Q1 2023 American Assets Trust Inc. Earnings Call
Good morning, and welcome to the American assets Trust first quarter 'twenty twenty-three earnings conference call.
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As a reminder, today's conference call is being recorded. 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 as actual events could cause the company's results to differ materially from these forward looking statements.
It is now my pleasure to introduce your host Mr. Adam <unk>, President and C. O O for American assets Trust. Thank you. Mr. Weil you may begin.
Thank you good morning, everyone welcome to American assets Trust first quarter 2023 earnings call yesterday afternoon, our earnings release and supplemental information were furnished to the SEC on our form 8-K, and both are now available on the investors section of our website American assets Trust's Dot com with that quick intro I'll turn the call over to Ernest Rady our.
Chairman and CEO to begin the discussion of our first quarter 2023 results Earth.
Thanks, Adam and good morning, everyone as.
As we are all acutely aware of the market has become quite pessimistic.
How 'bout, most public Reits over the past year picked it, particularly those with any significant office exposure.
At American assets Trust, along with virtually all of our peers continues to be faced with many macroeconomic headwinds, including volatility in the capital markets rising interest rates tech industry layoffs, and the disruption disruption caused by regional bank failures Howie.
Ever a silver lining for us is that because we have been cycle tested many times over our 55 year plus history. We believe we have proven that we are prepared for almost any future scenario, we may face whether it be inflation recession depression expansion.
Or most likely the unexpected.
We attribute our resilience to several factors, including the strength of our irreplaceable portfolio.
And its asset class diversity, our conservative balance sheet and ample liquidity, our efficient operating platform and our talented people each of which guides us as we exercise.
Innes Prudence and discipline in every decision we make.
As you know are thoughtfully assembled portfolio is comprised of a combination of very high quality office retail multifamily and mixed use properties and desirable high barrier to entry markets and the path of growth education innovation and mass transportation since the founding.
Of our company over 55 years ago.
We have seen firsthand.
That asset class diversity makes our portfolio more resistant to volatility as each sector has a different times enjoyed periods of growth and weather periods of adversity, Adam Bob and Steve will go into more detail on our various asset segments financial.
<unk> and guidance, but first I want to mention that the board of directors has approved.
And maintained a quarterly dividend of 33 cents per share for the second quarter, which we believe is supported by our financial results and as an expression of our boards confidence in the embedded growth of our portfolio. This year and beyond the dividend will paid be paid on June 22nd.
To shareholders of record on June eight.
Again on behalf of all of US at American assets Trust. We thank you for their confidence and continued support and allowing us to manage your company and he wanted to express our appreciation to those of you who are able to attend and assist in planning, our Hawaii Investor Tour last month, Sony showing our true.
V properties in Waikiki Beach walk and why Kelly Center on the island of Oahu, I'm now going to turn the call back to Adam Adam Please.
Thanks, Ernest we are pleased to report that despite the macroeconomic challenges mentioned by Ernest we have continued to generate solid operating results from our diversified portfolio of high quality office retail and multifamily properties.
Our best in class retail properties, which reside in supply constrained in densely populated markets with favorable demographics have remained well very well leased with high foot traffic and our dominant in their trade areas are comparable retail leasing spreads continued their strong trajectory over the past year with a nine 5% increase on a cash basis.
And 28% increase on a straight line basis for Q1 deals.
And a nine 7% increase on a cash basis, and 21% increase on a straight line basis for the trailing four quarters.
Additionally, we expect to backfill the remaining 25000 feet of our former bed Bath and beyond space at Alamo Quarry, this quarter, which would bring that property to 99% leased. We also have recently signed amendments with Regal cinema at our Alamo Quarry and party city at our gateway marketplace, each stronger performers in their respective.
Portfolios, both our pending court approval and successful exits from bankruptcy, which appear on track for later in Q2 or Q3.
Meanwhile, our multifamily communities, which reside among strong demographics with fairly low unemployment rates strong income growth and high homeownership cost post results.
Much better than our expectations in Q1, despite some softening of rate increases we saw our San Diego multifamily percentage leased excluding our AR, our RV resorts increased from 92% to 94% over the past quarter.
And our same store multifamily portfolio realized same store cash NOI growth of 13% in Q1 2023 as compared to Q1 2022.
More in Q1 in San Diego, we saw leases on vacant units ran at an average of approximately 2% over the prior rates while rates on renewed units increased an average of 11% over prior rents with minimal concessions. Additionally, in San Diego net effective rents for new multifamily leases are now 30% above pre COVID-19 level.
And 50% higher year over year compared to the first quarter of 2019 in 2022 respectively.
In Q1 in Portland at our house low on as we saw vacant units. It has a low leased at an average of approximately 3% over prior rents and renewal units leased at an average of approximately 5% over prior rates with minimal concessions and Portland net effective rents for new multifamily leases are now 2% above pre COVID-19 levels.
And 12% higher year over year compared to the first quarter of 2019 in 2022 respectively brief.
Briefly on the office utilization front, we continue to see employees gradually increasing their return to the office, particularly within our San Diego portfolio and continuing at our landmark in San Francisco, but hybrid work and widespread tech layoff start meaningfully impacting office utilization in Bellevue.
