Q1 2023 American Strategic Investment Co Earnings Call

Participants

Curtis Parker; SVP; American Strategic Investment Co.

Michael Weil; CEO, President and Chairman of the Board of Directors; American Strategic Investment Co.

Chris Masterson; CFO & Treasurer; American Strategic Investment Co.

Bryan Maher; Analyst; B. Riley

Presentation

Operator

Good morning, and welcome to the American Strategic Investment Company's first-quarter 2023 earnings call. (Operator Instructions) I would now like to turn the conference over to [Curtis Parker], Senior Vice President. Please go ahead.

Curtis Parker

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 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

Thanks, Curtis. Good morning and thank you all for joining us today. We continued to focus on leasing activity during the first quarter, while completing our change in corporate structure and a 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 will 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 terms start at 123 William Street and at 8713 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 while Weill Cornell Medical, CVS 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 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 as this annual cap was reached part of the way through the quarter, limiting the costs 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're 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

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 2020. Cash net operating income increased by $1.3 million or 21.9% to $7 million from $5.7 million in the first quarter of 2022. 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

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.

Question and Answer Session

Operator

(Operator Instructions) Bryan Maher, B. Riley.

Bryan Maher

Thank you. Good morning, Michael and Chris.

Michael Weil

Hi, Bryan.

Bryan Maher

Couple of questions. Look, you guys have boots on the ground in New York. We're re-reading all the stuff we read about New York City. Do you see any opportunities in that market? I know that you're expanding outside the market, but anything in that market that interests you? And if so, how would you finance it?

Michael Weil

Surprisingly, Bryan, the market has been pretty quiet. I think that many landlords like ourselves think that this is a period to focus on assets at hand. And as we were able to talk about in the previous comments, leasing activity has been strong in our portfolio. And we've been able to -- we executed five new leases. We've taken care of some renewals and we're really solidifying the portfolio.
The other part that comes to the top here is that in our situation, we don't have debt maturities. So, this is a period where we're shoring up the foundation, making the portfolio stronger and better, growing NOI and revenue as different things occur for different property owners. I do think there's a potential that inability to refinance will come to play as an opportunity.
The lending market remains open for stable assets. And given the opportunity, we will continue to look at targets. As I've said, this company really focuses in the kind of $50 million to $250 million asset range -- those are buildings that continue to have stable occupancy and continue to serve an important role in New York City business.
As far as how we would finance it, that would be part of the equation on our -- how aggressive we were in going after assets. The portfolio, as it sits today, is only about 40% levered. So, there are some opportunities to do some things with the existing assets that would allow us some flexibility in pursuing a target asset. So, there -- as we see different things come into the market, we'll have different ways of evaluating them. And if they fit in what the company can absorb, we will certainly be participants in the process.

Bryan Maher

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 the 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

Certainly, that is something that we have looked at. And yes, some of them do have assumable debt that is what I consider previous vintage debt. It is more attractive. I don't know that the buyer pool is very deep right now for people other than those that are looking for distressed sellers. And as I agree with you, the scenario that you just laid out, we would not be a distressed seller, we would be a opportunity seller.
And I don't know that that pool -- as we had several conversations with the institutional brokerage market, it's just not very deep right now. And I think we -- because the occupancy is at or near 100%, and we do have the benefit of the fixed rate debt, we certainly don't want to be viewed as a distress seller because we're not.

Bryan Maher

Okay. And maybe last for me, and maybe this is a little outside your sphere, but it might be helpful to kind of think through the market. My son and a bunch of his friends who all live in New York City, they're faced with rent renewals and just insane increases in rent. And if you want to try and find something else, it's virtually impossible to find something that these 20-somethings can afford -- one bedroom, two bedrooms, whatever.
We hear about a lot of empty office space, Class B stuff in New York City but also, hurdles about converting that to residential. How do you view that market? Is that anything that you could do at Times Square -- your 9 Times Square property or is there an opportunity for you or anybody else to tap into that scenario where I know an older office is not ideal to convert to residential and maybe a little difficult. But the something's better than nothing for these 20-somethings.

Michael Weil

I won't address the aspect of the 20-somethings, but I will address the conversion that we've all been watching of some office to residential. And I would tell you that I think the jury is out on that undertaking. It's incredibly expensive and the challenges of converting traditional office -- and if you take your specific example, I won't call it low-income out housing but reasonable housing.
I don't know that there's a justified return on that type of undertaking. The engineering, the construction, the just the time -- you have to empty your building, you have to get approvals for your work. You're two to three years before you can start the conversion. And then you have the very significant construction costs, architecture, et cetera.
So, I don't know -- to me if we're talking about a two- to three-year window, I think it's a better outcome to say we're already at 65% back to office. That's what the data shows; it's tracked every day. Organizations like [Rene] reported New York City is about 65% back to office, and that's just as we're coming to summer.
My belief is after Labor Day, when kids go back to school, I believe you're going to see a much different tenor from employers regarding back to office. I don't know that it will be five days a week; I don't know that it needs to be, but I do believe that it will be mandated that people are spending the majority of their work week in the office, something over than 50% of their time, and definitely something more than 65% back to office as we sit today.
So, when that happens, people are going to realize again that they need their office space and the market activity -- I think renewals will benefit. You could see some downsizing. Now, I think that's a positive for us because our tenants are not hundreds of thousands of square feet in trophy assets. Our tenants are in 8,000 or 10,000 square feet. They're not going to downsize in any material way, but we may get the benefit of somebody that was 25,000 feet saying, You know what? I could be a full-floor user at 9 Times Square with a 12,000 square foot lease, and that's a great new tenant for us on a long-term basis.
So, I think that where we sit today at 85% occupancy in a anticipated rising occupancy environment is a more predictable future than conversion from office to the residential.

Bryan Maher

Great. That's helpful. Thanks, Michael.

Michael Weil

All right. Thank you, Bryan.

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

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 again soon.

Operator

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