Ladies and gentlemen, thank you for standing by and welcome to the Q2 2021 American Assets Trust, Inc. Earnings Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I will now like to turn the call over to your host, Adam Wyll. You may begin.

Thank you, operator. Good morning, everyone. Welcome to American Assets Trust Inc's second quarter 2021 earnings call. Yesterday afternoon our earnings release and supplemental information were furnished to the SEC on Form 8-K. Both are now available on the Investors section of our website, americanassetstrust.com. A telephonic replay and on-demand webcast will also be available for this call over the next week. During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in 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. You are cautioned not to place undue reliance on these forward-looking statements. Actual events could cause our results to differ materially from these forward-looking statements for a number of reasons, including as it may relate to the continuing impact from COVID-19. And with that, I'll turn the call over to Ernest Rady, our Chairman and CEO, to begin the discussion of our second quarter 2021 results. Ernest?

Thanks, Adam, and good morning everyone. We are making great progress on all fronts as we focus our efforts on our rebound from COVID-19 impact by enhancing and amenitizing existing properties, acquiring new accretive properties like Eastgate Office Park in Bellevue, which the team will talk about more in a bit, retaining and adding new customers to our portfolio, furthering our development of La Jolla Commons, of which we recently bottomed out our excavation and otherwise remain on time and on budget, and of course, growing our earnings and net asset value for our stockholders. We have been through hard times before and each time we have emerged stronger, which remains our expectations and mine now. I want to mention that the board of directors has approved a quarterly dividend of $0.30 per share for the third quarter, an increase of $0.02 per share, or 7% from the second quarter, which we believe is supported by our increased collection efforts in the second quarter, improving traffic in Waikiki at our Embassy Suites, and our expectation for operations to continue trending favorably in the near-term. I'm also pleased to announce that the board has appointed Adam Wyll to the position of President in addition to his Chief Operating Officer role and title. As many of you know, Adam is a valuable and hard-working member of our executive team, and this title describes the breadth of responsibilities and leadership that he has successfully taken on prior to and during the pandemic, as well as the confidence our board, myself, and our management team have in him to manage in partnership with our excellent executive team the day-to-day operations of AAT. I personally am blessed with excellent health, and this company is very important to me. I intend to continue my role as Chairman and CEO for the foreseeable future. However, it is very important to our board, myself, and shareholders that this company will always remain in very capable hands and that we are fortunate to have such a great management team and group of associates at AAT, all of whom work together as we continue on as a best-in-class REIT. Adam, Bob, and Steve will go into more detail on our various asset management segments, collections, and financial results. And we will be available for any questions you may have at the conclusion of our prepared remarks. On behalf of all of American Assets Trust, we thank you for your confidence and allowing us to manage your company and for your continued support now more than ever. And now, I'm going to return it back to our newly elected President, Adam.

Thanks, Ernest. I very much appreciate the kind words and leadership opportunities, none of which would have been possible without your mentorship, not to mention the daily collaboration with such an incredible management team and top-notch colleagues. We continue to feel bullish about our portfolio, particularly with government restrictions lifted in all of our Mainland markets and Hawaii having lightened its reopening restrictions considerably, and we're seeing firsthand consumer behavior reverting to pre-pandemic levels with packed parking lots and many shoppers at all our retail properties. We're already seeing many of our retailers with gross sales above pre-pandemic levels, and our restaurants recovering, which is very encouraging. Our collections have continued to improve each quarter with a collection rate above 96% for the second quarter. Furthermore, we had approximately $850,000 of deferred rent due from tenants in Q2 based on COVID-19 related lease modifications, and we have collected approximately 94% of those deferred amounts, which further validates our strategy of supporting our struggling retailers through the government-mandated closures. Remaining collection challenges at this point are primarily with a handful of local retailers at our Waikiki Beach Walk property, but with Hawaii tourism back in large numbers, we believe we'll have an opportunity to rebound to be viable long-term, especially once Asian countries relax their travel restrictions to Hawaii later this year or early next. Additionally, we are seeing positive activity engagement with new retailers, including mid-box retailers; about half of our over 250,000 square feet of vacant retail space is in lease negotiations or LOI stage, deals that we believe we have a good likelihood of finalizing. And the vast majority of our retailers are renewing their leases at flat to modest rent increases. On the multifamily front, with new management in place at Hassalo, we are currently 99% leased, and asking rents are trending up almost 20% since December 2020. Multifamily collections have been more challenging in Portland due to eviction protection still in place for the next month or so, but we are doing everything we can to stay on top of that, which includes government rental assistance programs from which we expect meaningful disbursements soon. In San Diego, our multifamily properties are currently 97% leased, and we have leased approximately 90% of the 133 master lease units that expired less than two months ago and expect the remaining to lease over the next few weeks. Asking rents at our multifamily properties are also trending up in San Diego, almost 10% since December 2020. With that, I'll turn the call over to Bob to discuss Q2 financial results in more detail.

