Q4 2024 American Assets Trust Inc Earnings Call
Yeah.
Speaker Change: Good morning, and welcome to the American Assets Trust, Inc. 's fourth quarter and year end 'twenty 'twenty four earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after today's presentation there'll be an.
Speaker Change: Tuning to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Speaker Change: As a reminder, today's earnings call is being recorded I would now like to turn the call over to Mel Yano Levitan Associate General Counsel of American assets Trust. Please go ahead.
Speaker Change: Thank you and good morning. The statements made on this earnings 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 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.
Speaker Change: Yesterday afternoon American assets Trust earnings release, and supplemental information were furnished to the SEC on form 8-K, both are now available on the investors what.
Speaker Change: Mr Section of its website American ethics trash Dot com. It is now my pleasure to turn the call over to Adam while President and CEO of American assets Trust.
Speaker Change: Thank you and good morning, everyone. Thank you for joining us today and for your continued support during these extraordinary times to start I'd like to reaffirm our steadfast commitment to disciplined decision, making that supports the long term growth of our earnings and shareholder value.
Speaker Change: This approach underpinned by our high quality irreplaceable and diverse portfolio robust balance sheet exceptional exceptional management and employee team and agile operating platform positions us to adapt to evolving market dynamics effectively.
Speaker Change: We remain confident that this strategy will enable us to grow earnings Accretively and drive sustained outperformance over the long term.
Speaker Change: In an environment, where replacement cost for high quality properties continue to escalate. We believe today's valuations for premier assets like ours will increasingly compelling in hindsight. This is particularly important as we address upcoming transaction activity later in our prepared remarks.
Speaker Change: Turning to our results. We are pleased with our continued strong performance across all segments building on back to back record <unk> years in 2022, and 2023 2024 marked yet another milestone.
Speaker Change: As we achieved our highest <unk> per share since our IPO more than 14 years ago. This achievement is complemented by record total revenue NOI aggregate dividends over $103 million and record average monthly base rents across our office retail and multifamily portfolios. Additionally, our Waikiki Beach walk <unk>.
Speaker Change: The C suites delivered its highest ADR to date in 2024.
Speaker Change: These accomplishments are particularly noteworthy given the challenging and unpredictable economic cycles global events and unpredictability of interest rate movements that we continue to navigate.
Speaker Change: This also reflects the strategic capital improvements, we've made to enhance and amortize our properties ensuring they remain best in class. This focus has been instrumental in driving tenant satisfaction retention and rent growth, especially for our high barrier to entry modern properties located in areas of growth innovation and education and with <unk>.
Speaker Change: Barrier transportation access looking ahead, we continue to see significant opportunities for organic growth, including the lease up and stabilization of our new developments maximizing rental rates prudent expense management and the densification of existing assets with mixed use multifamily developments that we will do our absolute <unk>.
Speaker Change: To capitalize on over time.
Speaker Change: Nevertheless, you repeatedly hear us say, our top priority remains maintaining a strong balance sheet ample liquidity and increasing dividends through long term cash flow growth, ensuring we are well prepared to capitalize on opportunities while navigating any market volatility.
Speaker Change: As you will have noted from our initial guidance, which Bob will give additional details on adjusted moment 2025 represents a reset of sorts bar at four hour <unk> compared to last year, primarily due to certain one time opportunistic revenue generating items in prior periods that we do not expect to reoccur. This year absent these impacts.
Speaker Change: We still anticipate continued positive momentum in our core operational performance over the ensuing years.
Speaker Change: At the same time, we are accounting for increased interest expense from our bond offering last fall and the discontinuation of capitalized interest on La Jolla Commons tower, three and one Beach Street, and maintaining conservative collection reserves to safeguard our financial position.
Speaker Change: These measures reflect our commitment to balancing growth with prudent risk management as we move forward, noting that we have no debt maturities until 2027.
Speaker Change: In regards to our office segment as we enter the new year, we remain optimistic about a gradual yet steady improvement in office utilization across our portfolio driven by return to office mandates from many of our tenants, including some of the largest organizations in the country. While it is still early to fully assess the impact of these policies. We believe the superior.
Speaker Change: Your quality in prime locations of our office assets combined with best in class amenities will continue to set us apart leading to increased occupancy and leasing momentum over the ensuing years. Additionally, we are closely monitoring the new federal administrations policies, which appear to be supportive of business growth through tax reductions and regulatory.
Speaker Change: We anticipate that these measures will further strengthen tenant confidence and contribute to increased leasing activity.
Speaker Change: Looking ahead, we believe the class a office market is positioned for meaningful improvement over the next 12 to 24 months, assuming economic stability in that favorable or at least stable interest rate environment, which should drive higher long term occupancy and expanded space requirements Encouragingly office demand at a national level is approaching pre <unk>.
Speaker Change: <unk> levels with quarterly net absorption turning positive for the first time in three years.
