Q3 2023 American Assets Trust Inc Earnings Call
Good day and welcome to the American assets Trust third quarter 2023 earnings Conference call.
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I would now like to turn the conference over to Adam Woodrow President and Chief Operating Officer. Please go ahead.
Thank you and good morning, everyone and welcome to American assets Trust third quarter 2023 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 2023 results Ernest.
Yeah.
Thanks, Adam and good morning, everyone. During these times when the economic and business landscapes are so unpredictable it has become imperative to for us to focus on what we can control.
<unk> how are we can adapt to meeting the evolving market demands in such a turbulent economy. Along these lines, we have a history of overcoming challenges with resilience and we are confident that our high quality operating platform.
And real estate portfolio will remain steadfast in spite of market adversity, as we space persistent inflation.
Higher for longer federal funds rates, much tighter credit conditions and truly unfortunate geopolitical instability and war.
We are certainly not naive to the fact that the office sector in particular seems to be painted with a broad negative brush it.
It may take time for the office sector to see meaningful bifurcation of performance and value between the more modernized and <unk> office projects like ours versus that of commodity office.
But we are confident that we'll be on the right side of that equation and.
And not to mention as we see replacement costs for high quality property like our sorting and likely to continue to decline over the years to come.
The two days real estate prices for Premier properties will be a bargain in the future.
Meanwhile.
In Q3, 2023.
So again encouraged by our operating from fundamentals, which were stronger than our projections against the negative backdrop for commercial real estate. Nevertheless, we remain optimistic that our earnings trajectory for the rest of the years as we have once again increased our full year guidance based on our better than expected perform.
So far in 'twenty, two 'twenty three candy.
Candidly the outlook beyond this year at least in the short term is less certain with the prevailing economic and global challenges, but all as always I promise you. We will work hard and do our very best and look forward to presenting our twenties 24 guidance next February February.
Adam Bob and Steve will go into more detail on our batteries asset segments financial results and guidance, but first I want to mention that the board of directors has approved.
Entertain a quarterly dividend of 33 cents per share for the fourth quarter, which we believe is supported by our financial results.
And is an expression of the board's confidence in our expected performance the dividend will be paid on December 20, <unk> to shareholders of record December 7th.
Again on behalf of all of US at American assets Trust. We thank you for your confidence and continued support in allowing us to manage your company.
Now going to turn the call back to Adam.
Thanks.
Thanks, Ernest at American assets Trust, we focus our strategy and decision, making on what we believe will create long term financial outperformance, specifically our portfolio of high quality properties in our asset class diversity, which provides more stability and protection from risks associated with changes in economic conditions of a particular market or industry.
Right.
Our property locations and demographics favoring cities with temporary climates higher household incomes and education levels near world renowned universities and transit centers, our fortress balance sheet and debt profile with a well staggered debt maturity schedule on our integration of property technologies to provide operational cost savings and efficiencies.
Yes.
Our economically prudent ESG initiatives, and our integrity and transparency in our communications and business dealings with our stakeholders.
We certainly believe that these factors together with consistently improving our properties is critical to remaining best in class among our peers and being fiercely competitive in the marketplace, which will enable our continued long term success notwithstanding the inevitable cycles of the real estate industry, including the one we are currently mired in.
In fact as of the end of Q3, we had our highest ever average monthly base rent per square foot for both our office portfolio and retail portfolio.
It also highest average monthly rent per unit for our multifamily portfolio since our IPO pretty proud of that.
Briefly on the office utilization front, our recent study by resume builder showed that 90% of companies plan to implement returned to office policies women within the next 12 to 14 months with a meaningful amount of those companies also stating that they would threaten to terminate employees that don't comply.
This of course comes as more and more Ceos contend that employee collaboration engagement Mentorship and productivity are clearly suffering without an office presence no surprise there as labor forces soften in recessionary concerns ease we believe many more large companies will begin to solidify future space plans.
From what we can see based on tenant card swipes access control records and property manager estimates, we have seen an uptick in office utilization on average of a few percentage points at our properties. Since we last reported at the end of Q2 with Bellevue showing the most meaningful improvement.
