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spk00: Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2022 American Assets Trust, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Mr. Adam Weil, President and Chief Operating Officer. Please go ahead, sir.
spk04: Thank you, Operator. Good morning, everyone. Welcome to American Asset Trust's first quarter 2022 earnings call. Yesterday afternoon, our earnings release and supplemental information were furnished to the SEC under Form 8K. Both are now available on the investor section of our website, AmericanAssetsTrust.com. During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results and our earnings release and supplemental information. We will also be making forward-looking statements based on our current expectations, which statements are subject to risks and uncertainties discussed in our SEC filings. Your caution not to place undue reliance on these forward-looking statements as actual events could cause our results to differ materially from these forward-looking statements, including due to the impact of COVID-19. And with that, I'll turn it over to Ernest Rady, our chairman and CEO, to begin discussion of our first quarter 2022 results. Ernest?
spk05: Thanks, Adam. Great job, and good morning, everybody. Thank you for joining us. Over the past two years, I hope you heard me say that I truly believed that American Assets Trust would come out of the pandemic as good a company, if not better. And actually, I think what I said, better than when it all started. I believe that to be the case as we have strengthened our balance sheet, continued upgrading and improving our irreplaceable properties, and we are optimistic about the buoyant leasing interest across the portfolio in all segments, including the continued recovery of our retail properties and strengthening retail rates at our multifamily properties. In first quarter, 2022, we made great progress and actually we had a 50% increase in FFO over 2021. We are pleased to see better than budgeted financial results in our portfolio, significantly driven by outperformance of our recently renovated Waikiki Beachwalk Embassy Suites. That performance was notwithstanding the continued lack of Asian travelers who have historically been approximately 40% of all tourists vacationing in Oahu. We encourage that as travel from Asia to Hawaii continues, opening up later this year and beyond, that our ADRs, our average daily revenue and occupancy at embassy suites will continue to climb. And we will hopefully reach and eventually surpass our pre-pandemic 2019 numbers at Embassy Suites. Meanwhile, we are cognizant of the inflationary challenges in this business environment across our portfolio. And although we are confident in the thesis of our portfolio being an effective long-term protection against inflation, we remain vigilant and focused on managing our expenses and operating margins to the best of our ability. We have the tailwind now of inflation behind us in real estate. I'm optimistic about the outcome of that effect. In March, we purchased Bell Spring 520, an approximately 93,000 square feet multi-tenant office campus less than five minutes from downtown Bellevue for $45.5 million. We now sit with over 1 million square feet in Bellevue. an office market that we remain very bullish on, and we expect long-term growth as we look to push rents, create economies of scale, and certainly upgrade our properties. I also want to mention that the Board of Directors has approved a quarterly dividend of $0.32 a share for the second quarter, which we believe is supported by our financial results and is an expression of our Board's confidence in the embedded growth of our portfolio this year and beyond. The dividend will be paid June 23rd to shareholders of record June 9th. Finally, on the development front, both La Jolla Commons 3 and 1 Beach Street remain on time and budget, and we remain optimistic about the leasing prospects, but we do not have any specific news to share on that front at this time. Adam, Bob, and Steve will go into more detail on our various asset segments, financial results, and guidance updates. And I will be available for any questions you may have at the conclusion of our prepared remarks. On behalf of all of us at American Trust, we thank you for your confidence in allowing us to manage your company and for your continued support. We are proud to have that role. Thank you. And now I'm going to turn the call back over to Adam.
