Q4 2022 American Assets Trust Inc Earnings Call

Speaker 1: So.

Speaker 2: Good day. As a reminder, today's conference call is being recorded. Please note that statements made on this conference call include four different incidents based on current expectations, which are subject to risks and uncertainties discussed in the company's filings with the SEC.

Speaker 3: You are cautioned not to place undue reliance on these forward-looking statements. As actual events could cause the company's results to differ materially from those forward-looking It is now my pleasure to introduce your host, Mr. Adam Watt, President and COO for American asset trust.

Speaker 4: Thank you. Mr. Wilde, you may begin. Thank you. Good morning, everyone. Welcome to American Assets Trust, Year-End and Fourth Quarter 2022 earnings call. Yesterday afternoon, our earnings release and supplemental information were furnished to the SEC on Form 8K. Both are now available on the Investors section of our website, American Assets Trust.

Speaker 5: I wish all of our stakeholders continued health, safety, and prosperity, and express my sincere appreciation for your continued support of American Assets Trust through these most extraordinary times.

Speaker 6: As you've heard me say before, our discipline business decisions are predicated on taking a long-term view that we believe will support the growth of our earnings and drive shareholder wealth creation. We remain encouraged and optimistic with the high-quality, irreplaceable properties and asset class diversity of our portfolio.

Speaker 7: We believe this, combined with the strength of our balance sheet, ample liquidity, top-notch management team, not to mention a very nimble and efficient operating platform will allow us to continue growing our earnings on an accretive basis and contribute to our outperformance over the long term. Meanwhile,

Speaker 8: As the Federal Reserve is persistent in its ongoing attempt to tame inflation caused by the unprecedented fiscal stimulus enacted by the Federal Government, we are confident in our thesis of our portfolio being an effective protection against inflation, which will provide a tailwind of sorts to our rents.

Speaker 9: growth of our portfolio this year and beyond.

Speaker 10: Hi, along with Bob and Steve, we'll go into more detail on our various asset segments, financial results and guidance. So on behalf of Ernest and all of us at American Assets Trust Inc., we thank you for your confidence in allowing us to manage your company and for your continued support. I'm going to continue along with my own prepared remarks. You've heard us speak consistently to our focus on making meaningful capital improvements to continue to enhance, improve, and to monetize our properties to remain best in class. We know how well received those have been by our tenants and customers, and it truly is making a significant difference in our ability to retain.

Speaker 11: in 2022 as compared to 2021.

Speaker 12: Briefly on the office utilization front, we continue to see incremental progress of return to work since Q3 with more strength in San Diego, Portland, and specifically at our landmark in San Francisco than in Bellevue right now.

Speaker 13: We know many companies have implemented or are implementing increased in office work requirements for their employees. And together with the recent tech layoffs, we sense a shift towards employers having more leverage, not to mention more and more employees realizing they need to be seen in the office for job security, mentorship, collaboration.

Speaker 14: We think this should all continue to push a higher office utilization in our portfolio over the course of this year.

Speaker 15: Meanwhile, our multifamily portfolio saw a positive yet decelerating rent growth leading up to year end with some softening since Q3.

Speaker 16: In Q4 in San Diego, we saw leases on vacant units rent at an average of approximately 1% over the prior rates, which was negatively impacted by higher comparable rents at Pacific Ridge from master leases that previously terminated, while rates on renewed units increased an average of 11% over prior rents with minimal concessions.

Speaker 17: Additionally, in San Diego, net effective rents for new multi-family leases are now 29% above pre-COVID levels and 17% higher year over year compared to the fourth quarter of 2019 and 2021 respectively. In Q4 in Portland at a house low on 8th, we saw vacant units at Hassello lease at an average of approximately 6% of the population.

Speaker 18: and 2021 respectively.

Speaker 19: Though our multifamily least percentage decreased a few points towards the end of 2022 due to seasonality, we are pleased to report that as of the end of January 2023, our least percentage had increased from approximately 92% to 96.5% in San Diego and remained at about 94% in Portland.

