American Assets Trust, Inc. Q4 FY2021 Earnings Call

Hello and thank you for joining us for the Q4 and Year End 2021 conference call for American Assets Trust, Inc. I will now turn the call over to Adam Wyll, President and Chief Operating Officer. Please proceed.

Thank you, operator. Good morning, everyone. Welcome to American Assets Trust Inc.’s fourth quarter and year end 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. 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 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 will turn the call over to Ernest Rady, our Chairman and CEO, to begin the discussion of our fourth quarter and year end 2021 results. Ernest?

Thank you very much, Adam, and good morning everyone. First and foremost, I would like to wish all of our stakeholders continued health and safety as we hopefully find 2022 ushering in a more manageable phase of this pandemic. As you all know, we remain very optimistic with the high-quality irreplaceable properties and asset class diversity of our portfolio combined with the strength of our balance sheet, ample liquidity, top-notch management team. That said, with all due modesty, our efficient operating platform will allow us to grow our earnings and net asset value for our shareholders on an accretive basis over the long term. I recall at the outset of the pandemic, I thought we might be in for another Great Depression like the 1930s, but thanks to the incredible ingenuity and perseverance of Americans and modern science, particularly regarding the push for effective vaccines and antiviral drugs, the U.S. economy only felt a limited recession. Meanwhile, capital markets rebounded quickly in most industries. However, our economy is less managing the unprecedented fiscal stimulus that no doubt has contributed. There was likely to be more than short-term inflation. Along those lines, with the Consumer Price Index experiencing its largest gain in 30 years, approximately 7%, we are confident in the thesis of our portfolio being an effective protection against inflation based on three key factors. First, our ability to increase both base rents and annual rent escalators as leases expire within our portfolio to keep up with inflation. Second, our visibility of significantly higher demand and limited supply in our markets for higher quality assets, like the ones we own. And third, the replacement cost of our properties continues to rise. This is particularly more compelling with high barrier to entry, modern amenitized properties like ours that are in the path of growth, education, and innovation. Therefore, we can likely withstand the impacts of long-term inflation, if not ultimately thrive. These are amongst the reasons why I personally have purchased our stock during prior open periods, as I believe we are trading significantly below our net asset value, and I believe that the recent brokered transactions in our markets and asset classes support this view. With respect to our financial results, I was pleased to see our considerable rebound in 2021 compared to 2020 and continue to be optimistic about our growth in 2022 and particularly the years thereafter. As such, I want to mention that the Board of Directors has approved a quarterly dividend of $0.32 a share for the fourth quarter, an increase of $0.02 or approximately 7% from our previous dividend, which we believe is supported by our financial results and the expression of our Board’s confidence in the embedded growth of our portfolio this year and beyond. The dividend will be paid on March 24 to shareholders of record on March 10. Finally, on the development front, both La Jolla Commons III and One Beach Street remain on time and on budget. And though we remain optimistic by the leasing process, we do not have any specific views to share on that front at this time. Adam, Bob, and Steve will go into more details on our various asset segments, financial results, and guidance. I will be available for any questions that you may have at the conclusion of our prepared remarks. Again, on behalf of all of us at American Assets Trust, we thank you for your confidence and allowing us to manage your company and for your continued support. I am now going to turn the call back over to Adam. Adam, please.

