impact on NYC behind you? Or should we expect some residual write-downs in the first quarter related to Knotel, forget anything else at the moment? So maybe that for Chris. And for Mike, as you look out to 2021 and your balance sheet, your ability to grow, are you seeing anything in the New York market that you might think to make a run at? Are there any values out there that you can take advantage of? And that's all for me.

Thank you, Bryan. Chris, why don't you go first, and then I'll follow on.

Sure. So from a revenue perspective, we took all the write-offs in the fourth quarter, so we won't see an additional impact. What you would see in the first quarter, there are some intangibles that are still on the books related to the Knotel lease. Those will be written off, and we'll end up flushing through depreciation in the first quarter. And no other impact outside of that.

Thanks, Chris. Chris and I have been very active, reviewing deals that are being talked about in the market. Some have come to market, some are being considered by sellers to come to market. I think it's a little bit early, but I do think we're going to see opportunities in 2021. New York market continues -- from a value standpoint, replacement cost values are fairly stable. So we've looked at a couple of deals that we didn't feel reflected the opportunity and opportunity cost that we would have to invest in the property upon acquiring it. And I was frankly surprised how quickly these deals did go through the market. So we're going to remain disciplined. We're going to continue to look in this Manhattan market, again, the boutique-type buildings with stable occupying tenants, direct tenants, as you asked about earlier. And as the year goes through, I know Chris is very active in the brokerage community. The market knows that we are a capable buyer, and we'll continue to be involved.

[Operator Instructions] There being no further questions at this time, this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

All right. Well, thank you, Grant, and thank you all for joining us today. We have come through 2020, as we've indicated on our call today, with optimism, and we're very excited about vaccine rollout. I think that's going to have a tremendous positive impact on the New York City market. And we'll continue to keep everybody updated. And we thank you for taking the time to join us.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.