Q2 2020 American Assets Trust Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Q2 2020 of American assets Trust Inc. earnings call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session. Wassa question during especially in your press Star one on your telephone if you're required to further assistance. Please first started to zero I would now like.
The next Roasteries covers called Misrata, while you may begin sir.
Thank you good morning, everyone welcome to American assets Trust Inc. second quarter 2020 earnings call yesterday afternoon, our earnings release and supplemental information furnished to the FCC on form 8-K.
Now available on the Investor section of our website American assets Trust Dot com.
A telephonic replay ondemand webcast will also be available for this call over the next week.
During this call we will discuss non-GAAP financial measures, which are reconciled to work out financial results in our earnings release and supplemental information.
We will also be making forward looking statements based on our current expectations.
These statements are subject to risks and uncertainties discussed in our SEC filings you are cautioned not to place undue reliance on these forward looking statements actual events could cause results to differ materially from these forward looking statements, which we undertake no duty to update.
That will turn the call overt Ernest Rady, our chairman and CEO begin the discussion of our second quarter 2020 results.
Thank you Adam that was wells on as always.
These have been I'm precedent in the times.
I've never seen before in my lifetime.
Koeppen 19 began I honestly I Didnt know how fast will be.
We expected to be catastrophic, but we just didn't know how bad it wouldn't be.
Now that the second quarters behind Us I can tell you that it was not as catastrophic as our worst case projections. It still is that no fun.
Office has performed extremely well.
The shining light in our portfolio with high credit tenants and strong markets and that we wouldn't like to continue.
[laughter].
Multifamily that's also performed well better than we expected occupancy has been slightly lower.
Collections have been strong in the mid Ninetys.
And we expect a mean fills up tick in occupancy in August 1st as a local private University takes possession of approximately 130 units and our San Diego multi pack family portfolio, a good ramps by a master lease that has recently been executed.
Retail as expected has been very tough every deal feels like a street retail we try to balance what is best for the company and its shareholders with how to maintain the long bye bye.
Of these retail tenants that are so important to our shopping centers.
We know that some are not going to make.
Of course, we're hopeful that most of all makeup.
In fact, we're hopeful that all make up we have a committee comprised of myself, Chris element and Adam while not review every tenant request.
Ask for a deferral, we asked for something from the tenant and return as well each one is a negotiation and we tried to make sure that are we getting something fair in return for anything to mess on.
On 2% on time collection of our contractual rents.
I truly believe that our management team is second to none.
And has done an excellent job strategically navigating through this pandemic.
Americans Trust is.
Reflective of the quality people that we have working as appreciative of the quality people that we have working our company that are focused on creating value for our shareholder each and every day.
Lastly, I want to mention that our board of directors has improved increasing the quarterly dividend, 25% over the second quarter Twentytwenty debit them up 20 cents to 20 sites stands for the third quarter based on higher written collections in the second quarter than we had expected combined with a significant.
Embedded growth that we can do you expect in our office portfolio and the recent master lease sign.
In our multifamily portfolio.
A year from now once there is a vaccine we expect to look back and we.
Nothing more than a bad memories.
I believe that we came we come auto list, we will be as good a company or even better when all this started I'm now going to turn the call back over to Adam World.
Our EVP and Chief operating officer.
A quick just a quick update on our operations.
During this pandemics, followed by pop Barton, our VP and Chief Financial Officer, and we will end with a quick update on the leasing success that Steve Center, our Vice President of office properties is see.
Adam Please.
Thanks, Ernest from an operations perspective, as Corona virus infection continue to increase in many of our markets.
We remain hyper focused on the safety and well being of our personnel tenants and vendors as 100% of our properties remain open and accessible by our tenants.
We remain committed to ensuring full compliance with the ever changing regulatory mandates from all levels of government not to mention staying in front of and working against proposed regulations that we think we do damage to our industry and economy like SB 939 in California, which did not pass in the proposed repeal of prop 13 for commercial properties.
In California, which we believe is essentially a targeted tax increase on business, which will ultimately be passed onto tenants and customers.
Most of whom can absorb such increases and could lead to even more business failures.
As Chris mentioned, we continue to work with our tenants on renter permits and other lease modifications to assist those tenants as best we can whose business have been significantly impacted by cold chain.
We've also renegotiated or bid out most of our vendor contracts to meaningfully reduced operating expenses many of such reductions on a long term basis.
While maintaining our best in class properties, and we've leveraged the high unemployment rates in our markets to higher top caliber associates to fill open positions at 80.
