American Assets Trust, Inc.

the American Assets Trust, Inc.' 's fourth quarter and year-end 2024 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 will be an opportunity 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. As a reminder, today's earnings call is being recorded. I would now like to turn the call over to Meliana Leverton, Associate General Counsel of American Assets Trust. Please go ahead.

Thank you and good morning. The statements made on this earnings call include forward-looking statements based on current expectations, which statements are subject to risks and uncertainties discussed in the company's filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements as actual events could cause the company's results to differ materially from these forward-looking statements. Yesterday afternoon, American Assets Trust's earnings release and supplemental information were furnished to the SEC on Form 8K. Both are now available on the Investors section of its website, AmericanAssetsTrust.com. It is now my pleasure to turn the call over to Adam Weil, President and CEO of American Assets Trust.

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. This approach, underpinned by our high-quality, irreplaceable, and diverse portfolio, robust balance sheet, exceptional management and employee team, and agile operating platform positions us to adapt to evolving market dynamics effectively. We remain confident that this strategy will enable us to grow earnings accretively and and drive sustained outperformance over the long term. In an environment where replacement costs for high quality properties continue to escalate, we believe today's valuations for premier assets like ours will look increasingly compelling in hindsight. This is particularly important as we address upcoming transaction activity later in our prepared remarks. Turning to our results, we are pleased with our continued strong performance across all segments. Building on back-to-back record FFO years in 2022, In 2023, 2024 marked yet another milestone as we achieved our highest FFO 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 Beachwalk Embassy Sweeps delivered its highest ADR to date in 2024. 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. This also reflects the strategic capital improvements we've made to enhance and amenitize 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 superior 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 best to capitalize on over time. Nevertheless, as you will 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. As you will have noted from our initial guidance, which Bob will give additional details on in just a moment, 2025 represents a reset of sorts for our FFO 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, we still anticipate continued positive momentum in our core operational performance over the ensuing years. But 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 3 and One Beach Street and maintaining conservative collection reserves to safeguard our financial position. 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. 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 quality and 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 administration's policies, which appear to be supportive of business growth through tax reductions and regulatory easing. We anticipate that these measures will further strengthen tenant confidence and contribute to increased leasing activity. 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 a 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-pandemic levels, with quarterly net absorption turning positive for the first time in three years. Our office portfolio closed the year at 85% lease, reflecting a decrease of 200 basis points compared to the prior quarter. This decrease is 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 received an $11 million termination fee in Q3 of 2024, as well as other tenant downsizing and attrition, contributed to the overall decline. 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 20,000 square feet, with an additional 105,000 square feet currently in lease documentation, including 53,000 square feet of net absorption. Notably, these pending deals that have not yet been executed include the top floor of or 16,000 feet at La Jolla Commons Tower 3 and 29,000 square feet at Timber Ridge and Suburban Bellevue, which will bring that property to 97% leased. Additionally, our exposure to GSA tenants constitutes less than 5% of our total office square footage and approximately 3% of total office rent. The majority of these GSA tenants are secured under firm lease agreements with at least three years remaining. 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. As of today, just under 8% of our office portfolio is scheduled for lease rollovers in 2025, with an average deal size of 7,000 square feet. We anticipate approximately 181,000 square feet of attrition from known move-outs at First and Main and 14 Acres, formerly Eastgate. Office leasing activity remains focused on high quality, modernized and fully built out spaces as tenants increasingly seek options that allow for immediate occupancy with minimal downtime and upfront capital investment. Following our prepared remarks, Steve Center will be available to address any questions regarding our office portfolio. Turning to our retail segment, representing 27% of our portfolio NOI, our best in class retail segment continued to excel in 2024 with properties that dominate their trade areas and are at 95% lease with 5% same-store NOI growth in 2024. Taking into account the renewal assigned so far in 2025, we have less than 4% of our retail portfolio expiring in 2025. We are encouraged by positive leasing spreads, 6.5% 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 and the affluent supply-constrained markets in which our properties reside. We remain confident in our ability to backfill known vacancies, including our two-party city locations that have closed or are about to close, which will constrain 2025 same-store retail NOI numbers. And we are otherwise monitoring other retailers like Petco, Michaels, and Angelica Theaters. Finally, with respect to our multifamily segment, we realized same-store cash and OI 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 worked to push our lease percentage 3% higher in what is typically a seasonally slower period with end-of-the-year concessions granted in the markets. Recent trends indicate improving rental rates, and we anticipate further momentum in the spring and summer leasing seasons. Net effective rents for our San Diego multifamily leases are now 2% higher year over year compared to the fourth quarter of 2023. 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 3.5% through 2029. Up in the Pacific Northwest, our Hasolo and 8th community in Portland 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 at Hasolo are up about 3.5% year-over-year compared to the fourth quarter of 2023. 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 in Portland, where there has been some supply shock that is still being absorbed, we expect new completions to slow in 2025, with vacancy rates expected to decline as well, which hopefully sets the stage for rent growth later this year or next. Next, as mentioned earlier, I'm pleased to share a few updates on our long-term portfolio strategy as we are constantly evaluating opportunities to maximize value for our stakeholders and position ourselves for long-term growth. Notably, we have entered into an agreement to sell Del 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. The sale, expected 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. By concentrating on markets where we have established 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 the circumstances dictate. Additionally, we are an 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 family for decades, has rents that we believe are significantly below market, possibly 30% plus, with potential densification opportunity. We believe with certain upgrades, process improvements, and our form of management that we can generate an effect an attractive unlevered IRR over a long-term hold. The acquisition of this almost 200-unit property is expected to close in late February, subject to customary closing conditions. While Del Monte Center is being sold at a higher current yield than the initial yield on the prospective multifamily community acquisition, the decision reflects our focus on long-term value creation rather than short-term yield metrics and further enhances our multifamily portfolio in a high-growth market. Lastly, I'm pleased to announce that the Board of Directors has approved a 1.5% increase in our quarterly dividend to $0.34 per share for Q1, reflecting our confidence in the company's long-term financial performance and outlook. The dividend will be paid on March 20th to shareholders of record as of March 6th. On behalf of the entire team at American Assets Trust, including Ernest, 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 initial guidance in more detail.