Thanks, Ernest. In 2021, our fiscal and operational results showed a meaningful rebound from 2020, which, as Bob will describe in a few minutes, we expect to see continued growth in 2022 and beyond. Among a few of our accomplishments in 2021, we successfully closed our inaugural public bond offering of $500 million that was over 4x oversubscribed, acquiring two office projects in Bellevue, Washington for a total of approximately 440,000 square feet for a combined cost of approximately $210 million. This further established our critical mass and economies of scale within our Bellevue office portfolio, a market in which we believe the municipality has properly planned for growth with light rail alignment and other transit nodes, and with a spectrum of housing options for workers intended to minimize commutes and help create up-and-coming urban neighborhoods around downtown to capitalize on what we believe will be continued growth on the East Side markets. We also leased approximately 255,000 square feet of office space and 410,000 square feet of retail space and increased our portfolio of multifamily leased occupancy from 86% to 96% year-over-year. We also maintained our investment grade credit rating from all three major U.S. credit rating agencies and we remain vigilant and focused on the safety and well-being of our stakeholders, achieving a 99% COVID-19 vaccination rate among all AAT employees. Additionally, we increased our collection percentage sequentially for the six consecutive quarters since the onset of the pandemic to over 98% in Q4, including collecting over 96% of deferred rent payments due in Q4. We also continued our ESG initiatives, focusing on the positive impact of being both a steward of the environment as well as fostering a culture of diversity and inclusion, which has positively impacted the strength of our business and our partnerships with our communities. Along those lines, we are pleased to have increased our GRESB score in 2021 for the third consecutive year, placing in line with our peer average and above GRESB averages. We also increased our total dividends by 16% in 2021 over 2020 and negotiated our amended and restated credit facility, which closed a few days into this year, raising our borrowing capacity, extending the maturity dates of our revolver and term loan, and transitioning the borrowings to SOFR. As Ernest mentioned, we furthered development activity at La Jolla Commons and One Beach on time and on budget despite the headline headwinds of supply chain shortages, vendor staffing challenges, and governmental delays. Meanwhile, on the external growth front, we continue to be active yet disciplined as we evaluate acquisition opportunities in our target markets and various asset classes, while also keeping an eye on our cost of capital. Finally, I am pleased to announce that we promoted two key employees this month into Vice President positions: Abigail Rex, who is now our VP of Multifamily San Diego, and Emily Mandic, who is our VP Regional Manager at Portland, Bellevue. Their promotions were based on merit and their accomplishments with AAT, and we are excited to further strengthen our commitment to diversity among our management team. With that, I will turn the call over to Bob to discuss financial results and guidance in more detail.