On the retail front, where we stand just under 95% leased and comprises 27% of our portfolio NOI. We continue to see an improved leasing environment post COVID-19 as retail fundamentals have remained strong for the most part despite sustained headwinds we had a significant retail renewal activity in Q3, our comparable retail.
Leasing spreads have maintained their favorable trajectory over the past year, plus with an 8% increase on a cash basis and 19% increase on a straight line basis for Q3 deals and 8% increase on cash basis, and 15% increase on straight line basis for the trailing four quarters.
No doubt this is a testament to our best in class and well managed retail properties that are absolutely dominant in their trade areas, which reside in supply constrained in densely populated markets with favorable demographics.
With respect to our multifamily communities, we continue to see positive, albeit decelerating rent growth as we posted better than expected results in Q3, and our view of the deceleration of rent growth is due in part to an increased amount of applicants not meeting our income and credit requirements not to mention general economic stress on individuals.
And families.
Nevertheless in San Diego, we saw leases on vacant units ran at an average rate of approximately 3% over prior rents while rates on renewed units, increasing an average of 11% over prior rents for a blended average of approximately a 6% increase Additionally in San Diego net effective rents for our multifamily leases are now.
9% higher year over year compared to the third quarter of 2022 <unk>.
Meanwhile, as expected our occupancy at Pacific Ridge apartments rebounded from just below 70% as of the end of Q2 to approximately 90% as of the end of Q3 with the move in of USD students. This fall.
Ticked up a few more percentage points since the end of Q3 with additional occupancy of units in October.
In Q3 in Portland at our Hasler, one eight we saw a blended increase of approximately 4% and new move ins and renewals with concessions being offered on longer term leases. So net effective rents for our multifamily leases. It has a low or approximately 3% higher year over year compared to the third quarter of 2022 the multifamily.
On the market in the Pacific Northwest has remained sluggish as our occupancy has softened.
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 third quarter 2023 per share a 59 cents and third quarter 'twenty three.
Net income attributable to common stockholders per share of <unk> 20.
All in all the third quarter was better than our expectations.
Third quarter 'twenty three F F O was flat compared to the second quarter of 'twenty three.
Same store cash NOI ended at one 8% growth year over year for the third quarter.
Our same store office portfolio was flat in Q3, largely due to nonrecurring rent deferral payments made in the comparable period.
Excluding those payments received in Q3 of 2022 Q3, 'twenty three office same store would have been two 1%.
In total same store cash NOI would have been 3%.
On an individual office basis, we saw strong same store growth in Q3 at Torrey reserve of approximately 11% Torrey point of approximately 5% landmark at approximately two 5% in La Jolla Commons at approximately 7%.
Our same store retail portfolio grew at six three per Se I think Q3, primarily due to the commencement of new leases are.
Our same store multifamily portfolio was flat in Q3.
Primarily due to higher vacancies that are household names.
And our mixed use portfolio grew at two 1% in Q3 because of higher revenue at our embassy suites Waikiki Beach walk.
Speaking of Embassy suites, Waikiki Beach walk our hotel continues to lead its competitive set in occupancy ADR and revpar year to date through September 23.
It is worth noting that demand this past summer of 'twenty three ended sooner than expected as occupancy dropped in the third week of August.
It's typically does not occur until after labor day weekend and was likely the result of them Maui fires Japanese yen and with the strengthening of the U S. Dollar it makes it more attractive to travel internationally with Europe, and the Caribbean as competing destinations.
Our partners in Oahu, now believe that our Japanese guests are slated to return more meaningfully.
Late summer of 2020 for.
The Japanese yen, which is now approximately $1 49 to the U S. Dollar remains a major factor affecting the affordability of travel from Japan to Waikiki.
Pre COVID-19. It was approximately 105 to 108 to the U S dollar.
While the U S fed policy remains firm to keep inflation in check pressure on the Japanese yen continues.
