Q2 2022 American Assets Trust Inc Earnings Call
And then on Opex relapses.
Quarter two 2012.
American Assets Trust, Inc. Earnings Conference call. My name is Jenny and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press zero one on your Touchtone phone.
I will now turn the call over to Adam Wild President and C. O O you may begin.
Thank you operator, good morning, everyone and welcome to American assets Trust second quarter 2022 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 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 and with that I'll turn it over to Ernest Rady, our chairman and CEO to begin the discussion of our second quarter 2022 results.
Thanks, Adam well done and good morning, everyone as we've shared in the past towards each business decisions that we make we take the path that we believe will optimize the long term growth of our earnings and net asset value as.
As we work hard to create shareholder value that includes remaining disciplined with respect to our strong balance sheet and continuing to invest in and improve our illustrates irreplaceable properties to remain among the best in our markets for each of our asset classes, particularly.
We see an ongoing flight to quality based on location amenities asset quality public transportation and capital requirements, which are factors, we believe will contribute to our outperformance in the long term.
In Q2 2022, we were encouraged by our operating fundamental despite the volatility in capital markets and general economic uncertainty as we build upon our great progress from Q1.
We were pleased to see better than budgeted financial results and our portfolio in Q2, driven primarily by better than expected performance out of our multifamily properties and Waikiki Beach walk Embassy suites. We continue to believe there is meaningful growth potential for our embassy suite.
Particularly as Asian travels returned to Oahu as we've mentioned previously Asia travels have historically represented approximately 40% of Voluntarist vacationing in Oahu, but remain a small fraction of that at this point in time, we expect that to change over the next year.
Year or two Meanwhile, bode well, even without our earnings trajectory look steady and promising we understand the challenges presented by inflationary.
Recessionary forces and the potential for a slower economic growth period.
So we remain vigilant and focused on being prepared for any scenario to the best of our capabilities.
As you will hear shortly we are increased our guidance for the rest of the year based on our optimism for continued near term growth across our assets.
I also want to mention that the board of directors.
The quarterly dividend of <unk> 32 for the third quarter, which is supported by our financial results and it is an expression of our boards confidence in the embedded growth of our portfolio this year and beyond that.
Dividend paid be paid on September 23 shareholders of record.
On September .
Okay.
Finally on the development front bulk La Jolla Commons three at one Beach Street remain on time and on budget.
And we continue to remain very optimistic.
About the leasing prospects.
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 segment.
Actual results and guidance updates and I will be available for any questions. You may have at the conclusion of the repaired remarks.
On behalf of all of US at American assets Trust. We thank you for your Congress confidence in allowing us to manage your company and for your continued support.
Im going to turn the call back over to Adam.
Please thank you.
As Ernest alluded, we believe our underlying fundamentals in asset quality and support a favorable long term view of American assets Trust, regardless of the prevailing volatility in today's financial markets.
Along those lines. We currently estimate that our office tenants are just below 50% physical occupancy at our office campuses and that has remained somewhat static over the past quarter. Nevertheless, we believe the demand for premium office space like ours will remain strong as we believe tenants will prioritize office space quality to help retain and attract talent.
You'll hear more about our successful office leasing activity from Steve Bender shortly.
In Q2, our San Diego multifamily portfolio produced favorable rent growth.
Where we saw lease leaf is on vacant units rent at an average of approximately 23% over the prior rates while rates on renewed units increased an average of 10% over prior rents, which was capped due to rent laws in California as a rental market in San Diego County has remained strong little to no concessions were offered on these <unk>.
Yes.
At Pacific Ridge occupancy dipped to the low 80 percents at the end of June due to the expected seasonal move out of units in may primarily occupied by students. We had actually anticipated much lower occupancy at Pacific Ridge, but it fared better than expected as a result of several master leases that commenced in May and June Meanwhile, leasing for the upcoming.
Fall season is well underway, which includes an additional master lease for over 40 units with the University of San Diego.
We expect Pacific Ridge as occupancy to rebound into the mid Ninety's by the end of August at the University begins its fall quarter.
<unk> Labor day.