Finally, we appreciate more than ever the positive impact that SG, including fostering a culture of diversity and inclusion has on our business our economy in our society, particularly in light of current events, our focus on human capital and physical and mental well being both within our company and in our company.
Has never been stronger and represents the foundation better culture was built on.
For more insight on our SG efforts. Please take a look at our recently published 2019 sustainability report, which can be found on the sustainability page of our website.
I will turn the call over to Bob to discuss Q2 results and the impact from Cobot 19, Bob.
Good morning, and thank you earn us now Adam.
Last night, we reported second quarter 2020 FFO.
48 cents per share and net income attributable to common shareholders of 13 cents per share for the second quarter.
Let's look at the results of the second quarter for each property segment.
Our office property segment continues to perform well during these uncertain times office properties, excluding or one Beach Street property located on the North waterfront, the San Francisco, which is under redevelopment.
96% occupancy at the end of the second quarter.
An increase of approximately 3% from the prior year.
More importantly, same store cash NOI increased 16% in Q2 over the prior year, primarily from City Center Bellevue in Washington, Lloyd District Campus Office campus in Oregon, and Torrey Reserve campus here in San Diego.
Our retail properties have not fared as well during the pandemic.
Retail properties were adding 95% occupancy at the end of the second quarter.
Decrease of approximately 2% from the prior year.
However, retail collections have been difficult during the pandemic as reflected in or negative same store cash NOI.
Additionally, due to covert 19th we have taken reserved for bad debts.
Against the outstanding retail accounts receivable and straight line rents receivable at the end of the second quarter of approximately 14% and 7% respectively.
From a dollar perspective this translates into approximately 2 million and 1.4 million respectively for a total of 3.4 million dollar reserve.
Related to our retail sector, which is approximately four and a half sense of FFO.
We intend to continue evaluating it potentially revising these reserves each quarter as we monitor the ever changing viability and solvency of each of our retail tenants.
Our multifamily properties were at an 85% occupancy at the end of the second quarter.
The decrease of approximately 8% from the prior year as also reflected in our negative same store cash NOI.
But as they're in a sense as Ernest mentioned, we expect this to increase back into the low to mid 90%.
Occupancy once our master lease with a local private University commences on August Onest.
Our mixed use property consisting of the embassy suites hotel and the Waikiki Beach walk retail is located on the island level Wahoo.
The state of Hawaii remains in self quarantine through the end of August which has significantly impacted the operating results.
In the second quarter of 2020.
The embassy suites average occupancy for the second quarter of 2020 was 17% compared with the prior year second quarter average occupancy of 92%.
Good rule of thumb in our view is that a hotel without any leverage on it needs to have approximately a 50% to 60% occupancy to breakeven.
Our team in Hawaii forecasted earlier this month, the 46% to 50% occupancy by year end 2020.
To our Pleasant surprise, we ended June with a 29% occupancy much higher than the average occupancy of 17% for the quarter.
Additionally, in the last 15 days, we have been saying occupancy ranging from 45% to 55%.
With our team in Hawaii expecting to end the month of July at the 62% occupancy.
Right now it is our our understanding that only two hotels remain open in Waikiki, one of which is our embassy suites hotel, which has been completely renovated and is like a brand new hotel.
Let's talk about billings and collections.
On a company wide basis, we collected approximately 83% of the total second quarter billings, which primarily consists of base rent and cost reimbursements. We have also collected approximately 83% of july's billings as at the end of last week.
We expect those percentages to increase as we continue to work hard on collection efforts.
In Q2, our office rent collections were approximately 98% our retail written collections, excluding Waikiki Beach retail.
We are approximately 62%.
And by the way so far in July is about 70% and our multifamily collections were approximately 95%.
Waikiki Beachwalk retail had an approximately 30% collection rate in Q2.
As Ernest noted earlier the board of Directors has decided to increase the quarterly dividend from 20 cents, a 25 cents per share. The board took into consideration the increase in collections over what was expected during Q2 combined with the embedded growth in cash flow from the office sector over the next several years as well as them.
Master lease and the multifamily sector.
Using the same 83% collection rate applied to our initial targeted dividend of 30 cents per quarter gets you to approximately 25% 25 cents per share per quarter.
As we look at the liquidity on our balance sheet.
At the ended the second quarter, we had approximately 396 million in liquidity comprised of 146 million of cash and cash equivalents and 250 million of availability on our line of credit.
And only one of our properties as encumbered by mortgage.
Our leverage which we measure in terms of net debt to EBITDA was 6.4 times on a quarterly annualized basis, resulting from the lower EBITDA from the added reserves that we took in the retail sector during Q2.
