Q3 2022 American Assets Trust Inc Earnings Call
Good day and welcome to the American assets Trust third quarter 2022 earnings Conference call.
Some of them Binder today's conference call is being recorded all participants are in listen only.
Hi, Matt.
Please note that statements made on this conference call include forward looking statements based on current expectations, which statements are subject to risks and uncertainties discussed in the company's filings with the SEC you are cautioned not to place undue reliance on these forward looking statements and actual events could cause the company's results to differ materially.
Really from these forward looking statements.
It is now my pleasure to introduce your host Mr. Adam while President and C O L for American assets Trust.
Thank you Mr. Weil you may begin.
Thank you operator, good morning, everyone and welcome to American assets Trust third quarter 2022 earnings call yesterday afternoon, our earnings release and supplemental information were furnished to the SEC form 8-K. Both are now available on the investors section of our website at American assets Trust Dot com.
And with that quick intro I'll turn the call over to Ernest Rady, our chairman and CEO to begin the discussion of our third quarter 2022 results Ernest.
Thanks, Adam and good morning, everyone. As you all are aware, we are seeing considerable volatility in the capital markets and uncertainty in the economy and the economy that seems likely to continue for the next few quarters at a minimum given personal and persistent inflation rising interest.
Rates and national or global politics, not to mention what I considered to have been accepted and unprecedented fiscal stimulus and then United States. These are times. Unlike any other that I've seen and it is clear there is no monetary policy.
Playboy CT clear and obvious course correction.
But that's why I feel more than ever quality matters quality of our assets.
Quality of our balance sheet at more than anything else quality of our people who are the stewards of our organization that worked hard to act optimize our long term growth.
Shareholder wealth creation, and investing and improving what we considered to be among the best assets in our markets for each of our asset classes.
As you've likely heard about.
Ongoing flight to quality in commercial real estate, we know that are irreplaceable properties are sought after by tenants not just based on being the most desirable product, but also amongst the most desirable locations amended.
[noise] amenities access to public transportation path of growth and sustainability elements.
Of course, we also treat our tenants very well and our flexible with Tim at least requirements, which we believe also differentiates us from our peers, though.
Though we may be in for a prolonged macro economic challenges. We continue believe that these factors will continue.
To contribute to our relative outperformance in the long term.
In Q3, 2022 we're encouraged by operating for men for fundamentals and earnings trajectory as we built a very solid growth in Q1 and Q2 as you'll hear in a bit. We are now estimating 2022 to achieve our highest F F O per share.
Since our IPO over 11 years ago.
He has been pre Covid 2019 F F O per share and that is based on optimism and your near term growth across all our assets.
Again, our growth this year has been with a S. R.
Our growth this year has been notwithstanding the difficult economic cycle and volatility that we are faced with today to me that speaks volumes about American assets Trust, and we still see a meaning a meaningful opportunity for growth.
And then sue in years that we will do our absolute best to capitalize on the prospect of lease up of our new developments and continued rebound of our Waikiki Beach walk retail and embassy suites, particularly its Asian tourists begin to slowly return to Oahu.
Clearly the market view of AEP based on our share price is inconsistent with our actual performance and the quality of our assets and our people and how we have executed our strategies and stewardship.
We'll do our best to bridge that yes.
I also want to mention the board of directors has approved a quarterly dividend of 32 cents for the fourth quarter.
The dividend will be paid on December 22nd to shareholders of record December eight.
Finally on the development front, both La Jolla Commons III and one beach remain on time and on budget and we continue to remain optimistic about the leasing prospects and base requirements, but.
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.
Financial results and guidance updates.
Half 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 and our board.
Adam Please.
Thank you Ernest as Ernest alluded and as we continue to reiterate despite the headwinds of today's economic conditions and capital market challenges, we believe our underlying fundamentals and asset quality support a favorable long term view of American assets Trust.
In addition to our asset quality and strong balance sheet, we have minimal lease maturities in 2023 single digit percentages for both office and retail and low single digit percentages assuming options are exercised.
