What are the units of distance in this subtended angle calculation?

The units of radians are 'dropped' because unlike most units, they are dimensionless. Recall that the definition of radian angle measure is the ratio of the length of a circular arc to its radius. Thus, radian angle measures have units of $[mathrm{Length}]/[mathrm{Length}] equiv 1$, i.e. dimensionless.

Radians are units in the sense that they give information about what standard the angle quantity is measured by. Thus, the convention of writing $mathrm{rad}$ is useful in that it distinguishes it from other ways of measuring angles (e.g., in your question, arc-seconds), but in terms of dimensional analysis, $mathrm{rad} equiv 1$, so $mathrm{m}/mathrm{rad} = mathrm{m}$.