American Assets Trust, Inc. Q2 FY2025 Earnings Call

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 8-K. 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 Wyll, President and CEO of American Assets Trust.

Good morning, everyone. At American Assets Trust, we approach every cycle with the same mindset: Stay nimble, stay thoughtful and stay true to our strategy, investing in our high-quality assets, maintaining balance sheet strength and creating long-term value for our shareholders. That consistency has carried us through challenging environments before, and we believe it continues to serve us well today as we navigate elevated interest rates, persistent inflation, tariff uncertainty and evolving tenant demand. In the second quarter of 2025, our results came in just above our own expectations. FFO per diluted share was $0.52, and same-store cash NOI was approximately flat for Q2 and up 1.4% year-to-date compared to the prior year. These results reflect steady performance in a mixed operating environment and underscore the resilience of our portfolio and the value of our disciplined approach to asset management. Turning to the portfolio. Our office portfolio ended the quarter 82% leased, and our same-store office portfolio, which excludes One Beach and La Jolla Commons III, ended the quarter 87% leased. Same-store office cash NOI was approximately flat for the quarter and up over 2% year-to-date as compared to the prior year. We completed approximately 102,000 square feet of leasing during the quarter, with comparable rent spreads decreasing 2% on a cash basis and increasing 10% on a straight-line basis. Notably, the negative cash basis rent spread was primarily attributable to a deal backfilling a 12,000 square foot First & Main space with just 2 months of downtime, no TIs and a lower start rate than the prior tenant, but with 5% annual bumps. We entered Q3 with solid momentum, including approximately 17,000 square feet of executed leases and an additional 111,000 square feet in active lease documentation. Leasing interest continues to build across our office portfolio, reflected in growing prospect engagement and inbound RFP volume. Across our office portfolio, demand remains concentrated in less than full floor requirements, and winning in this environment depends on several fundamentals: Ownership with the financial strength to fund tenant improvements and commissions; a reputation for operational excellence and responsive service; completed renovations and amenities; availability of move-in ready suites requiring only light customization; hands-on construction management that minimizes cost and schedule uncertainty; and an efficient solutions-oriented lease negotiation process, because time kills deals. Of course, our near-term focus remains on driving occupancy, enhancing the tenant experience and positioning the portfolio to perform well under current utilization patterns even if broader office attendance has reached a near-term equilibrium. We remain confident in our coastal high-barrier markets over the long term as employers continue to prioritize high-quality, collaborative and amenitized environments to support productivity and talent retention. In fact, this year, two of the world's largest real estate brokerage firms, neither of which represent us as landlord, chose our San Diego properties for their new headquarters in the market. We view this as a meaningful validation of the quality, positioning and upkeep of our office portfolio and the strength of our tenant experience. In retail, our portfolio continues to perform well, backed by healthy consumer demand in our trade areas. We ended the quarter 98% leased with same-store cash NOI growth of 4.5%. We executed over 220,000 square feet of new and renewal leases in Q2, with spreads increasing over 7% on a cash basis and 22% on a straight-line basis. Rent collections remained strong in all tenants on our reserve list, including At Home at Carmel Mountain Plaza were