Speaker Change: Our office portfolio closed the year at 85% lease, reflecting a decrease of 200 basis points compared to the prior quarter. This decrease was primarily due to the remeasurement of certain properties, which resulted in additional vacancy. However, we expect to monetize this vacancy in the future. Additionally, the vacancy from a tenant for which we're re.
Speaker Change: <unk> and $11 million termination fee in Q3 of 2024 as well as other tenant downsizing and attrition contributed to the overall decline.
Speaker Change: In Q4 office leasing activity saw an approximately 2% increase on a cash basis and an 11% increase on a straight line basis Q1 has begun with strong momentum having already executed leases for approximately 20000 square feet with an additional 105000 square feet currently in lease documentation.
Speaker Change: <unk> 50 throughout 53000 square feet of net absorption, notably these pending deals that have not yet been executed include the top floor or 16000 feet at La Jolla Commons tower, three and 29000 square feet of timber ridge in suburban Bellevue, which will bring that property to 97% leased. Additionally, our.
Speaker Change: Our exposure to GSA tenants constitutes less than 5% of our total office square footage and approximately 3% of total office rents. The majority of these GSA tenants are secured under a firm lease agreements with at least three years remaining.
Speaker Change: Furthermore, we have been informed that all GSA tenants intend to return to the office five days a week in the early part of this year.
Speaker Change: As of today, just under 8% of our office portfolio is scheduled for lease rollovers in 2025 with an average deal size of 7000 square feet. We anticipate approximately 181000 square feet of attrition from known move outs at first in Maine, and 14 acres, formerly Eastgate.
Speaker Change: Office leasing activity remains focused on high quality modernizing fully built out spaces as tenants increasingly seek options that allow for immediate occupancy with minimal downtime in upfront capital investment.
Speaker Change: Following our prepared remarks, Steve center will be available to address any questions regarding our office portfolio.
Speaker Change: Turning to our retail segment, representing 27% of our portfolio NOI are best in class retail segment continue to excel in 2024 with properties that dominate their trade areas and are at 95% leased with 5% same store NOI growth in 2024, taking into account the renewal signed so far in 2025.
We have less than 4% of our retail portfolio expiring in 2025, we are encouraged by positive leasing spreads of six 5% increase on a cash basis and a 31% increase on a straight line basis for Q4 transactions and strong tenant sales supported by resilient consumer spending in the affluent supply constrained markets.
Which are properties reside.
Speaker Change: We remain confident in our ability to backfill known vacancies, including our two party city locations that we that have closed or are about to close which will constrain 2025 same store retail NOI numbers.
Speaker Change: We are otherwise monitoring other retailers like Petco, Michaels and Angelica theaters.
Speaker Change: Finally, with respect to our multifamily segment, we realized same store cash NOI growth of over 6% in 2024 as compared to 2023, our San Diego multifamily communities ended Q4 with a lease percentage of 97% and we saw a blended decrease of approximately 4% between new move ins and renewals as we work to <unk>.
Speaker Change: Our lease percentage, 3% higher than what is typically a seasonally slower period with ended the year concessions granted in the market recently.
Speaker Change: Recent trends indicate improving rental rates and we anticipate further momentum in the spring and summer leasing seasons.
Speaker Change: Net effective rents for our San Diego multifamily leases are now, 2% higher year over year compared to the fourth quarter of 2023.
Speaker Change: Also pleased to report that we have extended our master lease with the University of San Diego for another three years directly across the street from Pacific Ridge, which will cover well over 100 units until the summer of 2029, including annual rent bumps of 5% through 2026, and three 5% through 2029.
Speaker Change: Up in the Pacific Northwest are hassle of an eighth community importantly saw a blended increase of approximately 2% between new move ins and renewals as our lease percentage ended the year at 92% net effective rents for our multifamily leases. It has low are up about three 5% year over year compared to the fourth quarter of 2023.
Speaker Change: We remain bullish overall on our multifamily fundamentals in San Diego supported by fairly low unemployment rates prestigious universities strong demographics income growth and very high homeownership costs, and then Portland, where there has been some supply shock that is still being absorbed we expect new completions to slow in 2025 with vacancy rates.
Speaker Change: It is expected to decline as well, which hopefully sets the stage for rent growth later this year or next.
Speaker Change: Next as mentioned earlier I am pleased to share a few updates on our long term portfolio strategy is we are constantly evaluating opportunities to maximize value for our stakeholders and position ourselves for long term growth.
Speaker Change: Notably we have entered into an agreement to sell Dell Monte Center in Monterey, California. This decision reflects our strategy to focus on markets, where we can achieve greater economies of scale and operational efficiencies.
Speaker Change: They all expect it to close in late February subject to customary closing conditions allows us to recycle capital into opportunities better aligned with our long term growth objectives.
Speaker Change: Concentrating on markets, where we have establish a greater presence, we're not only strengthening our position, but also ensuring that our resources are aligned with our long term objectives. This decision underscores our dedication to delivering sustainable long term growth and value creation, while maintaining our ability to be nimble as circumstances dictate.