On a trailing 12 month basis, our EBITDA would be approximately 5.8 times.
Our focus is to maintain our net debt to EBITDA at five and a half times or below our interest coverage and fix charge coverage ratio ended the quarter at 3.8 times on a quarterly annualized basis.
And.
And at 4.1 times on a trailing 12 month basis.
And finally with respect to 250 million of unsecured debt maturities that come due in 2021.
We expect to extend the 100 million dollar term loan.
Up to three times with each extension for a one year periods subject to certain conditions and the remaining hundred 50 million series eight nodes does not mature until October 30, Onest 2021, which we would expect to refinance at lower rates.
Regarding our guidance as we previously disclosed we withdrew or 2020 guidance on April threerd due to the uncertainty that the pandemic would have on our existing guidance, particularly in our hotel or retail sector.
Fortunately the economy continues to change day by day in the current outcome remains uncertain as to NPAC in duration, which is why we will continue to withdraw our 2020 guidance.
I'll now turn the call over to Steve Center, our Vice President of office properties for a Steve for a brief updates on our successes and opportunities in our office segment Steve.
Thank you Bob.
We ended the second quarter net of one beach, which is under redevelopment our office portfolio stood at approximately 96% lease with approximately 6% expiring through the end of 2021.
We were fortunate to renew the IRS and veterans benefits administration leases early in 2020, the first in man in Portland in a total of 131000 feet and start reached nearly 20% above the range that exploration.
Given the quality of our assets and the strength of the markets in which they are located with technology and life science as key market drivers, we continue to execute new and renewal leases at favorable run rate delivering continued annualized growth.
Leases already signed we had locked in approximately 29.6 million NOI growth comprised of 6 million in 2020 14 million in 2021, and 9.6 million in 2022 in our office segment.
We anticipate significant additional analyte growth in 2022 through the redevelopment and leasing of one be street in San Francisco, and 710, Oregon Square and avoid Submarket in Portland, along with the repositioning of two buildings at Torrey Reserve and the Dumber Heights Submarket of San Diego.
In addition.
We can grow our office portfolio by up to 768000, rentable square feet or 22% on sites, we already own by building tower three of the way Commons, which is 213000 feet.
90, and one of three at Oregon square totaling up to 555000 square feet.
Tower three of the way it Commons is into the city San Diego for permits and we continue evaluating market conditions prospective tenant interest and hopefully decreasing construction costs, leading to our up coming commencing construction.
The next schematic schematic design is completed for blocks 90, and one of three and Oregon Square with design development at 50% complete.
We are scheduled for our first hearing with the design Review Committee in Portland on August 20.
We currently have two active request for proposals from from prospective tenants for blocks 91, three totaling 422000 square feet, but again, we will be evaluating market conditions tenant interest and construction costs prior to commencing construction.
We have a stable office portfolio with little near term rollover significant built in NOI growth.
Additional upside through repositioning and redevelopment redevelopment within our existing portfolio plus substantial new development sites, we already own.
Operator ill now turn the call overachieve requests.
Good thing.
Again, ladies and gentlemen, if you have a question or comment please press the star than the one key on your Touchtone telephone our first question clubs or Richard Hill with Morgan Stanley.
Hey, you guys you got Ron can them on the line for Richard.
Just.
I can tell Richard we're glad to have you Ron so so well.
Yes.
That's right.
Just a couple couple of quick ones from me.
The first is just going back to sort of the reserves taken on the uncollected rents in the retail portfolio.
I guess the question is trying to get an understanding of how much conservatism baked into that and how confident you feel that.
There is not maybe more reserves coming down the line as ads and that sort of that the pandemic installed so trying to get a sense of the conservatism and the numbers that that you guys took.
Yeah, Ron Thanks for the question.
We we.
Record those reserves in accordance with generally accepted accounting principles and under that Theres, a section called a 42 and what it says is that we have to be.
So.
775% confident that we're going to receive 95% of the cash flows and in layman's terms. What we look at it is is the tenant going to survive or not survive and so we have a group of about eight people, including Adam who's involved with the leases Chris all of a.
Heads up our retail our controller.
It's a whole team effort.
And what we do is we try to be we're not trying to be aggressive at all what we're trying to do is be conservative and but in this pandemic. It changes daily and what we do as we continue to evaluate dead on a month to month basis, and as new developments happen.
We'll with the reserves increase overtime it depend debt as a pandemic continues to linger there'll probably be more fallout and as a result will probably have to add to reserves, but at this point in time I feel that those reserves that we put on the books are adequately.