Good morning, and thank you, Ernest and Adam. Last night, we reported second quarter 2021 FFO per share of $0.51 and second quarter 2021 net income attributable to common stockholders per share of $0.15. From my perspective, I believe we are seeing the beginning of the recovery story for AAT that we have been talking about for the last six months with embedded growth into 2022 and beyond. As we have previously shared with you, let me share several data points that support my belief. First, as Ernest previously mentioned, the board has approved an increase in the dividend to its pre-COVID amount of $0.30 per share, based on the continued improvement in our collections as expected. The overriding factor is the strong results we're seeing at the Embassy Suites Hotel in Waikiki, beginning in mid-June and increasing into July with pent-up demand. Q2 paid occupancy was 67%, and for the month of June by itself, it reached approximately 83%. The average daily rate was $274 for Q2 and approximately $316 for the month of June. RevPAR, or revenue per available room, was $184 for Q2 and approximately $262 for the month of June. It is definitely heading in the right direction. Effective July 8, all travelers into Hawaii who are vaccinated in the U.S. can skip quarantine without getting a pre-travel COVID test by uploading proof of their vaccination to the state of Hawaii safe travel website. Oahu is still under Tier 5 of its reopening plan until Hawaii’s total population is 70% fully vaccinated, which should occur in the next month or two. Bars and restaurants in Oahu can be at 100% capacity as long as all customers show their vaccination card or a negative COVID test on entry. The Japanese wholesale market accounted for approximately 35% to 40% of our customer base pre-COVID. Japan is currently just 9% fully vaccinated, though with its current pace of over 1 million vaccines daily, Japan is expected to complete vaccinations by this November and start issuing vaccine passports in the next 30 days in anticipation of opening up international travel. In the meantime, there is sufficient pent-up demand from U.S. West and Canada that is expected to keep the hotel occupied and on track with this recovery. Secondly, looking at our consolidated statement of operations for the three months ended June 30, our total revenue increased approximately $7.8 million over Q1, a 9.3% increase, with about 37% driven by the outperformance of the Embassy Suites Hotel as California and Hawaii began to reopen travel. Additionally, our operating income increased approximately $6.3 million over Q1 2021, a 31% increase. Third, same-store cash NOI overall was strong at 23% year-over-year, with office consistently strong before, during, and post-COVID and retail showing strong signs of recovery. Multifamily was down primarily due to Pacific Ridge Apartments at 71% leased at the end of Q2, due to the recurring seasonality of students leaving in May, including the expiration of the USD master lease, with new students leasing over the summer before school starts in late August. Generally, approximately 60% of our 533 units at Pacific Ridge are leased by students with the USD campus right across the street. As of this week, we are approximately 90% leased at Pacific Ridge, with about 150 students moving in over the next several weeks in August. Hassalo on Eighth in the Lloyd District of Oregon is a 657-units multifamily campus. At the end of Q1, occupancy was approximately 84% due to COVID and political challenges in the prior months. As of Q2, we have increased the occupancy to approximately 95%, but in doing so, we had to adjust the rent and increase concessions. Pacific Ridge and Hassalo on Eighth are the two factors that impacted our multifamily same-store this quarter. As Adam mentioned, asking rates have been trending favorably on our multifamily properties recently, which we expect to support meaningful growth going forward. Note that our same-store cash NOI does not include our mixed-use sector, which will return with Q3 and Q4 2021, after completing the renovation of the Embassy Suites Hotel during COVID. Fourth, as previously disclosed, we acquired Eastgate Office Park on July 7, comprised of approximately 280,000 square feet in a multi-tenant office campus in the premier I-90 corridor submarket of Bellevue, Washington, one of the top-performing markets in the nation. The Eastgate Park is currently over 95% leased to a diversified tenant base with in-place contractual lease rates that we believe are 10% to 15% below prevailing market rates for the submarket. Additionally, Eastgate Park recently obtained municipal approval for rezoning, increasing the floor area ratio from 0.5 to 1.0, allowing for additional development opportunities. The purchase price of approximately $125 million was paid with cash on the balance sheet. The going-in cap rate was approximately 6% with an unlevered IRR above 7%. We believe this transaction will be accretive to FFO by approximately $0.05 for the remainder of 2021 and $0.10 for the entire year of 2022. These four items are the data points that are indicating the beginning of AAT’s recovery story starting to unfold. Lastly, on Page 16 of the supplemental total cash net operating income, which is a non-GAAP supplemental earnings measure, that the company considers meaningful in measuring its operating performance is shown for the three months ended June 30 at approximately $58.7 million. If you use this run rate going forward, it would be approximately $234 million, which would exceed 2019 pre-COVID cash NOI of approximately $212 million. A reconciliation of total cash NOI to net income is included in the glossary of terms in the supplemental. Moving on, at the end of the second quarter, we had liquidity of approximately $718 million comprised of $368 million in cash and cash equivalents and $350 million of availability on our line of credit. Our leverage, which we measure in terms of net debt to EBITDA, was 6.0 times. Our focus is to maintain our net debt to EBITDA at 5.5 or below. Our interest coverage and fixed charge coverage ratio at the end of the quarter was 3.7 times. As far as guidance goes, we are in the middle of budget season now for 2022. We hope to begin issuing formal guidance again for 2022 on our Q3 2021 earnings. I'll now turn the call over to Steve Center, our Vice President of Office Properties for a brief update on our office segment.

