The Company's History and Portfolio
American Strategic Investment Co. (NYSE: NYC) is an externally managed real estate investment trust (REIT) that has undergone a significant strategic shift in recent years. Formerly known as New York City REIT, Inc., the company has expanded its investment focus beyond traditional office properties to include a broader range of asset types, positioning it for potential growth opportunities.
American Strategic Investment Co. was founded in 2014 and initially elected to be taxed as a REIT. The company's portfolio consisted primarily of commercial real estate assets located within the five boroughs of New York City, with a focus on office properties and accompanying retail spaces and amenities. As of June 30, 2024, the company owned seven properties totaling 1.20 million rentable square feet, with an overall occupancy rate of 85.9%.
In August 2020, the company's shares of Class A common stock were first listed on the New York Stock Exchange. Subsequently, in January 2023, the company effected a 1-for-8 reverse stock split and changed its name from New York City REIT, Inc. to American Strategic Investment Co.
Strategic Shift and REIT Termination
On December 30, 2022, the company announced a change in its business strategy, expanding the scope of assets and businesses it may own and operate. This decision was driven by the company's desire to diversify its revenue streams and potentially generate income that does not qualify as REIT-eligible. As a result, on January 9, 2023, the company's board of directors authorized the termination of the company's REIT election, effective January 1, 2023.
Navigating the Pandemic's Aftermath
The COVID-19 pandemic had a significant impact on the New York City real estate market, where all of the company's properties are located. The city was among the hardest hit regions in the country, and the recovery has been challenging, with lingering effects on leasing activity and occupancy levels. During this period, the company experienced difficulties in leasing up available space and maintaining occupancy, which negatively impacted its results of operations, cash flows, and ability to comply with certain mortgage debt covenants.
Financials
For the year ended December 31, 2023, the company reported a net loss of $105.9 million, compared to a net loss of $45.9 million in the previous year. This decline was largely attributable to impairment charges of $66.6 million recorded during the year, primarily related to the 1140 Avenue of the Americas property.
The company's financial performance continued to face challenges in the most recent quarter. For the three months ended June 30, 2024, American Strategic Investment Co. reported revenue of $15.83 million, a slight decrease from $15.78 million in the same period of the previous year. The net loss for the quarter significantly widened to $91.85 million, compared to a net loss of $10.90 million in the second quarter of 2023. This substantial increase in net loss was primarily due to an $84.72 million impairment charge related to the 9 Times Square property.
For the six months ended June 30, 2024, the company's revenue from tenants was $31.23 million, compared to $31.32 million for the same period in 2023. The net loss for the first half of 2024 was $99.46 million, a significant increase from the $22.66 million loss reported in the first half of 2023.
Operating cash flow (OCF) for the most recent quarter was negative $0.92 million, while free cash flow (FCF) was negative $1.12 million. For the full fiscal year 2023, OCF was negative $7.41 million, and FCF was negative $11.46 million.
The company's primary operating expenses include asset and property management fees to related parties ($1.93 million for Q2 2024 and $3.83 million for H1 2024), property operating expenses ($8.46 million for Q2 2024 and $16.84 million for H1 2024), and the aforementioned impairment charges.
The adverse economic impacts of the pandemic have also led to covenant breaches and cash trap events on certain of the company's non-recourse mortgage loans. As of June 30, 2024, two of the company's mortgages, totaling $109.0 million in principal, remained in cash trap events, restricting the use of excess cash flow from these properties to fund operating expenses and other capital requirements.
Liquidity
To bolster its liquidity, the company has explored various capital-raising initiatives. In February 2023, the company completed a non-transferable rights offering, raising gross proceeds of $5.0 million. Additionally, the company has been able to preserve cash through an arrangement with its Advisor, which allows the Advisor to receive shares of the company's common stock in lieu of cash for certain services.
As of June 30, 2024, the company's cash position stood at $5.22 million. The company does not have any committed credit facilities available. The debt-to-equity ratio was 3.13, while both the current ratio and quick ratio were 2.27, indicating potential liquidity challenges.
Outlook and Strategies
As the company navigates the challenges posed by the pandemic's aftermath, it is focused on increasing occupancy within its portfolio, seeking new and replacement tenants for expired or terminated leases. The company believes that the use of tenant incentives, such as free rent periods and tenant improvements, will support its occupancy rate and extend the average duration of its leases.
During the first half of 2024, the company showed some progress in leasing activity. In the first quarter, one new lease commenced for 8,120 square feet at an annualized straight-line rent of $22.16 per square foot. In the second quarter, another new lease commenced for 5,280 square feet at an annualized straight-line rent of $70.30 per square foot. However, the company also had one lease terminated or expire during this period, covering 12,180 square feet.
Furthermore, the company is actively marketing certain properties for sale, including its 9.00 Times Square asset, which it expects to sell no later than January 2025, subject to certain conditions. The company's ability to execute on these sales and redeploy capital into new, potentially more diversified asset types will be crucial in its transformation and future growth.
Risks and Uncertainties
American Strategic Investment Co. faces several risks and uncertainties, including the continued impact of the pandemic on the New York City real estate market, the ability to successfully acquire new assets or businesses, and the potential challenges in executing on property sales and redeploying capital. Additionally, the company's transition away from REIT status introduces new regulatory and tax-related considerations that it must navigate effectively.
The company's financial performance remains under pressure due to the challenging market conditions in New York City's commercial real estate sector. The office market, in particular, continues to face headwinds with high vacancy rates and slow leasing activity, which directly impacts the company's properties.
Conclusion
American Strategic Investment Co. is at a pivotal juncture in its history, having recently terminated its REIT election and embarked on a strategic shift to diversify its asset base and revenue streams. While the company has faced significant headwinds due to the pandemic's aftermath, its focus on increasing occupancy, executing property sales, and exploring new investment opportunities could position it for potential growth in the years ahead.
The company's financial performance in the most recent quarter, particularly the substantial impairment charge related to the 9 Times Square property, underscores the ongoing challenges in the New York City real estate market. However, the slight improvement in leasing activity and the company's efforts to optimize its portfolio through strategic sales and potential diversification offer some hope for future recovery.
Investors will closely monitor the company's ability to navigate these challenges, improve its liquidity position, and capitalize on emerging opportunities as it redefines its role in the evolving real estate landscape. The success of American Strategic Investment Co.'s transformation will largely depend on its ability to execute its new strategy effectively while managing the risks associated with its concentrated portfolio in a still-recovering New York City market.