Thanks, Adam, and good morning, everyone. Last night, we reported fourth quarter and year-ended 2024 FFA per share of 55 cents and $2.58, respectively. Fourth quarter and year-ended 2024 net income attributable to common stockholders per share was 15 cents and 94 cents, respectively. Fourth quarter FFO decreased by approximately $0.16 to $0.55 per share compared to Q3 2024, primarily due to $0.15 in termination fees received in Q3 that were not present in Q4, and a $0.01 decline in revenue at Embassy Suites Waikiki reflecting expected seasonality between the high Q3 and lower Q4 demand. Same-store cash NOI for all sectors combined was 2.6% growth year-over-year for the fourth quarter, and 1.4% growth for the full year ended 2024, as compared to the full year ended 2023. Meanwhile, all sectors have positive same-store cash NOI in the fourth quarter, except for the office sector, which was negative 2.8%, primarily due to known move-outs in our Tory Reserve and Timber Springs properties. 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, and $400 million of availability on a revolving line of credit. Additionally, as of the end of the fourth quarter, our leverage, which we measure in terms of net debt to EBITDA, was 6.0 times on a trailing 12-month basis and 6.6 times on a quarter annualized basis. Note that subsequent to year-end, we repaid our term loan B, term loan C, and series C notes, totaling $325 million in the aggregate, without penalty or premium, utilizing cash on hand. Our objective is to achieve and maintain long-term net debt EBITDA five and a half times or below. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.4 times on a trailing 12-month basis. Let's talk about 2025 guidance. We are introducing our 2025 FFO per share guidance range of $1.87 to $2.01 per FFO share with a midpoint of $1.94 per FFO share, which is approximately a 24% decrease in over 2024 actual of $2.58 per FFO share. In our supplemental document, which was furnished yesterday via 8K and is available on our website, we have provided a high-level reconciliation of 2024 actual FFO to our 2025 forecasted FFO on our corporate guidance page. However, for those that would like a more detailed analysis of the 2024 to 2025 FFO reconciliation, I'm about to share that as well. So let's begin. Starting with 2024 ending FFO of $2.58 per share, there are 11 items combined that make up the decrease. They are, number one, nonrecurring termination fees occurring in 2024 are not included in 2025 guidance. Combined, they are expected to decrease FFO by approximately 15 cents per FFO share in 2025. Number two, non-recurring litigation income in 2024 is not included in 2025 guidance and is expected to decrease FFO by approximately 13 cents per FFO share in 2025. Number three, 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 in 2025. Broken out by each sector as compared to 2024 and excluding reserves in each case, same-store office cash NOI is expected to decrease approximately 1% or 2 cents of FFO share. Same-store retail cash NOI is expected to increase approximately 1.6%. or 1.5 cents per FFO share. Same-store multifamily cash NOI is expected to increase approximately 2.7% or 1.3 cents per FFO share in 2025. Same-store mixed-use cash NOI is expected to stay flat in 2025. 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 and or manage. Our 2025 guidance for the Embassy Suites Hotel in Waikiki is based on the following. Revenue is expected to increase approximately 5% in 2025. Operating expenses are expected to increase 7% in 2025 due to the inflationary impact on operating expenses in Hawaii. such as food costs, labor, and overhead. Average occupancy is expected to increase by approximately 2% in 2025. Average ADR is expected to increase approximately 4% from $371 in 2024 to $384 in 2025. Average REVPAR is expected to increase approximately 6% from $319 in 2024 to 337 in 2025. Of note, our 2024 NOI for the Embassy Suites Hotel increased by approximately 6% compared to 2019, even without the majority of our guests from Japan, who remain