Thanks, Adam, and good morning, everyone. Last night, we reported fourth quarter 2021 FFO per share of $0.54 and fourth quarter of 2021 net income attributable to common shareholders per share of $0.14. Fourth quarter results are primarily comprised of the following: actual FFO decreased in the fourth quarter by approximately 5.3% to $0.54 per FFO share compared to the third quarter of 2021 primarily from the following four items. First, as you may recall from our Q3 earnings call, our expectation for Q4 was for approximately $0.47 per FFO share. The assumption we made for Q4 was our best estimate at that time, but what increased the FFO from our Q4 guidance was the following four items. First, our Waikiki Beach Walk mixed use property contributed $0.04 per FFO share, half from Embassy Suites and half from Waikiki Beach Walk retail, which we did not anticipate in Q4 due to the lower than average tourism as a result of the Delta and Omicron variant. Second, our retail portfolio in San Diego performed $0.01 of FFO better than expected. Third, our office portfolio performed $0.01 of FFO better than expected. And fourth, our multifamily performed $0.01 of FFO better than expected. Adding this $0.07 of FFO per share to our Q3 guidance of $0.47 for Q4 gets you back to where we ended at $0.54 per share of FFO for the fourth quarter. Same-store cash NOI overall was strong in 2021, ending at a 20% growth year-over-year for the fourth quarter. It should also be noted that mixed-use was added back to the same-store pool in Q4. Absent the mixed-use sector in Q4, same-store cash NOI would have been approximately 11.6% growth, which we are still very pleased with. As it relates to liquidity at the end of the fourth quarter, we had liquidity of approximately $539 million, comprised of approximately $139 million in cash and cash equivalents and $400 million of availability on a revolving line of credit. Our leverage, which we measure in terms of net debt to EBITDA, was 6.8x. Our objective is to achieve and maintain a net debt to EBITDA of 5.5x or below. We do recognize that our net debt to EBITDA has increased during COVID as a result of lower EBITDA primarily from our retail portfolio and our mixed-use property at Waikiki. We believe these reductions are temporary and our expectation is that our EBITDA will increase over time to pre-COVID levels. Our retail centers on the Mainland are generally full with increasing sales, but still have a way to go. As you may recall, we have historically provided a pro forma cash NOI bridge to help all stakeholders understand the embedded growth that we see in our portfolio as well as what we are anticipating in the next year or two. We expect to update our cash NOI bridge to reflect our expectations for 2023 in the next 60 days or sooner. Our current cash NOI bridge through 2022 reflects that cash NOI in 2021 has finally surpassed 2019 cash NOI and is expected to increase another 6% in 2022. This increase has largely resulted from strong consistent growth from our office portfolio. This also shows the importance of a high-quality diversified real estate portfolio, such as American Assets Trust. I also need to point out that cash NOI is a non-GAAP supplemental earnings measure, which the company considers meaningful in measuring its operating performance. A reconciliation of cash NOI and net income is included in our supplemental material, which you can access on our website. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.8x. Let’s talk about 2022 guidance. We are introducing our 2022 FFO per share guidance range of $2.09 to $2.17 per FFO share with a midpoint of $2.13 per FFO share, which is approximately a 6.5% increase over the 2021 actual of $2 per FFO share. Let’s walk through the following nine items that comprise the increase in our 2022 FFO guidance over 2021 FFO actual. First, same-store office cash NOI is expected to increase approximately 9% or $0.14 per FFO share. Second, same-store retail cash NOI is expected to decrease approximately 5% or $0.05 per FFO share. Third, same-store multifamily cash NOI is expected to increase approximately 5% or $0.02 per FFO share. Fourth, same-store mixed-use cash NOI is expected to increase approximately 15% or $0.03 per FFO share and is attributable to approximately $0.01 of FFO to Waikiki Beach Walk retail and $0.02 of FFO to Embassy Suites Waikiki. All four sectors combined above are expected to generate a total same-store cash NOI growth year-over-year in ‘22 of approximately 5% or $0.14 of FFO per share. Fifth, non-same-store guidance includes our two acquisitions in Bellevue, Washington in 2021. Combined, they are expected to contribute approximately $0.07 of FFO per share in 2022. G&A is expected to increase approximately $3 million and decrease FFO by $0.04 per share. Interest expense is expected to be flat. Other expense is expected to decrease by approximately $4.4 million and increase FFO by approximately $0.06 per FFO per share year-over-year, resulting from a one-time early prepayment fee on the $150 million unsecured loan paid with a portion of the proceeds from our inaugural bond offering in January of 2021, which will not occur in 2022. GAAP adjustments primarily related to straight-line rents will decrease FFO by approximately $7.5 million or $0.10 per FFO share. These adjustments when added together will be approximately $0.13 per FFO share and represent the increase in 2022 over 2021 FFO per share. While we believe the 2022 guidance is our best estimate as of this earnings call, we also think it is possible that we could outperform the upper end of this guidance range in both the multifamily and in the mixed-use sector of our portfolio. To do that, tourism and travel to Waikiki on the Hawaiian Island of Oahu needs to return in full force, including our guests from Japan. We are cautiously optimistic that the Embassy Suites Waikiki will outperform our guidance, but we won’t know that until most likely the end of Q3 2022. As always, our guidance and our NOI bridge in these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances, or repurchases for 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 will now turn the call over to Steve Center, our Senior Vice President of Office Properties for a brief update on our office segment.

Thanks, Bob. At the end of the fourth quarter, net of One Beach, which remains under redevelopment, our office portfolio stood at 93% leased, with 8.5% expiring in 2022. Our office portfolio is gaining momentum. In the fourth quarter, we executed 18 leases totaling approximately 130,000 rentable square feet, including approximately 31,000 rentable square feet of comparable new leases, with increases over prior rent of 32% and 45% on a cash and straight-line basis respectively. Additionally, about 37,000 rentable square feet of comparable renewal leases saw increases over prior rent of 6% and 10% on a cash and straight-line basis respectively. Moreover, approximately 62,000 rentable square feet of non-comparable new leases were signed, including deals with a top 100 law firm for approximately 26,000 rentable square feet at Torrey Reserve and a global technology company for approximately 17,000 rentable square feet at La Jolla Commons I. Throughout our office portfolio, we have been employing multiple initiatives to drive occupancy and rent growth, including renovating buildings with significant vacancy and/or rollover, enhancing amenities at the project level, aggregating and white-boxing larger blocks of scarce space, and improving our smaller spaces into a new move-in ready condition. We realized meaningful increases in occupancy and rent growth resulting from these initiatives in 2021, with additional increases realized or in process in Q1 as follows: in Bellevue, we have signed approximately 18,000 rentable square feet of expansions, with another 12,000 rentable square feet of new leases and expansions pending documentation. In San Diego, we have signed approximately 23,000 rentable square feet of new leases and expansions, with another 19,000 rentable square feet of new leases pending. Including this Q1 activity, we believe that our office portfolio is on track to absorb an additional 71,000 rentable square feet or nearly 2% of the office portfolio at favorable rent spreads. As a result, we believe that strategic investments in our portfolio will position us to continue capturing more than our fair share of net absorption at premium rents as office markets rebound. I will now turn the call back over to the operator for Q&A.