spk04: Adam, please. Thank you. As Ernest mentioned, it has always been a focus of ours to continue enhancing and improving our properties to remain a best-in-class option for our tenants and guests. That has never been more important than it is now. Over the past few years, we've made meaningful capital improvements to our properties that have been very well received by both our existing and new tenants and guests, including upgrades and beautification to our San Diego multifamily portfolio, a full room renovation of our embassy suites in Waikiki, and modern state-of-the-art amenities and ESG elements at our office campuses, something we know is crucial to helping our office tenants bring their employees back to the physical office. Along those lines, we currently estimate that our office tenants are at about 45 to 50% physical occupancy at our office campuses, with an expectation for that to continue increasing as we reach the summer months. This is based on feedback from our tenants management teams who tell us how important having their employees back in the office is for their innovation, collaboration, culture, and ultimately their financial results. Of course, we realize there is an evolution of sorts with respect to the workplace right now, but we believe the demand for premium office space like ours will remain strong, and you'll hear more about our successful office leasing activity and new office capital projects from Steve's Center shortly. Regarding our multifamily portfolio in San Diego, we are seeing vacant units lease at an average of over 20% over prior rents with little to no concessions offered. Note that renewal rates are capped just below 10% based on California laws, so we are maximizing the rental rates on vacant units to the full extent of our capabilities, all the while managing expenses as Ernest alluded. At Pacific Ridge Apartments, we are expecting our occupancy to dip into the low 70% by June 30th due to the expected seasonal move out of units primarily occupied by students. Pre-leasing for the upcoming fall season has already begun with new lease agreements being signed for move-ins in Q3. We expect our occupancy to rebound back into the low to mid-90 percentile by the end of August as University of San Diego starts their fall session before Labor Day. Meanwhile, though our Hasolo on 8th multifamily in Portland came in above our internal expectations in Q1, the Portland multifamily market remains low relative to San Diego. However, we remain optimistic on that asset as major employers in the market have spoken to hiring campaigns in Portland in 2022 and beyond, which we hope to contribute positively along with some less extreme weather. On the retail front, as Ernest mentioned, we do sense a rising tide with renewed interest in many of our vacancies. For instance, we recently signed a lease with a regional sushi restaurant at our Waikiki Beach Walk for over 5,000 square feet of second floor space certainly a sign of the optimism surrounding the pending return of our Asian customers. Meanwhile, our retail sales at Waikiki Beach Rock saw a meaningful double-digit increase over February and March, clearly demonstrating an increase in customer traffic and expenditures. We understand that airlines have started adding more flights from Japan to Oahu, and tour companies are resuming sales of packages from Japan to Hawaii after a more than two-year hiatus. All good news. Additionally, at Alamo Quarry, Whole Foods and Nordstrom's have recently renewed their leases, and we are excited for Total Wine to open at Carmel Mountain Plaza in the next few weeks. Finally, in the next week or two, keep your eye out for our 2021 Sustainability Report, which covers our 2021 operations and highlights our initiatives and commitments across a range of topics, including environmental, social responsibility, corporate governance, and human capital. Though we are proud of our meaningful improvements and collaborative team efforts to date, we remain at the early stages of progress and know there's much more work to do. With that, I'll turn the call over to Bob to discuss financial results and guidance in more detail.
