Q2 2023 American Assets Trust Inc Earnings Call
Good day as a reminder, today's conference call is being recorded. Please note that statements made on this conference call includes forward looking statements based on current expectations, which statements are subject to risks and uncertainties discussed in the company's filings with the S. E T.
You are cautioned not to place undue reliance on these forward looking statements as actual events could cause the companys results to differ materially from this work are forward looking statements.
Is it it is now my pleasure to introduce your host for today, Mr. Adam while breast.
President and C O O of American assets Trust.
Thank you Mr. Weil you may begin.
Thank you Deseret good morning, everyone welcome to American assets Trust second quarter 2023 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 American assets Trust's Dot com.
That quick intro I'll turn the call over to Ernest Rady, our chairman and CEO to begin the discussion of our second quarter 2023 results Earth. Thanks.
Thanks, Adam and good morning, everyone.
With each strategic and operational business decision at American assets Trust makes we take the path that we believe will maximize shareholder value.
Over the longer term.
That includes remaining disciplined with respect to our strong balance sheet and continuing to invest in and improve our irreplaceable properties to remain among the best in our markets for each of our asset classes.
In Q2, 2023 we were once again encouraged by your operating from month fundamentals.
Which continued to defy the odds despite the ongoing negative market sentiment for commercial real estate.
Office sector in particular.
Nevertheless, we remain optimistic that our earnings trajectory.
As we have increased our full year guidance based on our better than expected performance so far in 'twenty to 'twenty three.
No doubt in our minds. This is a statement a testament to the exceptional quality of both our properties.
As well off and frankly, mainly our people who are the stewards of your in our organization that worked to optimize our long term growth and shareholder wealth creation.
I'm incredibly proud of what we've accomplished operationally in the face of market headwinds and all the pessimistic headlines.
And no matter, what we will remain vigilant and focused on any economic scenario that may be presented to us going forward. They continue to execute our business plan to the best of our abilities.
Adam Bob and Steve will go into more details on our various asset segments financial results and guidance, but first I do want to mention that the board of directors.
As a prudent and maintain our quarterly dividend of 33 cents per share for the third quarter, which we believe is supported by our financial results.
And as an expression of our board's confidence in the embedded growth of our portfolio. This year.
The dividend will be paid on September 21 to shareholders of record September 7th.
On behalf of all of Us at American Trust, and especially myself.
I want to thank you for your confidence and continued support and allowing us to continue to manage your company.
Now going to turn the call back over to Adam Adam Please.
Thanks Fair enough as you have all likely heard there exists an ongoing flight to quality in commercial real estate quite honestly, we welcomed out with our arms wide open as we know that our irreplaceable properties are sought after by tenants because they are among the highest caliber assets in the most desired locations with top notch amenities.
Sustainability elements access to public transportation and best in class property management teams. Additionally, most of our properties are close to world renowned universities and innovation centers, which provide an excellent source of perspective tenants and employee talent for those tenants. We have always believed that these factors will contribute to our <unk>.
Relative outperformance over the long term even in the face of the current macroeconomic challenges impacting our organization and others.
Briefly on the office utilization front over the past few months, we have seen many large corporations like Amazon Blackrock Disney and J P. Morgan to name a few.
Acquiring their employees to spend much more time at the office from what we can see based on tenant card swipes access control records and property manager estimates this translates to an uptick in office utilization at our properties up between 5% to 10% since early this year.
And San Diego Office utilization has increased to 65% on average in Bellevue office utilization has increased from 35% to approximately 40% to 50% and.
In San Francisco, we own one of the if not the best office properties downtown with the landmark at one market, where utilization is closer to 70% driven by this asset being the primary hub for one of our tenants Bay area employees and finally, Portland has remained relatively flat on office utilization at between 50 and 60.
<unk>.
On the retail front, we are thrilled to announce that we recently signed a lease with Homegoods for 25000 feet at our Alamo quarry market, bringing that property to 99% leased.
