American Strategic Investment - Q2 2024

Transcript

Operator (participant)

Good morning, and welcome to the American Strategic Investment Company's Q2 earnings call. My name is Bailey, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and one. I would now like to turn the conference over to Curtis Parker, Senior Vice President. Please go ahead.

Curtis Parker (SVP)

@Good morning, everyone, and thank you for joining us for our Q2 2024 earnings call. This event is also being webcast in the Investor Relations section of our website. Joining me today on the call to discuss the quarter's results are Michael Anderson, American Strategic Investment Company's Chief Executive Officer, and Mike LeSanto, the Chief Financial Officer. The following information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Please review the forward-looking and cautionary statement section at the end of the Q2 2024 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our call today.

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, 2023, filed on April 1, 2024, 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. We 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 Anderson, Chief Executive Officer. Please go ahead, Michael.

Michael Anderson (CEO)

Thanks, Curtis. Good morning, and thank you all for joining us. Our positive results for the Q2 included adjusted EBITDA growth of nearly 50% compared to the Q2 of 2023. We achieved this growth through a reduction in G&A and operating expenses, coupled with our ongoing leasing success. We also delivered an 80 basis point expansion in occupancy to 85.9% compared to the same quarter in 2023. Additionally, as we previously announced, we signed a non-binding agreement to sell our property at 9 Times Square for $63.5 million, which became definitive last week. The sale of this property would reduce leverage on our balance sheet and generate net proceeds of approximately $13.5 million, strengthening our cash position.

While there is no guarantee that the sale will close, we continue to work with the buyer to complete the transaction. We acquired this property in 2014 for $170.3 million. Accordingly, we incurred a non-cash impairment of $84.7 million in this quarter's results. Importantly, and as we previously shared, we successfully extended our debt on this asset through year-end as we work to close this transaction. The marketing process for the sale of 123 William Street and 196 Orchard Street is ongoing. We believe that these properties are also well positioned to generate significant net proceeds. We intend to use the proceeds from any disposition to diversify our portfolio into higher-yielding assets, a strategy we discussed last year.

We are excited to be moving forward on this initiative and look forward to the opportunity to increase value over time. While we are committed to value creation, we are focused on our current assets. As of June 30, 2024, our portfolio weighted average remaining lease term was 6.3 years, as 45% of our leases extend beyond the year 2030, based on annualized straight-line rent, which we believe enhances the stability of the real estate we own. Of the top ten tenants, 81% are investment-grade or implied investment-grade, showing the quality of our tenant roster. These tenants had a remaining lease term of 7.9 years, providing further stability to our portfolio. We believe our proactive asset management strategy has enhanced the marketability of our $593 million, 1.2 million sq ft New York City real estate portfolio.

Concentrated primarily in Manhattan, our 7 office and retail properties boast a strong tenant base, including several large investment-grade firms. By focusing on resilient industries like finance and healthcare, and strategically locating our properties in desirable transit-oriented areas, we believe we've positioned ourselves for success. Our Q2 results underscore the value of our consistent portfolio management approach. By prioritizing tenant retention, property enhancement, and cost control, we've created a solid foundation for maximizing shareholder value. As we embark on divesting certain Manhattan assets to reduce leverage and pursue higher-yielding opportunities, we are confident in our ability to execute on this strategy. With that, I'll turn it over to Mike LeSanto to go over the Q2 results. Mike?

Mike LeSanto (CFO)

Thank you, Michael. Q2 2024 revenue was relatively flat, as we produced $15.8 million in the Q2 of 2024, compared to $15.8 million in the Q2 of 2023. The company's GAAP net loss attributable to common stockholders was $91.9 million in the Q2 of 2024, compared to a net loss of $10.9 million in the Q2 of 2023, due primarily to the non-cash impairment Michael discussed earlier. For the Q2 of 2024, Adjusted EBITDA was $4.5 million, compared to $3 million in the Q2 of 2023. The growth was achieved through a reduction in cash paid for G&A and operating expenses, coupled with our ongoing leasing success.

Cash Net Operating Income was nearly flat at $7.4 million, compared to $7.5 million in the Q2 of 2023. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release and quarterly supplemental on our website. At quarter end, we had a relatively conservative balance sheet based on net leverage of approximately 56%, a weighted average interest rate of 4.9%, and 2.7 years of weighted average debt maturity. I'll now turn the call back to Michael for some closing remarks.