Presented on a conservative basis.
Our strategy has always been to try and over promise under promise on overbuilding and there is no pressure to have those reserves less than they ought to be.
As Bob said that committee has looked at it carefully and Thats, our best bet. These present circumstances, Ron and thank you for asking.
Got it just.
A couple more quick ones.
Just on the dividend.
I think he decides to raise in Threeq bye bye.
I think you cited just better battle rank collections.
Just trying to get a little more color what went into that vision.
Feels like.
Maybe the board thinks that the wars behind them and you feel like you sort of how they handle on the pandemic in the fall out.
Sorry to do that so what went into that decision what gave you confidence to boost.
Actually I mean, how should we think about that going forward.
As I said earlier run going into this pandemic.
Frankly.
Close to panicked, because I've never seen circumstances like this and I thought that we are in for a catastrophic situation.
The situation has not been as bad as our.
Worst case thoughts, let us too and so when we.
When we presented to the board.
Quarter over go to kind of from 30 cents to 20 cents, we took into account our view of the unknown is that we were facing.
But as we've come face to face with those I gnomes, while they've been very upsetting and very difficult. They havent been this catastrophic as we expected. So we suggested to the board. They look at this with a more balanced approach and rather than catastrophic approach that we had suggested at the.
Last quarter and so.
We would we paid a dividend if you want to know the truth, we would love to have maintained that dividend at the same central App.
We went public and increase it as we have over the 911 or 12 years since we've been public that is just not in the cards that given the circumstances that we're presently facing.
And we'll just have to see how it unfolds the board will make a decision.
Quarter by quarter, but I would think that based on the.
On the projections, we have now and I feel we happen to marketplace that the 25 cents should be able to be continue and with any good luck.
We will get back to where we'd like to be which is the same dividend as in prior years, and even a small increase tall possible feasible.
Great and then my last one if I may.
I think one of the questions. We're getting the most on the desk is just about sort of work from home in the implications right.
No and I think about your portfolio and just a great amount of demand in the tenants I think the numbers, it's sorta showing that.
The question is really what's the possibility of sort of the office market turning into a have a half knots right.
Think about some of maybe the old stock.
Out there compared to sort of your sort of class eight Scott.
Is there what's the possibility of maybe those assets being just across the impacted more on and what are you hearing on from tenants on the work from home fraud.
Sort of thinking the base. Thank you.
Well I think with this started everybody said well who needs office.
But I'd tell you.
Somebody who is involved in business on a day to day basis, we Miss.
People coming into the office and all the.
Results good results that flow from that the idea flow that training and so I know the theory is you don't need office the practices office is a valuable.
Away to operate a business and I'm looking forward to people coming back. How this is all going to come about I don't know, but I have confidence that the office portfolio, we have in the high quality high growth markets renders innovation.
And job creation, we will have a market for our office and hopefully even to a growing market.
That's my Best guess I mean on with the answer is but you probably here in lots of people if they if it was if it was New York City.
I would be more freight we should go I'd be more Frank.
Coastal west coast markets are very vibrant.
And I think we have good future with a portfolio.
Right.
Thank you appreciate it thank you Ron.
Our next question comes from Todd Thomas with Keybanc capital markets.
Hi, Thanks. Good morning, just first question I guess following up on on that.
Just wondering if you had any update specifically from from Google regarding their plan to move in and occupancy at landmark just given their latest announcement about not bringing back employees until at least the summer of 21.
Jerry Cambia is going to answer that keys in constant contact with them and we'll update you. Yes. Thanks for the question Todd Yeah. Good morning, Todd So at our landmark project in San Francisco in March we basically stopped construction at that point.
And at that point, we had two of the seventh floor is completed.
They have re mobilized this week and they are proceeding with the work on during the.
The break I'll call. It there was a lot of discussion about what they would do with the space, whether they would reprogram, whether they would change their layout or the floor plan and the decision has been made to proceed with the plans as originally contemplated so.
They are moving ahead.
Full steam now starting again this week and.
Expecting to complete somewhere around the first quarter of 21.
Okay and then.
Our next I appreciate your perspective sort of longer term, but curious in the interim here.
I was you're moving forward with.
A number of leasing initiatives and in the office segment.
Are you seeing any any changes in demand across your markets.
Changes in conversations with with tenants about how they're thinking about office space rents.
Or their decision that sort of willingness to sign leases today.