However on the positive side demand from Japan was strong with further growth held back by the lack of air seats for the current period.
The infrastructure is in place with Honolulu is nearly complete airport renovation that can handle more and much larger planes from Japan like a N as dreamliner.
Delta Airlines also recently announced that it will began daily round trips service between Tokyo another.
In Honolulu this model.
A N. A airlines will also operate all 14 weekly round trip flights on the NAREIT Honolulu Route beginning this December.
This will bring the number of seats offered on the Honolulu route to a record high including those before Covid. It's just a matter of time before we see the full return of our guests from Japan in the meantime, the U S market has filled a large part of the Japanese void and travel to Waikiki as shown in the following Geo.
Graphic revenue allocation.
In 2019, approximately 40% of our revenue came from the U S and 40% from Japan and.
In 2023, approximately 70% 73% of our revenue has come from the U S and just 9% from Japan, So that puts it more in perspective.
Turning to liquidity.
At the end of the third quarter, we had liquidity of approximately $490 million comprised of approximately $90 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 third quarter, our leverage which we measure in terms of net debt to EBITDA was six six times, our objective continues to be to achieve and maintain.
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 and a half times, we are well capitalized with no need no near term maturities.
We do have 100 million dollar unsecured debt maturity in July of 'twenty 'twenty four.
We have several options for refinancing that debt maturity, including without limitation, another private placement using our untapped line of credit on a short term basis or a new terminal ultimately with an eye of potentially approaching the public debt markets again in 2025.
We believe that we have several options and a good debt maturity ladder to work with along with a great banking syndicate overall I believe we are a pretty good shape.
Let's take a moment and talk about 2023 guidance.
We are increasing our 2023 F F O per share guidance range to $2 36 to $2.40 per <unk> share with a midpoint of $2 38 per <unk> share a two 6% increase from our previously stated guidance issued on.
Our Q2 23 earnings call that had a range of $2 28 to $2 36, with a midpoint of $2 32.
Let's walk through the following items that make up this increase in our 'twenty three F. F. O guidance that was not previously included in our original 2023 guidance.
First our retail properties contributed approximately two cents per <unk> share of outperformance in Q3, primarily as a result of lower operating expenses and collecting certain rents that we had previously reserved.
Second our office properties contributed approximately one cent per S. F O share of outperformance in Q3 third our multifamily properties contributed approximately.
<unk> share of outperformance in Q3.
And fourth our Waikiki Beach walk embassy suites contributed approximately half the set up that Oh sure.
Fifth lower G&A expenses.
Slightly lower.
Six we expect our multifamily properties to contribute an incremental one cents per <unk> share in Q4 due to leasing that occurred in Q3.
These adjustments when added together are approximately six cents per <unk> share to represent the increase into 2023 midpoint over our previous 2023 guidance midpoint, while we believe the 2023 updated guidance is our best estimate as of this earnings call. We do believe that it is also possible that we can.
It performed at 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've already discussed we will continue to do our best to be as transparent as possible and share with you our analysis.
And interpretations of our quarterly numbers.
I also wanted to briefly note that any non-GAAP financial measures that we've discussed like NOI 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.
Thanks, Bob at the end of the third quarter. Our office portfolio was 86, 8% leased but our same store portfolio of dropping 50 50 basis points to 89, 7% leased primarily due to a few known move outs.
In the third quarter, we executed 10 leases totaling approximately 87000 rentable square feet, including two comparable new leases for approximately 27000 rentable square feet with rent increases of 10% on a cash basis and 13% on a straight line basis, five comparable renewal leases totaling approximately 36000 rentable square feet with.
Rent increases of 5% on a cash basis and 14% on a straight line basis and three non comparable leases totaling approximately 24000 rentable square feet, one of which was an approximately 14000 rentable square foot medical tenant. It's a lot of crossing youll, yielding a $13 per rentable square foot annual triple net premium over a comparable office.
Right.
We are encouraged by significant new leasing proposal and tour activity across our portfolio, including eight deals currently in lease documentation totaling approximately 55000 rentable square feet, which would result in approximately 52000 rentable square feet of net absorption once signed nine.
