Q1 2022 American Assets Trust Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020, Chino 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 to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker, Mr. Adam Wow President and.
<unk> operating officer. Please go ahead Sir.
Thank you operator, good morning, everyone and welcome to American assets Trust first quarter 2022 earnings call yesterday afternoon, our earnings release and supplemental information were furnished to the SEC on our form 8-K. Both are now available on the investors section of our website at American assets Trust Dot Com. During this call we will discuss non-GAAP financial measures.
Which are reconciled to our GAAP financial results in our earnings release and supplemental information. We will also be making forward looking statements based on our current expectations, which 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 as actual events could cause our results to differ.
Materially from these forward looking statements, including due to the impact of COVID-19, and.
And with that I'll turn it over to Ernest Rady, our chairman and CEO to begin discussion of our first quarter 2022 results Ernest.
Yeah.
Thanks, Adam Great job and good morning, everybody. Thank.
Thank you for joining us over the past two years I Hope you heard me say that I truly believed that American assets Trust with all of.
The pandemic.
That's good economy, if not better and actually I think what I said better than when it all started.
I believe that to be the case as we have strengthened our balance sheet.
Continued upgrading and improving our irreplaceable properties and we are optimistic about the buoyant leasing interest.
The portfolio in all segments, including.
Kidney recovery of our retail properties and strengthening retail rates at our multifamily properties.
In first quarter 'twenty.
2022 we've made great progress and actually we had a 50% increase in F. F OHL over 2021 .
We are pleased to see better than budgeted financial results of our portfolio.
Significantly driven by outperformance of our recently renovated Waikiki Beach walk embassy suites.
That performance was notwithstanding the continued lack of Asian travels travelers, who have historically been approximately 40%.
The tourists vacationing in Oahu.
We are encouraged that as travel from Asia to Hawaii continues.
Opening up later this year and beyond that aren't a D ours, our average daily revenue and occupancy at embassy suites will continue to decline.
We will hopefully reach and eventually surpass our pre pandemic 2019 numbers at embassy suites. Meanwhile, we are cognizant of the inflationary challenges in this business environment across our portfolio.
And although we are confidence in the thesis of our port.
Or has there been an effective long term protection against inflation.
We remain vigilant and focused on matching our expenses and operating margins to the best of the comparability.
We have the tailwind now of inflation behind us in real estate I'm optimistic about the outcome.
That oh that affect it.
In March we purchased the Devil Spring 520, and approximately 93000 square feet multi tenant office campus.
Less than five minutes from downtown Bellevue for $45 5 million.
We now sit with over 1 million square feet in Bellevue at all.
Office market that we remain very bullish on and we expect long term growth as we look to push rents great economies of scale and certainly upgrade our properties.
I also want to mention that the board of directors has approved a quarterly dividend of 32 cents a share for the second quarter, which we believe is supported by our financial results and as an expression of our board's confidence in.
The embedded growth of our portfolio this year and beyond.
The dividend will paid be paid June 23rd just short holders of record.
Right.
Finally on the development front, both La Jolla Commons III and one Beach Street remain on time and budget.
And we remain optimistic about the leasing prospects, but we do not have any specific news to share.
On that front at this time.
Adam Bob and Steve will go into more detail on our various asset segments.
A natural result.
And guidance update and I will be available for any questions you may have.
The conclusion of our prepared remarks.
On behalf of all of US at American Trust, we thank you for your confidence in allowing us to manage your company.
And for your continued support we are proud to have that roll. Thank you I'm now going to turn the call back over to that Adam. Please.
Thank you as Ernest mentioned it if it has always been a focus of ours to continue enhancing and improving our properties to remain a best in class option for our tenants and guests that has never been more important than it is now over the past few years, we've made meaningful capital improvements to our properties that had been very well received by both our existing and new.
And gas, including upgrades in beautiful station to our San Diego multifamily portfolio, a full room renovation of our embassy suites, and Waikiki and modern state of the art amenities and ESG elements that are office campuses, something we know is crucial to helping our office tenants bring their employees back to the physical office.