Our highly diversified tenant credit and a well staggered debt maturity schedule and not to mentioned, having a diversified portfolio that helped us navigate through COVID-19 at certain of our segments proved more resilient than others at varying times mean.
Meanwhile, since labor day, we have seen incremental progress have returned to work in our office portfolio from Q2 to Q3 with strength in San Diego, and Portland, and fairly strong utilization at landmark in San Francisco by our two office tenants at about 75% Tuesday through Thursday, and 50% Monday and Friday as this.
Building serves as a hub for one tenant in San Francisco and as the others headquarter.
Meanwhile, BELBUCA continues to lag office utilization relative to our other markets of course, we still believe there is meaningful upside to our office utilization looking out several quarters as employers continue to convey their intentions to us for their employees being in the office and as we anticipate employers ultimately having more leverage with employees.
With our view of softening and more balanced labor markets over the next few quarters.
In Q3, our San Diego multifamily portfolio continued its favorable rent growth, where we saw leases on vacant units ran at an average of approximately 31% over the prior rates while rates on renewed units increased an average of 13% over prior rents with virtually no concessions in Q3. Additionally in San Diego.
Net effective rents for new multifamily leases are now, 22% above pre COVID-19 levels, and 16% higher year over year compared to the third quarter of 2019 in 2021 respectively.
Additionally, our hassle on April multifamily in Portland came in above our internal expectations in Q3 as the Portland multifamily market has continued its rebound.
In Q3, we saw vacant units a hassle low lease at an average of approximately 21% over prior rents and renewal units leased at an average of approximately 8% over prior rates in all cases with no concessions given during Q3 and Portland net effective rents for new multifamily leases are now back near pre COVID-19 levels.
And 18% higher year over year compared to the third quarter of 2019 in 2020 one respectively.
We expect to see some deceleration of rent growth in our multifamily portfolio into Q4, as we move into a seasonally slower time of year.
Meanwhile, we remain confident about our retail portfolio that is among the best in class in our markets. In Q3, we saw comparable retail leasing spreads increased approximately 7% and 28% on a cash basis, and GAAP basis, respectively, buoyed by favorite music favorable leasing activity in the quarter on the heels of <unk>.
Q2, which also saw similar favorable comparable leasing spreads on a cash and GAAP basis.
We have a fair amount of retail deals and document documentation right now and remain optimistic those deals get aimed in Q4.
Briefly with respect to ESG, we continue to make meaningful progress towards our ESG goals and are pleased to have achieved for the first time in a disclosure from grads, which measures the level of public stakeholder engagement and communication of our company's ESG initiatives. We were ranked first out of our disclosure comparison group and also we.
Earned a four star grasp rating on standing investments good for second out of our peer comparison group as you know we are committed to rolling up our sleeves and prudently advancing our ESG initiatives in the years to come and we'll do our best to be transparent on those efforts with that I'll turn the call over to Bob discuss financial results and updated guidance in more detail.
Thanks, Adam and good morning, everybody.
Yesterday, we reported third quarter 2022 peso per share of <unk> 63.
Excuse me in third quarter 2022, net income attributable to common stockholders per share up 21.
Third quarter F S, though increased approximately five cents over the second.
Second quarter of 'twenty, two and is comprised of the following.
First the embassy suites Waikiki hotel increased by approximately two cents per F. F O share during the high season of Q3 over Q2 and second two items that we look at as nonrecurring revenue in determining a run rate or <unk>.
First accelerated revenue recognition related to T. I over straight line rent related to the early termination of a tenant at city Center Bellevue was approximately two cents per F. F O share.
And secondly, and accelerated deferral of rent payment was received by a tenant at first in Maine in Q3, 'twenty two that generated approximately a penny per.
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Same store cash NOI in Q3 22 ended at approximately 11, 3% growth year over year for the third quarter.
Same store office was approximately 14, 8% in Q3 as a result of the remaining lease abatements burning off of one of our large tenants at our landmark building in San Francisco.