The home goods lease backfill the remainder of our former bed Bath <unk> beyond space with base rents that are approximately 30% higher than what bed Bath and beyond had been paid in Q2 retail leasing spreads, though still positive on both a cash and GAAP basis did drop off from the past few quarters due to the timing of rent escalations with certain.
One of our larger renewals that we inked in Q2. We also have several retail renewal deals that have already been signed or are in lease documentation in Q3, and we look forward to discussing next quarter.
With respect to our multifamily communities, we continue to see positive rent growth as we posted better than expected results in Q2 in San Diego, we saw leases on vacant units rent at an average rate of approximately 7% over the prior rents while rates on renewed units increased an average of 13% over prior rents with no concession.
For a blended average of approximately a 10% increase Additionally in San Diego net effective rents for our new multifamily leases are now approximately 33% above pre COVID-19 levels and approximately 15% higher year over year compared to the second quarter of 2019 and 2022 respects.
Right.
We are also pleased to announce that in Q2, we signed a new master lease with the University of San Diego for 109 units at our Pacific Ridge apartments.
And the master lease will be for three consecutive school year, starting in August 2023, which is nine five to 10 month lease terms first quote per school year with 5% annual rent bumps and staggered move out dates.
We expect this master lease to bring in approximately $17 million in cash rents over the three year term.
Along those lines you may have noticed that our occupancy at Pacific Ridge dropped just below 70% as of the end of Q2. This was the result of the expected move out by University of San Diego students at the end of May and we expect occupancy to rebound back to 90% plus levels by the end of August this year as our lease percentage.
At Pacific Ridge ended Q2 at over 90%.
Meanwhile, in Q2 in Portland at our Hasler, one eight we saw a blended increase of approximately 4% between new move ins and renewals with concessions being offered on longer term leases, though net effective rents for new multifamily leases are approximately 12% higher year over year compared to the second quarter of 2022.
The multifamily market importantly has remained somewhat sluggish relative to our San Diego numbers.
Finally, we published our 2022 sustainability report in Q2, which covers our 2022 operations and highlights our initiatives and commitments across a range of topics, including environmental sustainability, social responsibility corporate governance in Cuban human capital Hope you enjoy the report with that I'll turn the call over to Bob to discuss financial.
Our results and updated guidance in more detail.
Thanks, Adam and good morning, everyone.
Last night, we reported second quarter 2023.
<unk> per share of <unk> 59 says.
And second quarter of 2023 net income attributable to common stockholders per share of <unk> 20.
All in all the second quarter was a busy but quiet quarter, but overall better than expected.
Second quarter 'twenty three.
Decreased by approximately seven to.
To <unk> 59 per <unk> share compared to the first quarter of 'twenty three.
Primarily from the following two items.
Eight of the decrease in SSO is related to the previously disclosed nonrecurring litigation settlement in January 2023 related to certain building systems at our hassle eight imports.
Offsetting that decrease our office portfolio performed approximately one cents per <unk> share better than the first quarter of 2023 combined these two items reconcile our results for Q2 'twenty three back to Q1 'twenty three of approximately <unk> 66 per <unk> share.
Sure.
Let's talk about same store cash NOI in Q2 2023, we ended at seven 7% growth year over year for the second quarter.
Same store office portfolio grew at eight 7% in Q2 as a result of the remaining lease abatements burning off for one of our large tenants at our landmark at one market in San Francisco and new leases starting at our Torrey Reserve campus in Bellevue properties are.
Our same store retail portfolio grew at seven 6% in Q2, primarily as a result of new leases starting at our retail properties.
Our same store multifamily portfolio grew at five 8% in Q2, primarily due to higher rents at our San Diego multifamily properties.
And our mixed use portfolio grew at four 8% in Q2 as a result of higher revenue at our embassy suites Waikiki Beach walk.
Turning to liquidity at the end of the second quarter, we had liquidity of approximately 485 billion comprised of approximately $85 million in cash and cash equivalents and $400 million of full availability on our revolving line of credit.
Additionally, as of the end of the second quarter, our leverage which we measure in terms of net debt to EBITDA was six six times. Our objective is to achieve and maintain a net debt to EBITDA of five five times or below.