Along those lines. We currently estimate that our office tenants are at about 45% to 50% physical occupancy at our office campuses with an expectation for that to continue increasing as we reach the summer months. This is based on feedback from our tenants management teams, who tell us how important having their employees back in the offices for their innovation.
Collaboration culture, and ultimately their financial results of course, we realize there is an evolution of sorts with respect to the workplace right now, but we believe the demand for premium office space like ours will remain strong and you'll hear more about our successful office leasing activity and new office capital projects from Steve Center shortly.
Regarding our multifamily portfolio in San Diego, we are seeing vacant units leased at an average of over 20% over prior rents with little to no concessions offered note that renewal rates are capped just below 10% based on California laws. So we are maximizing the rental rates on vacant units to the full extent of our.
Capabilities, all the while managing expenses as Ernest alluded.
At Pacific Ridge apartments, we are expecting our occupancy to dip into the low 70 percents by June 30, due to the expected seasonal move out of units primarily occupied by students pre leasing for the upcoming fall season has already begun with new lease agreements being signed for move ins in Q3.
We expect our occupancy to rebound back into the low to mid 90 percentile by the end of August as University of San Diego starts their fall session before labor day.
Meanwhile, though are hassle <unk> on eighth multifamily in Portland came in above our internal expectations in Q1.
The Portland multifamily market remains slow relative to San Diego. However, we remain optimistic on that asset as major employers in the market has spoken to hiring campaigns in Portland in 2022, and beyond which we hope to contribute positively along with some less extreme weather.
On the retail front as Ernest mentioned, we do sense, a rising tide with renewed interest in many of our vacancies for instance, we recently signed a lease with a regional sushi restaurant at our Waikiki Beach walk for over 5000 square feet of second floor space certainly a sign of the optimism surrounding depending return of our Asian customers. Meanwhile, our retail.
Sales at Waikiki Beach walk saw meaningful double digit increase over February and March clearly demonstrating an increase in customer traffic and expenditures, we understand that airlines have started adding more flights from Japan to Oahu and tour companies are resuming sales of packages from Japan to Hawaii after a more than two year hiatus.
All good news.
Additionally, at Alamo quarry whole foods, and nordstroms have recently renewed their leases and we are excited for total wind to open at Carmel Mountain Plaza in the next few weeks finally in the next week or two keep your eye out for 2020 , one sustainability report, which covers our 2021 operations and highlights our initiatives and commitments across our.
Range of topics, including environmental social responsibility corporate governance in human capital and we are proud of our meaningful improvements and collaborative team effort today, we remain at the early stages of progress and know there is much more work to do with that I'll turn the call over to Bob to discuss financial results and guidance in more detail.
Thanks, Adam and good morning, everyone.
Yesterday, we reported first quarter 2022, <unk> per share of 57 cents in first quarter 2022, net income attributable to common stockholders per share of <unk> 18 says.
First quarter results are primarily comprised of the following the actual F. F O increased in the first quarter by approximately three to <unk> 57 per <unk> share compared to the fourth quarter of 2021, primarily related to lower G&A in the fourth quarter.
<unk> order had higher G&A, mostly related to year end compensation expense.
Same store cash NOI was strong in Q1, 2022 ending at approximately 18% growth year over year for the first quarter.
What's even more important from my perspective is that if you exclude the collection of rents received in Q1, 2021 related to rents that were previously billed and uncollected in 'twenty 'twenty of approximately $1.2 million.
Same store cash NOI growth would have been approximately 21% instead of 18% as reflected in our supplemental.
Same store cash NOI growth on a sector by sector basis for the first quarter of 'twenty two would have been as falls.
Office would have decreased from approximately 12% to 10%.
Retail would have increased from 2.5% to 13.4% multifamily would've increased from approximately 13% to 18%.
And mixed use would have decreased to 18, 7%.
From my perspective.