Speaker 20: As you know, our multifamily communities reside among favorable demographics with fairly low unemployment rates, strong income growth, and high home ownership costs. So we remain bullish long term on our multifamily fundamentals.

Speaker 21: On the retail front, we remain confident about our dominant best-in-class retail portfolio that resides in supply constrained and densely populated markets and where consumer spending has been strong. In Q4, we saw very active retail leasing activity, and as a result, our retail leased percentage is now at approximately 94%.

Speaker 22: with only 3% coming due to expire in 2023. We have a fair amount of retail deals and documentation right now and remain optimistic those deals get inked in Q1 or Q2.

Speaker 23: Briefly, in regards to retail tenants that have filed bankruptcy, we are in active discussions with Regal Theaters at our Alamo Quarry and current expectation is that they want to hold on to that location subject to finalizing documentation and obtaining court approvals.

Speaker 24: And with respect to party city, our location in White Kelly Center is franchise owned and not part of the bankruptcy process. And our other location is at Gateway Marketplace. And that we know it's sales are an above average performer for them. We are in very preliminary discussions with them in the bankruptcy process.

Speaker 25: Finally, on the development front with respect to Lohoya Commons 3, we are optimistic of the near-term space requirements in the UTC sub-market that currently sits with just 4% direct vacancy. And we will be patient with one beach street as San Francisco is not without its near-term challenges, but we remain bullish on San Francisco's long-term prospects.

Speaker 26: We have no specific leasing news to share on these developments at this point. With that, I'll turn the call over to Bob to discuss financial results and guidance in more detail.

Speaker 27: Thanks Adam and good morning everyone. Last night we reported fourth quarter and year ended 2022 FFO per share of 56.

Speaker 28: and $2.34 respectively. And fourth quarter and year ended 2022, net income attributable to common stockholders per share of $0.16 and $0.72 respectively.

Speaker 29: Fourth quarter FFO decreased by approximately 7 cents to 56 cents per FFO share compared to the third quarter of 22 and is primarily comprised of the following.

Speaker 30: First, Embassy Suites Beachwalk was lower by approximately 2 cents per FFO share as expected due to the normal seasonality between the high season of Q3 and Q4.

Speaker 31: Second, we increased our reserve for straight line rents receivable related to two tenants in the fourth quarter combined with higher accelerated non-recurring straight line revenue in Q3 that did not occur in Q3.

Speaker 32: which together reduced FFO for share by approximately 4 cents in Q4.

Third, G&A and interest expense combined was approximately 1 cent per FFO share higher in Q4 which decreased FFO by approximately a penny per FFO share.

Same-store cash NOI for all sectors combined with strong and Q4, ending at 5.5% growth year-over-year for the fourth quarter and 9.5% growth in 2022 over 2021.

Though the 2022 year over year same store retail NLI growth was essentially flat, if we exclude the 2021 property tax refund of approximately 2.4 million for Alamo Cori, that was received in Q3 2021.

Our same-store retail NOI growth increased from flat to 3.9% in 2022, and same-store cash NOI for all sectors combined on a year-over-year basis increased from 9.5% to 10.7%.

Let's talk about liquidity. At the end of the fourth quarter, we had liquidity of our approximately 414 million.

comprised of approximately 50 million of cash and cash equivalents and 364 million of availability on our revolving line of credit.

Note that subsequent to year end, we repaid 36 million outstanding balance on a revolving line of credit, such that we have full capacity of 400 million on it today.

Additionally, as of the end of the fourth quarter, our leverage, which we measure in terms of net debt de pedal, 7.0 times.

Our objective is to achieve and maintain a net debt to Yvda 5.5 times or below. Our interest coverage and fixed charge coverage ratio into the quarter at 3.8 times.

Let's talk about 2023 guidance.