Michael Anderson (CEO)

Thanks, Mike. Thank you all for joining us today. Our strong performance this quarter, marked by increased occupancy and growing Adjusted EBITDA, is a direct result of our strategic portfolio management efforts. As we initiate the divestment of certain Manhattan assets, we anticipate generating substantial cash proceeds and reducing our leverage. These funds will be instrumental in expanding our portfolio into new, higher-yielding opportunities. We believe that this is a strategic opportunity to enhance shareholder value and are committed to providing updates on our progress. Operator, please open the lines for questions.

Operator (participant)

Or to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Bryan Maher with B. Riley Securities. Your line is open.

Bryan Maher (Managing Director)

Thank you, and good morning. Just a few from me this morning, Michael. You continue to be a little bit vague about the redeployment of the proceeds, if and when you sell 123 William and 196 Orchard. Can you give us any color on? Are you willing to share anything more on kind of location or asset type? Has that evolved at all in a way that you can share that with us?

Michael Anderson (CEO)

Sure. So, you know, we, obviously don't have anything specifically identified at this point as we do continue to undertake the divestment process for 123 William and 196 Orchard. But I do envision that likely deployment of assets in the New England region and real estate coupled with operating business-type investments that we were precluded from touching in our prior restructure because of the operating nature of some of the businesses. And so I, I think that those are the types of assets and opportunities that we see fitting well within the portfolio and within our our skill set.

Bryan Maher (Managing Director)

As it relates to those two assets, can you share, you know, maybe the level of interest? If you don't want to go down that road per se, do you think it's something that either or both of those properties are under contract sometime in the back half of this year, or is it more likely to be the first half of next year?

Michael Anderson (CEO)

Yeah, so we've not accepted any offers on either of those, but we have begun recently to receive offers on both, and have ramped up the marketing process there. Our focus was certainly on 9 Times Square, as we had a near-term debt maturity there. But I do think that it's entirely possible, if not likely, that we see both of those assets under contract by year-end.

Bryan Maher (Managing Director)

Great, that's helpful. And then on 9 Times Square, I think you said you went definitive recently on that. Do you have a hard deposit on that, that the potential buyer cannot take back?

Michael Anderson (CEO)

We do, yes. The buyer put up approximately 10% of the purchase price as a non-refundable deposit about a week ago, and we expect to close that transaction no later than mid-Q4.

Bryan Maher (Managing Director)

Okay. And as it relates to occupancy in the quarter, 123 was down a little bit, 1140 was up a bit higher than our expectations. Anything going on with either of those two properties that we should know about from a, you know, leasing standpoint?

Michael Anderson (CEO)

Yeah, I think the real story at 123 is we do have a lot of interest and volume there in the works. Nothing signed or definitive at this point, but we're seeing a lot of interest in existing tenants expanding their footprint. Kind of an organic growth of those core tenants in the property. And we do continue to see a lot of traffic at 1140, as you noted, and have a handful of leasing transactions in the works.

Bryan Maher (Managing Director)

And then just last for me-

Michael Anderson (CEO)

Next quarter.

Bryan Maher (Managing Director)

Last, and kind of an open-ended question. I don't know if you saw last night, CNBC did a pretty meaningfully sized piece in the evening on the prospect that office has bottomed, possibly, even it bottomed last year. Are you seeing any signs of this? And in general, and in specifically in New York, are you seeing any kind of increased interest in leasing activity in your office buildings that maybe you didn't see just a couple of quarters ago?

Michael Anderson (CEO)

Yeah, I think that's an accurate assessment. We have seen more foot traffic. I think in-office policies have become the standard at this point. That wasn't necessarily the standard 12 months ago, and so I think we're seeing a lot more foot traffic in the Midtown and Financial District markets with return to work. And we're seeing more foot traffic with our existing tenants looking to expand. And I think tenants that took space during COVID or shortly after COVID are now needing additional space because of increased return to work requirements. And I think that we're starting to see some pricing come back in landlord's favor over where we were six months ago.

Bryan Maher (Managing Director)

Great. Good news to hear. Thanks. That's all for me.

Michael Anderson (CEO)

Thanks, Brian.

Operator (participant)

There are no further questions at this time. I would now like to turn it back over to management for closing remarks.

Michael Anderson (CEO)

Thank you. And again, thank you all for joining us this morning. We're excited about the quarter that we've had and what holds in the future for us, particularly with our divestment and reinvestment strategy, and we're looking forward to sharing additional updates as we have them in future quarters. Thanks.

Operator (participant)

Thank you. This does conclude today's conference call. You may now disconnect.