This data also reflects a more accurate presentation at retail growth is much stronger on a comparative year over year basis for the first quarter. Excluding the change in accounts receivable that was generally immaterial pre COVID-19 .
Let's talk about liquidity at the end of the first quarter of 2022, we had liquidity of approximately $474 million comprised of approximately $74 million in cash and cash equivalents and $400 million of availability on our revolving line of credit.
Our leverage which we measure in terms of net debt to EBITDA was six eight times. Our objective is to achieve and maintain a net debt to EBITDA of five five times or below our interest coverage and fixed charge coverage ratio ended the quarter at three nine times.
Let's talk about 2022 guidance.
We are increasing our 2022 F F O per share guidance range to $2.13 to $2 21 per <unk> share with a midpoint of $2 17 per Boe share.
From our initial guidance issued on our Q4 2021 earnings call that had a range of $2 nine.
Dollars and 17 cents with a midpoint of $2 13 says, which is approximately an eight 5% increase at the midpoint over our 2021 actual of $2 per <unk> share.
Let's walk through the following two items that make up the increase in our 2022 F. F O guidance over our previously introduced <unk> 2022 at that blow guidance.
First the embassy suites Waikiki Beach walk contributed two cents per F. F O share of outperformance in Q1 2022 that was not previously included in our 2022 guidance.
Embassy actually outperformed our team in Waikiki is internal expectations each month for the first quarter.
And second Bell spring five 'twenty, which is our most recent office acquisitions in Bellevue.
The first quarter and was not included in guidance Bell Springs is expected to contribute approximately <unk> <unk> per share in 2022.
These adjustments when added together will be approximately four cents per <unk> share and represent the increase in 2022 over our previous 22 guidance.
While we believe the 22 updated guidance is our best estimate as of this earnings call. We do believe that it is also possible that we could outperform this revised guidance range.
In order to do that tourism in Oahu needs to continue to return in full force, including our guests from Asia. We are cautiously optimistic that the embassy suites Waikiki has the potential to continue outperforming but theyre mirror there are many variables to that and we prefer to take a wait and see.
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As always our guidance our NOI bridge in these prepared remarks exclude any impact from future acquisitions dispositions equity issuances or repurchases future debt refinancings or repayments other than what we've already discussed we.
We will continue our best to be as transparent as possible and share with you our analysis and interpretations of our quarterly numbers I will now turn the call over to Steve Center, Our senior 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 our two Redevelopments our office portfolio stood at approximately 94% leased approximately 7% expiring in 2022.
Netting out our three recent acquisitions in Bellevue, our same store portfolio was approximately 96% leased.
The momentum in our office portfolio continues in the first quarter, we executed 19 leases totaling approximately 170000 rentable square feet, including approximately 13000 rentable square feet of comparable new leases with increases over prior rent of 30% on a straight line basis.
Approximately 91000 rentable square feet of comparable renewal leases with increases over prior rent of 16% on a straight line basis, including renewing Autodesk and 46000 rentable square feet at landmark in San Francisco and.
And approximately 66000 rentable square feet of non comparable new leases with Torrey reserve in San Diego and City Center, Bellevue accounting for 52% and 20, 27% of this activity respectively.
Throughout our office portfolio, we are reaping the benefits of the multiple initiatives, we have been employing to drive occupancy and rent growth, including renovating buildings with significant vacancy and or rollover furthering amenity packages aggregating and white boxing larger blocks of space, where there is scarcity and improving smaller spaces to be turnkey in move in ready.
Notably our San Diego portfolio is now approximately 94% leased in large part due to new leases and our two recently renovated buildings at Torrey reserve at rents that exceeded our projections, we have an additional 25000 rentable square feet of new leases in lease documentation.
In Bellevue, we signed approximately 18000 rentable square feet of expansions, but another 5000 rentable square feet of new leases in lease documentation City Center Bellevue is 96% leased with an additional 1% out for signature.