We are introducing our 2023 FFO for shared guidance range of $2.16 to $2.30 per FFO share with a midpoint of $2.23 per FFO share.

which is approximately a 4.7% decrease over 2022 actual of $2.34 per FFO share at the midpoint. I'm going to break this up into two parts, a high level overview and a detailed overview.

From a high level overview, I look at 2023 guidance as follows. Starting with 2022, FFO of $2.34 per share, there are four things that make up the decrease. They are...

Number one, start with subtracting three cents of non-recurring revenue that occurred in Q3 that we talked about on the Q3 earnings call.

That brings you down to $2.31 per share, which would be an approximate FFO run rate as of year-end 2022 before the following adjustments. Number two, interest expense will increase in 2023 by approximately 10 cents per FFO share.

This relates to 150 million of term loans that were maturing in March 2023, that we refinanced an increase from 150 million to 225 million, effective January 5, 2023.

The interest rates on the refinance term loans increased from approximately 2.65 percent to 5.47 percent for a three year period with a one year extension.

Number three, we are including approximately six cents per FFO share of bad debt reserves that we believe are more likely than not to occur based on our internal probability and risk assessment of specific tenants within our portfolio.

Approximately three cents of these reserves relates to our office sector and three cents relates to our retail sector.

We thought it would be better and more transparent to break out the reserve separately so you can understand what's driving same-store cash in a wide which we discuss in more detail below.

Number four, lastly, we had a positive outcome on a legal settlement in January 2023 related to certain building systems that are hassle on 8th in Portland. This will contribute approximately 8 cents per FFO share in 2023 on a one time basis. This will contribute to a positive outcome on a one time basis.

Combined, these adjustments should get us to our guidance midpoint of $2.23 per FFO share.

Now the following is a more detailed overview of the 2023 guidance, again starting with $2.34.

Number one, same-store office cash NLI excluding reserves is expected to increase approximately 4.3% or 8 cents for FFO share in 2023.

Number two, same-store retail cash and a Y, excluding reserves, is expected to increase approximately 4.2% or 4 cents per FFO share in 2023. Number three, same-store multifamily cash and a Y is expected to be approximately flat in 2023.

The name store Mixed Use Cache NY is expected to be flat in 2023. Our 2023 guidance is prepared by our partners at Outrigger and YKK that have boots on the ground that have an awareness in YKK for other hotels or retail properties that they own and or manage. Our 2023 guidance.

for the Embassy Suites Hotel in Waikiki is based on the following. Revenue is expected to increase approximately 10% in 2023. People will Prices will be raised.

Operating expenses are expected to increase significantly to approximately 17% in 2023 due to inflationary impact on operating expenses such as food costs, labor, and overhead.

Some of the metrics that Embassy Suites Hotel 2023 guidance is based on include

Occupancy is expected to increase approximately 8.7% from 77% in 2022 to 84% in 2023.

ADR is expected to increase approximately 3.3% from $352.22 to $364.23.

Rev Paris expected to increase approximately 7.4% from 283.

dollars in 22.

to $304.23. Our 2022 NOI for Embassy Suites Hotel doubled compared to 2021 year to date, and it's approximately the same as it was pre-COVID.

even without our guests from Japan. Unfortunately, Japan tourism to Oahu has been much slower than expected due to weakness in the Japanese currency.

However, exchange rates are trending in a better direction since last October , which is a positive to our Japanese guests returning to a law firm.

Number four, estimated bad debt expense reserves is expected to decrease FFO by approximately 4.2 million or $0.06 per FFO per share in 2023, which we have previously described in more detail above.

Number five, all four sectors above, excluding reserves, are expected to generate a total same store cash NOI growth year over year in 2023 of approximately 3.4% or $0.12 per FFO share. Including reserves, all four sectors are expected to generate a total of $0.12 per FFO share.

and 10.

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Combined, they are expected to contribute approximately 1 cent per FFO share in 2023.

G&A is expected to increase approximately $3.8 million and decrease FFO by approximately $0.05 per FFO share in 2023.