current through Q2. Meanwhile, we're actively engaged with At Home in a mutually beneficial lease structure moving forward for their sole location in San Diego. In addition, in Q2, we backfilled the former Party City space at Gateway Marketplace with rents approximately 30% above prior levels. We continue to see durable demand for our retail centers, which are supported by strong local employment and favorable demographics. With limited new supply and consistent foot traffic, we expect these trends to continue. Our multifamily portfolio performed in line with expectations, and San Diego recently delivered new supply has created a more competitive leasing environment, and we are navigating elevated operating costs and increased concessions. Still, our communities demonstrated strong stability, ending the quarter approximately 94% leased. We achieved rent increases of 7% on renewals and 4% on new leases for a blended rent increase of 6%. Excluding our new Genesee Park acquisition, rent increases were 6% on renewals, 2% on new leases for a 4% blended increase and an approximately 2% increase in net effective rents compared to the same quarter last year. Occupancy at Pacific Ridge temporarily dipped just below 85% at the beginning of July due to the seasonal student turnover, but it is expected to rebound above 90% by the end of August. The community remains at about 92% leased right now. And as previously disclosed, we acquired Genesee Park based on our conviction in the long-term fundamentals of the coastal San Diego market, the opportunity to meaningfully mark-to-market rents and the potential for future densification. We're pleased that the asset continues to perform in line with our underwriting assumptions. Up in Portland, Hassalo on Eighth ended Q2 91% leased with blended rent growth of approximately 1%. While the market continues to work through elevated supply and a slower pace of job growth, we're encouraged by steady leasing activity and solid retention. Competition from suburban product remains a factor, and with occupancy holding in the low 90s and signs of stabilization emerging, we see plenty of room for improvement, hopefully in the quarters ahead. At our fee-owned mixed-use Waikiki Beach Walk in Oahu, where we are pleased to report no damage or injuries from the tsunami warning last night, NOI declined 5% compared to Q2 last year, driven by softer performance at our Embassy Suites. While the NOI of the retail component grew 7% year-over-year, the hotel was down approximately 15%, reflecting lower paid occupancy and RevPAR amid ongoing softness and domestic leisure demand, heightened rate competition across Waikiki and global economic uncertainty. Elevated labor costs and room expenses also impacted margins during the quarter. That said, our Embassy Suites continue to lead its competitive set in RevPAR, underscoring the strength of the asset, its prime location and its appeal to value-driven travelers. We remain confident in the property's long-term positioning as the market stabilizes. A few final items. I'm pleased to share the Board approved a quarterly dividend of $0.34 per share for Q3, payable on September 18 to shareholders of record as of September 4. This reflects our continued confidence in the long-term stability and cash flows of the portfolio. And additionally, in Q2, we published our 2024 sustainability report, highlighting our progress and commitments across environmental, social, governance and human capital initiatives. We remain proud of the role our company plays in advancing responsible business practices. In closing, while external conditions remain dynamic, we will continue to manage with flexibility and a long-term view, always grounded in the fundamentals that have served us in our portfolio well across countless cycles. Our team is known for executing with this discipline and foresight. On behalf of the management team, including Ernest, who is joining us today, thank you for your continued support.