We have established new market rents at our recent acquisitions in Bellevue and expect our Bellevue portfolio to provide opportunities to grow NOI through renewals and new leasing activity at replacement rents that we believe to be meaningfully higher than expiring rents. For example, most recently we entered into a 6000 rentable square foot expansion at corporate campus East three.
With an increase over the existing premises rent of 25% on a straight line basis.
As mentioned, we continue to invest in our properties, which will help position us to continue to capture more than our fair share of net absorption at premium rents as office markets rebound, specifically, where I'm moving forward with the following new projects major renovations at Eastgate Office Park.
New fitness center and by Cabo showers, and lockers in a conference Center at City Center Bellevue.
Renovations and common area enhancements at Solana crossing and new amenities at corporate campus East III.
Meanwhile, Q2 is shaping up nicely with 12 deals totaling 172000, rentable square feet of new and renewal leases in lease documentation.
I'll now turn the call back over to the operator for Q&A.
Thank you as a reminder to ask a question you will need to pass through one on your telephone.
Sure.
Please stand by while we compile the.
The Q&A roster. Our first question comes from Todd Thomas with Keybanc Capital. Please go ahead.
Yes.
Hi, Thanks, good morning out there.
First question I, just wanted to dig in a little bit on the guidance. If we look at this quarter as a result.
Just to $2 28, a share.
So and some of the <unk> <unk> accretion that you talked about from Bell spring 'twenty doesn't.
Really show up much in the first quarter since it was acquired in March.
I heard I heard the comment about the temporary dip in occupancy at Pacific Ridge, that's anticipated, but what what other offsets.
Should we be thinking about throughout the balance of the year to get back down towards the revised $2 13 to $2 21 range.
That we should be thinking about here.
Hey, Bob would you put it and I thought that that's a good question.
On the as it relates to the guidance.
We have not increased the AR.
Our guidance for the remainder of the year at Waikiki Beach walk.
So we're hopeful that that does increase so just to give you put it in perspective, our original budget at.
At Waikiki Beach walk, our mixed use or the embassy suites was 54%.
Pre COVID-19 from a NOI standpoint.
And with with the update in the first quarter that gets us to 74% of pre Covid NOI we.
We think that we will exceed that but we got to do a wait and see on that so we have not adjusted our guidance to reflect that so we like I said in the comments, we do have a fairly you know.
Good shot at exceeding our current guidance, but.
We still have we just there's volatility out there so.
What did that long as department at the embassy suites.
For the month of March.
Our occupancy was 80% of pay to occupancy.
So that compared to the first quarter, which was 73% or 80 or is seems to be consistently over 300.
For the first quarter was like 303 hundred $33 for the first quarter and similar for the month of March and our Revpar, which is what we also follow us.
Around 243 to $2 62, that's a number we also focus on that as like an NOI to us and we pre Covid, we were above 300 on that Revpar.
The other thing is that as of Monday. This week from Japan update Japan's vaccination data was 81% of the total population.
And that's for both the first and second shot boosters had been administered to 38% of Japan's population.
So you know the Japanese government is speeding up the rollout of those booster shots. One last one last comment that we've recently seen as that.
The eastbound air seats are on the rebound and if you compare.
Well just the increase over the prior years, what we're seeing there is out there is that aprils.
The seat eastbound seats from Japan are 13% higher than April .
So.
13% higher in April 'twenty, two versus the prior year and in July we expect them to be 74% higher than July 2021, and the same thing for Korea, and Oceana, but I think that's telling the story that there there is a very good shot at it.
Feeding the spud to goodwill the portion of it comes from.
The embassy.
Okay great.
No more no more omnicom Byron Varian dollar so any darn thing can happen. So we hate to counter Netherlands before they are in the bank.
Okay.
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I guess it just sounds for the mixed use asset right the leasing at the hotel retail.
That should be recurring and then Ernest your comments suggested that you do expect to see higher occupancy in daily rates at the hotel throughout the balance of the year and it sounds like you're encouraged by.
