Q1 2021 American Assets Trust Inc Earnings Call

Good day and thank you for standing by welcome to the Q1 2021 American assets Trust, Inc. Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

I ask a question during the session you will need the press star one on your telephone. Please be advised that today's conference is being recorded is the acquire any further assistance. Please press star zero and I.

I'd now like to hand, the conference of it you speak of today.

Adam while EVP and CFO. Please go ahead.

Thank you operator, and good morning, everyone and welcome to American assets Trust first quarter 2021 earnings call.

Yesterday afternoon, our earnings release and supplemental information were furnished to the SEC on form 8-K. Both are now available on the investors section of our website and American assets Trust Dot com. The telephonic replay and on demand webcast will also be available for the call over the next week.

During the call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results and 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 arise.

Cause our results to differ materially from these forward looking statements for a number of reasons, including uncertainty related to the scope severity and duration of the COVID-19 pandemic on us and on our tenants and with that I'll turn the call over to Ernest Rady, Our chairman and CEO to begin the discussion of our force first quarter 2021 results.

Thank you Adam.

First and foremost once again, we hope that this letter finds you and your loved ones the space.

Thankfully at several of vaccines have been broadly administered and it would be we'd begin to reach herd immunity. We are very optimistic that the pandemic is nearing the sand and our lives will soon return to normalcy and our final financial results will continue to improve into 2021.

Over the past year of the COVID-19 pandemic severely affected most industries and commercial real estate being no exception and we knew what the onset of the past.

But that American assets trust would not be impervious to the economic impact, but we were confident that the high quality irreplaceable properties and <unk>.

Asset class diversity of our portfolio combined with the strength of our balance sheet and ample liquidity.

The pull us through this.

As we've worked our way.

Through these past 12 months, however, we realized that and so the risk is the resiliency of our properties and our company's employees that has enabled us to weather the storm and Fortunately to embark on the path to recovery. We are proud of our response to the challenges presented to us and 2020 and our.

Ability to successfully operate.

For our company, while keeping our employees and customers as safe as possible and we've been through hard times before and each time, we emerged stronger which is that our expectation now as we celebrate our 10th anniversary of being the New York Stock Exchange listed company, we are reminded that our COO.

Amendment to our stockholders has always remained front and center, we will continue to do our best to Accretively grew our asset base and shareholder wealth.

And on both organic growth and development opportunities as they present themselves within our existing portfolio as well as acquisitions and our targeted coastal west coast markets with a primary focus on the office sector going forward at this time.

And finally I want to mention that the board of directors has approved the quarterly dividend of <unk> 28 cents a share for the first quarter consistent with our previous dividend.

Which is we believe is supported by our collection efforts and the first quarter. The border is the board is looking for the rebound and Waikiki, which impacts our embassy suites and our retail on Waikiki Beach walk once the mandatory quarantine has been eliminated.

The seen the beginning of a recovery and Waikiki, which will allow the board to consider and increase in the dividend. We are hopefully that this will recur in the third quarter and hopefully sooner.

And I'm, Bob and Steve will go into more detail on our various assets segments collections and financial results and I will be available for any questions. You may have at the conclusion of repair and remarks on behalf of all of US at American assets Trust and we thank you for your confidence and allowing us to manage the company and for your <unk>.

<unk> support and now more than ever I'm going to turn the call back over to Adam. Thanks. So on US we are feeling more bullish than at any time over the past 12 months now that the vaccine is widely available. The COVID-19 governmental restrictions on our coastal markets of lightened considerably and we are seeing firsthand the consumer behavior.

And has begun reverted closer to pre pandemic levels per.

Perhaps most significantly and California, Governor Newsome announced recently that the stable fully reopened its economy on June 15th lifting substantially all of the restrictions that have guide of daily life for more than a year and California. We're currently two thirds of our annualized base rent is derived we would expect our other coastal markets to follow similarly, and the <unk>.

And to come and Meanwhile, we are encouraged and seeing our shopping center parking lots of coal our office tenants returning rescheduling the return to office tourism ramping up and Hawaii and public schools and our markets are starting to open back up allowing parents to return to work shopping and the like are collections of continued to improve each quarter since the pandemic began.