And by the way, you guys, I think the team is doing a really good job. So I'm grateful.

Thanks, Adam and Ernest. And good morning, everyone. Last night, we reported second quarter 2025 FFO per share of $0.52. Second quarter 2025 net income attributable to common stockholders per share was $0.09. Second quarter 2025 FFO remained flat compared to Q1 2025. However, excluding the approximately $800,000 in lease termination fees recognized in Q2 '25, FFO declined by approximately $0.01 per share. The decrease primarily reflects the sale of Del Monte Center on February 25, '25, with 2 months of FFO contribution in Q1 that was no longer present in Q2. Same-store cash NOI for all sectors combined was approximately flat year-over-year in the second quarter of '25 compared with the same period in '24. Breaking out Q2 out by segment and each as compared to Q2 '24. Our same-store office portfolio's NOI was approximately flat, primarily due to the known move out of CLEAResult at first of May on April 30, '25. A portion of the vacated space has already been backfilled, as Adam mentioned earlier. Our same-store retail portfolio's NOI increased by 4.5%, primarily driven by commencement of new leases and contractual rent escalations at both Alamo Quarry and Carmel Mountain Plaza. Additionally, retail portfolio also benefited from lower operating expenses at Carmel Mountain Plaza and Alamo Quarry, further contributing to the year-over-year growth. Our same-store multifamily portfolio's NOI declined by 3.9%, primarily due to lower rental income at our Hassalo on Eighth property in Portland and higher operating expenses at our Pacific Ridge property in San Diego. And our same-store mixed-use portfolio's NOI declined by approximately 5%, primarily driven by lower-than-anticipated ADR at Embassy Suites Waikiki. Specifically and compared to Q2 '24, paid occupancy for Q2 '25 was approximately flat at 86%. RevPAR for Q2 '25 was $305, down 4%, though we exceeded our competitive set in Q2 by $62 per room. ADR for Q2 '25 was $355, down 3%, though we expected our competitive set in Q2 by $86 per room. Net operating income for Q2 '25 was approximately $2.9 million, down $0.5 million. Based on our STARs reports that we see monthly, most, if not all of the hotels in Waikiki are experiencing similar trends. The Japanese yen remains around $147 to the U.S. dollar. Rising airfare and hotel costs are prompting some domestic travelers to reconsider trips to Hawaii, instead choosing international destinations, supported by a strong dollar, or opting for all-inclusive cruises. That said, the unique appeal of the aloha spirit and safety of Oahu and the neighboring islands continues to attract visitors. We view these headwinds as temporary and remain confident in the long-term strength of Hawaii's tourism market. Let's talk about liquidity. As of the end of the second quarter, we had total liquidity of approximately $544 million, consisting of roughly $144 million in cash and cash equivalents and $400 million of availability under our revolving line of credit. Additionally, our net debt-to-EBITDA ratio was 6.3x on a trailing 12-month basis and 6.6x on a quarter annualized basis. Our long-term goal remains to reduce and maintain net debt-to-EBITDA at 5.5x or lower. Our interest coverage and fixed charge coverage ratios were about 3.1x on a trailing 12-month basis. Let's talk about our '25 guidance. We are increasing our full year 2025 guidance range to $1.89 to $2.01 per FFO share with a midpoint of $1.95 per FFO share, an increase of $0.01 over our initial midpoint of $1.94. This outlook reflects steady momentum across our core sectors, supported by leasing activity, rent escalations and disciplined operations. Our guidance assumes a stable environment and sustained tenant demand. Based on year-to-date performance and current visibility, we believe we are well positioned to meet our full year goals. While the updated guidance reflects our best estimate today, outperforming toward the high end would require several favorable developments, including, first, the majority of office or retail tenants for whom we have established credit reserves must continue to meet their rent obligations throughout the year. As of Q2 '25, we have reserved approximately $0.02 per share of FFO, split evenly between office and retail tenants. Based on a probability-weighted assessment of at-risk tenants, year-to-date, none of these reserves have been utilized. Second, our multifamily segment would need to exceed expectations, driven by improved occupancy, continued rent growth and better-than-forecasted expense management. Third, a meaningful recovery in tourism in the last half of the year would support stronger performance at our Embassy Suites property. We remain optimistic that both domestic and international travel will improve either later this year or in the years ahead. Together, these levers represent upside potential, and we will continue to monitor each closely as the year progresses. As a reminder, our guidance in these prepared remarks exclude the impact of any future acquisitions, dispositions, equity issuances or repurchases and debt refinancings or repayments, except for those already discussed. We remain committed to transparency and will continue to provide clear insights into our quarterly results and the key assumptions that inform our outlook. Additionally, please note that any non-GAAP financial metrics discussed today, such as net operating income or NOI, are reconciled to the most directly comparable GAAP measures in our earnings release and supplemental materials.

Our first question comes from Todd Thomas with KeyBanc Capital Markets.

This is A.J. on behalf of Todd. I have a question regarding guidance, Bob. Are there any changes to the same-store NOI growth outlook for the various segments compared to the forecast provided with the initial guidance from 4Q '24? Just wondering if there are any adjustments to those assumptions.

Thanks for the question. Yes, we're still on track. There's obviously noise going on with some of the termination fees that we've had. But from my perspective, we're still on track. We hope to outperform what we currently have in guidance. But I don't see any significant differences. Adam, do you have any input on that?

No. I think we might find, A.J., that a few of our segments may outperform the guidance Bob gave on same-store NOI and others may underperform. For instance, the hotel is not going to do as well as we expected based on what's going on in the world these days, but office seems to be trending better. So we'll see how it shakes out over the last 2 quarters.

Okay. I appreciate that color. And Adam, maybe sticking with you. Last quarter, you noted an uptick in the touring around the La Jolla Commons III and One Beach. Can you just discuss the leasing pipeline and interest level for those two specifically, any year-end leasing goals you may be able to share with us?

Yes, we are seeing increased touring activity and prospects and RFP activity, but I'll let Steve kind of chime in a little bit more on that. He's a little more dialed in.