The increase in GNA includes approximately 1.9 million in non-recurring legal expenses relating to opportunistic litigation that we have initiated against certain vendors in which we are hopeful to see a meaningful recovery later this year, if not early next.

Number eight, interest expense is expected to increase approximately 7.4 million and decrease F-10 cents per FFO share in 2023, which we have previously described in more detail above. Number nine, gap adjustments, primarily relating to straight line rents.

will decrease FFO by approximately 7.9 million, or 11 cents per FFO share in 2023. A large part of this relates to a large abatement that has expired June 2022 for a tenant in our landmark at One Market Street building.

decrease FFO by approximately 7.9 million or 11 cents per FFO share in 2023. A large part of this relates to a large abatement that has expired June 2022 for a tenant in our landmark at 1 Market Street building. Number 10 litigation settlement.

will increase FFO by approximately 6.3 million or 8 cents per FFO share in 2023, which we have previously discussed above.

These adjustments when added together will be approximately 11 cents per FFO share and represent the net decrease in 2023 midpoint over 2022 FFO per share. While we believe the 2023 guidance is our best estimate as of the date of this earnings call.

We do believe that it is also possible that we could outperform towards the upper end of this guidance range. In order to do that,

Number one, tourism and travel to Waikiki needs to see a meaningful return from our Japanese guests, which we are cautiously optimistic about.

And number two, we need to outperform our multifamily guidance by continuing to see increasing rents and or less expenses than budgeted. And three, the office or retail tenants that we reserved for continue to pay rents through the year. As always, our guidance.

Our NOI bridge and these prepared remarks exclude any impact from future acquisitions, just positions, equity issuances or repurchases, future debt refinancing, or repayments other than what we've already discussed. We will continue our best to be as transparent as possible and share with your analysis and interpretations of our quarterly numbers.

I also want to briefly note that any non-GAAP financial measures that we've discussed, like NOI, are reconciled to our GAAP financial results and are earnings to release some supplemental information.

I'll now turn the call over to Steve Senter, our Senior Vice President of Office Properties, for a brief update on our office segment. Steve. Thanks, Bob. Leasing activity in our office portfolio returned to the levels achieved in 2019 with 64 deals totaling approximately 475,000 square feet.

At the end of the fourth quarter, our office portfolio was 89% least, with our same store portfolio dropping to 92.5% least, primarily due to right sizing and tenant offices closing or downsizing in Bellevue as follows.

At City Center Bellevue, VMware renewed in 75,000 square feet in Q2 at $64.75 but let approximately 17,000 rentable square feet of their space expiring Q4.

Home Street Bank downsides from approximately 13,000 square feet into a 7,000 square foot sublease because we didn't have a 7,000 square foot suite to accommodate them.

At Eastgate Office Park, Great American Insurance downsides from approximately 15,000 square feet into a 7,000 square foot short-term sublease. And Cronus closed their office of approximately 7,000 square feet, opting to work from home.

At Eastgate Office Park, Great American Insurance downsides from approximately 15,000 square feet into a 7,000 square foot short-term sublease. And Cronus closed their office of approximately 7,000 square feet, opting to work from home. All of these expiring leases were well below market.

The weighted average ending rate of the city center Belby leases was $46.45 on a full service gross basis versus the mid to high 60s for deals recently closed drought for signature

Likewise, the weighted average ending rate of the Eastgate leases was $25 triple net versus the mid 30s for closed or pending deals.

Even with the headwinds of right sizing and work from home, the quality of our office portfolio continues to yield strong rent growth.

In the fourth quarter, we executed 17 leases totaling approximately 97,000 square feet, including one comparable new lease for approximately 24,000 square feet, with increases over a prior rent of 19% on a straight line basis. 12 comparable renewal leases totaling approximately 75,000 square feet.

with increases over prior rent of 25% on a straight line basis. And for non-comparable new leases totaling approximately 20,000 square feet, two of which were new medical office leases totaling approximately 15,000 square feet, at triple net rents 35% and 41% higher than comparable office rents.

at Solana Crossing and Torrey Reserve respectively. We are encouraged by current tour and proposal activity across our portfolio, especially in the small to mid-sized tenant range. This bodes well for our current vacancies and future rollover.