And improved each month and Q1 with the collection rate north of 93% for the first quarter. We expect this collection trend to continue to improve going forward with April at approximately 94% to day.

Furthermore, we had approximately $800000 of deferred rent due from about 100 tenants and Q1 based on COVID-19 related lease modifications entered into in 2020, and we have collected approximately.

Proximately, 88% of those deferred amounts we believe this further validates our strategy of supporting our struggling retailers through the government mandated closures.

We have avoided any material impact from retailer bankruptcy, having lost only 13000 square feet and the aggregate out of our over 3 million square foot retail portfolio, which we believe is a testament to us having superior locations at these restructured tenants want to remain and.

As we've mentioned before we continue working with challenged retailers with a heavy focus currently on those and Waikiki, who historically have been solid operators to bridge them through to the recovery is tourism continues to ramp up which is primarily from the U S. Mainland at this point as Asian countries had not yet relax COVID-19 restrictions and their travel to Hawaii.

Additionally, we are seeing significant positive activity and engagement with new retailers for vacant or distress spaces, and our retail portfolio as we negotiate new retail leases and term sheets, which we will keep you posted on.

On the multifamily front, we have hired a new community manager at our house of low on a property, who we were who we expect will lead out the low to increased occupancy and better financial results over the remainder of the year. Furthermore of the 133 unit Master lease with the private University and our San Diego multifamily portfolio expires at the end of May.

And our San Diego multifamily team led by Abigail Rex is fully engaged on additional marketing and advertising campaigns to entice students to remain and expiring units and to attract new prospects to date and we have leased approximately 20% of those expiring units and expect to have the majority of them released by the end of summer.

And I want to mention that last week, we issued our 2020 sustainability report, which covers our 2020 operations and highlights of our initiatives and commitments across a range of topics, including health and safety environmental and social responsibility corporate governance and was prepared entirely in house and a a T. These initiatives were of massive collaborative effort from our and.

Ploy base led by our sustainability Committee with Representatives of Representatives from virtually every department and our company and oversight from our executive management team and board of Directors. We are proud of our efforts to day, particularly our focus on human capital, but we know we have a lot more work to do going forward on all fronts. We welcome you to visit the sustainability page of our website to download.

Our 2020 sustainability report for more details please reach out with any questions with that I'll turn the call over to Bob to discuss Q1 financial results and more detail.

Good morning, and thank you Ernest and Adam.

The reported first quarter 2021 F F O per share of <unk> 38 cents first quarter 2021, net income attributable to common stockholders per share of.

Two says I believe it is important to note that the S. F O and the first quarter includes a charge of approximately $4 3 million for the early extinguishment of $150 million senior guaranteed notes series, a which were due on October 31 2021.

Without the charge for the early extinguishment of debt, our first quarter 2021 peso per share would have been approximately 44 says.

From a financial perspective, it was a relatively quiet quarter I'm not going to spend a lot of time on anything that has already either been discussed or as in the earnings release and save time for the follow up questions. We did end up close to our expectations based on the current environment same store metrics are down and retail as expected and office was.

Also lower for the quarter, but is expected to and with 8% of greater same store cash NOI for the year end of 2021 and I'll now turn the call over to Steve Center, Our Vice President of office properties for a brief update on our office segment Steve.

Thanks, Bob at the end of the first quarter net of one beach, which is under redevelopment of our office portfolio stood at approximately 94% leased with just three 4% expiring through the end of 2021.

Our top 10 office tenants represented 52% of our total office space rent.

Given the quality of our assets and the strength of the markets in which they're located with technology and life Sciences. The key market drivers our office portfolio has weathered the crisis well current stats by region are as follows Bellevue is 96, 5% leased.

Portland is 97, 1% leased.

San Francisco is 100% leased net of one beach and San Diego was 89, 1% leased with two buildings under renovation of Torrey reserve, making up five 8% of San Diego's vacancy and.

And two six per cent of the office portfolios vacancy.