What youre seeing on the ground, but I guess, Bob it sounds like that that outlook is not in the guidance can you maybe talk a little bit more.
Around what that translates into for occupancy and sort of daily rate.
Assumptions that are embedded in the guidance as we look ahead for the next couple of quarters.
Yeah.
I don't have it.
In front of me.
Go ahead <unk>.
It depends how our prayers are answered if everything comes together, it's going to be wonderful and if and if theres. Another variant, it's not going to be and that's why I just hate to count those Nichols until we make out deposit slips sits in the bank, but its a great property in a great location.
It's going to come back, we're just not sure when and to what extent.
Okay.
Maybe just switch gears and talk about acquisitions.
You've been pretty busy.
More recently, you talked about some of the transactions in Bellevue, where you own a million square feet today.
Company still sitting on about $75 million of cash.
Just curious if you could talk about the investment pipeline a little bit in the company's appetite to continue deploying capital today.
You know Todd we're finding that the market for acquisitions is so buoyant.
We haven't been able to focus on anything that we could acquire that you would be proud of.
There's just so much money out there so and we have a great portfolio and we have most of our money invested cap rates are.
Hello.
And interest rates are rising so I think the best thing. We can do is just kind of sit and improve what we have to keep our eyes open but we don't have any specific target at the moment a friend of mine just sold property and he's got some 10 31 money to invest so I sent him all the offerings that idea.
And he said Ernest have you had a shot at any of these cause I've tried them.
I can acquire any of them at a reasonable price.
Our strategy now is to.
And make what we have as profitable as we can keep our eyes open and hopefully there'll be an opportunity we're going to we are opportunistic and we're going to examine opportunities that come up but there's nothing in the pipeline now, but I can talk about.
Okay, and just lastly, Bob any update on the City Center Bellevue maturity in November .
Yes.
Looking at it.
Obviously that matures in November of 111 million its a secured mortgage.
The only reason that it has secured is that we try to cover the negative tax basis on some of our O P unitholders.
So we'll refinance.
You know a portion or all of it.
We'll probably have more news about that in the second quarter.
But certainly there's no issue.
And the financing or the availability of cash.
That's a good question and thank you.
But you expect to unencumber that asset.
Well, yeah that would be.
Would be the goal.
As to is to put a secured mortgage on a smaller asset and free.
The value.
Of that asset compared to where where it was when we initially bought that what that would do is that would enhance the.
Unsecured.
Asset pool and.
Assist with.
The combined leverage.
Okay.
Alright, great. Thank you.
Thank you Todd Thank you for the question.
Thank you. Our next question will come from Richard Hill with Morgan Stanley . Please go ahead.
Hey, guys, you've Adam Kramer on for Richard Hey, Hope Hope, you're all doing well.
I appreciate kind of the commentary earlier on on kind of cap rates and what the market looks like in acquisitions wondering if you could maybe comment on kind of what what are Unlevered IRR is now in the market.
Are you guys kind of buying out of your recent acquisitions and how do you kind of see the unlevered IRR in the market currently.
That's such a broad question I don't know how to answer it that cap rate.
Residential are somewhere between three and four probably closer to three and office what we what we acquired there is room for improvements in the cap rates were five ish give or take it Steve could comment on that but we see upside as we monetize new word in English language and improve the properties.
When you acquired.
And those those are really.
Markets are we're in is retail cap rates seem to be.
Five ish, four and a half to five and a half.
And we're not.
About.
Sorry.
Good retail with upside so we're looking for upside our strategy is to increase shareholder wealth.
We have to buy something that we can improve.
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And the opportunities we see now are fairly limited.
We're pretty well invested with good properties and we love what we have are just going to make the most of it that's a problem.
In the short term.
Yeah.
Adam This is Bob.
Bob.
Let me let me just add to earn his comments is that.
So the cap rates are just one data point.