Sure. Starting with One Beach, we've mentioned before that the deal size is increasing, making it practical for us to engage in these transactions. In the past, we were looking at spaces of 2,000, 4,000, or 6,000 square feet, while our floor plates are 35,000 square feet. Currently, the average deal size has risen, with the majority of activity occurring in the range of 20,000 to 60,000 square feet, which fits our strategy perfectly. Therefore, in this market, it’s crucial to have spaces ready for potential tenants, as Adam previously noted. We are advancing our plans to develop parking and amenities on the ground floor and are preparing improvements on the first and second floors to meet this demand, ensuring that when tenants are ready, they can move in within a couple of months. Because of our commitment, brokers are conveying this information, and we have divided the building into smaller sections, leading to a significant increase in our touring activities. In fact, we had a full building tour yesterday afternoon, which is promising. Moving on to La Jolla Commons III, our amenities are not fully finished yet. The restaurant, Fleurette, is expected to be completed this fall, likely in October, and this will be a vital factor in attracting tenants to the campus. Additionally, we have a major conference center under construction that is projected to be completed in September.

Absolutely same timeframe, yes.

We anticipate an increase in lease-up activity. Currently, we are working on three spec suites—one on the second floor and two on the fourth floor. We're heavily involved in negotiations and space planning for these suites, which represent about 9% of the property. There is existing tenant interest tied to the merger of an accounting firm that has a 10-year lease with us in Tower 1, which will exceed Tower 1’s capacity. This could lead to them needing space in Tower 3. Additionally, another law firm tenant is also considering expansion but may find it challenging to accommodate all their needs in Tower 1. Our 930,000-square-foot campus encompasses three buildings, making it more than just a single 200,000-square-foot ten-story tower. The campus is dynamic and has significant long-term appeal for larger tenants due to the flexibility it offers.

I appreciate that color. It's really helpful. And then maybe just moving on to the occupancy at 14 Acres increased significantly in the quarter. Can you just talk about the lease that was completed there and maybe with the renovations completed at that asset and the other Bellevue properties that were acquired within the last few years? What's the demand response you're seeing? Is it as anticipated? What are the leasing goals for those assets, specifically at 14 Acres and Timber Spring?

Great question. We'll start with 14 Acres. Jerry and I discussed it this morning. The renovation is complete and looks beautiful. As a result, tour activities have increased. We've been very proactive in developing a spec suite program there as well. All of the multi-tenant space is less than a full floor, and we have the plans finalized and tenants engaged. They've noticed our commitment to invest in renovations. As a result, we've concluded several leases and have more pending for the designed spaces, which require only minor modifications to the spec suites. We are progressing quickly. It's important to note that this is a submarket with 44% vacancy and negative net absorption, yet we are experiencing significant activity there, which is encouraging. Todd mentioned that we saw a decline of 70 basis points in occupancy, and to clarify, we had 113,000 square feet of known reductions this quarter. Through new leasing, we accounted for all of the 28,000 square feet of that. The reductions amounted to 280 basis points, but we recovered 210 basis points through new leasing. This quarter, 81% of our leases were new, comprising both comparable and non-comparable deals. We have strong leasing activity along the I-520 corridor, which is performing better than the I-90 corridor. Locations like Bell Spring, now Timber Springs, and Timber Ridge are doing well. Timber Ridge is 97% leased following the Sitech lease we signed last quarter. Timber Springs is nearing 87% or 88% leased with a full floor lease draft in progress. We have made great advancements in a market that has negative net absorption and higher vacancy.

Next question comes from Haendel St. Juste from Mizuho.

This is Ravi on the line for Haendel. I hope you guys are doing well. I wanted to ask about the multifamily portfolio. I think I heard in your prepared remarks that the new lease spreads were below renewal spreads. I guess I would have maybe anticipated to hear the opposite and given the perpetual high interest rates and on affordability with housing, I thought we would have seen maybe some heightened demand for multifamily. Can you maybe offer some further commentary or color?

Yes. Ravi, it's Adam. We're navigating different markets, right? So we're in San Diego and Portland. Portland has had its share of struggles that's been compounded with the extra supply. So obviously, we're doing the best we can there, rents have stabilized. And we expect some growth later this year or into next year once the markets kind of absorb that excess supply. San Diego is a different story, though, where we've seen like an incredible surge over the past several years and it's starting to equalize somewhat now that there's a lot more supply being absorbed as well here. But maybe Abigail can add a little color on the difference between the renewals and the new rates that we're seeing, which are still growing positively, but not as much as they have been over the past few years. Abigail, do you see anything there you can share?