Thanks, Bob. At the end of the second quarter, excluding One Beach, which is under redevelopment, our office portfolio stood at approximately 93% leased with less than 1% expiring through the end of 2021. Our top ten office tenants represent 51% of our total office space rent. Given the quality of our assets and the strength of the markets in which they are located, with technology and life sciences as key market drivers, our office portfolio is poised to capitalize on improving dynamics, especially in Bellevue and San Diego. Q2 portfolio stats by region were as follows: our San Francisco and Portland office portfolios were stable at 100% and 97% leased, respectively. City Center Bellevue was 93% leased, net of new amenities space under development, and San Diego was 91% leased, net of new amenities space being added to Torrey Reserve. We had continued success in Q2 preserving pre-COVID rental rates with 13 comparable new and renewal leases totaling approximately 50,000 rentable square feet, with over a 9% increase over prior rent on a cash basis and almost 15% increase on a straight-line basis. The weighted average lease term on these leases was 3.6 years with just over $7 per rentable square foot in TI’s incentives. We experienced some modest small tenant attrition during the quarter due to COVID, resulting in a net loss of approximately 16,000 rentable square feet or less than half a point of occupancy, none of which was lost to a competitor. Our outlook moving forward is one of positive net absorption, with our proposal activity picking up significantly. At this point in time, we are seeing smaller tenants willing to commit to longer-term leases at favorable rental rates. Even more exciting is the push to return to the office and the emerging large tenant activity and competition for quality larger blocks of space in select markets, including San Diego and Bellevue, where we currently have availability and active prospects. Our continued strategic investments in our current portfolio will position us to capture more than our fair share of net absorption as the markets improve. The renovation of two buildings at Torrey Reserve is near completion. We have aggregated large blocks of space to meet demand and take advantage of pricing power. We have active large deals in negotiations on both buildings. The final phase of the renovation will include a new state-of-the-art fitness complex and conference center serving the entire 14-building Torrey Reserve Campus. Construction is in full swing on the redevelopment of One Beach Street in San Francisco, set to deliver in the first half of 2022, and construction is nearly complete on the redevelopment of 710 Oregon Square in the Lloyd submarket of Portland. One Beach will grow to over 103,000 square feet, and 710 Oregon Square will add another 32,000 square feet to the office portfolio. As Ernest mentioned, construction is well underway on Tower 3 at La Jolla Commons, with expected completion in Q2, Q3 of 2023. We are encouraged by the emerging large tenant activity and competition for quality large blocks of space in UTC. Finally, leasing activity is robust for upcoming availability at Eastgate Office Park in suburban Bellevue, even prior to executing the exciting renovation plans under development to take this special property to the next level of quality and customer experience. In summary, our office portfolio is on offense as we move forward into the rest of 2021 and beyond. Operator, I'll now turn the call over to you for questions.

The first question comes from Haendel St. Juste with Mizuho.

Hi, this is Lydia on behalf of Haendel. Congratulations Adam. My first question is, can you discuss the status of La Jolla Commons, your new UTC development, and also the decision to build spec? And how are you thinking about the UTC market and expected return?

Why don't you handle the construction and then Steve will handle the leasing opportunity?