Speaker Change: Additionally, we are in escrow and a multifamily community in San Diego with a terrific location, including very strong transit and retail access, which we believe has substantial upside. This property owned by the same same family for decades has rents that we believe are significantly below market, possibly 30% plus with potential densification.
Speaker Change: Opportunity.
Speaker Change: We believe with certain upgrades process improvements in our form of management that we can generate.
Speaker Change: An attractive unlevered IRR over a long term hold.
Speaker Change: The acquisition of this almost 200 unit property is expected to close in late February subject to customary closing conditions, while at del Monte Center is being sold at a higher current yield and the initial yield on the perspective multifamily community acquisition. The decision reflects our focus on long term value creation, rather than short term yield metrics.
Speaker Change: Other enhances our multifamily portfolio and a high growth market.
Speaker Change: Lastly, I'm pleased to announce that the board of directors has approved a one 5% increase in our quarterly dividend to <unk> 34 per share for Q1, reflecting our confidence in the company's long term financial performance and outlook. The dividend will be paid on March 20 to shareholders of record as of March six.
Bob: On behalf of the entire team at American assets Trust, including artist who will be available during Q&A. Thank you for your confidence and continued support with that I'll turn the call over to Bob to discuss our financial results and our initial guidance in more detail.
Bob: Thanks, Adam and good morning, everyone.
Bob: Last night, we reported fourth quarter and year ended 2024.
Bob: There are 55.
Bob: And $2 58, respectively.
Bob: Fourth quarter and year ended 2024 net income attributable to common stockholders per share was 15.
Bob: 94 cents respectively.
Bob: Fourth quarter <unk> decreased by approximately 16 to <unk> 55 per share compared to the Q3 2024, primarily due to <unk> termination rights fees.
Bob: Received in Q3 that were not present in Q4.
Bob: And then once that decline in revenue at the embassy suites, Waikiki, reflecting expected seasonality between the high Q3, and lower Q4 demand.
Bob: Same store cash NOI for all sectors combined was two 6% growth year over year for the fourth quarter and one 4% growth for the full year ended 2044.
Bob: Compared to the full year ended 2023.
Bob: Meanwhile, all sectors have positive same store cash NOI in the fourth quarter, except for the office sector, which was negative two 8% primarily due to known move outs at our Torrey reserve and timber Springs properties.
Bob: As it relates to liquidity at the end of the fourth quarter, we had liquidity of approximately $826 million comprised of approximately $426 million in cash and cash equivalents.
Bob: $400 million of availability on our revolving line of credit.
Bob: Additionally, as at the end of the fourth quarter, our leverage which we measure in terms of net debt to EBITDA was six <unk> times on a trailing 12 month basis, and six six times on a quarter annualized basis.
Bob: Note that subsequent to year end, we repaid our term loan b.
Bob: Term loan C series C notes totaling $325 million in aggregate.
Bob: Without penalty or premium utilizing cash on hand.
Objective is to achieve and maintain long term net debt to EBITDA five and a half.
Bob: Times or below.
Bob: Our interest coverage and fixed charge coverage ratio ended the quarter at three four times on a trailing 12 month basis.
Bob: Let's talk about 2025 guidance.
Bob: We are introducing our 2025 peso per share guidance range of $1 87 to $2.01 per <unk> share with a midpoint of $1 94 per <unk> share, which is approximately a 24% decrease in over.
Bob: Over 'twenty 'twenty four actual of $2 58 per <unk> share.
Bob: In our supplemental document, which was furnished yesterday via 8-K.
Bob: And this is available on our website, we have provided a high level reconciliation of 2024 actual well to our 2025 forecast.
Bob: On our corporate guidance page however.
Bob: However for those that would like a more detailed analysis of the 2024 to 2025 a reconciliation.
Bob: About to share that as well.
Bob: So let's begin.
Bob: Starting with 2024 ending.
Bob: <unk> of $2 58 per share there are 11 items combined that makeup the decrease they are number one.
Bob: Non recurring termination fees occurring in 2024 are not included in 2025 guidance combined they are expected to decrease <unk> by approximately 15 cents for F. F O share in 2025.
Bob: Number two.
Bob: Nonrecurring litigation is in 'twenty 'twenty four is not included in 2025 guidance and is expected to decrease <unk> by approximately <unk> 13 cents per share.
Bob: Sure in 2025.
Bob: Number three.
Bob: Same store cash NOI for all sectors, combined excluding reserves, which I will discuss in more detail in a few minutes is expected to be flat to slightly positive.
Bob: In 2025.
Bob: Broken out by each sector as compared to 2024 and excluding reserves in each case same.
Bob: Same store office cash NOI is expected to decrease approximately.
Bob: 1% or two sets of F F O share.
Bob: Same store retail cash NOI is expected to increase approximately one 6%.
Bob: Or one and a half sets for F F O share.
Bob: Same store multifamily cash NOI is expected to increase approximately two 7% or one three.