Fortunately, we had a negligible impact from the collapse of Silicon Valley Bank as we had no bank accounts investments loans or leases with Silicon Valley Bank.
And just three of our office tenants had letters of credit with Silicon Valley Bank for less than two and a half million in the aggregate in each of those have been replaced by a new bank or reaffirmed by first citizens bank.
We are not aware of any of our tenants finances, our operations being materially impacted by regional bank failures at this time.
On the development front, we have no specific leasing news to share on La Jolla Commons three but we are cautiously optimistic about several active space requirements and UTC that we're participating in the RFP process and one beach will likely take more time than anticipated due to prevailing challenges in San Francisco Vine.
Finally in May keep your eye out for 2022 sustainability report, which will cover our 2022 operations and highlight our initiatives and commitments across a range of topics, including environmental social responsibility corporate governance and human capital 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 first quarter 2023 per share of 66 cents at.
First quarter 2023, net income attributable to common stockholders per share of 27.
First quarter 2023 F F will increase by approximately 10 to.
<unk> 66 per share.
Sure compared to the fourth quarter of 'twenty, two primarily from the following three items first.
Eight cents of the increase in that vessel was is related to the previously disclosed nonrecurring litigation settlement in January 2023 related to certain building systems at our hassle eight important.
Second our multifamily portfolio performed approximately one sad for F F O share better than the fourth quarter of 2022.
Third our mixed use portfolio performed approximately one or F. S a share better than the fourth quarter of 2022.
Due to the outperformance of our embassies Waikiki Beach walk.
Combined these three items reconcile our results from Q1 2023 back to Q4 of 2020 twos of approximately <unk> 56 per share.
Looking at it from a different perspective Q1 results came in approximately four and a half cents higher than our own internal forecast of 61, and a half cents per <unk> share, which is primarily comprised of the following three items first our multifamily portfolio out before.
Approximately two cents per share better than originally projected.
Second our retail portfolio outperformed by approximately one and a half cents per <unk> share better than originally projected.
Third our embassy suites, Waikiki Beach walk outperformed by approximately.
One cents for F F O share better than originally projected.
Same store cash NOI in Q1 2023 ended at approximately six 5% growth year over year for the first quarter.
Same store office grew at approximately three 2% in Q1 because of the remaining lease abatements burning off for one of our large tenants at our landmark at one market Street in San Francisco.
The retail sector had a 6% increase in same store cash NOI in Q1 as a result of leases starting at our Carmel Mountain Plaza, South Bay marketplace, and Lomas Santa Fe properties.
Multifamily had a 13% increase in same store cash NOI, primarily due to higher rents at our San Diego multifamily properties.
Mixed use portfolio grew at an approximately 19% as a result of higher revenue at our embassy suites Hotel and Waikiki Beach walk.
For the year ending 2023, we are updating our same store cash NOI metrics to be as follows same store office cash NOI. Excluding reserves is expected to increase approximately 4% in 2023.
Same store cash NOI, excluding reserves is expected to be approximately five 5%.
Same store cash NOI for the multifamily is expected to increase approximately three 8% in 2023.
And same store mixed use cash NOI is expected to be approximately one 8%.
23.
Total same store excluding reserves is excluded is expected to increase approximately four 2% in 2023.
Turning to liquidity at the end of the first quarter, we had liquidity of approximately 487 million comprised of approximately $87 million in cash cash equivalents and 400 million of full availability on our revolving line of credit.
Additionally, as of the end of the first quarter, our leverage which we measure in terms of net debt to EBITDA was six one 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 4.0 times.
Let's talk about 2023 guidance, we are increasing our 2023 <unk> per share guidance range.
Two $2.23 to $2.33 per <unk> share with a midpoint of $2 28 per <unk> share a two 2% increase from our previously stated guidance issued at our Q4 'twenty two earnings call that had a range of two.
Dollars and 16 cents to $2 30.
With a midpoint of $2 23.
Let's walk through the following items that make up this increase in our 2023 F F O guidance.
First our multifamily properties contributed approximately two cents for F. F O share of outperformance in Q1 'twenty three.
Which was not previously included in our 'twenty three guidance.
Second our retail properties contributed about one cent per F. F O share of outperformance in Q1 'twenty three that was not previously included in our 'twenty three guidance.
Third our office sector is expected to contribute an additional one cent per <unk> share.
That was not previously included in our 'twenty three guidance due to one of our office tenants that was expected to vacate in.
February has since reduced their lease.
And fourth our Waikiki Beach walk Embassy suites contributed one cent per <unk> share of outperformance in Q1 'twenty three that was not previously included in our 'twenty three guidance.
At this point in time with visibility into hotel bookings currently being just 30 to 45 days out we intend to maintain our prior forecast prepared by a local park or is that outbreak or for the remainder of 'twenty three.
These adjustments when added together will be approximately five cents per <unk> share and represent the increase into 'twenty three midpoint over our previous 23 guidance.
While we believe the twenty-three 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 increased guidance range.
As always our guidance our NOI bridge.
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 to be do our best to be as transparent as possible and share with you our analysis and interpretations of our quarterly numbers.