Nine additional deals and proposals totaling 134000, rentable square feet, which would result in approximately 93000 rentable square feet of net absorption assuming those deals close.
These numbers at our new development La Jolla Commons three we are currently in lease documentation for 14000 rentable square feet and in proposals for an additional 61000 rentable square feet with expected rents generally consistent with our development underwriting no news to report on one beach at this time.
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.
And while we are not immune to potential additional attrition due to current conditions. The attrition is waning and is expected to be more than offset by the new leasing activity just discussed.
We have approximately 7% of the portfolio Rolling in 2024 with the median suite size of approximately 3600, rentable square feet and of which approximately 30% of rentable square feet. Rolling is already in various stages of negotiation, we believe that the flight to quality for new tenants and the stickiness of quality for our existing customers with leases expiring we will.
Continuing to drive solid performance from our office portfolio.
I'll now turn the call back over to the operator for Q&A.
Great job you guys.
Before we get to the Q&A I just wanted to give you. A brief reminder, that statements made on this 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.
Actual events could cause the company results to differ materially from those forward looking statements.
And now we'll begin the question and answer session if you'd like to ask a question. Please press Star then one on your telephone keypad.
I would like to withdraw your question. Please press Star then two.
Today's first question comes from Handel St Juste with Mizuho. Please go ahead.
Handel.
Hi, Good morning. This is Ravi with you on the line for Hyundai All Hope you guys are doing well.
Dig into a bit.
Just can we just dig into like what are the various AR bad debt or 10 credit kind of risks that are there within your within your various.
Different segments in the portfolio.
That'd be the only one.
One is in office and Steve why don't you handle that.
Are you Ravi are you looking for.
The reserves that are we kind of placing on certain tenants in our portfolio.
Yeah like for like Watchlist reserves.
Things along that line.
Yeah. So I mean, we're keeping an eye on folks like at home on the retail side Petco UFC gym Rite aid.
On the office side of course, when we work on the office side, we're keeping around we work and there's a few biotech tenants that we have in our portfolio that we're just making sure to stay well capitalized and you know we've been.
Fairly conservative and having these reserves on those tenants and for the most part this year, we havent needed most of those but.
We'd rather under promise and over deliver on this.
That's helpful. Can you can you please quantify what that is on our ABR basis.
These are all these exposures.
I don't know that that's possible because there's so many variables but.
People are still paying rent.
Well, Hey, Ravi Bob here, we can look at it from a different perspective, we started out with six cents of reserves and.
We've used probably 60% of those.
Through through the year, whether it was a bad debt expense or whether an adjustment.
Rent abatement or reduction in one way or the other.
So they were they some of them have used had been used or applied in our financial statements.
Now from a reserve standpoint from the office, we have about a half a set of office remaining and we have about a half a cent of retail remaining that's for Q4 as we go into Q4.
Got it that's helpful and just wanted to touch on the embassy suites in Hawaii.
<unk> is nearly 90% occupied with the strong rate, but going forward. What do you have factored in in terms of the recession or pull back with the sector has been from American tourists and and what's your forecast for that looking forward.
For for just the hotel Waikiki Beach walk or.
Yeah, primarily the hotel.
So so for going into Q4, you know historically this.
The hotel has seasonality.
And so in Q4 historically, we've been Q3 has been our strongest and were generally down about two two and a half since in Q3.
Yes.
It's very difficult to predict what the tourist is going to do but that is a great property in a great location and we will do it as well as anybody.
And the same set we're in.
The reservations or Norwalk are made.
A long time out there made short term so so far so good.
Got it got it thank you great property.
Thank you and our next question today comes from Todd Thomas of Keybanc. Please go ahead.
Good morning, Hey, this isn't Tara for Andre.
Todd Thomas just a quick one from me.
Would you mind talking a little bit more about the office portfolio and just describe the leasing environment today I know occupancy was down a bit further in the quarter compared to <unk>. So any sense on whether youre seeing any stabilization in the near term Steve.