slow to return to Oahu due primarily to continued weakness in the yen. Non-same-store cash NOI is comprised of two office buildings that were recently completed. One is One Beach Street on the north waterfront of San Francisco, overlooking the Golden Gate Bridge and Alcatraz. The other is La Jolla Commons 3, which is located in University Town Center, sub-market of San Diego, and which was completed in Q2 2024 and is approximately 19% leased as of the year end. For 2025, we expect the operating expenses to exceed the operating revenue, as we are in the lease up stage, which will decrease FFO by approximately $0.04 per FFO share. Credit reserves is number five, are included separately and will decrease FFO by approximately $0.05 per FFO share. Of the $0.05 of credit reserves, approximately $0.02 of the reserves are allocated to the office sector, and $0.03 of the reserves are allocated to the retail sector. These reserves constitute under 1% of our total expected revenue in 2025, which we believe is a reasonable percentage. Similar to last year, we are taking a conservative view of the potential risk with certain tenants, particularly in this somewhat unpredictable economic environment, and hope to reduce these amounts each quarter as rents are paid. G&A is budgeted to increase slightly in 2025 and decrease FFO per share by approximately one cent. Number seven, interest expense is expected to increase in 2025, primarily due to the termination of capitalized interest expense related to La Jolla Commons III and the issuance of our 6.15% senior notes last fall, which combined is expected to decrease FFO per share by approximately 6 cents in 2025. Number eight, other income is expected to decrease FFO by approximately 4 cents per FFO share in 2025, resulting from the payoff of our maturing debt indebtedness subsequent to the issuance of our 6.15% senior notes last fall, the proceeds of which will no longer be earning interest income in the bank. Number nine, 2025 gap adjustments are expected to decrease by approximately $5.5 million, which is expected to decrease FFO by approximately $0.07 per share. The majority of gap adjustments relate to the net effect of straight-line rents, but should have no effect on the overall rent income. Number 10, Del Monte disposition is expected to decrease FFO by $0.11 for FFO share 25. Number 11, multifamily acquisition is expected to increase FFO by 2 cents per FFO share 25. These adjustments when added together will be approximately 64 cents per FFO share and represent the net decrease in our 2025 midpoint over 2024 FFO per share. While we believe the 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 perform towards the upper end of this guidance range. In order to do that, among other things, number one, speculative office leasing needs to occur in the first half of the year. Number two, the office or retail tenants that we reserve for need to continue to pay rents through the year. And number three, we need to have increasing rents and occupancy and or less expenses than budgeted in our multifamily facilities. Of note, as I previously mentioned, we have several hundred million dollars of invested capital in La Jolla Commons III, One Beach Street development and renovation, and our suburban office portfolio in Bellevue, Washington. All great properties and highly amenitized in great locations. Our focus is getting each of these properties leased as quickly as possible to high-quality tenants over the ensuing years. At a 93% lease document we should be able to add over 30 cents of FFO per share, which will lower our net debt to EBITDA, increase our NAV, and allow us to continue to grow the company. We are excited for the future ahead of us. 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've 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 also want 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. I'll now turn the call back over to the operator for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Todd Thomas with KeyBank Capital Markets. Please go ahead.