spk06: Thanks, Adam, and good morning, everyone. Last night we reported first quarter 2022 FFO per share of 57 cents and first quarter 2022 net income attributable to common stockholders per share of 18 cents. First quarter results are primarily comprised of the following. Actual FFO increased in the first quarter by approximately $0.03 to $0.57 per FFO share compared to the fourth quarter of 2021, primarily related to lower G&A in the fourth quarter. The fourth quarter had higher G&A, mostly related to year-end compensation expenses. Same-store cash NOI was strong in Q1 2022, ending at approximately 18 percent growth year over year for the first quarter. What's even more important from my perspective is that if you exclude the collection of rents received in Q1 2021 related to rents that were previously billed and uncollected in 2020 of approximately $1.2 million, Same-store cash NOI growth would have been approximately 21% instead of 18% as reflected in our supplemental. Same-store cash NOI growth on a sector-by-sector basis for the first quarter of 22 would have been as follows. Office would have decreased from approximately 12% to 10%. Retail would have increased from 2.5% to 13.4%. Multifamily would have increased from approximately 13% to 18%, and mixed use would have decreased to 18, 67%. From my perspective, this data also reflects a more accurate presentation that retail growth is much stronger on a comparative year-over-year basis for the first quarter, excluding the change in accounts receivable that was generally immaterial pre-COVID. Let's talk about liquidity. At the end of the first quarter of 2022, we had liquidity of approximately $474 million, comprised of approximately $74 million in cash and cash equivalents and $400 million of availability. Our leverage, which we measure in terms of net debt to EBITDA, was 6.8 times. Our objective is to achieve and maintain a net debt to EBITDA of 5.5 times or below. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.9 times. Let's talk about 2022 guidance. We are increasing our 2022 FFO per share guidance range to $2.13 to $2.21 per FFO share with a midpoint of $2.17 per FFO share. from our initial guidance issued on our Q4 2021 earnings call that had a range of $2.09, $2.17, with a midpoint of $2.13, which is approximately an 8.5% increase at the midpoint over our 2021 actual of $2 per FFO share. Let's walk through the following two items that make up the increase in our 2021 2022 FFO guidance over our previously introduced 2022 FFO guidance. First, the Embassy Suites at Waikiki Beachwalk contributed two cents per FFO share of outperformance in Q1 2022 that was not previously included in our 2022 guidance. Embassy actually outperformed our team in Waikiki's internal expectations each month for the first quarter. And second, Bellsprings 520, which is our most recent office acquisition in Bellevue from the first quarter and was not included in guidance. Bellsprings is expected to contribute approximately two cents per FFO share in 2022. These adjustments when added together will be approximately four cents per FFO share and represent the increase in 2022 over our previous 22 guidance. While we believe the 22 updated guidance is our best estimate as of this earnings call, we do believe that it is also possible that we could outperform this revised guidance range. In order to do that, tourism at Oahu needs to continue to return in full force, including our guests from Asia. We are cautiously optimistic that the Embassy Suites Waikiki has the potential to continue outperforming but there are many variables to that, and we prefer to take a wait-and-see approach. As always, our guidance, our NOI bridge, and 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 our analysis and interpretations of our quarterly numbers. 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?
spk02: Thanks, Bob. At the end of the first quarter, net of our two redevelopments, our office portfolio stood at approximately 94% leased with approximately 7% expiring in 2022. Netting out our three recent acquisitions in Bellevue, our same-store portfolio was approximately 96% leased. The momentum in our office portfolio continues. In the first quarter, we executed 19 leases totaling approximately 170,000 rentable square feet, including approximately 13,000 rentable square feet of comparable new leases with increases over prior rent of 30% on a straight line basis. Approximately 91,000 rentable square feet of comparable renewal leases with increases over prior rent of 16% on a straight line basis, including renewing Autodesk and 46,000 rentable square feet at Landmark in San Francisco. And approximately 66,000 rentable square feet of non-comparable new leases, with Torrey Reserve in San Diego and City Center Bellevue accounting for 52% and 27% of this activity, respectively. Throughout our office portfolio, we are reaping the benefits of the multiple initiatives we have been employing to drive occupancy and rent growth, including renovating buildings with significant vacancy and or rollover, furthering amenity packages, aggregating and white-boxing larger blocks of space where there is scarcity, and improving smaller spaces to be turnkey and move-in ready. Notably, our San Diego portfolio is now approximately 94% leased. in large part due to new leases in our two recently renovated buildings at Torrey Reserve at rents that exceeded our projections. We have an additional 25,000 rentable square feet of new leases and lease documentation. In Bellevue, we signed approximately 18,000 rentable square feet of expansions with another 5,000 rentable square feet of new leases and lease documentation. City Center Bellevue is 96% leased with an additional 1% out for signature. We have established new market rents at our recent acquisitions in Bellevue and expect our Bellevue portfolio to provide opportunities to grow NOI through renewals and new leasing activity at replacement rents that we believe to be meaningfully higher than expiring rents. For example, most recently we entered into a 6,000 rental square foot expansion at Corporate Campus East 3 with an increase over the existing premises rent of 25% on a straight line basis. As mentioned, we continue to invest in our properties, which will help position us to continue to capture more than our fair share of net absorption at premium rents as office markets rebound. Specifically, we are moving forward with the following new projects. Major renovations at Eastgate Office Park, a new fitness center and bike hub with showers and lockers, and a conference center at City Center Belt, renovations and common area enhancements at Solana Crossing, and new amenities at Corporate Campus East Street. Meanwhile, Q2 is shaping up nicely with 12 deals totaling 172,000 rentable square feet of new and renewal leases and lease documentation. I'll now turn the call back over to the operator for Q&A.