Steve.
We are on the on the rollover side, we're down to 7% rolling through the end of 2024, and the average suite side or the median suite sizes 3600 feet and 30% of that rollover is already in some form of discussion.
We have really good new leasing activity.
As I mentioned, we've got eight deals out for signature one of which signed on Friday totaling 55000 feet of which 52000 feet of net absorption and then we've got another nine deals that were close to letter of intent on two of which went to leases yesterday.
And the remaining seven the total of all of that is 134000 feet with about 90000 feet plus a net absorptions so.
We think the the attrition due to work from home or right sizing is waning.
And we think the net absorption from the activity, we've got right now will outpace.
Any any further attrition. So we think we've turned the corner.
Okay. Thank you.
Net net our office is well located east of a great job managing that and add the amenities nation is really working to work to our advantage. So we're hopeful we're certainly not as bad as the public opinion of office goes.
If I'm wrong, yeah. Thank you for the question.
And specifically could you touch on the assets in Portland, and in the Bellevue Submarket.
A little bit of outsized occupancy what currently using trends are there in those submarkets and how do you feel that recovery for those assets.
Starting with Bellevue suburban Bellevue I first of all East Gate is where we experienced most of it and it's not unexpected when we bought the asset.
Much of it was leased as commodity office space, where we're making good investments in that property and the.
The rent spreads that we've achieved thus far prove that that theory up and we're going to complete phase two of that renovation mid next year. So we think that asset will will come on strong in 2024 and beyond.
City Center Bellevue is actually doing really well, we just went to letter of intent yesterday on the top two floors of that building.
Got another full floor in leases so.
The CBD is recovering right now and the suburbs follow so we think both are I 520 corridor assets and the I 90 quarter assay, which is east gate.
We'll follow the recovery and in the Central business District.
And in Portland.
Go ahead go ahead.
The East Gate is one of the best opportunities I've ever run across in my career. That's just a fantastic piece of property go ahead, Steve story for interrupting.
Oh, no no worries and then in Portland.
We're doing well.
We had a couple of full force comeback in our in the Lloyd District.
But we've got some good current leasing activity, we have three deals pending at the 710 building, which we recently completed the renovation of that'll be two thirds of that building. When if we are closed those leases and then we've got some good new activity. There are we're just adding some additional amenities to Lloyd Center tower.
And you know, we're we're actually grew.
Very encouraged by our activity relative to that market in the downtown we don't we have limited vacancy we got one space back that the U S Marine Corps recruiting.
Station, they close that office, but.
But we've got space rolling in 'twenty five that we've got multiple suitors for so.
We're encouraged by our activity in and that's really due to again investment and amenities.
Our first <unk> main building downtown.
It's one of the three type buildings in that marketplace and the activity. We're seeing is representative of that.
Yeah.
Great.
Just one quick one from me.
Yeah.
Yeah.
Thank you and our next question today comes from Ronald Camden with Morgan Stanley. Please go ahead.
Hey, guys. It's it's Adam Kramer on for Ron could too good to chat it always does.
Wanted to ask about the the maturity schedule for.
For your outstanding debt.
Well it looks like 2024 pretty limited I think just 100 million.
Senior notes in July, but I think in early 'twenty five it looks like a number of pieces that come due.
I totally get it looks like around 500 million and even a little bit over $500 million of maturities through kind of early 2025.
I'm wondering if you could just kind of walk through what.
You know what you guys are thinking in terms of kind of the five major mountains maturities again I know some of it is not for a little bit but.
But you know we are getting close to 2024 years. So it's not too far away. So maybe just walk through your plans for maturities here you know that's.
That's the hardest question I've ever heard because interest rates are so uncertain in the economy. So uncertain, but we won't have options available to us that are available to anybody in the marketplace and so we'll just have to wait till we get there and see what the landscape looks like but we have a history of being able to take advantage of the opportunities when they are available.
And then we look upon that as an opportunity.
I don't know what that was going to happen two years out.
Hey, Hey, Adam.