Hi, thanks. Good morning. Bob, I just wanted to touch on the 30 cents of upside, which you reiterated again in your comments from La Jolla, One Beach, and the three office assets in Bellevue. Appreciate the detail in the guidance with some of the moving pieces there, but can you just talk a little bit more about what you might expect in terms of that beginning to be recognized, whether there's any contribution anticipated to be realized in 2025 during the year from some of those assets in aggregate, or will cash flow not really start to improve at all during the year with the cap interest and real estate taxes burning off, I guess, primarily at La Jolla?

Thanks, Tom, for the question. Yeah, I mean, the 93%, first of all, is based on our underwriting for these properties. And we've underwritten them. We knew that the renovation would take place in suburban Bellevue, and that process is just being finished in the first quarter. So I think the future is bright on that. I'll see, talk more in terms of what the activity is on there. And La Jolla Commons 3, when we underwrote that, the future looks bright. What we've seen is it takes longer to sign leases. But I think it'd be better to have Steve really speak to what the current environment is on each of these properties. Steve?

Sure. Up in Bellevue, Todd, at what we now call Timber Ridge, We're in lease documentation with a 29,000 foot full building lease that'll take that property to 97% lease. And we have an existing tenant that needs to expand and that will perhaps take our last vacancy there. So that project could reach 100%. At Timber Springs, which is formerly Bell Spring 520, we're in negotiations with a full floor deal for the majority of the vacancy in that project as well. So activity's good. And now in terms of timing of seeing the rent come in for those things, it'll be later this year. December 1st is the commencement date of the deal up at Timber Ridge. And the full floor deal at Timber Springs will likely commence in 26. In terms of La Jolla Commons, we've got our third floor tent that will commence in September. The spec suite tents are One's in place and already paying rent. We're in negotiations with another for 9,000 feet that we commence later this year. It's a spec suite, so they can move in within months. And then the deal we're negotiating on the top floor of the penthouse, their goal is to move in in November, December. So that's kind of the timing of that activity. In terms of proposals that are active right now, They require full build-outs. Those are really likely to hit 26.

Okay. I guess if we're thinking about, you know, sort of the cadence of FFO during the year, you know, thinking about, you know, 26 a little bit, 27, right, is there a point in the model where you have confidence that, you know, FFO will potentially bottom or inflect? It sounds like late 25 might sort of mark the bottom there. with some of the commencements that might be scheduled at these assets, you know, late in the year and into early 26. Is that sort of a fair assessment?

Yeah, I would say that, you know, mid to late year, because it takes time. I mean, once you sign the lease, you've got to get the permits, you've got to get things going. It's just, you know, I think in Adam's commentary, too, is that, you know, we're –

we're not expecting anything in the first two quarters one of the things todd we're doing to accelerate that is an extensive spec we're continuing our specs we program we've been doing it since 2018 but but uh we've got we've got a big program this year uh to deliver suites in the second half of the year as as adam mentioned our average deal size is about 7 000 feet uh 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 going to be ready to go. We've had really good success with it. A good example of that is we built a 4,200-foot spec suite four years ago, leased it to a pharma company, and now they're taking another spec suite that's 9,200 feet, and they're moving in in July. So we're going to continue that program, deliver ready-to-go spaces, which should accelerate much of that demand. Okay.

And then if I could switch over to the disposition and acquisition to Del Monte Center, can you just better help us understand the FFO dilution there? It's 11 cents, so that's $8.5 million. I'm just curious if you can provide some additional detail around 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?

This is Adam. We're not in a position really to go into too many details on either of the transactions, considering they're both in escrow. So we're trying to limit our comments other than to say this is what we feel like is better positioning for us for long-term growth. I would just point out what we're selling Del Monte 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 it while we continue to look for source transactions. 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'd give the public. But for now, we don't want to jeopardize anything with these deals, considering where they are in the escrow process.

Todd, just to add to Adam's comment, is that we want to be respectful to the buyer and the seller of both those transactions. We're happy to give you more information once these transactions are closed.

Okay. All right. Thank you. Thank you, Todd.

The next question comes from Handel St. Juiced with Mizuno. Please go ahead.