Sure, sure. I think so right now we are at the bottom of the hole as I mentioned earlier, and we are beginning the first phases of pouring our foundations. We remain on schedule, on-time, and on-budget. Our first concrete pour is going to be over 3,500 cubic yards of concrete and almost 430,000 pounds of rebar. There is a lot of work to do between now and August 14, but we remain confident in our ability to execute this.

And I think as we pointed out before, we were fortunate enough to buy it out during the last quarter of last year, and construction costs have escalated since, so it would cost us substantially more if we had to buy it today.

Well, as we've said before, you have not only life science venture capital flowing into San Diego at record rates, but also technology venture capital is flowing in as well. You have Apple, Amazon, Google, and Facebook; the big tech companies are taking advantage of the quality talent pool that has been developed here. The market dynamics are in our favor. We're the only pure office development coming out of the ground; the rest of the new developments are life science or lab-targeted buildings. Furthermore, in the three adjacent sub-markets of Del Mar Heights, UTC, and Sorrento Mesa, approximately 3 million square feet of office product has been, or is being converted to lab. So that's taking away competing inventory. We think we're well positioned to take advantage of that. The market demand continues to be strong for those large users, and there's not going to be much available product predicted for 2023 when we're delivering this building to the marketplace. So we're confident we're going to do well in leasing that building.

Lydia, I hope that answers your question and please say hi to Haendel for us.

Yes, that's very helpful. Thank you. And as a quick followup with office being the largest percent of ABR and NOI, are you at all worried about work-from-home and adding to your office exposure at this time?

I think our strategy is to focus on markets that are buoyant. If we were in markets that were not buoyant, I would indeed have more concerns than we do now. However, our strategy of having top-notch office space in some of the best markets in the country will allow us to outperform compared to less favorable markets, because growth is growth, and we're in the path of growth.

Anyone want to add anything to that?

I think he covered it well.

Yes. Okay. It's a good question, though. Everybody's asking what's going to happen if people return or don't return to the office. It will be different, but I think that well-located office in the path of growth will do extremely well, and that's our strategy.

Thank you. Our next question comes from Todd Thomas with KeyBanc.

Hi, thanks.

Good morning, Todd.

Good morning. First question I have is on the mixed-use on the hotel and hotel retail. Bob, I appreciate the color on June, and it sounded like performance has continued into July. Can you just provide some additional detail around July and maybe talk about the outlook for August and September in terms of bookings and, I guess, the outlook for occupancy and rates?

Yes, good morning, Todd. In terms of the data points for July, we're still gathering that information. However, we can see pent-up demand and the pace of bookings. July, August, and September represent peak season for the Embassy Suites hotel, which is seasonal. Generally, it tends to decline a little in the fourth quarter but picks up again at the end of December. For July, August, and September, we are expecting performance similar to, if not better than, what we experienced at the Embassy in the last half of June.

Just as additional color, if you recall, Todd, we used the pandemic downtime to refresh the rooms, paint the exterior, and deal with some maintenance issues. So we are ready when the tourism market does recover, and we expect a strong recovery.

Okay. And I guess, how should we think about the results in the quarter and think about what you're experiencing there relative to your expectations for 2021 or 2022? Looking at that NOI bridge you've provided, has the outlook for the mixed-use asset changed as we move further into the year?

Well, regarding the bridge we’ve shared with our investors and research analysts over the last year or so, we tend to update that at the next conference or presentation. My comment is that if you look at the total cash NOI and use that as a run rate, you're looking at around 238, and you can adjust that down for some non-recurring collections that occurred in Q2. Even then, after adjustments, you're still significantly higher than our 2019 cash NOI. We are witnessing the recovery, and we are now ahead of 2019 pre-COVID cash NOI. We expect to build upon that.

Bob's comments give me great confidence in saying that we are going to emerge from this better off than ever.

All right. And then on the retail portfolio, I was wondering if you could comment on the negative leasing spreads in the quarter and talk about the outlook for leasing going forward.

Bob, you want to handle that?

No – he just stepped out for a moment. Todd, your question was on the negative leasing spreads. Let me explain; some of the numbers reflect that because Quiksilver had some struggles at Beach Walk. Their lease was coming to an end, and we were having troubles with them. We replaced them with First Hawaiian Bank, and there was a dip in the lease rate between those, as Quiksilver's rates were done at a time when they were historically very high. We also had an art gallery in the middle of Beach Walk, where that lease was at a premium, and we had the opportunity to bring another quality gallery in at a good market rate. So, while leasing has improved and things have gotten better, the drop left a mark. I was surprised by the impact, but fortunately, I think that's a temporary issue due to specific lease transitions.