Also wanted to briefly note that any non-GAAP financial measures that we have discussed like NOI are reconciled to our GAAP financial results at our earnings release and supplemental information.
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.
Bob at the end of the first quarter, our office portfolio was 88% leased our same store portfolio now at 91, 4% leased primarily due to right sizing at City Center Bellevue as follows.
Cisco systems renewed and 10508 rentable square feet and vacated 18907 rentable square feet.
Zanotti renewed 12232 rentable square feet in Q2, 2022, letting 11938 rentable square feet expired this quarter.
Both of these leases were well below market.
So Cisco systems, ending rate was approximately $48 full service gross versus the renewals start right at $65.
Likewise, there's a note of any rate was approximately $32 triple net versus the renewals start rate at $35.
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 first quarter, we executed 15 leases totaling approximately 80000 rentable square feet include.
Including one comparable new lease for approximately 2300 rentable square feet with increases over prior rent of 21% on a straight line basis.
Seven comparable renewal leases totaling approximately 54000 rentable square feet with increases over prior rent of 23% on a straight line basis of note. We have agreed to terms to renew autodesk and approximately 93000 rentable square feet at landmark with lease amendments out for review.
We intend to provide insight into those renewal terms once fully executed.
And we are encouraged by our current tour and proposal activity across our portfolio, including the emergence of some larger users.
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 those strategic strategic investments include exceptional new amenities, such as fitness centers bike hubs conference centers outdoor spaces <unk> lounges at most of our office properties.
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.
I'll now turn the call back over to the operator for Q&A.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question is from Handel St. Jude of Mizuho. Please go ahead.
Hi, Good morning, this is Ravi.
Line for Hyundai Al Sanchez I Hope you guys are all doing well.
Your breath.
Could you comment on foot traffic in physical occupancy on your office assets, how has it trended over the last few quarters and what are your tenants been communicating with you regarding our badge swipes and physical occupancy.
Okay.
I would say the trend is up.
And our tenants want their people back in the office and so we won some new office leases for that reason, where we monetize the space, we either monetize the buildings.
And they.
They made the choice to come to our property to take advantage of that so that people would come back to work. So things are trending positively and even in San Francisco.
With Google and Autodesk, both or are ramping up the occupancy the space.
Got it thanks.
For the question.
Yeah of course.
One or two more here.
With office.
You walked it hung around five years for a couple of quarters now is that a function of tenants requesting shorter deals are as well.
Well, what what what should we expect that number to go looking forward on new leases and what do you like forecasting on that.
It's a good question and Ed that the weighted average lease term is largely determined by the size of the tenant, but what we are saying I mentioned in our comments that we are seeing larger tenants become active and those larger tenants are doing tenure tenure deals. So we.
I just did a 10 year renewal with one of our existing customers that's been with US for 24 years and Ive got another customer that's.
Relocating and expanding at La Jolla Commons into 24000 feet and that's a 10 year commitment as well plus any proposals that were engaged with.
In terms of La Jolla Commons III are longer term deals as well. So we're seeing tenants step up even smaller tenants. We just came to terms with a smaller accounting firm that was previously just kicking the can year over year now theyre committing to a five year term. So just across the board we're seeing longer commitments.
And tenants stepping up.
Thank you just one more here or are you targeting a biotech or pharma or anything like that less good than recent issues with D C financing.
Yeah.
We were in office player, but we do have some life science companies that are tenants of ours that arent lab uses a so so we've got several that their headquarters is office space and they have their labs elsewhere.
But it's not a specific target it's a function of where we are in terms of our location and in that industry continuing to grow here.
Yeah.
Got it. Thank you I appreciate the color. Good question. Thank you.
The next question is from Michael Manos with Green Street. Please go ahead.
Good morning.
Good morning, everyone I'm, just quickly and I know it kind of comes up on most of these calls but on our numbers you guys are kind of you know.
Call it a double digit implied cap rate. So just curious as kind of the public market has presented this opportunity in your own stock how you guys and the board kind of way weigh share repurchases in this environment.
Yeah, I'll take that question that Theyre in a spot Bob said earlier that our target is to reduce our net debt to EBITDA. We also are a mid sized REIT, but on the small side, we'd like to get larger if we could for the economies of scale.
So stock repurchases are really not on our agenda.
But that's a good question and thank you for asking.
Great and then why don't you just quick follow up.
Kind of in the local media mileage tax that's been proposed in San Diego curious if you guys have any insight to that.
How that may potentially impact both.
Office retail and multifamily portfolios.
Well I can answer that personally I think it's preposterous and probably won't get passed but again you never know.
Government has done things that have surprised us all and I would be surprised if that past.
Great. Thanks, that's it for me Thank you Sir.
Alright.
This concludes our question and answer session.
Like to turn the conference back over to Ernest Rady for any closing remarks.
You guys. Thanks, Thanks for particularly to the management on this call your exceptional and your much appreciated and much admired and for the questions of our of our investors. We appreciate your interest and we hope you maintained and interest and we hope we continue to satisfy you. Thank you all for your participation.
Look forward to seeing you soon.
Goodbye. Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
[noise].
Yeah.