Our acquisition underwriting we underwrite also put a lot of emphasis on our Unlevered IRR. So we look at it in relation to our weighted average cost of capital and we see the acquisitions, obviously that means many other criteria, but we want to make sure that the debt.
That they exceed an unlevered IRR of 7% or more because that really points to the growth of that asset.
Over the long term.
That's been the strategy.
That's a good tie Bob Thank you.
All really helpful guys. Thanks, Thanks for the color on that.
I guess kind of a related question.
I was kind of about the rise in interest rates and recognized.
You've got the balance sheet. So it's a really good spot.
Cash on hand, et cetera to kind of your acquisition, but wondering kind of if the rise in rates changed your capital allocation decision, making.
And again, you mentioned rate cap rates haven't really kind of moved yet in tandem with this rise in interest rates. So just wondering kind of how that how you guys view the rising rates with regards to your capital allocation.
Well, we were fortunate our year ago too as you know most of our debt came from.
Private placements and when that became more expensive than public issuance, we were fortunate enough to offer a half a billion dollars worth of bonds.
And we were four five times oversubscribed, and we picked up $500 million at three and three 8% for 10 years.
Those rates would not be available to us today. So if we had to finance an acquisition it would be more expensive and we don't see the the cash.
Cap rates on acquisitions coming down so it's kind of out of balance in the short run and I think our strategy now is to just improve what we have I hope that answered your question if not please explore further.
Yes.
And I'm wondering about your appetite for buybacks, maybe I think it's been addressed on past calls, but to figure out how to kind of asking again about what kind of appetite for buybacks and awareness, Steve you've had some public filings that you're buying.
I'm wondering about kind of buybacks for the for the for the REIT.
Well you know the board makes those decisions, but I have no.
Land to encourage.
Buy back.
You know, we're a midsized REIT, but on the smaller side and as Bob pointed out in some of his prior.
Our information is made available we'd like to grow but we have to grow.
The way that enhances our shareholder value. So we want more assets and we don't want to do it at the expense of growing smaller.
So that's kind of that's my that's my personal view.
Okay.
Really helpful guys.
Let me add on that later.
Paul Adams earn his last comment there is that yes, we agree with everything Ernest said, but I think in terms of allocation is.
While we are improving our assets now in terms of capital and we always continue to do that we still favor.
Commercial real estate.
Commercial office, and we think that and then specifically if you can add to the Suez.
Not looking for a commodity space Theres, a big difference between commodity space at newer space either been recently built or building or stuff that's relevant to today's marketplace.
When you look at what we're doing to one beach on the North waterfront.
At current and relevant to the marketplace you look at La Jolla, Commons, III and Steve will talk more about that.
I think these are great assets, and we continue to see opportunities up and down whether it's in Bellevue or down the borrowings in Californian line from San Francisco South.
Two opportunities down here in San Diego, So, we do love office resolved multifamily, but right now were over 50% allocation to.
Just to the office sector, Steve as Boston and to add to that.
Let's go ahead and winds out that the thing that we really love as wealth creation.
And so we have this marketplace as Bob pointed out geographically.
And we will only do something that enhances the value of our stock and.
Creates creates wealth. So that's like that's our strategy and there is sometimes that you passed on time Dupont and sometimes you run right now we're just going to improve what we have until we see a significant opportunity.
I've been buying stocks as I tell people if I can buy real estate cheaper on wall Street that ICANN on main street.
Yeah, Yeah, no that all makes a lot of sense and I appreciate the football referenced with the NFL draft coming up this week. Thanks for the time guys appreciate it.
Thank you for your interest.
Thank you and I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Mr. Ernest Rady for any closing remarks.
Okay. Thank you operator, and thank you all for your interest. Thank goodness, we're getting to the end of this endemic and we can see each other again, we're going to NAREIT or hope you'll have a chance to visit with you. All thank you for your interest we're doing the best we can for you and we'll continue to do that again have a good day. Thank you.
And thank you guys and San Diego for doing such a great job on this call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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Yeah.
Sure.
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