Our strategy of offering lease term flexibility, while preserving pre COVID-19 and rental rates produced 36 comparable new and renewal leases over the last 12 months totaling 182000, rentable square feet, but the weighted average increase of eight 9% over prior rents on a cash basis 16, 9% on a straight line basis the way.

The average lease term was 3.3 years with just $8.07 per rentable square foot and T I's and incentives.

We experienced limited small tenant attrition due to COVID-19 and other business challenges during the quarter, resulting on a net loss of approximately 31000 rentable square feet, none of which was lost to a competitor.

However, smaller tenant activity has picked up significantly with tenants willing to commit to longer term leases at favorable rental rates, even more encouraging is the push of returned to the office and the emerging large tenant activity and competition for quality larger blocks of space and select markets, including San Diego and Bellevue.

We continue to strategically invest and our current portfolio through renovation and redevelopment and ground up development the.

And the renovation of two of the 14 buildings of Torrey reserve should be complete this summer and the process. We are enhancing the campus amenities and aggregating large bought large blocks of space and the del Mar height, submarket to meet demand and take advantage of pricing power.

Construction has commenced on the redevelopment of one Beach Street in San Francisco with delivery and the first half of 2022 and construction is nearly complete on the redevelopment of seven and 10, Oregon square and the Lloyd's Submarket of Portland one.

On beach will grow to over 102000 and square feet and seven and 10, Oregon Square will add more than 33000 square feet to our office portfolio.

Construction has also commenced on tower three of the way of comments of 213000 square foot 11 story class, a plus office tower and the UTC Submarket of San Diego with expected completion in Q2 Q3 of 2023.

We are encouraged by the emerging large tenant activity and competition for quality large blocks of space and UTC.

We are optimistic about our office portfolio as we move forward into the rest of the 2021 and be on operator, I will now turn the call over to you for questions.

Thank you.

To ask a question you will need the press star one on your telephone.

Your question press the pound key.

Please stand by while we compile the Q&A roster.

Our first question comes from Craig Schmidt with Bank of America. Your line is now open.

Thank you on <unk>.

Hey, how are you I wonder if you are in the code.

Good.

And as the retail leasing environment and.

At the end of March.

The first four weeks or so of April can you describe where we can lease the news would I get the much.

When you go.

I think I remember the we're going to ask Chris Sullivan cancer that he's been in the midst of it and as our interim and expert.

External as well.

Good morning, Craig.

The lease is definitely picked up exactly picked up since before March and respected more phone calls the real estate department of our retailers starting to look for space starting to shore stuff.

And our solid of Black obviously in 2019 with it and you start to pick up towards the starting to go on so on the way more optimistic now than it was the year ago debt to help answer your question.

Right.

Still sounds like a generally improved.

The beginning of the year.

And generally improving you really got of focus back on California and pop.

And with the indoor dining and if you look at so many of the shopping centers throughout the country not quite of bit of dining.

And just consider that category and anchor tenant and in California and.

Pop backup into indoor and until middle of March.

And so as that has opened up the registers of Stryker and the C, especially here in San Diego you see a lot of the weekend tourism and so.

And you see you're starting to see the more aggressive retailers and savvy retailers and restaurant tours are now.

And looking for space on that day, the results of that when you actually see that good and maybe four to six months from now but.

The grass and starting to sprout backdrop on the deals will be the way of.

The spread.

Great and then I was wondering if you're experiencing much in terms of cost increases on your development and redevelopment projects.

And are they possibly impacting the yield.

And I'm going to ask Jerry get me arrogant handle that and he handles our construction and is involved on a day to day basis with.

Sure Craig. Thank you for the question you know, we're seeing cost increases and the construction industry as a whole.

You know year over year. It has gone up we were very successful in the buys that we made and our three major projects with the seven and 10.

Oregon Square building, the one beach project and La Jolla Commons.

I think on.

Ernest had asked me a question yesterday that if I had to go out and buy La Jolla Commons today.

In today's dollars, how much more would would it cost us to build it versus when we started negotiating those fees a year ago during the pandemic and I would venture to say that it would probably be as much as about 15% above what we have bought today. So.

Hope that answers your question.

Great and then just finally on.

The the Asian.