Thank you. Our first question comes from Haendel St. Juste with Mizuho. You may proceed with your question.

Hey, good morning out there. Just an early good morning to you guys. Ernest, a question for you: you mentioned that you bought back some stock in the fourth quarter, I don’t think…

No. I can say I bought back the stock. The company didn’t buy back the stock. I bought the stock personally and through affiliates.

Right, right. No, that’s what I am getting at. So, I guess you bought, but the company did not. And so clearly you see a value proposition here. Now, you talked about the stock being discounted. So, maybe you can help me better understand the decision to raise the dividend versus perhaps buying back the stock here in light of the discount you highlighted?

Haendel, this is something that is discussed in depth. As a REIT, we are on the smaller side relative to the absorption of the cost of being public. So, there is no emphasis whatsoever on becoming smaller and reducing our capacity to make acquisitions and grow. That’s why I buy the shares personally – I would love to see a path or a strategy for American Assets Trust to have more assets on its balance sheet, more income from all these additional assets and spread the overhead of being public over these additional assets. That’s the logic.

No, I appreciate that, Ernest. And so I certainly appreciate the comments there. But then also on the leverage, Bob, maybe you can help us understand. You outlined getting to that mid-5 level, but I don’t think you outlined a timeline. So, any updated perspective there? Is that something we can expect by next year in light of perhaps some of the delayed recovery in certain parts of the portfolio?

Yes, Haendel, I can’t put a date on that. But it’s really the EBITDA that temporarily went down as a result of COVID. As soon as we can get Waikiki Beach Walk back with the Embassy Suites and have our Japanese guests return to the island, I think you are going to see significant growth this year. I think we have a good shot at outperforming if those things happen, which will increase our EBITDA and help drive our net debt to EBITDA back down. But, we do need to see more improvement on the retail side as well.

Fair enough. We get those comments. Maybe a comment on pricing power over on the portfolio. Certainly a differentiator amongst the asset classes we look across REITs. Can you compare and contrast the pricing power across the key corridors of the portfolio: apartment, office, open-air centers? And do you think that will be enough in the near-term to offset the rising costs due to inflation that we are seeing? Thanks.

Somehow, we have got a bad connection, Haendel. Is there something you could do? Maybe step back a little bit from the microphone and repeat the question, because it’s not coming through?

I apologize. Is that better?

That’s better. Thank you.

Okay. Well, I was hoping for some comments on pricing power across the portfolio, certainly a key differentiator amongst the asset classes. I was hoping you could compare and contrast the pricing power across the key corridors of the portfolio: apartments, office, shopping centers, if you think that will be enough to offset the near-term rise in cost and inflation. Thanks.

Sure. That’s a very good question and something that we think about frequently. First and foremost, as Bob pointed out, retail is indeed getting repriced to some extent. Our product – our retail will do as well as anybody, but retail by definition now is being affected. Our residential segment is strong, and I’m really optimistic that we are going to have a very good year in residential. For office, Steve went through the facts and outlined that our office properties in the path of growth are improving the amenities, the word he has taught me. We are preparing offices so that when the smaller tenants want to occupy, they can occupy it more quickly. Because of our offices in the path of growth, we are optimistic that it’s going to be a significant contributor to the growth of the company. And of course, La Jolla Commons is under construction, and that could add significantly. And we have the property in San Francisco where we are positioned well. Portland just completed, but there is no lease on it yet. But you know what? It’s all good property. And if anybody can make it, our properties can do equally as well as the market, and I am confident. If not, I am hopeful, if not confident that we will outperform the market.