Bob: Oh share in 2025.
Bob: Same store mixed use cash NOI is expected to stay flat in 2025.
Bob: Our 2025 embassy guidance is prepared by our partners at outrigger in Waikiki that have boots on the ground and have an awareness in waikiki from other hotels and retail properties that they own <unk> manage our.
Bob: 2025 guidance for the embassy suites Hotel Waikiki is based on the following revs.
Bob: Revenue is expected to increase approximately 5% in 2025 operating operating expenses are expected to increase 7% in 2025 due to the inflationary impact on operating expenses in Hawaii, such as food cost labor and overhead.
Bob: Average occupancy is expected to increase by approximately 2% 25 average ADR is expected to increase approximately 4% from $371 in 24 to $384 25.
Bob: Average revpar is expected to increase approximately 6% from 319 and 24 to 337 in 2020.
Bob: Of note our 'twenty 'twenty four NOI for the embassy suites hotel increased by approximately 6% compared to 2019.
Bob: Even without the majority of our guests from Japan, who remains slow to return to work.
Bob: Do prime there.
Bob: Two continued weakness in the yeah.
Bob: Number four non same store cash NOI is comprised of two office buildings that were recently completed.
Bob: One is one beach street on the North waterfront, San Francisco overlooking the Golden Gate Bridge, and Alcatraz and the other is La Jolla Commons three which is located in University Town Center Submarket of San Diego.
Bob: And which was completed in Q2, 'twenty 'twenty four and it's approximately 19% leased as of year end.
Bob: For 2025, we expect the operating expenses to exceed the operating revenue as we are in the lease up stage, which will decrease <unk> by approximately four cents per <unk> share.
Bob: Credit reserves as number five are included separately and will decrease by approximately five cents per F. F O share.
Bob: Of the five cents of credit reserves approximately two cents of the reserves are allocated to the office sector and three of the reserves are allocated to the retail sector.
Bob: These reserves constitute under 1% of our total expected revenue in 2025, which we believe is a reasonable percentage.
Bob: Similar to last year, we have taken a conservative view of the potential risk with certain tenants, particularly at this somewhat unpredictable economic environment and hope to reduce these amounts each quarter as rents are paid.
Bob: Number six.
Bob: G&A is budgeted to increase slightly in 2025.
Bob: The decrease F F O per share by approximately <unk>.
Bob: Number seven interest expense is expected to increase in 2025, primarily due to the termination of capitalized interest expense related to the Hawaii comes three and the issuance of our six 5% senior notes last fall, which which combined is expected to decrease <unk>.
Bob: Sure by approximately six steps in 2025.
Bob: Number eight other income is expected to decrease F. F O by approximately four cents per share in 2025.
Bob: Resulting from the payoff of our maturing debt indebtedness subsequent to the issuance of our six 5% senior notes last fall the proceeds of which will no longer be earning interest income in the bag.
Bob: Number 920, 25, GAAP adjustments are expected to decrease by approximately $5 5 million.
Bob: Which is expected to decrease <unk> by approximately seven cents per share.
Bob: Majority of this GAAP adjustments relate to the net effect of straight line rents, but should have no effect on the overall rents.
Bob: Number 10.
Bob: Del Monte disposition is expected to decrease <unk> by 11 cents.
Bob: Or F. F O share 25 number 11 multifamily acquisition is expected to increase <unk> by two sets for F. F O share of <unk> 25.
Bob: These adjustments when added together will be approximately 64 cents per <unk> share.
Bob: It represents a net decrease in our 2025 mid point over 2024 per share.
Bob: We believe that 2025 guidance is our best estimate as of the date of this earnings call. We do believe that it is also possible that we could before towards the upper end of this guidance range.
Bob: In order to do that among other things.
Bob: Number one speculative office leasing needs to occur in the first half of the year number two the office of retail tenants that we reserved for it needs to continue to pay rents through the year and number three we need to have increasing rents and occupancy and are less expenses than budgeted in our multifamily.
Bob: Of note as I previously mentioned, we have several hundred million dollars of invested capital. It comes three one Beach Street development and renovation.
Bob: And our suburban office portfolio in Bellevue, Washington.
Bob: All great properties at Haile amenity monetized in great locations for our focus is getting each of these properties leased as quickly as possible to high quality cabinets over the ensuing years.
Bob: At a 93% leased occupancy we should be able to add over 30.
Bob: Oh for sure.
Bob: With the lower our net debt to EBITDA increase or at Navy and allow us to continue to grow the company.
Bob: We are excited for the future ahead of us.
Bob: 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.
Bob: We will continue 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 in our earnings release and supplemental information.
Bob: I'll now turn the call back over to the operator for Q&A.
Bob: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Bob: Anytime you question has been addressed and you'd like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Todd Thomas with Keybanc capital markets. Please go ahead.
Todd Thomas: Hi, Thanks, good morning.
Speaker Change: Hey, Bob I, just wanted to touch on the.