Tightened less somebody's dad, dumb and Def there, they're thinking about that circumstances that theyre operating under now and by Steve is centuries, and constant contact with the eight the agents and the prospective tenants and you probably best able to handle that Steve yes.
We're seeing.
Tenants proceed but their plans. One example is smart sheet.
As recently signing a deal to accelerate taking two additional floors. The city center Bellevue by 14 months.
As Jerry point out Google, they're proceeding with their plans, it's not a matter if.
They are moving back and its matter when and what I liked about the message from Jerry is that they're going with the design that they previously come up with pre coated. So that's a believe it indicates to me if thats a belief that we're going to return to some semblance of normal and.
Get back to business and so we've got two deals were in discussions with in Portland for 2023 deliveries and those are businesses looking through the noise and looking into the future and they've got to grow an 80 to own for all those employees. So.
So far so good, especially with our tech technology and life science companies.
Okay, and then is shifting over to the multifamily segment. The occupancy decline there was a little bit greater than we expected, but it seems like occupancy is going to get a boost with the master lease at Pacific Ridge.
What's the term.
Of that master lease and.
The master lease representative of market rents and then when that kicks in on August Onest, where where would you expect multifamily occupancy to be.
The the master leases for two projects.
Loma Palisades and Pacific Ridge, and Abigail why don't you.
You bet.
Adam Gail and Adam did a great job in.
In negotiating this transaction.
Sure. Good morning, so that master lease agreement will span between Loma Palisades.
Ranjan consist of about 130 unit.
A little bit.
Above market rate, because it's an all inclusive rental rate package for the University that will be for a 10 month term starting August 1st and then go through May 31st.
2021.
[music].
Yes.
Yeah.
We anticipate that come August when all of the move and take place not only in addition to the master lease felt with other renters as well will probably be back to the low to mid Ninetys as Bob mentioned earlier.
One thing you have to consider is that the government's now or extending the terms that tenants have to pay the ramp with this lease it's collectible.
Thats a huge difference. So in addition to the rate to be.
Acceptable and perhaps even a bit more than acceptable.
Quality.
For payment is assured and Thats a big deal in this crazy market.
Okay.
Alright, great. Thank you. Thank you Todd Thanks, Thanks for your interest.
Our next question comes from Craig Smith with Bank of America.
Good morning, Craig.
Good morning, Q Hum.
Just wondering what you're seeing regarding the California efforts to roll back reopening on the retail real estate, whether in terms of impact the traffic or possible impact on rent collection.
Chris you want to have again, I mean, if nothing changes day by day.
So maybe you can that type of view that you're going to Sherry.
Margins impact.
Came back as you remember right after.
Good morning on day restaurants were allowed to start.
Hi.
That only last for a couple of weeks or so Webb County.
And then when they shut down.
Restaurant operating inside tiny that really through.
Mentioned assistance as you drive around your own.
Where you are you can see the restaurants.
Try.
Sidewalk diameter, patios and that unfortunately with that.
Lower to the occupancy still lives that they're all strives by just to cover their cover their cost and keep that remains yes.
Staff, so that really.
Into it.
So the shopping center guys have you might add 10% to 15%.
Service.
Parties together.
That really are.
Yes.
On the nail salons.
Service providers that we're no longer able to have folks come inside.
So as this constant little chipping away.
Certainly.
Retail so.
That's a big piece.
In fact, all the problems tourism and the rest of it though country.
Spacing.
Thanks, Chris Thank you Craig any more questions Craig.
I guess I know that.
In terms of.
University housing for students.
The changing densities that there are allowing is that having any impact.
Is it more negative on you in terms year multifamily leasing, yes, I think that was the Genesis for the lease that we signed with the local University.
Sure.
The Densifying if thats a word there.
Norms and they needed more space.
Unfortunately that lease expires.
Just at the heavy rental season, so having a better opportunity to fill those leases.
Hopefully when the market is more normal there is a vaccine that world has returned to normal and our properties will have the opportunity to fill them.
Thank you.
But in the meantime, it's a great stopgap measure.
Collectible okay. Thank you.
Thank you.
And I'm not showing any further questions at this time, let's turn the call back over to chairman to earn us ready for concluding remarks.
To sum it all up this is a very difficult time.
American assets Trust has great properties, a great team and liquidity at certain that we will see the other side of this pandemic and we will come out of this at least as good as we were coming into this and hopefully better with all the opportunities that are available to us. So thank you all for your interest and.
We hope to talk to you 90 days from now.
Ladies and gentlemen does conclude today's presentation. You may now disconnect that have a wonderful day.