Hi there. I think Mizuno makes baseball gloves. Mizuno, hey, guys. So I wanted to follow up on the Del Monte question. I get it you're in a position where you can't say much, but I guess I'm more curious just high level. You know, the decision to sell the asset here, which is your largest retail asset, It sounds like it's more of a decision around perhaps the asset maybe having less growth prospects long term and not necessarily maybe a view on wanting to cut back on retail. So maybe a bit more on that and just the strategic rationale here. And it sounds like multifamily is the intended use of proceeds here. An asset class you guys have talked about in the past wanting to get into, but The pricing there is a bit tight. It sounds like you're willing to incur a bit of dilution, but what type of multifamily assets could we see you go after? Smaller, perhaps adjacent to existing properties, assets perhaps that are maybe under construction or maybe offer some operational upside. Just curious how you're broadly thinking about not just the decision to sell, but the reinvestment and what type of profile assets in multifamily you're looking at.

Quite a mouthful, Handel. Just to start with your question on growth prospects for Del Monte Center, obviously not going to comment on that. The buyer of that can comment on that 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, 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 in our other markets. And that's kind of something that's been driving that decision. And we've been looking for a right entry point to 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 some with a little bit of hair on it where we can add value and come in, 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 on the multifamily side, generally in the markets we're already in. There's not a ton trading that hit those qualifications that we're looking for. So when we saw this one come through, and we'll give Ernest credit because he had a bullseye on this one once he saw it, it just made a ton of sense for us, and it's exactly what American Assets is built to do.

And I think that, Adam, as you said earlier, after it closes, we'll explain the rationale. but I think there is a compelling rationale for the transactions.

Right. And so we continue to look for multifamily handout, but we're not just solely focused on that. We would look for retail opportunities as well. 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.

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 kind of reduction in the AFFO expectation for this year. And so now kind of looking at where your coverage ratio is, at least on our estimates, around 100%, suggests a more limited financial flexibility to a degree. So curious on why the decision to to raise the dividend here now when you're cutting earnings expectations? And when do we think you can get back to your long-term AFO ratio target of around 80%, 85%?

Ford decided by increasing the dividend in 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, questions have been raised. 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 in leasing the great properties we have.

Hey, Handel, let me add to Erna's comments. Historically, since we did the IPO back in 2011, our internal... structure and our internal point was 85% dividend payout ratio. And we've generally been there or less. This time we're still under 100%. So anytime you're over 100% on a ratio, you're paying more than your free cash flow, which is not what we want to do. What we did is we've increased it half a penny per quarter, which is about $480,000 per quarter or less than $1.5 million a year. From the bigger picture of the balance sheet, we can afford that. We're still under or somewhere from a high 80s to low 90s percent on the payout ratio. I saw your number of 99%. We don't believe that is correct. But But it is either low 90s or high 80s, and 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.

Okay. And on that last point, what's your estimated annual free cash flow post-dividend in CapEx?

I don't have that right in front of me. I mean, we can pull up the supplementals.

Okay, we can come back to that one. Maybe last one on credit reserve. I think the five cent, maybe some color on the five cent credit reserve and what's some of the driving factors here. It feels a little elevated. And so I guess, are these in relation to previously known move outs or any new tenants involved there?

Thanks. I mean, I think it's less elevated than it was a year ago when we had a nine or 10 cent reserve hand out. There's two office tenants that we're keeping an eye on that are having some challenging business 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 Angelica Theater in our Carmel Mountain Plaza. And 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 let the investor decide. opposing our judgment.

Yeah, but just know that the Party City vacancies have been reflected in Bob's guidance, so there's no reserves on those, obviously, and there's interest already percolating in those sites, so we're hopeful to have news on those later this year.

Got it. Thank you, guys. Thank you. Thank you, Handel.

The next question comes from Dylan Berzinski with Green Street. Please go ahead.

Just a quick one on the party city boxes. I mean, is it your expectation that you'll sort of break these boxes up, or do you think you'll be able to get a tenant to sort of backfill it in its entirety?

We'll let Chris Sullivan answer that one for you, Dylan.

Hey, Dylan. So keep in mind, we have two party cities, but one is not a traditional party city. The one in Hawaii is a 5,000-foot space. That was their only franchisee. be leased as a 5,000-foot space. The other is in our Gateway Center down in National City. That's a 14,000-foot space, and we're seeking users that will be in the 14,000-foot range. It won't be split.

Great. 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 has sort of been slow. But, I mean, are you starting to see any green shoots on this front as it relates to larger tenants coming back to the market and looking to lease space?