Our average vacant space is under 7,000 square feet with just 11 spaces greater than 10,000 square feet including the three floors at one beach ranging from 30 to 37,000 square feet each.

The average space size rolling in 2023 and 2024 are approximately 7300 square feet and 5600 square feet respectively. The largest tenant rolling in 2023 is Autodesk and approximately 93,000 square feet on the fourth and fifth floors of Landmark in San Francisco, which we currently expect to renew.

We continue to believe that 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. And while we are not immune to potential additional attrition due to current conditions, we believe that the flight to quality will continue to drive solid performance from our office portfolio over the long term.

I'll now turn the call back over to the operator for Q&A. We will now begin the question and for session.

To ask a question, you may press star then 1 on your touch tone phone.

If you are using a speaker phone, please pick up your handset before pressing the keys.

If at any time your question has been addressed and you would like to withdraw your question, please press star then two.

At this time, we will pause momentarily to assemble our roster.

The first question today comes from Handel St. Just with Mizzoujo. Please go ahead.

See you guys good morning.

A couple questions first on the leasing front. Steve, I guess first of all, appreciate all the details in relation to the guide. Steve, I wanted to ask you a bit about the office demand trends you are seeing. I appreciate the color on the number of tenants who are coming whose leases are maturing in the average size. I'm curious, how many other tenants beyond Autodesk?

have leases maturing in a maybe 30,000 square foot plus basis. And what do you think that line is, plus or minus, that gives you a good amount of optionality and doesn't necessarily pose a problem being too large for tenants in this current environment? [...]

Good question Handel. The answer is Autodesk is it. I mean everything else is full floor or less.

So it really is a lot of small tenant rollover. So we're really not exposed beyond Autodesk to the big tech situation that you're seeing in multiple markets. So we're actually well positioned and it's a small tenant rollover. Actually, that's where we're seeing the most new tour and proposal activity is in the small to mid-sized tenants.

Got it, got it. Okay. I noticed that industrious is in the list of top tenants on the office side. Maybe comment on that. Is there anything unique or different about the leases they're doing? Are they longer? Do they require more CapEx? Are they based around a percentage?

event base of some comment that would be appreciated. Sorry, you're talking about industries. Actually, their initial lease was two floors done back in 2017 or 2018. And that was their typical co-working situation. The newer lease is

are enterprise level deals. I think Databricks is their big kind of that just took down two half floors in our latest lease at City Center Bellevue. So they're really kind of towards the enterprise level tenant

Okay, and one on the retail side, seems like all the leasing done in the fourth quarter was renewals. I don't know if that's just a unique confluence of events, but maybe if there's anything to share on the new lease side, or is there something maybe underlying this from a demand perspective, but some color or some thoughts on the retail leasing in the fourth quarter?

Yeah, I mean, hi, Handel, Fatum. So a lot of it was renewals in the fourth quarter. We did have a handful of new deals, including a 14,000-foot Solosalon at our Carmel Mountain Plaza, which is a great deal for us. We finally replaced the PF Changs Restaurant at Del Monte Center with the Kona Stake and Seafood, which will be opening.

I think now that we're up to 94, 95% least and we've got some in the hopper that should hopefully round that up another percent or so. We feel like things are functioning pretty well on the retail side for us. So given that you are a fire I can be level in.

a lot of your space vacancies have been addressed. How do you then feel about pricing power in near term for the outlook for spreads on the retail side?

I think it's probably going to be pretty consistent with what we've been seeing. It should be, of course, we're looking for increases over expiring rents and to the extent we can get that we will. We'll do as well as any of our peers with similar situated class H, shopping centers hand-dale. For the most part, we're seeing positive spreads. There may be roll-downs and certain instances on more difficult spaces. But...