Lifting tourism is it really what required to.

And Hawaii to health or can and increase and the domestic travel.

The mitigate the the.

And the disruption.

Our domestic travel would help for sure, but I bet. That's the cake the icing on the cake is the Asia and travel.

Okay, great. Thank you. Thank you Gregg thanks for your interest.

Thank you. Our next question comes from Todd Thomas of Keybanc Capital markets. Your line is now open.

Good morning, Todd.

Hi, good morning.

And just first question on the multifamily segment you saw a nice increase in occupancy and Portland has that continued into April and can you comment on the decrease and rents and the use of concessions to drive traffic there.

Yes, it's been very tough frankly and.

Portland, and we had of management issue, which we solved immediately when it came to our attention. We are now having to give concessions, which are painful but the biggest cost of operating real estate is vacancy and we'd sooner have somebody and there Dan.

Abbott vacant.

But we hope that Portland will return to normal, but if you read the newspapers you see what the turbulence Portland has been subject to and we have not been an exception.

Okay shall we expect to see the concessions burn off and in the second and third quarters and drive the face rents higher and and and and is the occupancy increase.

Is that continuing.

Todd I'd like to tell you I know, but I really don't know I've been through a circumstance like Portland before I'll tell you. This though will do as well as anybody and the market we have a team.

The in place they are who had been with us for a number of years, we've just hired a new.

Project manager she comes very very experienced and we will do as well as anybody and.

And the Portland will have the returned to normal before our.

Rental income returns to more normal levels is what I believe.

Okay, and the Bob and then I wouldn't disagree.

And.

Go ahead.

Okay. I also I wanted to ask about the the retail segment and.

The 'twenty 'twenty two NOI bridge that you provided and your your latest.

Corporate presentation on the retail cash NOI and the quarter was was a little over 60 million so $65 million annualized I think and that's ahead of the 'twenty 'twenty two projection for retail cash NOI, which was $63 million.

And now if there's some deferred rent that was collected in the quarter, which I think was referenced in the prepared remarks, but but Bob can you can you help us sort of unpack the retail NOI and the quarter of little bit and maybe help us understand how that's tracking relative to two prior projections.

Yeah.

I think we're pretty close to what our presentation is.

And our quarterly presentation Tod.

And I think really what it points to is at.

And the way we look at it is at 22 is really the recovery year, because it and in 'twenty. Two you continue to outperform and.

The growth of the office cash NOI plus the mixed use which we think is a it's.

It's going to be strong and 'twenty, two which should take you from.

The total cash NOI of around 211, increasing up to a total of around 250, plus so we think 'twenty twos recovery year, but in terms of unpacking 'twenty, one or this quarter.

And I think we're still on and on track I think if not even more so.

Right, Okay, because it seems like the retail this quarters already ahead on an annualized basis of where you expect it to be in 'twenty. Two so I didn't know if you're anticipating some some sort of move outs or.

The decrease in and cash NOI for retail that that might take some time to recover then over the next several quarters.

No. We're just we're just going to have to play that out but I think we're still on track with the unofficial guidance in Q Q4 that we issued.

If you go back and take a look at that but theres nothing that really step debt that points to anything different and that obviously some of the collection and you know like Adam had mentioned on his script that 88% of the deferred rent has been collected which is positive. So you know that that's starting to come in as well.

Which I think is additive to that.

Okay Alright.

Alright, great and just one last question if I could I'll hop off I was just wondering if there was an update at landmark related to the Autodesk explorations that occur later in 'twenty, two and and twenty-three not sure. If it's too early but if there's any update there that'd be great.

No update at this time, except they've just gone through extensive renovation of their second and fourth floors. The second floor is the space that expires at the end of next year with the remainder and 23 and what was the investment they made us the upwards of $450 a foot and yes, what $15 million seen millions of apps.

And we just toured it on the last Tuesday, and saw it so they're investing in their and their space.

I think it is a good indicator of of.

And their commitment to the building revisit the landmark at one market and we wanted to see what our tenants are spending one of the era of spending.

The spending almost of $100 million of their own money on the building and the other one is spending over $15 million. So we're pretty happy with that investment and the short run and the long run.