Our interest coverage and fixed charge coverage ratio ended the quarter at three five times, we are well capitalized with no near term maturities.
Let's talk about 2023 guidance.
We are increasing our 2023 <unk> per share guidance range to $2.28.
$2.36 per <unk> share with a midpoint of $2 32 per <unk> share an approximate 2% increase from our previously stated guidance issued in our Q1 2023 earnings call that had a range of $2.
<unk> 23 to $2 33.
With a midpoint of $2 28.
Let's walk through the following items that make up this increase in our 23 <unk> guidance first our office properties contributed approximately <unk> <unk> per <unk> share of outperformance in Q2 'twenty three that was not previously included in our 'twenty three guidance, primarily as a result of new offers.
Leases signed and.
And are collecting rents on certain office tenants that we have reserve.
Second our multifamily properties contributed approximately a penny of SSO share of Alpha outperformance in Q2 'twenty three that was not previously included in 'twenty three guidance.
Third our retail properties contributed approximately half a cent per.
Per share that was not previously included in our 'twenty three guidance, primarily as a result of collecting rents on certain retail tenants that we had reserved.
And for US our Waikiki Beach walk Embassy suites contributed <unk> <unk> per share of outperformance in Q2 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 60 days out we intend to maintain.
Our prior forecast prepared by our local partners that outright or for the remainder of 2003 <unk>.
These adjustments when added together will be approximately four cents per <unk> share and represent the increase in the 'twenty three midpoint over our previous 23 guidance at this point.
While we believe that 2023 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 in these prepared remarks exclude any impact from future acquisitions dispositions equity issuances or repurchases future debt refinancings or repayments other than what we have already discussed we will continue our best to be as transparent as possible and share with you are now.
Alice this and interpretations of our quarterly numbers I also wanted to briefly note that any non-GAAP financial measures that we've discussed are reconciled to our GAAP financial results and 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. Thanks, Bob at the end of the second quarter. Our office portfolio was 87, 4% leased our same store portfolio at 93% leased.
In the second quarter, we executed 13 leases totaling approximately 120000 square feet, including three comparable new leases for approximately 6400 square feet with rent increases of 23% on a cash basis and 19, 6% on a straight line basis.
Nine comparable renewal leases totaling approximately 113000 square feet as follows.
We renewed seven smaller tenants totaling approximately 20000 square feet with rent rent increases of seven 6% on a cash basis and nine 3% on a straight line basis.
We renewed autodesk at our landmark at one market in San Francisco, and approximately 93000 square feet with a rent decrease of approximately 5% on a cash basis, but an increase of approximately 4% on a straight line basis versus comparison ramps that were set in Q1 of 2018.
We believe that this renewal was the largest office deal completed in San Francisco in Q2, and we were thrilled with the result, certainly a win win for us and Autodesk as we understand that our building and will remain there headquarters for the foreseeable future and they are a terrific customer of ours.
We are encouraged by significant new leasing proposal and tour activity across our portfolio with many tenants that are willing to make longer term commitments note that this increased tour activity includes our La Jolla Commons III, which is nearing completion, but no news to share on the leasing front at this point.
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 investments include exceptional new amenities, such as fitness centers can bite hubs conference centers outdoor spaces Android 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 will now turn the call back over to the operator for Q&A.
Thank you.
Florida is now open for your questions.
To ask a question. Please press Star then the number one on your telephone keypad.
Well pause for just a moment to compile the Q&A roster.
Your first question comes from the line of.
Haynesville Tuesday.
With Mizuho.
Your line is open.
Good morning handle.
Hi, Good morning. This is Ravi the idea on the line for <unk>.
Hope you guys are doing well.
Just wanted to follow up on the home goods.
Home goods lease.
You discussed the Capex and capital investments and retrofitting the space and that contributed to that 30% spread.
Oh, you want to handle that.
Sure. So the Capex is just a matter of getting the space ready for the Janet bringing again.
Are we going a little bit of the storefronts and such I don't have the exact numbers in front of me but.
But that's pretty standard to what youre going to have to do a mid sized box like that.
And again, we're looking at delivering space early next year.