Hey, Haendel. Let me just add to that too: in the supplemental we talk about the leasing spreads on new leases. On a comparable basis, our cash basis percentage change over the prior rent on the leases we did for retail was down 6%, but on a GAAP basis, it was positive at 5.2%. So they had some free rent initially, but once it straight-lined over the term, obviously, it’s a positive 5.2%. On the office sector, we saw strong increases of 17% to 18% in cash rent increases over prior rent. And on a GAAP basis, it’s like 26% to 27%. I think we are in the right sectors. We have got the right product. It’s just the retail segment is a little bit slower.

And Steve would agree we have excellent management.

Wonderful. Alright guys. Thank you so much for the time.

Thank you.

Haendel, thanks for your continued interest. Hope to see you sometime soon.

Thank you. Our next question comes from Todd Thomas with KeyBanc. You may proceed with your question.

Hi, good morning. Hi, how are you? So, a couple of questions on some of the segments as it pertains to guidance. First, can you talk a little bit more about the mixed-use segment? The guidance you discussed sounds like there is some uncertainty, but perhaps also some conservatism embedded in the forecast. And I was just wondering if you could elaborate more around bookings and what the guidance translates into for RevPAR growth throughout the year in ‘22?

Todd, that’s probably the most difficult part of the whole portfolio to predict what’s going to happen because we don’t know what’s going to happen with the virus. We don’t know whether the Japanese tourists will return. We don’t know what the Governor of Hawaii is going to do to encourage or discourage tourism. But the properties we own are in first-class shape. They are the simplest. And so, it’s not a question of if they return; it’s a question of when they return, and it’s the 'when' that we find difficult to quantify. Do you want to add something, Bob?

Yes. So Todd, thanks for the question. Yes. So as we mentioned, our guidance for that same-store mixed-use is a 15% increase, which is approximately $0.03 of FFO per share. We rely heavily on our outrigger team that has boots on the ground out there. We are in contact with our General Manager and our team out there, so we know what’s going on. We know the data. In fact, we are visiting this coming March face to face with everybody. So that really is the upside. And like Ernest mentioned, the return of our Japanese guests is really important. But if that portion is delayed, we are seeing strength on the U.S. west and east sides. Let me give you a quick update on the Embassy Suites Hotel. For December, our paid occupancy was 86%. What we have shown on a quarterly basis, it was a 73% average for the fourth quarter, but it really was strong in December. Our paid ADR or average daily rate for the average quarter was $215, but in December, it spiked up to $350. That was a strong month. And then RevPAR also increased similarly to that $315 as well versus $215 on average. As of mid-January, Japan was experiencing its sixth wave of COVID, this time around largely from Omicron. Japan is better prepared today with 30% more capacity in hospitals and a more flexible homecare recommendation for all but the serious cases of infection. Vaccination data as of yesterday shows that 80% of Japan’s total population was partially vaccinated, and 79% was fully vaccinated with the second shot. The Japanese government is speeding up its rollout of booster shots and shortening the interval between the second and third shots. So, they have made positive strides in the vaccination rate since last July. We are hopeful that they too will get through this as we have, and we look forward to welcome them back. And that’s really the key to outperforming on this guidance.

Thanks. That’s helpful. I mean, the fourth quarter exceeded your expectations. You talked about half of that $0.04 delta being the hotel and half being retail. It seems like occupancy and ADR outperformed despite the Delta and Omicron. How are bookings trending through the spring and summer?

Because of Omicron, they are still slow. We expect them to pick up for the March spring break, which is always a popular destination. So, they are not at pre-COVID levels at this point in time, but we are seeing the growth; I don’t have the exact number in front of me.