You know, larger tenants, you know, in Bellevue, there have been some monster tenants that have shown up, which are great for the market. San Francisco, you're seeing the tenant size increase. It's still not quite full floor, but it's gotten better than the twosies, foursies that you're seeing when AI was just on, it still is active, but all the startups. So the size is increasing in San Francisco, which is good for us because one beach has big floor plates and it's not going to demise down to, you know, 5,000 foot increments. So that's heading in the right direction, but it's still, you know, overall it's, it's smaller tenants, it's right sizing tenants and, And the winners are going to be the properties that have the best amenities and the best offering, the best location, and that's what we have. And in terms of current activity, we're seeing a number of tenants growing. So I think Adam mentioned, you know, we've got 105,000 feet of new deals and lease documentation and 53,000 feet is net absorption. And the other thing that you're seeing is our weighted average lease term of the deals that are out in negotiations over 10 years. So we're seeing people go long, we're seeing them commit to space. So that's very encouraging.

Thank you. The next question comes from Ronald Camden with Morgan Stanley.

Please go ahead.

Hey, just a couple quick ones. Just circling back to sort of the office leasing fundamentals and so forth. I appreciate the comments on the pipeline and all the leasing that's been sort of done. I was just curious if you could just comment more on the types of tenants, what they're looking at, sort of incentives and so forth. And it sounds like you're maybe seeing signs of inflection is what I'm hearing from the sort of opening comments. And I'm wondering if that's the messaging. Thanks.

Sure. It's a broad spectrum of tenants from construction to wealth management to life insurance to all kinds of – there's really no one tenant type that's driving it. In terms of what we're seeing, tenants don't want to spend capital up front. So having spaces that are already completed or being willing to commit to longer term to build up the space for them. And you're seeing that, like I said, the weighted average term of 10 years. They're getting spaces that are custom 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 seeing is tenants don't want to write checks for their TIs.

Is this competitive? Not it, but what keeps us

First of all, customer service. You've instilled the strategy that we treat these people as customers. The term customer, we refer to them as customers rather than tenants. It's interesting. You hear it in the language. When we talk to Autodesk, for example, or we talk to Google, the language they use is partnership. That comes through where we treat them as partners. We collaborate. And you'll see we've downsized or right-sized a number of tenants, and we flexed with them. But we don't lose tenants to competitors. We lose tenants 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 the long term. And so our people that operate our buildings do a wonderful job of taking care of people. Our construction teams are excellent. In fact, you come away from you know, a TI experience and the tenants are very happy with the outcomes and the experience.

So, you know. 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 market.

That's really a good point, Ernest, that confidence in our ability to perform. You know, 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 secure debt on the building that that building doesn't have a loan against it. He was shocked and impressed and happy about that because so much of Portland is in distress. So our ability to execute is really a very important point in this environment.

Great. That's really helpful. My second question was just on the guidance. What are you assuming for same store for the office and the retail portfolio? And how does that even trend throughout the year? Thanks so much.

So, Ron, your question is, what's the impact on the same store? What is the same store for office and retail this year? Yeah, so on the same store, we're saying there's a 1% decrease in same store office cash NOI. And really that's a big portion of that. is, first of all, think about the tenant that we had the termination fee from in Q3. Well, that's going away. So Q4, it went down, and then the remainder of 25, until that gets leased, that goes away. You know, we've also had another big one is at 1st of May. We've had a tenant in there since the IPO called Clear Results. kind of a quasi-governmental organization utility. And they let us know during COVID that they are no longer working from the office, but they maintained their lease. So as of April 1st, that goes away, and that's going to be a significant decrease.

Great. And then the leverage levels? I'm sorry, what? Leverage levels.

Of debt?

Yeah, how does, like, where is it trending throughout the year?

That's, you know, that's in our supplemental. I mean, we're still net debt EBITDA has a six range on it. So I think we're in pretty good shape.

Hey, Ron, just a supplement. what Bob said on the same store, Cash NOI. He said that Office Cash NOI would be down 1%. 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 retail is up almost 1.5%, maybe a little bit higher. If not for Party City, that would have probably been another percent higher. And we have multifamily near 3% up. So segment-wise, they all seem to be trending fairly well. We just got to lease up the developments, basically.

That makes a ton of sense. Thanks so much. That's it for me.

We have to look at us as if we hadn't had these two extraordinary items. And on that basis, we're doing better. And the two extraordinary items give us an opportunity to lease out the space that this company prepaid. We're the same company we were before, only better.

Seeing 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.

So we're excited about the opportunities ahead and the strong foundation we've built to drive future growth. And our team, all 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 and all the questions and look forward to reporting good results going forward. Thank you, everybody.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.