Additionally, our hassle O&M from multifamily in Portland came in above our internal expectations in Q2 as the Portland multifamily market has recently picked up some momentum as a result of a continued influx of people moving to Portland, and corresponding decrease in unemployment rates, even with all of its challenges the past few years time.
Disease recently listed Portland, its one of the world's greatest places in 2022.
In Q2, we saw vacant unit that has a low lease at an average of approximately 15% over prior rents and renewal units leased at an average of approximately 6% increase with consistent concessions ranging from zero to eight weeks, depending on product type and most recently over the past few weeks no concessions at all later this month.
At new bicycle and pedestrian bridge two blocks from half below will connect the central east side of Portland to the Lloyd neighborhood, which we are optimistic will bring additional rental prospects the hassle.
On the retail front, we continue to see a rising tide in our retail portfolio in Q2, our four largest renewals totaling approximately 130000 square feet. We're all foods at Alamo quarry bonds at Lomas, Santa Fe Plaza, and Petco, and Ross at South Bay marketplace with rents increasing 10%.
<unk> percent, 8% and 10% respectively. Later this year or early next upon renewal.
Additionally, we have a meaningful amount of new deals in documentation and remain positive about prospects of getting those deals done not including those pending deals that leaves us with about 2% of our retail portfolio expiring through the end of 2022 and less than 7% expiring in 2023, assuming lease options are not exercised.
Finally, I just wanted to point out that in Q2, we issued our 2021 sustainability report, which highlights our ESG initiatives and goals and that is available on our website with that I'll turn the call over to Bob to discuss financial results and updated guidance in more detail.
Thanks, Adam and good morning, everyone last night, we reported second quarter 2022 peso per share a 58.
In second quarter 2022, net income attributable to common stockholders per share of <unk> 18.
Second quarter results are primarily comprised of actual <unk>, increasing by approximately one said $2 58 per <unk> per share compared to the first quarter of 'twenty, two primarily related to outperformance by the embassy suites Hotel and Waikiki Beach.
On the Hawaiian Island of Oahu.
Let's talk about same store cash NOI.
Same store cash NOI in Q2, 2022 ended at approximately three 6% growth year over year for the second quarter same store office was approximately flat in Q2.
As a result of the remaining lease abatement for one of our large tenants at our landmark building at one market Street in San Francisco we.
We expect same store office to REIT to return to a double digit increase in Q3 similar to Q1.
The retail sector had a one 8% decrease in same store cash NOI in Q2, but when excluding prior year Covid related accounts receivable collections. The retail same store cash NOI percentage increases to a positive 1% growth year over year.
To put it in perspective for the year ending 'twenty 'twenty. Two we are expecting same store cash NOI metrics to be approximately as.
False office ending at eight 3% retail ending at negative three 7% multifamily 10, 6% mixed use at 49% for a total same store cash NOI of seven 4%.
Excluding a $2 4 million property tax refund received at Alamo Quarry shopping center in 2021 and higher collections of Covid back in 2021 from prior periods retail same store cash NOI is expected to be approximately a positive 3%.
For the year and total same store cash NOI is expected to be approximately nine 5% for the year ended 2022 to me. This shows that retail growth is much stronger on a comparative year over year basis, when excluding those onetime items.
Meanwhile, the retail sector is also showing positive signs in the cash basis leasing spreads in Q2, we are showing a five 7% cash basis change over the prior rents and 20% on a GAAP basis for the retail sector.
Office leasing spreads continue to be strong in Q2 with leasing spreads on a cash basis and GAAP basis at 20% change over the prior rent.
Our liquidity at the end of the second quarter of 2022, we had liquidity of approximately $461 million comprised of approximately $61 million in cash and cash equivalents.
$400 million of availability on our revolving line of credit.
Our leverage which we measure in terms of net debt to EBITDA was six seven times. Our objective continues to be 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 3.9.
Nine times.
Let's talk about 2022 guidance update.
We are once again, increasing our 2022 <unk> per share guidance range to $2 21 to $2 27 per <unk> share with a midpoint of $2 24 per <unk> share a 3% increase from our previously updated guidance issued in our Q1 2022.
<unk> earnings call that had a range of 13 to $2 21, with a midpoint of $2 17.