Okay. And then shifting over to the retail segment, and apologies if I missed this, but just trying to understand that down 5% same-store NOI growth forecast for ‘22 a little bit better. What’s the impact year-over-year from out of period collections that were recognized during ‘21? And do you have that number for the fourth quarter? I’m just trying to get sort of a better run-rate heading into the new year for that segment.

Yes, I don’t have it for that segment. But I can tell you that our change in accounts receivables, which is where we book the collections from, are down approximately $600,000 in the fourth quarter. We were about $1 million of collections in the third quarter from prior quarter collections. In the fourth quarter, that was down to about $400,000 or less. So, it wasn’t that meaningful. And then going into 2022 in terms of our guidance, we have nothing in there for prior collections. We try to go back and get as much as we can during lease modifications at that point in time, and then it’s generally in a deferral that we will build and collect in the current month.

Okay, that’s helpful. And then just last question on the office segment. Can we get an update at all around the leasing or pre-leasing for the tower at La Jolla? And then can you also provide an update on the office portfolio around the late ‘22 expirations that you have? I think VMware and Autodesk, if there is any updates there and any activity that we should be thinking about late in the year or heading into ‘23?

I think Steve should handle that. He is intimately involved with it. Do you want to handle it, Steve?

Sure. You addressed Tower 3. We have got activity, but nothing to report at this point. But the market remains very strong. It’s tight for large blocks of space, and there are a number of large users looking long-term to aggregate space. So we are still bullish on Tower 3 and the eventual outcome there. With regard to the ‘22 rollover, we have come to terms with Autodesk on that second-floor renewal, and we are currently finalizing that deal. We expect to receive an RFP from VMware in the next week or two for engagement in that discussion.

That market, where La Jolla Commons is, is very strong. We bid – it’s not an adjoining property, but a few hundred yards away, and we got outbid by 25%. We reached for it too, because that is a great market. So, it’s a strong market. I don’t know what the outcome will be for leasing, but based on the activity in the area, the outcome ought to be positive.

Okay, alright. Thank you.

Thank you.

Thanks, Todd.

Thank you. Our next question comes from Craig Schmidt with Bank of America. You may proceed with your question.

Thank you. I have just if we could talk a little bit about the increase in tenant improvements and leasing commissions in the office segment. I assume it’s related to the new level of the new leases, but can you comment especially on trends for 2022 on those measures?

Yes. I am looking at the numbers overall focused on comparable new leases in ‘21. We increased NOI on those deals by $9.12 or about 22% over the rents prior and in place. If you apply a 5 cap to that increase, it’s worth about $182 per foot. In terms of investment, we spent about $15 a foot on the renovations we did in Torrey Reserve and both Torrey Plaza and North Court One. We achieved outsized increases in NOI as well, and we leased them quickly. Our average weighted average TIs on new leases last year was $50 a foot. We’re upgrading spaces, some of which haven’t seen a lighting package change in 20 years. So you are going from parabolic lights to LED. That’s a $10 foot swing. We see a less full drop ceiling and more of a combination of cloud ceiling and open ceiling, which requires rigid duct distribution of air, and that’s another $10 a foot on the TI package. So we are seeing higher-end TIs, and we are also seeing big co-investment from tenants. While our TI contribution is up, tenants are contributing 2x or even more in certain cases. So, yes, the investment is bigger, but the increase in NOI we are achieving and the quicker lease-up we are attaining more than compensates for the additional costs.

How would you describe the markets that our offices are in relative to what you read about in the newspapers concerning the office sector?

I would talk about our assets within these markets. I touched on renewing Autodesk, and it’s a great customer of ours. It’s a strong building, and we achieved a win-win outcome in a market that’s choppy. When you have exceptional assets in markets, even if it’s choppy around you, the outcomes are good because people just want to be there. This applies to Bellevue and San Francisco, and even our holdings in Portland, especially in Lloyd; we are essentially full in Lloyd. In San Diego, we have made these investments I mentioned in Torrey Reserve, and we are seeing the results right now. It’s a lot of fun.