The retail sector had a negative three 8% decrease in same store cash NOI in Q3, but when excluding prior year COVID-19 related accounts receivable collections.
State tax refund at Alamo Quarry in 2020 was the retail same store cash NOI percentage increases to a positive 1% growth year over year.
Retail growth is much stronger on a comparative year over basis, when excluding those one time items.
Let's talk about liquidity.
At the end of the third quarter of 'twenty. Two we had liquidity of approximately 427 million comprised of approximately $63 million in cash and cash equivalents and 364.
L ability on our revolving line of credit.
Our leverage which we measure in terms of net debt to EBITDA was 6.4 times. Our objective is to achieve and maintain a net debt to EBITDA of five and a half times or below.
Our interest coverage and fixed charge coverage ratio ended the quarter at four one times.
Let's talk about 'twenty two guidance for a moment.
We are once again, increasing our 22 episodes per share guidance range to 230 or sports or S. S O share with a midpoint of $2 32 per <unk> share.
A three 6% increase from our previously updated guidance.
Hit a midpoint of $2 32, we are expecting Q4 to be approximately 54 cents for F. F O share, which is a decrease from Q3 of approximately nine cents per share.
The majority of this expected decrease from Q3 is comprised of the following first embassy suites Waikiki Beach walk is expected to be lower by approximately three cents for F. F O share.
Due to the normal seasonality between the high season of Q3, and Q4 second G&A is expected to be higher in Q4, thereby decrease <unk> by approximately two cents per <unk> share due to the expected inflationary adjustments at year end.
Third non recurring accelerated rapid revenue recognition related to T. I, overages and an accelerated deferred rent payment, which occurred in Q3 will not reoccur in Q4.
And thereby decrease <unk> by approximately <unk> <unk> per <unk> share.
It is also possible that we could perform to their high end of the updated guidance range.
Tourism and spending in Waikiki maintains its positive trajectory as we expect at embassy suites.
And approximately equal to 2019 pre COVID-19 NOI up from our estimate of 89% at the end of Q3.
Two with incremental improvement, depending on the magnitude of job or Japanese tourism to Oahu.
As always our guidance and 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 will continue our best to 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 third quarter, our office portfolio remained stable with our same store portfolio remaining at approximately 96% leased.
Quality of our portfolio continues to yield strong rent growth.
In the third quarter, we executed 13 leases totaling approximately 9000 rentable square feet.
<unk>, one comparable new lease for approximately 18000 rentable square feet with increases over prior rent of 55% on a straight line basis, approximately 25000 rentable square feet of comparable renewal leases with increases over prior rents at 19, 6% on a straight line basis, and approximately 16000 rentable square feet of non comparable new leases.
Yes.
Office leasing spreads continue to be strong in Q3 with leasing spreads of 24% increase on a cash basis over the prior rents and a 35% increase on a GAAP basis.
As we shared last quarter you.
It expanded access to medical office users in select markets and buildings in response to very tight market conditions producing longer term leases at premium mass relative to traditional office tenants in Q3, we renewed an existing medical user and approximately 4000 rentable square feet and earlier. This month, we expanded them into an additional 7400 square feet.
The triple net rate for this expansion is approximately 40% greater than the comparable office lease.
We have a lease out for signature for a 770 400 rentable square foot medical use it's Lana crossing at a triple net rate that is 35% higher than a comparable office lease and.
And we are continuing to invest in our properties. In addition to the redevelopment at one beach and San Francisco 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 headless showers and lockers in a conference center.
Renovations and commentary enhancements at Solana crossing.
New fitness center at corporate campus East three.
New amenities at first in Maine, and Lloyd Center Tower in Portland, including a fitness Center Conference Centre and lounge at each building.
We continue to believe the strategic investments in our office portfolio will position us to continue to capture more than our fair share of net absorption of premium rents despite current market headwinds.
I'll now turn the call back over to the operator for Q&A.
Yeah.
We will now begin the question and answer session.
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Once again Star then one.
One quick question.
Momentarily to assemble our.
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Yes.