Let's walk through the following four items that make up this increase in 2022 <unk> guidance first our Waikiki Beach walk embassy suites and retail contributed approximately two cents per <unk> share of outperformance Q2.
<unk> 22 that was not previously included in our 'twenty two guidance.
Our multifamily properties contributed approximately two cents per <unk> share of outperformance in Q2 'twenty two.
Was not previously included in our 'twenty two guidance.
Third our straight line rent and interest savings contributed another <unk> <unk> per share about performance in Q2 that was not previously included in our 'twenty two guidance and.
Fourth our retail properties contributed to approximately a penny of <unk> per share of outperformance in Q2 'twenty. Two that was not previously included in our 'twenty two guidance.
These adjustments when added together will be approximately seven cents per <unk> share and represent the increase in the 2022 midpoint over our previous 22 guidance mid point.
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 perform to the high end of this guidance range.
In order to do that tourism and spending in waikiki needs to maintain its positive trajectory.
As of the end of Q2 'twenty two our forecast for calendar year 'twenty. Two is that our embassy suites will end at approximately 83% of 2019 pre Covid NOI.
Up from our estimate of 74% at the end of Q1 'twenty two.
Embassy suites has a potential to do much more of a remains dependent on our Japanese tourism opening back up and more favorable foreign exchange rates to our Japanese guests as a foreign exchange rate between Japan and the U S. It's been at recent highs.
As always our guidance our NOI bridge in these prepared remarks exclude any impact from future acquisitions dispositions equity issuances and repurchases future debt refinancings or repayments other than what we've already discussed.
We will continue to be.
Do our best and be as transparent as possible and share with you our analysis and interpretations of our quarterly numbers.
I'll 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 second quarter net of our two Redevelopments our office portfolio stood at approximately 93% leased.
Adding out our three recent acquisitions, our same store portfolio was approximately 96% leased the.
The momentum in our office portfolio continues in.
In the second quarter, we executed 15 leases totaling approximately 148000 rentable square feet, including approximately 12000 rentable square feet of comparable new leases with increases over prior rent of 48, 9% on a straight line basis.
And approximately 116000 rentable square feet of comparable renewal leases with increases over prior rent at 18, 3% on a straight line basis, including renewing at Vmware and 75000 rentable square feet at City Center Bellevue.
And approximately 20000 rentable square feet of non comparable new leases.
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 Android 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, we continue to realize meaningful increases in occupancy and rent growth, resulting from these initiatives. For example, with our recent 25000 rentable square feet square foot lease to seismic software at Torrey Reserve, our San Diego Office portfolio is now 95% leased the 10000 rentable square foot comparable new lease pool.
<unk> of that lease produced an increase over prior rent of 49% on a straight line basis.
In addition to the initiatives outlined above we are expanding access to medical office users in select markets and buildings in response to a very tight very tight market conditions producing longer term leases at what we believe are premium rents relative to traditional office tenants along those lines. We are in lease documentation of Torrey reserve with an existing medical user.
To renew them and approximately 4000 rentable square feet and expand them into an additional 7400 rentable square feet that we believe will provide a much better return than a comparable office lease and we have agreed to terms on a new 7400 rentable square foot medical eases Falana crossing at a triple net rate that is 35% higher than a comparable office lease.
And we continue to invest in our office portfolio.
In addition to the Redevelopments at one beach and San Francisco in Oregon Square in Portland, and the development of tower three at La Jolla Commons in San Diego, We are underway on the following projects major renovations at Eastgate Office Park, New amenities at City Center, Bellevue, including a fitness center and bike hub with showers and lockers in a conference center renovations and <unk>.
<unk> enhancements at <unk> crossing.
New amenities at corporate campus East three and new amenities at first in Maine, and Lloyd Center Tower in Portland, including a fitness Center Conference Centre and lounge in each building.
We continue to believe the strategic investments in our portfolio will position us to continue to capture more than our fair share of net absorption at premium rents. Despite current market headwinds I will now turn the call back over to the operator Q&A.
Thank you have a question.
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Speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press <unk>.
One on your Touchtone phone.
And our first question comes from Todd Thomas Please go ahead.
Good morning, Todd.
Hey, Good morning. This is Arthur Porto on for Todd today.
Thanks for taking the question so just.