We had five of them.

Alright, thank you.

It's a great building.

Thanks for the questions. Thank you Todd.

Thank you. Our next question comes from Richard Hill with Morgan Stanley. Your line is now open.

Good morning, Richard.

Hey, you got Ron Tam demand for Richard Hill.

Okay, well sell Richard we think we're better off with you of the NIM.

[laughter].

That's right.

The first question was just going to the office portfolio.

And maybe you can touch on the same store NOI. This quarter I thought I saw was down maybe what happened there and actually just the bigger picture question, which is just what are you hearing from sort of the office tenants and a return to the office.

Well the answer your first question.

That negative was due to one deal and it was the business decision to keep US a law firm and 17000 feet.

They were there of 24000 foot full floor law firm. They had sub leased about 7000 feet of their space to somebody else and that subtenant and moved out so their lease was coming up and they went to the market and found of competing space about the same size of $3.10 of foot.

And we looked at the price.

The boy comments was false we looked at the prospect of losing of 17000 and foot law firm.

And we decided to keep them, where they are not put in the corridor no T eyes and the.

And the competing space was of $3.10 of flood the agreed to stay at $5 a square foot. So.

That was the victory for US we had to take a hit on square footage and that's what happened and now just to add to that Theyre paying 35, 6% more and and rental rate than they were at lease expiration. So we.

We think it was a good business decision and the full building to keep of 17000 foot law firm.

Excuse me Ron in terms of your question on the same store cash NOI for the office, it's it's friendly primarily because of.

Our government tenants up in our first and main we still had through Q1 abatements.

Were incurred there so that reduced your cash NOI by close to a million Bucks.

To answer your question on on back to work, we've got a number of firms coming back we are of life science firm right across from US here that it came back this past Monday.

And others are making plans to come back and the next few months. So we're encouraged by that and then you can read what Google is doing and and other big technology firms are doing.

Sure. What we're hearing is that Theres, a big push to get back to the office.

Great. That's helpful. And then if I could sort of the second question was just on sort of the the mixed used assets and Hawaii and so forth.

Obviously, the you know the N.

Oh, I still sort of flat.

The slightly negative and in the quarter.

I remember I think three months ago, you sort of felt that that was of a decent shy of the recovery and the second half of the year. Just curious how you guys are feeling or thinking about.

The Waikiki and the recovery there on the mixed used stuff.

You know on everybody I talk to is looking forward to the end of this pandemic and getting back to a normal life and particularly people feel deprived that they can't travel now if youre going to travel and Youre going to go to someplace safe and Hawaii is safe so I'm as confident as I can be.

That Hawaii is going to return to <unk>.

Pre pandemic levels and.

Just don't know exactly when but it's going to happen if I had the opportunity I'd buy everything Hawaii all over again, it's great property and of great location and I'm looking forward to the recovery.

Yeah, we're on just add the earn his comments work.

In terms of our estimation, it's not the timing, but we do believe that the back half of 'twenty, one we're going to see an increase over the first half.

I know that when I look at the embassy suites.

Our booking pace and I take a look at that our expectation is that will be 79% or higher and in June.

People are ready to travel.

Ourselves included.

Yep.

Great. That's helpful. That's all my questions. Thank you okay. Thanks Ron.

Say alone and Richard.

I'm not showing any further questions at this time I would now like to turn the call back over to Ernest Rady, Chairman and CEO for closing remarks.

To sum it all up we've come through this.

The terrible of turmoil and.

And in excellent shape, everything considered and I know that you're all familiar with the fact that we used to borrow money on a private placement basis and private placements became more expensive than public issuance. So we thought we tried the public issuance market, we offered $500 million of 10 year.

Our bonds.

And we were four five times oversubscribed and so we now have the proceeds of that issue and after paying off some debt and earmarking some of that proceeds for the improvement of the properties, which we've discussed we're looking forward to investing that money in additional assets.

Which we're going to do our best to make sure. They are accretive for our stock holders. So I know that you can't count on it but one thing you can count on and we'll do our best for you and we appreciate your confidence and thank you for your interest.

Yes.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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