We're looking at a summer opening of 24 for them on that.
Our San Antonio Okay.
Great Pride to us so we're glad to have them.
Yeah.
Okay.
Another one or two more here.
Regarding the Hawaii.
Can you discuss the tourists mix and what Youre seeing.
Further rebounding of the Japanese tourists there yet and are you seeing.
Any potential softness from the American consumer.
Bob do you want to handle that please.
Sure.
Ravi.
Yes.
No.
The so far we have not seen the Japanese coming back as strong as our expectation for the 23 summer so.
Part of it is is that one is that you have a foreign exchange rate of $1 40.
<unk> U S dollar.
But it's not a matter of if it's just a matter of when I know the airlines J P. J P T y.
All the major airlines are lined up ready to take on additional tourism from Japan, and we know that Hawaii is the number one destination for our Japanese gas from from our feedback. So so we're not we haven't seen it in June but what's.
Seeing as that the ADR remains strong I mean, it's increased over.
Last year, not only has our ADR, but our revpar and our occupancy increase not only over our competitive set in waikiki.
Hello.
So.
So anyway, hopefully that answers your question.
Alright. Thank you that's very helpful and just one more here for just a couple of quarters now we've seen that the term for the office leases signed was about five years. This is something we can expect to see going forward.
Ravi Youre cutting out.
Yes.
I'm getting cut out he wants to know about the office leasing and Steve you ought to handle that and what's going to happen over the next five years and if you know the answer I'd like to have it too.
Yeah.
Alright.
Regarding my.
My question is regarding the term the term of office leases signed was about five years for a couple of quarters now is that something that we could expect to see going forward.
Good question and its actually going longer.
The deals I've got pending right now.
Either signed or in lease documentation are at nine one years.
And I mentioned, we're seeing tenants willing to go longer.
Both new and renewal tenants, so that trend is going up.
Got it. Thank you for your time I think I said earlier in my remarks that things aren't nearly as bad as the opinion of the public seems to be in.
Thanks to our management team, which is great and our properties, which are great.
Is there any other questions.
We got them.
Yeah.
Our next question comes from the line of Todd Thomas.
With.
Keybanc capital markets. Your line is open.
Good morning, Alright, thanks, good morning.
Hey, Bob I appreciate the detail around the guidance, but I was just hoping you could provide a little bit more detail.
Helped bridge the step down that you are anticipating in the third quarter and fourth quarter.
Second quarter right, if we if we assume.
In the first half results here at $1 25.
<unk> 59 in each of the third and fourth quarter would get you to two Fortunately that's well above the high end of the revised range can you just talk about some of the primary family with decrease in quarterly <unk>.
Back half of the year.
That's a great question yeah. Thanks for the question Todd Yeah.
I think one way to look at it especially on the bridge.
If you recall, we started our guidance this year was six six.
<unk> per <unk> share of reserves.
And that was because we identified risks that we thought was more likely than not to occur and of that six cents, we attributed <unk> per Boe.
Oh sure.
To the office and <unk> to the retail and then Q1 came along and we updated that.
So it got down to three cents for office and <unk> for retail and now for Q2 in our guidance. We have now have ratcheted that down to <unk> office to a.
Retail so lease we still have some reserves that we think that there is a likelihood that.
We may need to use those reserves, but if we don't use those reserves that's another what two two.
Two $6 million I think of cash it could come back on we just don't know at this point in time the times that we're going through are uncertain and volatile so the.
The last thing we want to do it sandbag, but we think that we're doing the right thing and if you agree or disagree you can adjust in your models accordingly.
Hope that answers your question, but that was a good question and that's helpful.
So yeah. That's helpful. So that's about <unk> right.
And then to get to the midpoint is there additional seasonality perhaps.
The embassy suites.
Yeah, you're right Todd is that right now what.
What we mentioned is that we're going to keep the original forecast at outrigger did who manages our property.
In Waikiki and they they know the economics out there better than we do in terms of who is coming to town. We have a team from outrigger theyre actually flies over to Japan.
Several times, a year and they have the relationships over there so.