Speaker Change: The 30 <unk> of upside, which you reiterated it again in your comments from.
Speaker Change: La Jolla, one beach and the three office assets assets in Bellevue.
Speaker Change: Appreciate the detail in the guidance with.
Speaker Change: Some of the moving pieces there but.
Speaker Change: Can you just talk a little bit more about.
Speaker Change: What you might expect in terms of that beginning to be recognized whether there's any contribution anticipated to be realized in 2025 during.
Speaker Change: During the year from from some of those assets in aggregate or will cash flow.
Speaker Change: No.
Speaker Change: Not really start to improve at all during the year with the cap interest in real estate taxes burning off I guess, primarily at La Jolla.
Speaker Change: Yeah. Thanks, Thanks, Todd for the question.
Speaker Change: Yeah, I mean, the the.
Speaker Change: The 93% first of all is based on our underwriting for these properties and we've underwritten we know that their their renovation would take place in suburban Bellevue and that process is just being finished in the first quarter.
Speaker Change: So I think the future is bright on that you know I'll have Steve talk more in terms of what the activity is on there and the whole your comments three we when we underwrote that you know the future looks bright.
Speaker Change: It's what we've seen is it takes longer to sign leases.
Speaker Change: But I think it would be better to have Steve really speak to what the current environment.
Steve Center: The environment is on each of these properties Steve sure.
Speaker Change: Up in Bellevue Todd.
Speaker Change: Now called timber ridge.
Speaker Change: We're in lease documentation with the 29000 foot full building lease it will take that property to 97% leased and we have an existing tenant.
Speaker Change: That needs to expand and that will perhaps take our last vacancy there so that project could reach 100%.
Speaker Change: At timber Springs, which is formerly bell spring $5 20.
Speaker Change: We're in negotiations with a full floor deal for the majority of that vacancy in that project as well so activity is good.
Speaker Change: And now in terms of timing I've seen that the rent come in for those days it'll be later this year.
Speaker Change: December 1st is the commencement date of the deal of that timber ridge.
And the full floor deal that timber spreads will likely commence in 2006.
Speaker Change: In terms of La Jolla Commons, we've got our third for capital commence.
Speaker Change: September.
Speaker Change: The spec suite tangible R. R.
Speaker Change: Once in place and already paying rats, we've got we're in negotiations with another for 9000 feet that will commence later this year, it's a spec suite. So they can move them within months.
Speaker Change: And then the <unk>.
We're negotiating on the top floor of the penthouse.
Speaker Change: Their goal is to move in in November.
Speaker Change: November December.
Speaker Change: So that's kind of the timing of that activity.
Speaker Change: In terms of proposals that are active right now they require full build out so those are really likely to hit in 2006.
Speaker Change: Okay, I guess, if we're thinking about sort of the cadence of F. F O. During the year you know thinking about you know 26, a little bit twenty-seven right is there a point in the model, where you have confidence that.
Speaker Change: You know F O will will will potentially bottom or inflect. It sounds like late 25 might sort of mark the bottom with some of the commencements that that might be scheduled at these assets.
Speaker Change: In the year and into early 'twenty six is that sort of a fair assessment.
Yeah.
Speaker Change: I would say that you know mid to late a year because it takes time I mean once you sign the lease that you got to get the permits you've gotta get things going.
Speaker Change: I think in Adams.
Speaker Change: Our commentary to that.
Speaker Change: You know where.
Speaker Change: We're.
Speaker Change: We're not expecting anything in the first two quarters.
One of the things Todd we're doing to accelerate that is an extensive we're continuing our spec suite program, we've been doing it since 2018, but.
Speaker Change: We've got we've got a big program this year to deliver suites in the second half of the year is as Adam mentioned, our average deal size is about 7000 feet.
Speaker Change: We're seeing less than full floor demand throughout all of our markets. So we're going to meet that demand and the suites are gonna be ready to go we've had really good success within a good example of that as we built it for you Tonight, but spec suite.
Speaker Change: Four years ago, we used it to a pharma company and now Theyre, taking another spec sweep its 9200 feet.
Speaker Change: And they're moving in in July so.
Speaker Change: Going to continue that program deliver ready to go spaces, which should accelerate.
Speaker Change: Much of that.
Speaker Change: Cash flow.
Speaker Change: Okay, and then if I could switch over to until it to the disposition and acquisition to del Monte Center can you just better help us understand the <unk> dilution. There. It's a you know 11 cents, that's eight and a half million dollars I'm. Just curious if you can provide some additional detail around the.
Speaker Change: The expected value of that sale and and some of the proceeds are earmarked for the multifamily acquisition at a lower initial yield you mentioned, but what are you assuming you do with the remainder of the proceeds.
Speaker Change: We saw this with Adam we're not in a position really to go into too many details on either of the transactions considering there both in escrow. So we're trying to limit our comments other than to say this is what we feel like it's better positioning for us for long term growth.