spk00: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Todd Thomas with KeyBank Capital. Please go ahead.
spk01: Hi, thanks. Good morning out there. Morning. First question, I just wanted to dig in a little bit on the guidance. If we look at this quarter's result, it annualizes to $2.28 a share. And some of the two cents of accretion that you talked about from Bell Spring 520 doesn't really show up much in the first quarter since it was acquired in March. I heard the comment about the temporary dip in occupancy at Pacific Ridge. That's anticipated, but what other offsets should we be thinking about throughout the balance of the year to get back down towards the revised 213 to 221 range that we should be thinking about here?
spk06: Todd, that's a good question. As it relates to the guidance, you know, we have not increased the the guidance for the remainder of the year at Waikiki Beachwalk. So we're hopeful that that does increase. So just to give you, put it in perspective, our original budget at Waikiki Beachwalk, the mixed use or the embassy suites was 54% of pre-COVID from a NOI standpoint. And with the update in the first quarter, that gets us to 74% of pre-COVID NOI. We think that we will exceed that, but we've got to do a wait and see on that. So we have not adjusted our guidance to reflect that. So we, like I said in the comments, we do have a fairly good shot at exceeding our current guidance, but You know, we still, we just, there's volatility out there. So, you know, one of the longest retirement at the embassy suites, Todd, you know, for the month of March, our occupancy was 80%, a paid occupancy. So that, you know, compared to the first quarter, which was 73%. Our ADR seems to be consistently over 300%. So for the first quarter, it was like $333 for the first quarter, and similar for the month of March. And our rev par, which is what we also follow, is around 243 to 262. That's a number we also focus on. That's like an NOI to us. And pre-COVID, we were above 300 on that rev par. The other thing is that as of Monday this week, you know, from a Japan update, Japan's vaccination data was 81% of the total population. And that's for both the first and second shot. Boosters have been administered to 38% of Japan's population. So, you know, the Japanese government is speeding up the rollout of those booster shots. One last comment that we've recently seen is that the eastbound air seats are on the rebound. And if you compare just the increase over the prior years, what we're seeing that is out there is that April's eastbound seats from Japan are 13% higher than April. So 13% higher in April 22 versus the prior year. And in July, we expect them to be 74% higher than July 2021. And the same thing for Korea and Oceania. But I think that's telling the story that there is a very good shot at exceeding this budget, which a big portion of it comes from the embassy.
spk05: Pray for no more Omnicom variant, though, so any darn thing could happen. So we hate to count our nickels before they're in the bank.
spk01: Okay. No, certainly. I guess it just sounds for the mixed-use asset, right, the leasing at the hotel retail market, that should be recurring. And then, you know, Ernest, your comments suggested that you do expect to see higher occupancy and daily rates at the hotel throughout the balance of the year. And it sounds like, you know, you're encouraged by what you're seeing on the ground. But I guess, Bob, it sounds like that outlook's not in the guidance. Can you maybe talk a little bit more, you know, around what that translates into for occupancy and sort of daily rate assumptions that are embedded in the guidance as we look ahead for the next couple of quarters?