Hey, Craig. Let me add to what Steve is saying: the first part of your question was about the operating CapEx, which drove down our funds available for distribution this quarter. That relates to a one-time TI reimbursement for our largest tenant at Landmark. That’s what drove that down. That’s been out there for some time and we finally got the invoice, so we are pleased with that.

Just as a matter of information, that tenant spent about $100 million of their own money for the property. So yes, we are investing wisely. I know you are very familiar with all the other markets we are in. But San Diego is on fire. I have been around here for a lot of years and I have never seen the San Diego economy as strong as it is today. Biotech lab space is amazing. I mean, we are in the right place at the right time.

Thank you for that. And then just one small follow-up, the lower occupancy at Del Monte Center, is that due to the previous vacant 2021, or is that smaller specialty business driving the ADG 0.1% occupancy?

There are two vacancies there. One, as Macy’s abandoned the furniture store, and the other is Forever 21. We are doing our best to replace those tenants. Of all the properties we have, we have challenges with Del Monte over others, but it does not have enough population around it to really make it into what we would like it to be. But it is constrained by the fact that the population is not as dense as it should be in that area.

Great, I think I mean, I guess that’s a better position to be in the NAV, the specialty gets so hard. Thank you for that update.

Thank you, Craig. Hope to see you soon.

Thank you. Our next question comes from Richard Hill with Morgan Stanley. You may proceed with your question.

Hey, guys. It’s Adam on – hey, it’s Adam on for Rich. Hope you guys are all well. And thanks for taking the question and appreciate the bridge earlier to kind of the guidance, really, really helpful. I wanted to ask about kind of the mixed-use asset in terms of kind of recovery to pre-COVID NOI. I think your other property types, they didn’t recover in ‘21, should kind of recover to 2019 levels and exceed those results. I am just kind of wondering what you think about recovery to pre-COVID NOI in mixed-use, whether that’s a ‘23, ‘24 event and just kind of how you think about that?

From what I read, the American tourist is anxious to travel. Right now, we just don’t know when. But I think when this opens up, people are anxious to get out and have vacations, and I suspect we might see unprecedented demand for our Hawaiian properties just because people are tired of staying home. So, we don’t know when, nor the extent. I’d like to tell you a clearer answer, but we don’t. I believe you probably know just as well as we do by reading the newspapers.

We are hopeful to see significant outperformance beginning in the third quarter. But again, let’s get rid of this COVID.

So, it’s not anything you can predict; we don’t think you can hope for. It’s something that we honestly expect, but we don’t know the timeline.

Okay, that’s all really helpful. Thank you. And I just want to ask about kind of acquisitions recognized. You made two larger deals last year? I guess kind of what’s the appetite today for future acquisitions, given the debt levels, but also considering that EBITDA is obviously recovering, right? So, your net debt to EBITDA will just look better organically and recover organically. What asset types are you focused on for acquisitions here, and what are you thinking there in terms of valuation and further acquisitions?

You couldn’t have asked a more contentious question than the one you just did. I think that money costs today are modest compared to inflation. If you can borrow money at 3% or 4%, and inflation is 7%, the economy is paying you to take the money. If you can buy a property that will return more than the cost of the money, there is accretion. There is a great internal debate about net debt to EBITDA, and we have been examining those numbers thoroughly. If we found something that – prices are not compelling, they’re really high. So, we have to find something that is below replacement cost that you can add to and increase the value. That’s what we have been successful doing, and we continue to explore all possibilities, including the retention of our net debt to EBITDA and enhancements to shareholder value due to inflation. All of our property replacement costs are increasing dramatically. Jerry estimates that if we were to buy La Jolla Commons today versus when we bought it at the bottom during the coronavirus, it would have been upwards of 30% more.

That would have been upwards of $30 million on a $100 million contract. This is happening across our portfolio. It doesn’t happen unless the demand isn’t there to compensate for the cost. But this is happening across our portfolio, and that’s why I am so optimistic about the quality and position of the American Assets Trust portfolio. It’s not only a great inflation hedge; I think its performance over the mid-term will outpace inflation.

Got it. And just kind of in terms of a property – by property type. I mean is there more of an appetite for office rather than multifamily? If you could kind of rank the different property types, what would be your first in line?