Speaker Change: I would just point out what we're selling them money for relative to what we're buying the apartment community that apartment community is maybe a little over half the proceeds from del Monte. So we continue to look for other opportunities out there and otherwise keep that excess cash invested in the bank account and get some interest income off of it while we continue to look for source.
Speaker Change: Actions, but we'll have more color on those deals Todd once they're closed on our next call or maybe on an interim update we would get.
Speaker Change: The public but for now we don't want to jeopardize anything with these deals considering where they are in the escrow process.
Speaker Change: Just to add to Adam's comment is that we want to be respectful to the buyer and the seller or both those transactions, where we're happy to give you more information.
Speaker Change: Once these transactions are closed.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Alright, thank you.
Speaker Change: Thank you Todd.
Speaker Change: The next question comes from the Haynesville St Joost with Mizuho. Please go ahead.
Speaker Change: Hi, there.
Speaker Change: You know make baseball glove, Mizuno, Hey, guys.
Speaker Change: So.
Speaker Change: Yeah.
Speaker Change: Wanted to follow up on the del Monte question I get it you're in a position we can't say much but I guess I'm more curious just high level you know the decision to sell the asset here at your largest retail asset it sounds like it's more of a decision around a perhaps the asset maybe having less growth prospects long term and not necessarily.
Speaker Change: And maybe a view on wanting to cut back on retail.
Speaker Change: So maybe a bit more on that in just you know the strategic.
Speaker Change: Rationale here and it sounds like you know multifamily is the intended use of proceeds here.
Speaker Change: And asset class you guys had talked about in the past and wanting to get into but you know the pricing there is a bit tie it sounds like you're willing to incur a bit of dilution, but you know what.
Speaker Change: But you know what type of multifamily assets could we see you go after smaller perhaps adjacent to existing properties.
Speaker Change: Assets perhaps.
At are maybe under construction and maybe offer some operational upside just curious kind of how you're broadly thinking about not just the decision to sell but the reinvestment and what type of profile athletes in multifamily you're looking at.
Speaker Change: It's quite a mouthful.
Speaker Change: Just to start with your question on the growth prospects for del Monte Center, obviously, you're not going to comment.
Speaker Change: Comment on that.
Speaker Change: The buyer of vacuum comments on that one when we close on it but like I mentioned in my remarks, it's really about focusing on the operational efficiencies and synergies we have in other markets Monterey for US is of course, a kind of often an island of sorts and it's a lot more difficult for us to manage and not having all the economies of scale like we do.
Speaker Change: Do in our other markets and that's kind of something thats been driving that decision and we've been looking for right entry point.
Speaker Change: List, it and see what we could get for that property and in the same vein. We continue to look for multifamily opportunities as you know, we like to find something with a little bit of hair on it where we can add value and come in and fix them up get the rents up and make the residents and our shareholders proud of what we own. So that's kind of what we've been looking for in the multifamily.
Speaker Change: <unk> are generally in the markets, we're already and there's not a ton trading.
Speaker Change: That hit the.
Speaker Change: Kind of hit those qualifications that were looking for so when we saw this one come through and will give <unk> credit because he he had a bulls eye on this one once he saw it it just made a ton of sense for us and that's exactly what American assets is built to do.
Speaker Change: And I think that Adam as you said earlier after it closes we will explain the rationale, but I think there is a compelling rationale for the transactions right and so we continue to look for multifamily handle but we're not.
Speaker Change: Just solely focused on that we would look for retail opportunities as well.
Speaker Change: But for now we're not just seeing a ton of stuff that really pencils for us and gets us that IRR. We're looking for so in the meantime, we're focused on what we've got in front of us.
Speaker Change: Got it got it appreciate that color and maybe a bit more around the decision to raise the dividend I know it wasn't a big increase here, but it comes at a time, when you're making a meaningful.
Speaker Change: Kind of.
And the a F O F O episodes expectation for this year and so now kind of looking at where your coverage ratio is at least on our estimate around 100% suggest more limited financial flexibility to a degree. So curious on why the decision to raise the dividend here now when you're cutting.
Speaker Change: Hum.
Speaker Change: Earnings expectations and when do we think you can get back to you a longtime apple ratio target of around 80, 85%.
Speaker Change: The board decided by increasing the dividend and a token amount that he wanted to assure investors that they had the highest confidence in the quality of the portfolio and that was their way of saying you guys are doing the right thing for the stockholders in the long run in the short run obviously the questions have been raised.
Speaker Change: As far as the last part of the question I have no way of answering that because we'll just have to see how successful we are.
Speaker Change: Leasing the great properties, we have.
Speaker Change: And let me add to earn his comments.
Speaker Change: We've historically since we have been.
Speaker Change: Since we did the IPO back in 2011 or a turtle.
Speaker Change: The structure.
Speaker Change: Structure of our our internal point was 85% dividend payout ratio and we've generally been there or less this time were still under 100% so anytime you're over 100%.
Speaker Change: On the ratio.