spk06: Yeah, I don't have that added in front of me. Go ahead, Ernest.
spk05: It depends how our prayers are answered. If everything comes together, it's going to be wonderful. And if there's another variant, it's not going to be. And that's why I just hate to count those nickels until we make out deposit slips that's in the bank. But it's a great property. It's in a great location. It's going to come back. We're just not sure when and to what extent.
spk01: Okay. Maybe we just switch gears and talk about acquisitions. You've been pretty busy. More recently, you talked about some of the transactions in Bellevue, where you own a million square feet today. The company is still sitting on about $75 million of cash. I'm just curious if you can talk about the investment pipeline a little bit and the company's appetite to continue deploying capital today.
spk05: You know, Todd, we're finding that the market for acquisitions is so buoyant that we haven't been able to focus on anything that we could acquire that you would be proud of. There's just so much money out there, and we have a great portfolio, and we have most of our money invested. Cap rates are extremely low, and interest rates are rising. So I think the best thing we can do is just kind of sit and improve what we have, keep our eyes open, but we don't have any specific target at the moment. A friend of mine just sold a property and he's got some 1031 money to invest. So I sent him all the offerings that I get. And he said, Ernest, have you had a shot at any of these? Because I've tried them. He says, I can't acquire any of them at a reasonable price. So I think our strategy now is to make what we have as profitable as we can Keep our eyes open, and hopefully there will be an opportunity. We are opportunistic, and we are going to examine opportunities that come up, but there's nothing in the pipeline now that I can talk about.
spk01: Okay, and just lastly, Bob, any update on the city center Bellevue maturity in November?
spk06: Yeah, we're looking at it. I mean, obviously that matures in November, $111 million. It's a secured mortgage. The only reason it is secured is that we try to cover the negative tax bases on some of our OP unit holders. So we'll refinance that portion or all of it, and we'll probably have more news about that in the second quarter.
spk05: But certainly there's no issue in the financing or the availability of cash. That's a good question, and thank you.
spk01: But you expect to unencumber that asset?
spk06: Well, yeah, that would be the goal is to put a secured mortgage on a smaller asset and free up the value of that asset compared to where it was when we initially bought that. What that would do is that would enhance the unsecured asset pool and assist with the combined leverage. Okay.
spk01: All right. Great. Thank you. Thank you, Todd. Thank you for the question.
spk00: Thank you. Our next question will come from Richard Hill with Morgan Stanley. Please go ahead.
spk03: Hey, guys. You have Adam Kramer on for Richard. Hey, I hope you're all doing well. Look, I appreciate kind of the commentary earlier on kind of cap rates and what the market looks like on acquisitions. Wondering if you could maybe comment on kind of what are unlevered IRRs now in the market? What are you guys kind of buying out of your recent acquisitions, and how do you kind of see the unlevered IRRs in the market currently?
spk05: You know, that's such a broad question. I don't know how to answer it. Cap rates in residential are somewhere between three and four, probably closer to three. In office, what we acquired, there's room for improvements, and the cap rates were 5-ish, give or take, as Steve could comment on that. But we see upside as we amenitize a new word in English language and improve the properties we acquired. And those are really the markets we're in. As retail, cap rates seem to be 5-ish, 4.5 to 5.5, and we're not as hopeful about acquiring good retail with upside. So we're looking for upside. Our strategy is to increase shareholder wealth. To do that, we have to buy something that we can improve, and the opportunities we see now are fairly limited. And we're pretty well invested with good properties, and we love what we have, and we're just going to make the most of it. That's our thought in the short term.
spk06: Hey, Adam, this is Bob. Hey, Bob. So let me just add to Ernest's comments. So the cap rates are just one data point. In our acquisition underwriting, we underwrite also and put a lot of emphasis on our unlevered IRR. So we look at it in relation to our weighted average cost of capital. And we see the acquisitions, obviously, that meet many other criteria, but we want to make sure that they meet that they exceed an unlevered IRR of 7% or more, because that really points to the growth of that asset over the long term. So that's been the strategy.