And our first question will come from Todd Thomas of Keybanc capital markets. Please go ahead.
Yeah.
One he thought hi, thanks, Hi, good morning.
Bob just in the context of the updated guidance I was just wondering if you could provide.
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Okay.
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In prior quarters.
Yeah, we we can we have the information available.
Let's see for prior quarters, well one of the comments that I have is.
It is.
If you compare the 2021 like that.
Real estate property tax refund that we received you know I mentioned that the retail would be on a positive approximately four 2% that we expect for year end 2022.
In total same store cash NOI.
Eight 6% at year end.
Approximately 10, 4%, excluding the Alamo real estate property tax at year end.
Does that answer your question you were looking for like.
Quarter by quarter.
I think I mean, you're you're tracking you know pretty well I had I guess on all four segments that you've.
Discussed from a same store standpoint, and I just wanted to know if you know.
You you were updating those forecasts for the full year.
It's helpful on the retail side, but you know what what are you expecting I guess for office multi.
The mixed use and.
In general it just seems like you're.
Continuing to track well ahead of expectations from from a same store standpoint for the for the year.
Yeah for the year 22, our expectation is like office would be eight 8% and again. These are approximations retail would be 2.3% without factoring in the prior year 21 real estate tax refund at element.
Multifamily, we think will come in approximately 11%.
And we think mixed use.
Well end the year approximately 56%.
Okay.
But we'll put.
Put in the actual numbers on Q4 call.
Alright got it that's helpful and then.
With regards to.
222.
Asset specific questions I guess first you know the leasing momentum that you discussed at hassle out has that continued in October in terms of rent levels and and concessions.
October has been a bit of a slow month, but the metrics are still in place.
Okay, and then for the hotel.
You're expecting.
Sort of a two cent decrease I guess so.
Or I'm sorry.
Alright, <unk> decrease sequentially as you head into the fourth quarter you know we're almost through October .
Can you just provide a little bit of an update in terms of occupancy and rate and what youre seeing there.
You know heading into the towards the end of the year.
Bob I think I think the occupancy and rate or are holding.
And it's just just a question of our Japanese Tourism October and November I mean November is typically a shoulder month the month that.
You know, it's not as strong obviously is the summer.
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October is on track.
We may see some pullback on November but.
We're still we're still moving forward on that.
So we're very positive on Waikiki Beach walk in and the fact that you know we were for the first three months.
For the first three quarters of this year, we were 99% of pre Covid.
On a year to date basis.
Compared to pre Covid.
So we're just looking to see will that trend continue into Q4.
Okay, and then and then just Bob Lastly, I guess the.
The term loans B and C $150 million that matures in May of next year. What are your current thoughts are on on refinancing those those two term loans.
Yeah, our current thoughts as we will obviously you refinance them, we have a great banking syndicate. So I mean, it's likely that we will enter into a refinance those possibly add a little bit to it.
Yeah, it'll it'll probably be a term of two plus a one year options.
I think what what we think is the right thing for our company is to do a bridge just to get you through the upcoming recession. If there is one and be set up ready to go.
You know what once we come out of this recession.
Okay, and then any you know I realize there's you know a lot of movement potentially here between now and then but what sort of change in rates or pricing.
Would you anticipate today, if you went out to the market for that relative to the.
The 2.65%.
On those two term loans.
Well, it's definitely going to be higher.
And we're still pricing that out as we speak so I don't have a number for you but.
It'll be higher.
Okay alright, thank you.
Thank you Tom and thank you for the question.
This concludes our question and answer session I would like to turn the conference back over to chairman Ernest Rady for any closing remarks.
Thank you for your interest thank you for allowing us to manage the company I do have to express my concern that there's this disconnect between the market value of our.
Our stock and the market value of our assets and the quality of the assets and the management.
We hope at some point this gap narrows, but in the meantime, it is disconcerting, but thanks for your interest and we look for many more years of being able to report good results and good good job, Bob Steve and Al.
Bye bye.
Okay.
The conference has now concluded. Thank you for attending today's presentation and you may now.
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