This is Bob I, just wanted to add to Ernests comments. So in the script. We also talked about it as well I don't know if you were listening to that but we have 100 million dollar maturity in July of 2024.
Well, we have a lot of options you know, we got $100 million plus.
Our cash in the bank right now, we got a $400 million unsecure, our unsecured revolving line of credit that's untapped. So there's a lot of ways. We can go including are you.
Doing a short term.
Hey off that hundred million dollar maturity in July of 'twenty, four and take that out to the maturities of 25 roll that all into a public debt offering.
If.
All the stars aligned on that.
And we've already been through the public debt market. So.
People know who we are.
There's a lot of ways to go and we could go turn law private placement we could go.
I mean, the one thing that we know is that interest rates will interest expense will go up.
We're factoring that into our 24 guidance. When we are sure that 'twenty 'twenty February 'twenty four but all in all I think we're really you know a pretty good shape, we have a lot of ways to go great banking syndicate and.
Hope that answers your question.
Yes, it does it does it.
That's helpful. Maybe just on the occupancy I know you talked about this in the prepared remarks too.
But just looking at kind of.
Sequentially, it looks like office occupancy and leased percentage was down a bit.
I know multifamily was up.
So part of that is from the kind of the student housing element in it you know I think multifamily to 89 and a half it's probably still below kind of industry averages maybe just walk through.
I guess first on the office side.
Where we can expect at least percentage to be in the non multifamily kind of how do we get that and you get little bit closer to industry averages in the low nineties.
Okay.
I guess just to start with office as I mentioned in our remarks, I think we've turned the corner. So I wouldn't expect to climb about 90% in 'twenty 'twenty four but as important if not more important the rent spreads are good and they vary from quarter to quarter, but.
We've got some really positive things happening so.
Oh I was actually up for the three quarters this year versus last year. So you know.
I'm encouraged by the performance in terms of rent spreads I can't control right sizing of companies that just you know, we're not losing tenants to competitors. If we're losing that we're losing it to to work from home and right sizing.
But again, we're data set just 7% rolling in 2024, and the median space is small at three 600 feet.
We're in play on 30% of that rollover and.
Our rents are good so I think we will will cross back over into the 90 <unk>.
90 plus percent range.
In 2024, and we'll go from there.
On multifamily multifamily, we're using this opportunity to really reposition and upgrade.
All of our properties in San Diego.
Of course.
The Pacific Ridge is dependent on U S D.
And Portland is very special situations. So.
I don't know exactly what the numbers are going to be but they'll be all they can be because we're improving the properties that we own Abigail do you want to add anything to that.
Sure in San Diego right now we are operating at about 93% occupied and our lease percentage right now, it's just right under 94%. So when we look at it in terms of our competitors there is approximately about 7%.
The Lady there rent so when you look at our portfolio right on par with the Lee.
These percentages the availability to Rad center occupancy.
It's where I believe it should be right now.
Adam and earn it has mentioned quality our communities are in great locations. We have great team members, who operate the properties really well our pricing is right, where they should be and in terms of where we compare to the county averages.
You know we are trying to offer positive experience and customer service.
In addition to great product and I think we're very dwelling comparison to our competitors in the market.
And Adam as we mentioned thank you.
Adam as we mentioned hassle Lowe Portland has been slow.
Pacific Northwest in particular absorb absorption has eroded theres been an oversupply. So occupancy is down there and that's kind of dragging the overall numbers.
But we're hopeful that we'll get those back up to be more in line with where we think it should be.
Great. Thanks for the time guys I appreciate it.
Thank you and this concludes our question and answer session I would like to turn the conference back over to Ernest Rady for any closing remarks, I just like to say. Thank you all for your interest. These are very turbulent times and the fact that you still care is very important to us I think they would all this is said and done we will have differentiated ourselves.
The pack the quality of the portfolio the excellent.
Management with all due modesty.
The to the market that you know this is an above average group with above average performance.
And you'll be and will be grateful for your continued interest. So thank you and have a good day.
Everybody.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.