Speaker Change: You're paying more than your free cash flow, which is not what we wanted to do.
Speaker Change: What we did is we've increased it half a penny per quarter, which is about $480000 per quarter or less than $1 5 million a year.
Speaker Change: From the bigger picture of the balance sheet, we can afford that we're still under or somewhere from a high eighty's to low ninety's percent on the payout ratio.
Speaker Change: I saw your number of 99% that's a we don't believe that is correct.
Speaker Change: But but it is it is either low nineties are high eighty's.
Speaker Change: We don't think that's going to make a material impact one way or the other considering we have over $100 million of cash on the bank.
Speaker Change: Okay and on that last point, what's your.
Speaker Change: Estimated annual free cash flow.
Speaker Change: Both dividend and Capex.
Speaker Change: I don't have that right in front of me I mean, we can pull up the supplemental.
Speaker Change: Okay, we could come back to that one maybe last one on credit reserve I think are the five set maybe some color on the 5% credit reserve and what's some of the driving factors here it feels a little elevated and so I guess are these and relationship previously known move outs or any any new tenants.
Speaker Change: Out there thanks.
Speaker Change: I mean, I think it's less elevated than it was a year ago. When we had a nine or 10 set reserve handle theirs to office tenants that we're keeping an eye on that are having some challenging business.
Speaker Change: Situations right now and I'm not going to name those names, but on the retail side like I mentioned, we're just keeping an eye on petco Michaels and we've got a Angelica theater and our Carmel Mountain Plaza.
Speaker Change: And.
Speaker Change: Those are the ones that we have our eyes on right now, but so far they're all current and we're hopeful that we'll be able to collect on them all but as you know we prefer to be conservative over you know under promise over deliver and also.
Speaker Change: Investors decide.
Speaker Change: Okay.
Speaker Change: Imposing our judgment, yeah, but just know that our party city vacancies have been reflected in Bob's guidance. So there's no reserves on those obviously theres interest already percolating in those sites. So we're hopeful to have news on those later this year.
Speaker Change: Got it thank you guys.
Speaker Change: Thank you. Thank you your endo.
Dillon Burzynski: The next question comes from Dillon Burzynski with Green Street. Please go ahead.
Dillon Burzynski: Hey, guys just quick one on the party city boxes, I mean is it your expectation that you'll you'll sort of break these boxes up or do you think you'll be able to get a tenant sort of backfill it in its entirety.
Speaker Change: I will let Chris Sullivan answer that one for you Don.
Speaker Change: So keep in mind.
Speaker Change: Two party city's but one is not a traditional party city one in Hawaii is a 5000 foot space that was their only franchisee.
Speaker Change: Located out license or a much smaller space. So that'll be leases of 5000 foot space. The other is in our Gateway center down in National City, That's a 14000 foot space and we're seeking users that will be in the 14000 foot range it will be split.
Great I appreciate that detail and I guess, just sort of going back to office leasing activity I know Paul over the last year or so large tenant activity I sort of inflow, but you're starting to see any any green shoots on this front as it relates to larger tenants coming back then marketing and looking to lease.
Speaker Change: Base.
Speaker Change: Yeah.
Speaker Change: Larger tenants and.
Speaker Change: In Bellevue there have been some monster tenants that have showed up which are great for the market San Francisco Youre seeing the tenant size increase it's still not quite full floor, but it's gotten better than that <unk> that you are seeing when AI was just on it still is active but all the stars.
Speaker Change: So the size is increasing in San Francisco, which is good for us because one beach has big floor plates and thats not going at the demise down to 5000 foot increments. So that's heading in the right direction, but it's still.
Speaker Change: Overall, it's smaller tenants.
Speaker Change: Right sizing tenants N and the winners are going to be the properties that are that have the best amenities and the best offering vessel location and that's what we have so.
Speaker Change: And in terms of current activity.
Speaker Change: We're seeing a number of tenants growing.
Speaker Change: So I think Adam mentioned, you know, we've got 105000 feet of new deals in lease documentation and at 53000 feet of net absorption.
Speaker Change: No.
Speaker Change: And the other thing that you're seeing is our weighted average lease term of the deals that are out and.
Speaker Change: <unk> has over 10 years. So we're seeing people go along we're seeing them commit to space. So.
Speaker Change: That's very encouraging.
Speaker Change: Okay.
Speaker Change: The next question comes from model Camden with Morgan Stanley. Please go ahead.
Camden: Hey, just a couple quick one just circling back to sort of the office.
Camden: Leasing fundamentals and so far it just I I appreciate the comments on the pipeline and all the leasing that's been sort of a dog just was I was just curious if you could just comment more on the types of tenants are what they are looking at sort of incentives and so forth and it and it sounds like you're you may be seeing signs of inflection.
Camden: That's what I'm hearing from the sort of opening comments and I'm I'm wondering if that's the messaging. Thanks.
Camden: Sure.
Camden: A broad spectrum of tenants from construction to.