We'll just have to see what happens. Okay, fair enough. Best of luck, guys. Thank you. Thanks, Andell. As a reminder, if you would like to ask a question, please press star and 1 to be joined into the queue. The next question comes from Ronald Camden with Morgan Stanley . Please go ahead.

Hey guys, it's Adam Kramer on Forron. I appreciate all kind of the guidance, commentary, and breakdowns earlier are really helpful. I guess just thinking about the multi-familm report fully, if I heard correctly, I think the comments was kind of in a live flat, you're a rear in 23, some kind of elevated expenses there. Wondering just maybe on the revenue side, on the leasing side from multi-family, kind of what's happening there? What are you seeing in your markets? 3 cuts?

You know that there may be, you know, it's driving some revenue but kind of not enough to talk about what's going on in the expense line.

You know that that that maybe you know I was driving some revenue but but kind of not enough to kind of off stuff It's going on in the expense line

We are seeing, I think we're looking at our numbers right now and we are expecting two plus percent revenue growth under multi-family side, but the expenses are just. They're a little more challenging for us, particularly on some of our older product like Loma, Palisades or Mariners Point, some of these are older.

been around for 60, 40 years. They take a little more TLC. So we've been kind of putting a lot more OpEx into those to get them back.

to where they should be in terms of roofing or balconies or painting and landscaping just to make sure they're humming properly. So we're seeing a little more expenses on that side perhaps for being a little conservative because it's a little more difficult to predict the upcoming year. But that's kind of it at a high level. I would go to do anything to add to that. Sure, I can add to that. Thank you Adam. I think also on the revenue side of it.

that are coming online for rent and there's a cap on them too. So once that lifts the state of emergency that we can show forward with pushing the revenue, the rent for new units as much as possible and as we move into the spring and into the summer.

Historically, that is when we start to see units rent quickly and they rent at a higher So we'll continue to push where we can. Got it. Just on a market level, you know, kind of how are you using concessions and, you know, it seems like based on a commentary from others, there's probably some concessions.

over $3,224. Our net effective rents were $3,208. So when you look at that on a cost basis, it's just a little under $200 per unit, and we had 85-week leases in the fourth quarter. So a little bit of softening there in concessions that had to be offered in that fourth quarter. Moving forward into Q1, concessions have pretty much...

kind of wet wing development versus M&A, obviously been active in office the last few years, office M&A, so maybe just kind of your thoughts there. I mean, I don't know if shared buyback is something that would be on the table at a point, but we'll have to just hear kind of the latest thoughts on capital deployment. Hey Adam, this is Bob. Yeah, in terms of.

We all are, Steve's looking at the markets that things are brought to him. I see things and Adam does as well. But when you run the economics of them, it just doesn't make sense. And sometimes during the markets like this, it is sometimes in the best interest to just...

take care of what you got, keep it in pristine condition, and push rents as much as you can. We're big believers in the office sector, but every sector that we have, I mean look at the retail, look at the same store growth before reserves, look at the leasing spreads on retail that are coming in.

What we have, we believe is gold. And we don't want to make a bad acquisition. But having said that, we also look at every opportunity that is presented to us. And if nothing else, we learn from those opportunities that are presented. That's great. Thanks again, guys. Appreciate the time.

Next item. This concludes our question and answer session. I would like to turn the conference back over to Adam Lowe for any closing remarks.

Thanks again for all that have listened in today and those that have been stakeholders along the way. We remain encouraged by our operating fundamentals notwithstanding the challenging economic cycle and volatility in the capital markets today. But we'll be prepared for any scenario to the best of our abilities. And we've been through many cycles before and our properties or platform or balance sheet of successfully guided us through the ups and downs each time. Thanks again.

As Ernest would say, if you are here, when the going gets tough, the tough get going. We're going to roll up our sleeves and get back to work. I appreciate you. The conference has now concluded. Thank you for attending today's presentation. See you right now.

And C the F.