spk05: That's a good point, Bob. Thank you.
spk03: That's all really helpful, guys. Thanks for the color on that. Look, I guess kind of a related question. I wanted to ask kind of about the rise in interest rates and recognize kind of, you know, you guys' balance sheet sits in a really good spot, and you know, cash on hand, et cetera, to kind of do acquisitions. But wondering kind of if the rise in rates changes your capital allocation decision-making. You know, and again, you mentioned, right, cap rates haven't really kind of moved yet in tandem with this rise in interest rates. So just wondering kind of how you guys view the rise in rates with regards to your capital allocation.
spk05: Well, we were fortunate a year ago to, as you know, most of our debt came from private placements. And when that became more expensive, and public issuance, we were fortunate enough to offer a half a billion dollars worth of bonds. And we were four and a half times oversubscribed, and we picked up $500 million at 3.38% for 10 years. Those rates would not be available to us today. So if we had to finance an acquisition, it would be more expensive. But we don't see the cap rate on acquisitions coming down. So it's kind of out of balance in the short run. And I think our strategy now is to just improve what we have. I hope that answered your question. If not, please explore further.
spk03: Yeah, it does. And wondering about the kind of appetite for buybacks maybe. I think it's been addressed on past calls. But I figured I'd kind of ask again about kind of the appetite for buybacks. I know, Ernest, it's in public filings that you're buying. But I'm wondering about kind of buybacks for the REIT.
spk05: Well, you know, the board makes those decisions, but I have no idea. a plan to encourage buybacks. We're a mid-sized REIT, but on the smaller side. And as Bob has pointed out in some of his prior information he's made available, we'd like to grow, but we have to grow in a way that enhances our shareholder value. So we want more assets, and we don't want to do it at the expense of growing smaller. So that's my personal view. Okay, that's all really helpful, guys.
spk06: Adam, let me add on to that, to Adam's last comment there, is that, yeah, we agree with everything Ernest just said, but I think in terms of allocation is that while we're improving our assets now in terms of capital, and we always continue to do that, we still favor commercial real estate, commercial offices. And we think that, and specifically, and Steve can add to this too, is that we're not looking for a commodity space. There's a big difference between commodity space and newer space that either been recently built or were building or stuff that's relevant to today's marketplace. And when you look at what we're doing to One Beach on the north waterfront, making it current and relevant to the marketplace, you look at La Jolla Commons 3, Steve will talk more about that. I think these are great assets and we continue to see opportunities up and down whether it's in Bellevue or down the following the Caltrain line from San Francisco south to San Francisco to opportunities down here in San Diego. So We do love office. We love multifamily. But right now, we're over 50% allocation to the office sector. Steve, do you have anything to add to that?
spk05: As Bob points out, the thing that we really love is wealth creation. And so we have this marketplace, as Bob pointed out, geographically. And we'll only do something that enhances the value of our stock. And and creates wealth. So that's our strategy. And there's sometimes that you pass and sometimes you punt and sometimes you run. Right now, we're just going to improve what we have until we see a significant opportunity. I've been buying stocks as I tell people I can buy real estate cheaper on Wall Street than I can on Main Street.
spk03: Yeah, that all makes a lot of sense, and I appreciate the football reference with the NFL draft coming up this week. Thanks for the time, guys.
spk05: I appreciate it. Thank you for your interest.
spk00: Thank you. And I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Ernest Rady for any closing remarks.
spk05: Okay. Thank you, Operator, and thank you all for your interest. Thank goodness we're getting to the end of this pandemic. and we can see each other again. We're going to Navy. We hope we'll have a chance to visit with you all. Thank you for your interest. We're doing the best we can for you, and we'll continue to do that. Again, have a good day. Thank you. And thank you guys in San Diego for doing such a great job on this call.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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