Camden: <unk> management to life insurance to all kinds of areas.
Camden: And there's really no one tenant type thats driving it in terms of what we're seeing.
Camden: Tenants don't want to spend capital.
Camden: Upfront, so having spaces that are already completed or being willing to commit to longer term to build out the space for them and youre seeing that like I said, the weighted average term of 10 years.
Theyre getting spaces that are that are accustomed to them, but we always ensure that what we're building is going to have long term utility beyond that lease so really the capital piece on the front end is probably the biggest thing I'm, saying is tenants don't want to write checks for their T is.
Camden: It gives us a competitive.
Camden: H, but what.
Camden: It keeps us in the fall.
Camden: Yes.
Camden: He says in the body well first of all the customer service side.
Thank you.
Camden: <unk>.
Camden: The strategy that we treat these people as well.
Camden: The term customer we refer to them as customers rather than tenants.
Camden: And it's interesting you hear it in our language when we talked to Autodesk for example, or we talked to Google, but the language they use partnership.
Camden: And.
Camden: That.
Camden: That comes through where we treat them as partners, we collaborate and you'll see we've downsized or right size the number of tenants and we flexed with them, but we don't lose tenants. The competitors, we lose tens to attrition, we lose them to right sizing and those types of things that can't be controlled by us, but our tenants stick with us for long term.
Camden: Are people that that operator buildings do a wonderful job of taking care of people. Our construction teams are excellent in fact, you come away from.
Camden: T I experienced and the tenants are very happy with the outcomes and experience so.
Speaker Change: And we have the capital to pay the leasing commissions and do the Ti, Yes, which is a significant factor in what has become a divided Marc that's really a good point and I said that.
Camden: Confidence in our ability to perform.
We had a tour two days ago, where the tenant was touring our tower in downtown Portland, and the fact came up that we don't have any secured debt on the building. The building doesn't have a loan against it. He was he was shocked and impressed and happy about that because so much of Portland is in distress, so our ability to execute.
Camden: Really a very important point in this in this environment.
Camden: Great. Thanks, that's really helpful.
Camden: My second question was just on <unk>.
Camden: One just on the guidance what is what are you assuming for same store for the office and the retail portfolio and how does that to EBITDA trend throughout the year. Thanks, so much.
Speaker Change: So rod Youre.
Camden: Your question is what's the.
Speaker Change: <unk> on the same store, but as the same store for office and retail this year.
Speaker Change: Yeah. So we're all on the same store, we're saying, there's a 1% decrease in same store office cash NOI.
And really that.
Speaker Change: A big portion of that is first of all I think about the tenant that we had the termination fee from in Q3, well that that's going away. So Q4, it went down.
Speaker Change: And then the remainder of 'twenty five and until that gets leased that goes away.
Speaker Change: We've also had another big one is at first in May we've had attended in there since the IPO.
Speaker Change: A clear result kind of a quasi.
Speaker Change: Governmental organization to utility.
Speaker Change: They they let us know.
Speaker Change: They let us know during COVID-19.
Speaker Change: They are no longer working from the office, but they maintained their lease.
Speaker Change: So.
Speaker Change: As of April 1st that goes away and that's that's going to be a significant decrease.
Speaker Change: Great and then on the leverage levels.
Speaker Change: I'm, sorry, what leverage levels.
Speaker Change: Of of death.
Speaker Change: Yeah, how does like whereas whereas it trending throughout the year.
Speaker Change: That's you know that's in our supplemental.
Speaker Change: We're we're still net debt to ebitdas as the six range on it so I think we're in pretty good shape.
Speaker Change: Hey, Brian just to supplement what Bob said on the same store cash NOI. If he said that office cash NOI would be down 1% if that if that one termination deal hadn't happened office NOI would be up 1%, but that deal made more sense for us because it got us four years of income the <unk>.
Speaker Change: Retail was up almost one 5%, maybe a little bit higher if not for party city that would've probably been another percent higher.
Speaker Change: And we have multifamily near 3% up.
Speaker Change: So segment wise, they all seem to be trending fairly well, we just got to lease up the development basically.
Speaker Change: That makes sense.
Speaker Change: Thanks, so much that's it for me.
Speaker Change: Yeah. Thanks, Ron you have to look at us as if we hadn't had these two extra ordinary items and on that basis, we're doing better and the two extra ordinary items gave us an opportunity to lease up the space.
Speaker Change: The prepaid so with.
Speaker Change: At the same company, we were before only better.
Yes.
Speaker Change: Okay.
Speaker Change: That's just that there are no further questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Adam Weil for any closing remarks.
Speaker Change: So we're excited about the opportunities ahead and the strong foundation, we've built to drive future growth and our team who's around the table with US today, we're focused on executing our strategy and delivering results for our shareholders and stakeholders. So we really appreciate your time today and attention on all the questions.
Speaker Change: And look forward to reporting it.
Speaker Change: Good results going forward. Thank you everybody.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.