I hate to tell you this. But our appetite is governed by greed. If we find there is an opportunity in office, which we have in Bellevue, we are very optimistic about that market. We did it. If we could find apartments, which are now trading in the mid-3% cap, we would improve them and improve the returns. We would do that. If we could find retail that has upside, we would do that. We have the advantage of looking at three product types in several markets, and we are going to do what we think enhances the underlying value of our stockholders as best we can. The emphasis recently has been in office, because we found a couple of office products. But we are also investing in our residential dramatically, improving the properties we have. We are also looking at every opportunity we can for retail. We have our weather eye peeled to find something that will add to the value of our shares. It isn’t easy; what’s easy to see is that the cost of money is moderate relative to inflation. But then you have to find a product that isn’t overpriced. And so that’s accretive.

Got it. Thanks for the time; I really appreciate it.

Thank you for your interest.

Our next question comes from Tamara Fique with Wells Fargo. You may proceed with your question.

Thank you very much. Wondering, I guess a couple of questions. Given the increased leasing activity that you saw in the fourth quarter, it drove your signed but not opened rents to get more than double what was reported in our third quarter. Can you just talk about how much of that…?

Tammy, somehow, something is wrong with our speaker system here. If you can step back from your microphone, we might be able to hear you better, please.

Okay, is this better?

Is that better?

We hope so.

Given the increased leasing activity in the fourth quarter that drove your signed but not opened rents to more than double what you reported in the third quarter, can you just talk about how much of that you expect to come online in 2022? And then, secondly, related, are you generally delivering spaces to tenants on time given the supply and labor constraints in the market today?

Do you want to handle that, Steve?

We are managing it well in terms of timing because we are integrated from having in-house legal to having a talented construction team. We got in front of it. We don’t work – we work parallel paths while we are going through a transaction. As a result, we have the lease execution, and we generally have an approved plan that we can readily go into CDs, and we do everything we can to expedite the process because our tenants have time constraints, and we take those on as our own. We perform well. That being said, there are delays in permitting and certain materials. We tend to have an urgency to get in, and we will have that move-in. If you have a long lead time on certain millwork, they will move in and start operating, and then we will do the millwork after they moved in. So, we adapt, but we do it really well.

It’s difficult, but we do as well as anybody. I think that would be the way to phrase it.

No, it is not. If the supply chain is strained and there are labor constraints. One of the points we made and Steve has brought to us is we instituted this program with specs leads. I would like to call those ready rooms. As we found tenants to lease some of those spaces, that might involve adding one office or taking out one office, so we were able to adapt quickly. We had some inventory. So, timing has been good for us.

I think we have a great team that’s doing a great job, but it isn’t easy.

Okay, appreciate that. And then maybe following up on your appetite to be a larger company, what do you see as the best pathway to getting to the level that you feel you are maximizing your G&A cost? Is it just slow and steady, or is there a bigger transaction that you see you can do to get there quicker? I am wondering if you can give us your perspective on that and what’s kind of governing that?

If our stock was fairly priced, that wouldn’t be a path to be larger. But at the price of our stock today, that’s not a path. If another path would be to find somebody who would like to work with us, that isn’t easy either. I would say the ultimate outcome is slow, but steady wins the race. That’s what we are working on, bit by bit, piece by piece. You can see that when we issued that $500 million of bonds, we were a year early. But now interest rates are moving up. That fixed rate on those bonds allows us some flexibility. We recently extended a bank loan and locked in the rate. So, it’s slow, but steady wins the race. When we started this company as a public entity, we had about $1.7 billion in assets. Now, I estimate our underlying value is about $5 billion to $6 billion. We didn’t do anything dramatic; we simply kept a consistent focus on enhancing shareholder value.

Okay, great. Thank you so much for your time.

Thank you.

Thank you, Tammy.

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Ernest Rady for any further remarks.

Okay, stay well, everyone. Don’t get any viruses. Wear a mask. We hope to see you soon and share a hug. We get through this nonsense that we have experienced over the last two years. I have always said the portfolio will come through better off than when we began, and I still feel that way. Thank you all.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.