I think Adam hit the nail on the head with answering that question. In San Diego, our rental rates across the portfolio are operating a little bit higher than what we are seeing county-wide. With some of the properties, we have some caps that are in place. But at Pacific Ridge, we're continuing to see some rent growth that's favorable throughout the region where there is saturation with new supply and new products. The good part about our properties is, as mentioned before, is that we are in unbeatable locations. We've got irreplaceable products, experienced and knowledgeable management teams that attract residents near and far, and we maintain our communities in top order. And so I think we'll continue to see favorable growth as much as we can and continue to thrive in this current marketplace. It's a desirable location, and we've got great properties throughout.

Got it. I wanted to ask about the hotel in Hawaii and some of the demand drivers there. It seems like a weak yen, north of 145. The conversion rate between the yen and the dollar is weighing on demand from that market. Is there a number where you think the demand will pick up? Like, is it 120? Is it 110? Is that something that you guys are kind of forecasting in terms of maybe, future demand?

It's really tough to predict, Ravi. As you know, Oahu's tourism was 40% from Japan or Asia, pre-pandemic. And I think right now, it's kind of in the mid-teens, and it's incrementally picking up. But the dollar is getting a little weaker. So that's helping somewhat on the margin. I think we're anticipating more action next year, but it really remains to be seen because there's so much going on in the world with geopolitics and economic uncertainty. We're hopeful and we're doing our best to kind of cater to those large Asian package groups. But I think to expect anything meaningful this year would be a stretch. Do you have anything to add to that, Bob?

Yes, Ravi. This quarter has seen a decline, and honestly, we're at levels similar to what we experienced before COVID began, which puzzles me. The Japanese yen is currently at 147, whereas it was at 108 before COVID, meaning the tourism income from Japan is likely to continue to struggle. Japanese tourists have other options and while wealthy travelers may still choose to visit, there's a lot of uncertainty with global tariffs and various international issues. People seem to be holding back. As I mentioned earlier, they have other destinations to consider. According to the STAR reports we receive, which track comparable hotels, we have around 10 to 12 competitors in Waikiki. Despite this, we outperform all of them in terms of RevPAR and ADR. Therefore, I'm not overly worried; I believe this is just a temporary phase we’re all experiencing, and we're still performing better than most.

Got it. That's really helpful. Lastly, in the past, I think you've mentioned that there's about $0.30 of leasing upside in terms of a pipeline going forward. In which segments do you expect that total pipeline to materialize first?

That $0.30, Ravi, was predominantly office. Leasing up La Jolla Commons III, One Beach and our suburban Bellevue assets gets you to about $0.30. And I guess I could mention, too, that we've got probably 5% of our office GLA is signed leases, but have not commenced yet. So there is going to be a meaningful uptick coming down the road once those rents commence.

Our next question comes from Brenny Pyre with Green Street Advisors.

So it seems like AAT was pretty busy on the acquisitions and dispositions front earlier this year and there's a healthy balance of cash on the balance sheet at the moment. Any plans to put that to work? And if so, which property types or markets do you think provide the best risk-adjusted returns?

We're always looking for opportunities that offer significant upside. We don't want to spend money just for the sake of it. Currently, we prefer not to invest in office space because we see potential opportunities there, but we are exploring multifamily options and would consider retail if the right opportunity arises.

And of course, Brenny, that money is working for us in the bank, earning interest right now as we evaluate options, and it gives us pretty solid comfort, having that balance sheet strength as we look for...

With all the uncertainties in the world, that money in the bank plus the line of credit does give us some extra sleep that we wouldn't enjoy otherwise.

Got it. All fair points. And then one more question. In regards to the touring activity you're seeing at One Beach and I guess, for San Francisco as a whole, could you talk about the tenant industries that you're getting most touring from? Is AI starting to step up as a more likely tenant for the One Beach asset?

That's the main reason for the recent activity. They have contributed 5 million square feet of leasing so far, but it is expected to grow to as much as 25 million square feet in the next few years. It is rapidly expanding. Additionally, Databricks is also an AI company, so yes, it's primarily focused on AI and technology. On the law firm side, there's noticeable rightsizing and consolidation, particularly in financial services. Overall, the growth is really driven by technology.

This concludes our question-and-answer session. I would like to turn the conference back over to Adam Wyll for any closing remarks.

Well, on behalf of everyone at American Assets Trust, we appreciate your support, and you're joining us today. Have a great week.

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