There is a lot of marketing going on but even with all of that is that pre COVID-19. We were seeing you know up to 80% of the rooms reserved bookings occurred 90 days out and now I mean 60 days is the best we've seen generally its proud.
<unk> 30, 35 days, so we don't have the foresight and so.
<unk>.
Very hesitant to put anything.
Down that would reflect that but having said that we know historically that the.
And as the embassy will bring in probably another two to three cents.
If if we see pre COVID-19.
Numbers again.
During this current year.
Okay. That's helpful and then just shifting over to the office portfolio.
Maybe for Steve or Adam as well I guess, you know Adam you talked about the flight to quality that you're seeing across the portfolio I think Steve you did too.
And I just wanted to ask about the leasing environment in general.
You know, whether youre, starting to see that translate into occupancy stabilization.
You know whether whether demand is beginning to pick up as you look ahead to 2024.
Maybe you could comment about the explorations.
Throughout the balance of this year and in 'twenty, four whether theres any additional known move outs as well.
I think Steve should cover that please.
Yeah. Good question Todd.
I think 23 is going to be that.
The highest attrition we will see I think 'twenty 'twenty four will be muted there'll still be some.
But and then on the leasing side, we're seeing the first two quarters were dominated by renewals as you see.
Got new leasing activity now we've got net absorption pending.
Which is good and I think that's going to continue given given the tour activity proposal activity. So and then again as I noted earlier, we're seeing longer terms as well so you'll see that.
And as we sign new deals in Q3 is off to a good start already.
Just as a comp so you know where we're at.
We're blessed with good properties and Steve does a great job Stephen Adam do a great job.
Do you expect Steve do you expect to see occupancy.
Trough.
Stabilize.
In 'twenty three and then begin to rebound in 'twenty four or do you think that some of the additional attrition that youll see in 'twenty four well will continue to weigh on occupancy.
Just what im looking at now I've got 23, and 24 in front of me I think.
There may be.
Modest attrition the remainder of 'twenty three given what I've known move outs I can.
Can't predict the new leasing beyond what I've got in front of me for this quarter, but it is positive. So I think what Youll see is 24 will be a rebound I think we will stabilize.
The good news is and much of the attrition is not losing to competition, it's tenants rightsize and yet we're keeping those tenants and when those tenants sign up for their smaller space theyre paying a premium rent. So it's this kind of anomaly or do you see slippage in occupancy, but it's not a softness in the rent market itself. It's more.
This is part of this thing playing through where companies have changed their operating model there right sizing and then moving forward I am seeing some positive I've seen some girls, we had an existing tenant thats going to vacate 14000 feet and move into 25000 feet and that that should sign in the next few weeks so things are getting better.
Again, like I said, Theres, new leasing activity Theres net absorption that I'm looking at right now and then before I think that the attrition is going to be much more modest and hopefully net absorption outpaces the attrition.
Okay and just last question you know for Ernest.
If you could comment I mean, <unk> been fairly opportunistic over the years many sitting.
Sitting on about $85 million of cash today.
There's a lot of volatility in the capital markets and in commercial real estate in general are you seeing any opportunities begin to surface anything.
And the investment pipeline today, and if so how should we think about the company deploying incremental capital going going forward yeah.
That's a good question you know we're governed by greed and we also want to put a smile on all or find a way to put a smile on our shareholders face at the same time, Bob Barton is very dedicated to 5.5 times EBITDA. So we've got to weigh that.
Losing our liquidity during times that are turbulent with taking advantage of an opportunity that presents itself.
All I can say is that we're looking at the opportunity and that if something comes along which is compelling we would certainly have to.
Deal with Bob So we're working on it.
Okay Alright. Thank you. Thank you Todd Thanks for your interest.
There are no further questions at this time, Mr. <unk> I'll turn the call back over to you. Thank you.
Are you guys at American assets Trust, great job. Thank you very much.
To our shareholders and their interest.
We're greatly appreciative and as I said earlier, our job is to help find a way to make you smile and that's what we keep working out. So thank you all for your interest and we'll see you next quarter.
Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Okay.
[music].