Additionally, to what Bob was saying, Todd is that when we replaced Quiksilver on the end cap of Kalakaua on Waikiki Beach Walk, the net impact of bringing in the bank was less than $0.50 about that both. The reason for that is because by replacing Quiksilver, we also terminated our sublease with the bank at that point in time. The sublease rent on that was $1.7 million a year. So that goes away. So it's a beneficial transaction overall.

From a macro point of view, we've always stated that 75% of all our properties are subject to a ground lease. Now 100% of our property has, we have simple title, so it's a very high-quality portfolio.

Okay. And just looking ahead, are you expecting more roll downs within retail, or do you think you’ve moved past that? It sounds like in retail, broadly, rents are firming up and fundamentals have improved quite a bit. Are you seeing that across your retail portfolio as well?

Yes, Todd, for the most part, things are starting to stabilize. There are still going to be ups and downs; some categories are still struggling due to the ongoing turbulence of COVID. However, looking ahead, we're in pretty good shape, but there may still be some turbulence. I know you've visited our Beach Walk property; it really shows an impressive rebound, and I'm quite bullish. I can see that as we sit in this new conference room and I look out at the increasing traffic, it's going to be a significant order for retailers.

All right. Thank you.

Thank you, Todd. Thanks for your interest.

Our next question comes from Craig Schmidt with Bank of America.

Good morning, Craig.

Thank you. Good morning. I was wondering when you think occupancy may return to Q4 2019 levels by the different sectors?

For which property are you talking about?

Retail for all property types.

Yes. Well, multifamily is going to be there; it's almost there now. It's one of our properties, which we're repositioning is 100% leased now. As for Pacific Ridge, your guess is as good as mine, but things are improving, not worsening, which is a good sign. As for office, we've never had a decline in occupancy—it’s more on the upswing.

We've had some attrition over the last year; I can go into detail on that. From Q2 2020 to Q2 2021, it was about 139,000 feet of attrition; about 21,000 feet of our amenities spaces will be absorbed in the next two quarters as we enhance our buildings. We've measured two projects that are now growing in size, 26,000 square feet and 11,000 square feet, so that will offset the losses. Our portfolio is solid, we have great assets, and we continually generate increasing rents even through COVID. As I previously stated, I expect substantial net absorption in our office portfolio moving forward.

That strategy is going to produce substantial shareholder accretion to value, and that's our strategy. We believe that in order to achieve these increased rents, we have improved the properties and manage them better, thanks to Steve's leadership. So we remain optimistic about our office portfolio.

It's a steady climb, but I can't say when we'll recover to Q4 2019 levels; it could be a year out or a year and a half. Sometimes it's one step forward, two steps back; it's reliant on consumer spending, which I think will be favorable, but it will take time.

Our retail properties are well positioned. Our management in retail will outperform, primarily due to excellent management and prime locations. In terms of the broader industry, we will do as well as anyone else, but there is always some uncertainty involved. That's a great question, Craig.

Great. Just a little more color—Is there enough pent-up demand on domestic travel to Hawaii to make up for Japan, which it sounds like really won't get going until November or later? Given the recent brief reopening, you've done very well.

Well, the Embassy Suites has been a very pleasant surprise. During COVID, it broke even, which exceeded our expectations. There has been a rebound from domestic demand, but I view domestic demand as the cake; the icing is the demand from Asia. Once that market unfolds, we will return to pre-COVID levels.

Yes, to answer your question, Craig, yes, there is sufficient demand from U.S. West and Canada to maintain high occupancy rates, around 80%. Our strategy at the Embassy is to keep it around 87% to 88% occupancy while pushing rates. There is less strain on the hotel when there is strong occupancy without being fully booked.

Great. Thanks for the color, guys. Bye.

Thank you, Craig.

And I'm not showing any further questions at this time. I'd like to turn the call over to our chairman, Ernest Rady for any closing remarks.

Again, thanks for your patience. We're glad to have the dividend back to where it was pre-COVID. We wish we hadn't had to go through COVID and reduce the dividend, but we’re pleased it's back. We regret the necessity, but we believed that survival was essential and conserving cash was our priority. As you all know, we had a bond offering, which was 4.5 times oversubscribed; we now have substantial liquidity and look forward to employing it in projects that will continue to enhance our net asset value and shareholder wealth. Thank you for your confidence in us, and we look forward to a great future.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.