I'm going to jump into it for the first one so it looks like you've increased exposure to office over the last several quarters, mainly through acquisitions and I'm sort of wondering if your view around the office has changed at all at the margin and as you think about deploying incremental capital going forward would you look at possibly other crop.
30 types today, given what may be sounds like changes in asset pricing.
Well, let me answer that.
From my point of view, we were fortunate enough a year ago to borrow half a billion dollars $500 million.
At three and three 8% for 10 years, when we looked at how we were going to invest that money. We looked at apartments, which are priced now to perfection retail which has issues that we have to deal with and has not it's also priced for perfection and we found some office opportunities.
That we could buy at below replacement cost.
And improve and I think that's proved to be a very good strategy in the short run it's not acceptable obviously in the marketplace because office is out of favor, but if you want to make money you got to buy them when they ate them and sell them when they welcomed Buffett said that and that's our strategy.
Oh wait now we have a full plate, where you have a great properties to develop an absolutely the best locations in the path of growth, where there's where there's barriers to entry. So that's our strategy and we're just we're executing on it.
And where we go where we go from here will be governed by what I said at the outset, we want to create long term growth and shareholder value and net asset value I hope that answers your question.
Thank you that's helpful.
Sure My second question.
Occupancy fell sequentially to recent escape office Park acquisition.
Maybe speak to that decrease in occupancy and maybe talk about the strategy in timeframes or at least the space.
First of all Eastgate is a fantastic project. So happy we bought that it's absolutely amazing, but Steve has been.
The author of that acquisition.
The impetus upon the growth and I'm not going to describe it with the pleasure of describing it.
Thanks for the question. Good question. Arthur This is not a surprise to US we knew we were buying vacancy we knew we had certain.
Customers in that project that we're not premium rent paying customers, but more commodity space users case in point this quarter. We lost two tenants at Eastgate both were in the <unk>.
Insurance related businesses, both paying below market rents of 26 and $28 a foot triple net versus the current market of 35 to $36 Triple net in both cases, they just shut down operations one shut down the company operations. The other shut shut down our local operations and again these werent unexpected we saw east.
It is a value to take something that had been leased by the past or the prior to owners as more of a commodity projects. We saw outstanding bonds Tourette tremendous amenities that just hadn't paid much attention to for the last couple of owners and so we're going to improve significantly I would suggest that the process. We're starting at Eastgate is similar to the process.
We went through at Torrey Reserve and now we're at the combination of that transformation of Torrey reserve and I touched on our results with the latest deals and reaching 95% occupancy at premium rents. So we think we're going to have a similar outcome there with east gate, a little more perspective on Eastgate, we acquired the equivalent of a.
Yes.
A health club.
But we didn't pay for it it came without the.
Having to pay for it so we're going to be able to rent at market rents were going to be able to offer costs that are similar to market, but add the amenities that we paid nothing for two prospective tenants I'm really bullish on escape.
That's helpful.
Thanks for that.
One one more quick question.
So apartment rents increased in the quarter.
It looks like three 5% over <unk> <unk>.
Are you seeing that pace of growth moderate or do you anticipate that you'll be able to maintain pricing power as the year progresses.
Well I don't but Abigail might want to answer that question I think the market is strong and getting stronger in all our apartment markets ABL do you want to add to that.
Good morning.
San Diego County.
Second quarter occupancy has been really strong and not only the portfolio, but in the county, we think about living in.
Or do you believe that will continue.
<unk> strong into the third.
Great.
You mentioned rents across the board have been averaging upwards of 23% or so.
We still feel positive about.
Forward to that.
During the current season.
And during this time, we are improving our projects so with landscaping roofing soundproofing. So we will have a better projects at the end of this.
Uh huh.
Current situation than we had at the beginning and I think that will help us command or.
Our rents as well so.
We love our apartments.
Great. Thanks for the time everyone.
Thank you thanks for your interest.
We have no further questions at this time I will now turn the call over to Ernest Rady for closing remarks.
Okay. Thank you guys for listening we have a great portfolio. We think it's going to continue to produce results, which are going to be.
More than acceptable and we're happy to do this we loved this company we love this job and we hope he believes our stockholders. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.